Pillar 2
Pillar 2 (Supervisory Review)
Definition
The second pillar of the Basel framework covering the supervisory review process. Pillar 2 requires banks to conduct their own internal assessments of capital adequacy (ICAAP) and liquidity adequacy (ILAAP), and provides supervisors with the authority to impose additional requirements above Pillar 1 minimums based on firm-specific risk assessments.
Regulatory Context
Pillar 2 requirements (P2R) are binding and must be met with capital, while Pillar 2 guidance (P2G) represents the supervisor's expectation of the capital buffer a bank should hold above P2R. Breach of P2G triggers restrictions on distributions.