zeb: ECB specifies ILAAP and ICAAP requirements
Posted: 19 December 2017 | Author: Dr. Ulf Morgenstern, Dr. Dirk Holländer & Jens Kuttig | Source: zeb
Systemically important banks, or SIBs for short, are facing new ECB requirements regarding their reporting obligations in the areas of capital and liquidity. In this context, the ECB sent out a letter to the executive boards of the systemically important banks at the end of February 2017.
What is the background?
The ECB has initiated a multi-year project entitled “SSM Guides on ICAAP and ILAAP for significant institutions“. It aims at a consistent definition of the ICAAP and ILAAP in the euro area as well as the harmonization of the documentation and information to be submitted by the credit institutions.
Seven key principles are described as the supervisory authority’s expectations regarding ICAAP and ILAAP:
- Responsibility of the management body: The overall responsibility for implementing the ICAAP and ILAAP rests with the management body which has to establish an adequate governance structure and make a capital adequacy statement (CAS). In particular, the supervisory authority perceives a considerable gap regarding the involvement the management body and the adequate discussion of ICAAP/ILAAP topics within the institutions.
- Definition of decision-making processes: The ECB expects the integration of ICAAP and ILAAP as integral components of the risk management and decision-making processes. In particular, the interlinking of ICAAP and capital planning as well as the granularity of information for decision-making in many institutions are regarded as inadequate by the supervisory authority.
- ICAAP/ILAAP to ensure banks’ ability to survive: This principle—a core principle from the supervisors’ point of view—requires the comprehensive analysis of scenarios for the capital and liquidity position from various perspectives (normative and economic) and over various time horizons. Especially with regard to the suitability of the scenarios and their detailed adjustment for individual institutions, the supervisory authority sees a clear need for action.
- Identification and consideration of material risks: In the risk inventory, the consideration of all material risks is demanded. The focus should be shifted to risk types that have been rather neglected in the past, such as implicit options, legal risks, conduct risks and model risks.
- Quality of internal capital: From a supervisory point of view, the internal capital has to be of a very high quality in order to actually be available for risk absorption as and when the need arises. In this context, special attention should be paid to the treatment of hidden liabilities or reserves as well as deferred taxes.
- Quantification methods: The demand for adequate, consistent and validated risk quantification methods as such is not new. However, as the supervisory authority perceives deficits both in the independent validation of the models and the review by internal auditors, in practice special importance is attached to improving validation.
- Requirement for stress testing: The design of the stress tests must be adequate with regard to the institution’s risk situation and business situation—a flexible scenario capability is highly important in this context.
Time is of the essence—the supervisory authority’s procedure makes this very clear: The systemically important banks were asked to submit their feedback on the new requirements to the ECB by May 31 of this year. The institutions are supposed to apply the new principles as early as in 2019.