7.1 General considerations

Competent authorities should determine through the SREP capital assessment whether the own funds held by the investment firm provide sound coverage of risks to capital stemming from regulated and non-regulated businesses to which the investment firm is or might be exposed, or poses to others, if such risks are assessed as material to the investment firm.

Competent authorities should do this by determining and setting the amount of additional own funds the investment firm is required to hold to cover risks and elements of risks the investment firm is exposed to or poses to others, that are not covered or not sufficiently covered by Parts Three and Four of Regulation (EU) 2019/2033. Where necessary, competent authorities should determine additional own funds requirement to address deficiencies in investment firm’s governance and control mechanisms, internal models used for regulatory purposes, prudent valuation of the trading book, or to address the investment firms’ repeated failure to maintain adequate level of additional own funds guidance. Additional own funds requirement should be met by the investment firm at all times.

To address potential capital inadequacies, including in adverse conditions, competent authorities should take appropriate supervisory measures, including, where relevant, establishing and communicating guidance on additional own funds (P2G), which is the amount of capital the investment firm is expected to hold to ensure that cyclical economic fluctuations do not lead to a breach of own funds and additional own funds requirement or threaten the ability of the investment firm to wind down and cease activities in an orderly manner.

When setting the additional own funds requirement and, where relevant, P2G, competent authorities should:

• a. take into account any supervisory measures that the competent authority has applied or is planning to apply to an investment firm in accordance with Title 10 and having regard to paragraphs 291 to 293;
• b. clearly substantiate the decision to impose additional own funds requirement and guidance;
• c. apply additional own funds requirement and guidance in a consistent manner to ensure broad consistency of prudential outcomes across investment firms.

Competent authorities should assess the adequacy of the investment firm’s own funds and the impact of cyclical economic fluctuations thereon as a key determinant of the investment firm’s viability. This determination should be summarised and reflected in a score based on the criteria specified at the end of this title.

Competent authorities should determine and set the additional own funds requirement and, where relevant, P2G in accordance with the minimum engagement model specified in Title 2. In particular, the minimum frequency with which such additional requirement and, where relevant, P2G are determined and set should follow the frequency of the capital adequacy assessment under the SREP minimum engagement model.

Competent authorities may determine any additional own funds requirement for small and non-interconnected investment firms, complying with the criteria of Article 12 of Regulation (EU) 2019/2033, when they deemed justified and on a case-by-case basis. Such small and non-interconnected investment firms are not subject to any P2G, pursuant to Article 41 of Directive (EU) 2019/2034.