Prudential Capital Requirements for Banks: Buffers and the Pillar 2 Capital Assessment

The Basel capital framework has evolved since the introduction of Pillar 2 in Basel II. Basel III enhanced capital quality and quantity, adding macroprudential buffers such as the capital conservation buffer, the countercyclical capital buffer, and systemic risk buffers for global and domestic systemically important banks to strengthen banking resilience post-global financial crisis. Pillar 2 remains crucial for addressing bank-specific risks and vulnerabilities beyond Pillar 1, relying on supervisory judgment and banks’ internal capital adequacy assessments. Emerging and developing economies should adapt the Basel framework to local contexts, often maintaining higher capital requirements because of macroeconomic volatility and structural weaknesses. In developing the architecture of capital adequacy, jurisdictions need to focus on the appropriate mix and the sequencing of Pillar 2 add-ons and Basel III capital buffers tailored to their specific circumstances. Effective implementation requires strong supervisory powers, good data quality, and a tailored mix of Pillar 2 add-ons and Basel III buffers.