Capital buffers · RiskAtoms Academy

By the end you will be able to

1Name the Basel buffers (conservation, countercyclical, G-SIB and domestic systemic) and the EU's systemic risk buffer, and say who sets each one.
2Explain how the countercyclical buffer is built and released, using the UK's rate since 2016.
3Calculate the combined buffer, the CET1 free for it, the MDA headroom and the maximum distributable amount.
4Work out RiskAtoms Bank plc's restriction line, including the CET1 that fills its AT1 and Tier 2 gaps, and why its O-SII buffer is 0%.

Why it matters

In March 2020 the Bank of England cut the UK countercyclical buffer from 1% to 0%, with immediate effect. On 31 March the large UK banks cancelled their 2019 dividends. The first move freed capital; the second kept it in the banks. Both come from the same idea: some capital is meant to be used, and a bank that uses it must stop paying out until it rebuilds. RiskAtoms Bank plc holds £1,026m of buffers. This lesson shows how big a loss starts to cut its dividend.

Core explanation

Capital that can be used, at a price

Minimums and buffers

L4.1.01: Capital ratios and the capital stack stacked the requirements: Pillar 1 minimums of 4.5% CET1, 6% Tier 1 and 8% total capital, then Pillar 2A. A bank that falls below them is in breach, and the supervisor can take away its licence. Buffers sit on top, all in CET1. Falling into a buffer is not a breach. It switches on limits on what the bank may pay out, so that it rebuilds capital from its profits.

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

Buffer	Basel rate	Set by	RiskAtoms Bank plc
Capital conservation (CCB)	2.5%	Fixed in the rules (RBC30.2)	2.5%
Countercyclical (CCyB)	0% to 2.5%	Each country, for exposures there (RBC30.9)	2.0% (UK)
G-SIB	1% to 3.5%	FSB list; bucket by score (RBC40.4)	0%: not a G-SIB
D-SIB or O-SII	National	National authority (RBC40.22)	0%: below the threshold
Combined buffer			4.5% = £1,026.3m

The countercyclical buffer

The conservation buffer is always there. The countercyclical buffer moves with the credit cycle: the authority raises it while risks build, and releases it when losses come, so banks can absorb them and keep lending instead of shrinking. Increases are announced up to 12 months before they bind; cuts take effect at once (RBC30.11). A bank's rate is the average of the rates in the countries where its private sector borrowers are, weighted by its exposures to each (RBC30.13).

TimelineThe UK countercyclical buffer

1 / 6

Jun 2017

Off zero

The FPC raised the UK rate from 0% to 0.5% (FPC Record, June 2017).

The FPC's neutral rate is around 2%, set in December 2019: the level it expects to hold when risks are neither high nor low (Financial Stability Report, December 2019; FPC CCyB policy statement, July 2023). So a UK bank holds 2% in normal times, and there is something to release when trouble comes.

Extra for this lessonThe book applies 2% to all RWA

The rate applies to exposures in each country. About 29% of RiskAtoms Bank plc's corporate loans are to non-UK borrowers, which would carry their own countries' rates. The book uses the UK's 2% throughout, which slightly overstates or understates the buffer depending on those rates.

Systemic buffers

The bigger and more connected a bank, the more its failure would hurt everyone else, so the more capital it must hold. The Financial Stability Board names the global systemically important banks (G-SIBs) each November and puts each in a bucket by its score. The bucket sets an extra CET1 buffer (RBC40.4) that extends the conservation buffer (RBC40.2).

Public dataThe FSB's 2025 G-SIB list (27 November 2025)

29 banks. The buffers apply from 1 January 2027. Selected names by bucket; the full list is in the FSB's annex.

