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UK banks subject to highest Pillar 2 requirements among major European lenders

Banks in the U.K. have some of the highest Pillar 2 capital requirements in Europe, while lenders in Spain and France need to hold much lower reserves, S&P Global Market Intelligence data shows.

Pillar 2 capital covers bank-specific risks that are not addressed in their minimum capital requirements, such as interest rate, strategic and reputational risks.

Five U.K. lenders — Barclays PLC, Lloyds Banking Group PLC, NatWest Group PLC, Standard Chartered PLC and HSBC Holdings PLC — sit in the top six of a selection of 20 large European banks ranked by Pillar 2 requirements. All five are required to hold a Pillar 2 capital above 1.50%, with three having a requirement of 2.0% or more.

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In the U.K., the Prudential Regulation Authority updated the regulations governing Pillar 2 for banks in the country in the wake of Brexit. A new methodology for Pillar 2 will take effect Jan. 1, 2022.

At 3.10%, Denmark's Danske Bank A/S has the highest requirement in the sample. The Danish financial regulator in 2018 doubled the bank's Pillar 2 requirement for heightened compliance and reputational risks amid a money-laundering scandal.

Meanwhile, Spain-based Banco Bilbao Vizcaya Argentaria SA, CaixaBank SA and Banco Santander SA have Pillar 2 requirements below 0.90%. Those of French banks Crédit Agricole SA and BNP Paribas SA are 0.80% and 0.70%, respectively. Fellow French lender Société Générale SA has a requirement of 0.98%, along with Italy's UniCredit SpA and Netherlands-based ING Groep NV.

Countercyclical buffers

Banks are also required to hold countercyclical buffers, or CCBs, which take into account macroeconomic conditions. CCBs can be built up in times of economic stability and released during downturns in order to maintain liquidity.

HSBC and Finland-based Nordea Bank Abp have the highest CCB requirements at 0.20%, followed by Standard Chartered at 0.15% and Danske Bank at 0.10%.

Nordic countries were among the first in Europe to hike CCBs following the relaxation of rules due to the COVID-19 pandemic, underscoring the capability of banks to withstand stress. Though based in the U.K., HSBC and StanChart operate global businesses and generate a significant portion of their income overseas, particularly in Asia.

Europe's banking sector had strong capital levels pre-pandemic, paving the way for regulators to loosen buffers so that banks could keep credit flowing into the economy amid the resultant downturn.

Though market observers have warned of potential capital erosion when government support schemes end, banks should be able to withstand the blow, according to S&P Global Ratings. The agency expects European banks' risk-adjusted capital ratios to fall moderately in 2021, especially as they resume dividends and share buybacks, but remain above pre-pandemic levels at many lenders.