Bucket	Buffer	Banks
5	3.5%	(empty)
4	2.5%	JP Morgan Chase
3	2.0%	Bank of America, Citigroup, HSBC, ICBC
2	1.5%	Barclays, BNP Paribas, Goldman Sachs, UBS and five others
1	1.0%	Standard Chartered, Deutsche Bank, Santander and twelve others

Banks that matter at home but not worldwide get a domestic buffer: a D-SIB buffer in Basel terms (RBC40.22), called an O-SII buffer in the UK and the EU. In the UK it rises with the bank's UK leverage exposure measure, averaged over the quarter ends. The FPC indexed the thresholds to nominal GDP in July 2025:

UK leverage exposure measure thresholds for the O-SII buffer (FPC response, 29 July 2025)
O-SII rate	Before 2026, £bn	Rates set in 2024, from 1 Jan 2026	Rates set in Dec 2025, from 1 Jan 2027
0.0%	below 160	below 190	below 205
1.0%	160 to 305	190 to 365	205 to 390
1.5%	305 to 450	365 to 540	390 to 575
2.0%	450 to 595	540 to 715	575 to 760
2.5%	595 to 740	715 to 890	760 to 945
3.0%	740 and above	890 and above	945 and above

RiskAtoms Bank plc's UK leverage exposure is £64.6bn, well under half of the lowest threshold on any of the three scales. Its O-SII buffer is 0%. If it were 1%, its combined buffer would rise by £228m and its headroom would fall to £345m.

The EU adds a systemic risk buffer for risks that are not about one bank's size: a housing market, say. It can target a subset of exposures, such as residential mortgages (CRD Article 133). Together the buffers form the combined buffer requirement.

What happens inside the buffer

CET1 that meets a minimum cannot also count towards a buffer (RBC30.4; PRA Rulebook, Capital Buffers 4.1). That includes CET1 that stands in for missing AT1 or Tier 2: if a bank's AT1 is smaller than its share of the Tier 1 requirement, CET1 fills the gap first. Whatever is left is free for the buffers. If it falls short of the combined buffer, the bank faces limits on distributions: dividends, share buybacks, AT1 coupons and discretionary bonuses (RBC30.5). Basel sets the share of earnings to keep by how deep into the buffer the bank is (RBC30.4), for a 2.5% buffer:

RBC30.4 minimum capital conservation ratios, conservation buffer only
CET1 ratio	Earnings to keep
4.5% to 5.125%	100%
5.125% to 5.75%	80%
5.75% to 6.375%	60%
6.375% to 7.0%	40%
above 7.0%	0%

The UK writes it the other way round, as a maximum distributable amount: the bank's profits of the last four quarters not yet in CET1, less anything already paid, times 0, 0.2, 0.4 or 0.6 by quartile, lowest first (Capital Buffers 4.3). A bank inside its buffer must also send the PRA a capital conservation plan within five working days (4.4).

Sort itDoes the MDA stop it?

A bank is in the lowest quartile of its combined buffer. Which payments are limited?

The final dividend on ordinary shares
A share buyback
The coupon on its AT1
Annual bonuses to staff
The coupon on its Tier 2 notes
Interest on its senior bonds
Fixed salaries

RiskAtoms Bank plc's restriction line

The bank's CET1 requirement is 5.90625%: Pillar 1's 4.5% plus 56.25% of its 2.5% Pillar 2A. Its AT1 of £400m is £49.0m short of its AT1 slice, and its Tier 2 is £23.9m short of its slice. CET1 fills both. So payout limits start at a CET1 ratio of 10.73%, not the 10.41% you get by adding the CET1 requirement to the combined buffer. At 13.24% the bank has £573.5m of headroom. Each loss below takes CET1 across a line, with RWA unchanged:

Payout limits start

£574m

Into quartile 3 (40%)

£830m

Into quartile 2 (20%)

£1,087m

Into quartile 1 (0%)

£1,343m

AT1 trigger (7% CET1)

£1,423m

Minimum requirements breached

£1,600m

CET1 lost, £m. The AT1 is written down if CET1 falls below 7%. The last line is where CET1 no longer covers the minimum requirements with the AT1 and Tier 2 gaps filled: total capital falls to its 10.5% requirement while the CET1 ratio is still 6.23%. The CET1 ratio reaches its own 5.91% minimum only after a loss of £1,673m, the figure in L4.1.03: Additional Tier 1 and Tier 2.

Buffers are meant to be used

The idea fails if banks treat the buffer as a second minimum. The liquidity buffer has the same problem: L3.5.06: The liquidity buffer quoted the Basel Committee calling it “entirely appropriate” for banks to use their HQLA in stress (LCR20.5). Banks may be reluctant to dip into capital buffers because markets read it as weakness and because the MDA would stop the AT1 coupon. In December 2025 the FPC noted that banks had been reluctant in practice to use their buffers and said it would work to make them more usable (FPC Record, December 2025, paras 32 and 42).

The formal version

With CET1 $C$ , AT1 $A$ , Tier 2 $T$ , RWA $R$ , the CET1 requirement $r_C$ and the AT1 and Tier 2 slices $s_A$ and $s_T$ (RBC30.4; PRA Rulebook, Capital Buffers 4.1 and 4.3):

\begin{aligned} \text{CBR} &= \text{CCB} + \text{CCyB} + \text{systemic} = 2.5\% + 2.0\% + 0\% = 4.5\% \\ \text{gap}_A &= \max(0,\ s_A R - A) = \max(0,\ 449.0 - 400) = 49.0 \\ \text{gap}_T &= \max\big(0,\ s_T R - T - \max(0,\ A - s_A R)\big) = 23.9 \\ C_{\text{free}} &= C - r_C R - \text{gap}_A - \text{gap}_T \\ &= 3{,}019.9 - 1{,}347.1 - 49.0 - 23.9 = 1{,}599.9 \\ \text{headroom} &= C_{\text{free}} - \text{CBR}\times R = 1{,}599.9 - 1{,}026.3 = 573.5 \\ \text{restriction line} &= r_C + \text{CBR} + \frac{\text{gap}_A + \text{gap}_T}{R} = 5.906\% + 4.5\% + 0.32\% = 10.73\% \end{aligned}

Inside the buffer, with profits $P$ not yet in CET1 (Capital Buffers 4.3(4) to 4.3(7)):

\begin{aligned} q &= \min\!\left(4,\ \left\lfloor \frac{C_{\text{free}}}{\text{CBR}\,R/4} \right\rfloor + 1\right), \qquad 0 \le C_{\text{free}} < \text{CBR}\,R \\ \text{MDA} &= P \times f_q, \qquad (f_1, f_2, f_3, f_4) = (0,\ 0.2,\ 0.4,\ 0.6) \end{aligned}

The $\max(0,\cdot)$ keeps a surplus of AT1 or Tier 2 from creating CET1; see M-A11: Min, max, floors and caps. £ millions; RWA £22,807.7m.

Try it

Put a loss through the bank and watch CET1 fall through the combined buffer. The board plans £240m of payouts over the next year out of £420m of profits. At what loss does the MDA cut the plan? Then release the countercyclical buffer and see how far the line moves.

Try itWhat a CET1 loss does to payouts

CET1 lost, after tax£0m

UK countercyclical buffer

0%3%6%9%12%15%

CET1 minimum, Pillar 1 + 2A: 5.91%
CET1 filling the AT1 and Tier 2 gaps: 0.32%
Combined buffer, four quartiles: 4.5%
AT1 trigger: 7% CET1

CET1 ratio13.24%

Restrictions start below10.73%

Headroom to restrictions£573.5m

Basel: share of earnings to keep0%

UK MDAno cap

Payouts allowed of £240m planned£240m

Above the combined buffer: no regulatory cap on payouts.

The loss comes straight off CET1 and RWA stay at £22,808m. Then the bank earns £420m after tax over the next four quarters, not yet in CET1, and wants to pay out its £240m plan (AT1 coupon £30m, ordinary dividend £150m, variable pay £60m). The profits and the plan are assumptions for this lesson. The book applies the UK countercyclical rate to all its RWA. Illustrative data, £ millions.

Worked example

A bad year eats into the buffer

Suppose RiskAtoms Bank plc loses £700m of CET1 after tax and its RWA stay at £22,807.7m. Over the next four quarters it expects to earn £420m and plans £240m of payouts: AT1 coupon £30m, ordinary dividend £150m, variable pay £60m. The profits and the plan are assumptions for this lesson. £ millions.

From a £700m loss to the payout

Step 1 of 6

1
CET1 after the loss
$\frac{3{,}019.9 - 700}{22{,}807.7} = \frac{2{,}319.9}{22{,}807.7} = 10.17\%$

Regulatory lens

Basel's buffers are RBC30 (conservation and countercyclical) and RBC40 (systemic). Each jurisdiction adds its own. Statements below are as at 3 November 2026 as at 3 Nov 2026.

In the UK

The UK countercyclical buffer is 2%, held at the FPC's September 2026 meeting. The PRA sets O-SII rates at least once a year on the FPC's thresholds (July 2025). In December 2025 the FPC lowered its benchmark for the system's Tier 1 capital from about 14% to about 13% of RWA, about 11% in CET1 (FPC Record, December 2025, para 21). In July 2026 it set a goal of a single releasable buffer and welcomed the PRA's plan to release the O-SII buffer in a systemic stress; the PRA was to consult on how O-SII rates are set in the second half of 2026 (FPC Record, July 2026, paras 27 to 30). As far as we could find, that consultation had not been published by 3 November 2026.

In the EU

The combined buffer adds the systemic risk buffer. Member states may apply it to all exposures or to a subset, such as residential mortgages, in steps of 0.5 percentage points. Above 3% they need opinions from the Commission and the ESRB, and above 5% the Commission's authorisation (CRD Article 133).

In the US

For the largest US banks the conservation buffer under the standardised approach is the stress capital buffer, set each year from the Federal Reserve's stress test with a floor of 2.5%. Payouts inside the buffer are limited to 60%, 40%, 20% or 0% of eligible retained income by quartile (12 CFR 217.11). A final rule published on 2 October 2026 averages two years of stress test results, from the requirements effective on 1 January 2029.

Spark Atoms

Spark AtomReleased, then held back

The March 2020 release freed UK banks' buffers. On 31 March 2020 the PRA welcomed the decisions of the large UK banks to suspend dividends and buybacks until the end of 2020 and cancel outstanding 2019 dividends, and said it expected them to pay no cash bonuses to senior staff. Capital released by one hand was kept in the system by the other.

Spark AtomThe trigger that frees nothing

After a loss of £1,423m, CET1 falls below 7% and the AT1 is written off, still £176m before CET1 stops covering the minimum requirements with the AT1 and Tier 2 gaps filled, and £249m before the CET1 ratio reaches its own minimum. Take a loss of £1,450m: the write-down lifts CET1 from 6.88% to 8.64%, but the AT1 gap grows by the same £400m. CET1 free for buffers stays at £149.9m. The bank is no nearer paying a dividend.

Key takeaways

Buffers are CET1 above the minimums. Falling into them is not a breach, but it limits dividends, buybacks, AT1 coupons and bonuses.
The combined buffer is the conservation buffer (2.5%) plus the countercyclical buffer (0% to 2.5%) plus any G-SIB, O-SII or systemic risk buffer.
The countercyclical buffer is raised with notice and released at once. The UK rate has been 2% since July 2023 (as at 3 November 2026).
CET1 that meets a minimum, or fills an AT1 or Tier 2 gap, cannot count towards the buffer. RiskAtoms Bank plc's restriction line is 10.73%, with £573.5m of headroom.
In the UK the MDA is profits times 0, 0.2, 0.4 or 0.6 by quartile, lowest first.
The bank's O-SII buffer is 0%: its UK leverage exposure of £64.6bn is far below the lowest threshold.

Reaction

Check what stuck

Question 1 · objective 3

A bank has RWA of £50bn and CET1 of £5.5bn. Its CET1 requirement is 6% of RWA, its combined buffer 4.5%, and its AT1 and Tier 2 fill their slices. How much CET1 headroom does it have above the MDA line, in £m?

£m

Question 2 · objective 3

A UK bank's CET1 sits in the second quartile of its combined buffer, counting from the bottom. Its distributable profits are £300m. What is its MDA, in £m?

£m

Question 3 · objective 3

A bank is in the lowest quartile of its buffer. Which payment does the MDA not stop?

AThe coupon on its Tier 2 notesBThe coupon on its AT1CThe final dividend on its ordinary sharesDBonuses to its traders

Question 4 · objective 4

RiskAtoms Bank plc needs AT1 of £449.0m for its Tier 1 requirement and holds £400m. How much CET1 is used to fill the gap, in £m?

£m

Question 5 · objective 2

If the FPC cut the UK countercyclical buffer from 2% to 0%, what would RiskAtoms Bank plc's MDA headroom be, in £m? Today it is £573.5m and RWA are £22,807.7m.

£m

Glossary

Capital buffer: CET1 held above the minimum requirements. A bank may fall into it without breaching its minimum, but then faces limits on payouts.
Capital conservation buffer: Capital conservation buffer: 2.5% of RWA in CET1, for every bank, at all times (RBC30.2).
Countercyclical capital buffer: Countercyclical capital buffer: 0% to 2.5% of RWA in CET1, set by each country for exposures there, raised as risks build and released in a downturn (RBC30.9).
G-SIB buffer: Global systemically important bank buffer: 1% to 3.5% of RWA in CET1 by bucket, for the banks on the FSB's annual list (RBC40.4).
O-SII buffer: Other systemically important institution buffer: the UK and EU name for a domestic systemic bank buffer (Basel's D-SIB). In the UK it rises with the size of the bank's UK leverage exposure.
Systemic risk buffer: Systemic risk buffer: an EU tool for structural risks, which may apply to all exposures or to a subset such as residential mortgages (CRD Article 133).
Combined buffer requirement: The combined buffer requirement: the conservation buffer plus the countercyclical buffer plus any systemic buffers, all in CET1.
Maximum distributable amount: Maximum distributable amount: in the UK, the most a bank inside its combined buffer may pay out in dividends, buybacks, AT1 coupons and variable pay; recent profits times 0, 0.2, 0.4 or 0.6.
Quartile: One quarter of the combined buffer. The deeper the quartile CET1 sits in, the smaller the share of profits that may be paid out.
MDA headroom: CET1 above the line where payout restrictions start: how big a loss the bank can take before the MDA applies.
Buffer release: Cutting the countercyclical buffer rate, with immediate effect, so banks can absorb losses and keep lending without hitting the MDA.

Deep Dives & Origins

Deep Dives

Bank of England, The Financial Policy Committee's approach to setting the countercyclical capital buffer, policy statement, July 2023: why the neutral rate is 2%. Intermediate.
Financial Policy Committee, Record, July 2026: the plan for a single releasable buffer and the leverage reforms. Advanced.

Origins

Basel Committee on Banking Supervision, RBC30: Buffers above the regulatory minimum, paras 30.2, 30.4, 30.5, 30.8, 30.9, 30.11 and 30.13, bis.org.
Basel Committee on Banking Supervision, RBC40: Systemically important bank buffers, paras 40.1, 40.2, 40.4, 40.22 and 40.23, bis.org.
Prudential Regulation Authority, PRA Rulebook, Capital Buffers, 4.1 (version of 31 July 2025), 4.3 and 4.4 (version of 31 December 2020).
Financial Policy Committee, Records, June 2017, November 2017 and December 2021.
Bank of England, Financial Policy Summary and Record, March 2020.
Bank of England, Financial Stability Report, December 2019, opening remarks: the neutral rate.
Financial Policy Committee, Records, December 2025 (paras 21, 32, 42 and 53), July 2026 (paras 18 and 27 to 30) and September 2026 (para 26).
Financial Policy Committee, response on the O-SII framework, 29 July 2025.
Financial Stability Board, 2025 List of Global Systemically Important Banks, 27 November 2025.
Prudential Regulation Authority, statement on dividends and bonuses, 31 March 2020.
Directive 2013/36/EU (CRD), Article 133, as amended.
12 CFR 217.11; Federal Reserve Board, “Modifications to the Capital Plan Rule and Stress Capital Buffer Requirement”, final rule, Federal Register, 2 October 2026.

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