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ICAAP and ILAAP

NBR approach

Lucretia Paunescu

Head of Division

Supervision Department

April 9, 2020


OUTLINE

I. General considerations

II. ICAAP and ILAAP under SREP

III. Legal basis for ICAAP, ILAAP, and SREP

IV. ICAAP – NBR approach

V. ICAAP – NBR questionnaire

VI. ICAAP disclosure

VII. ILAAP – NBR approach

VIII. ILAAP disclosure

2


I. General considerations (1)

• The Pillar 2 supervisory review process is an integral part of the Basel Framework and

consequently of the EU regulations.

• A fundamental objective of the Basel Committee's work, when Basel II framework was

introduced in 2004, was to reinforce the minimum capital requirements of the first pillar

with a robust implementation of the second pillar. This included efforts by banks to

assess their capital adequacy and by supervisors to review such assessments.

• SREP it is intended to ensure that banks not only have adequate capital to support all the

risks in their business but also develop and use better risk management techniques in

monitoring and managing these risks.

Source BIS

3


I. General considerations (2)

• Bank’s management bears responsibility for ensuring that the bank has

adequate capital to support its risks beyond the minimum requirements

• Supervisors evaluate how well banks assess their capital needs relative to

their risks and take measures, where appropriate.

• An active dialogue between banks and supervisors is needed, when

excessive risks, insufficient capital or deficiencies are identified, prompt

and decisive action can be taken to reduce risk, address deficiencies or

restore capital.

• Supervisors rely on banks' ICAAP and other risk reporting

4


I. General considerations (3)

• Pillar II is principles-based and intended to be tailored to the

risks, needs and circumstances of the respective credit

institution

• Supervisors use a range of approaches, methodologies and

strategies to execute their supervisory review process to

meet the overall objectives of a sound supervisory approach

to Pillar 2

• Differences between the capital assessment under a bank’s

ICAAP and the supervisory assessment of capital adequacy

made under Pillar 2 should trigger a dialogue that is

proportionate to the depth and nature of such differences.

5


II. ICAAP and ILAAP under SREP (1)

6


II. ICAAP and ILAAP under SREP (2)

7


II. ICAAP and ILAAP under SREP (3)

8


II. ICAAP and ILAAP under SREP (4)

9


II. ICAAP and ILAAP under SREP (5)

Risk management

10


II. ICAAP and ILAAP under SREP (6)

11


II. ICAAP and ILAAP under SREP (7)

Governance

Internal control

Assessment and

capital planning

ICAAP

Monitoring and

reporting

Comprehensiveness

Stress test

12


II. ICAAP and ILAAP under SREP (8)

13


II. ICAAP and ILAAP under SREP (9)

14


II. ICAAP and ILAAP under SREP (10)

15


III. Legal basis for ICAAP, ILAAP and SREP (1)

‣ Article 149 (ICAAP) – banking law (GEO no.99/2006) stipulates that credit

institutions are responsible for the internal assessment process of the

capital adequacy to its own risk profile.

‣ Art 166 (SREP) – banking law stipulates that the NBR shall review the

arrangements, strategies, processes and mechanisms implemented by

each credit institution to comply with Banking Law, with CRR, and with the

applicable regulations, and shall assess the following risks:

risks to which the credit institution is or might be exposed;

risks that a credit institution poses to the financial system taking into

account the identification and measurement of systemic risk;

risks identified by stress tests taking into account the nature, scale and

complexity of the credit institution's activities.

In addition, the NBR shall determine the risks or elements of risks not

covered and is entitled to request additional capital (the so-called “Pillar 2

capital requirements”)

16


III. Legal basis for ICAAP, ILAAP and SREP (2)

• Regulation no.5/2013 requires banks to have an appropriate internal

process for assessing their overall capital and liquidity adequacy in

relation to their risk appetite and risk profile

• ICAAP: Regulation no.5/2013 (article 68) stipulates that ICAAP represent a

component of the management process of the credit institution and of its

organizational culture and that this gives the management body the

possibility to assess, on an ongoing basis, the risk profile of a credit

institution and the adequacy of its internal capital in relation to it;

• ILAAP: Regulation no.5/2013 (article 137) requires banks (i) to have adequate

levels of liquidity buffers, (ii) to have strategies, policies, processes and

systems proportionate to the complexity, risk profile, scope of operation of the

bank and risk tolerance set by the management body, (iii) to communicate risk

tolerance to all relevant business lines.

17


III. Legal basis for ICAAP, ILAAP and SREP (3)

Regulation no.5/2013

Credit institution shall identify and assess all material risks to which it is or

may be exposed:

‣ the risks for which, according to CRR, there are regulatory capital requirements, including

significant differences between the regulated risk treatment for the calculation of minimum

capital requirements and the treatment under the ICAAP or governance environment

‣ the risks for which the regulatory capital requirements are not fully covered:

(i) risks arising from the application of less sophisticated approaches;

(ii) the underestimation for the stressed loss given default;

(iii) the residual risk related to the credit risk mitigation techniques;

(iv) the securitisation risk;

(v) the risks which arise from the foreign-exchange lending activity of obligors exposed to

foreign-exchange risk;

‣ risks such as: interest rate risk from non-trading book activities, concentration risk, liquidity risk,

risk of excessive leverage, reputational risk and strategic risk.

‣ risks outside the credit institution, respectively risks related to the regulatory, economic or

governance environment

18


III. Legal basis for ICAAP, ILAAP and SREP (4)

Regulation no.5/2013

‣ Credit institutions shall be responsible for the ICAAP, as well as for laying

down internal capital requirements in compliance with their risk profile and

their environment in which they are operating.

‣ The ICAAP shall be appropriate to the credit institutions' needs and shall

use the input data and the definitions that credit institutions use for internal

purposes.

‣ Credit institution may use its own definitions for risks and for the

materiality of a risk (subject to NBR notifications)

‣ Credit institution may use its own definitions for internal capital and

components thereof (subject to NBR notifications)

‣ Credit institutions shall submit internal regulations on governance

arrangements, ICAAP, material risk management arrangements and

stress testing

19


III. Legal basis for ICAAP, ILAAP and SREP (5)

Regulation no.5/2013

‣ Credit institutions shall draw up annually an ICAAP report that must include:

the manner in which the internal capital adequacy assessment process is

structured

the assumptions used for determining the risks by sectors and the risk types

the risk sensitivity and the confidence levels used for risk quantification

the means for risk aggregation in order to determine the internal capital

requirement

the assumptions used for determining the internal capital availability,

including the time horizon taken into account in planning the internal capital

the identification of aspects needing improvement and the measures planned

to that end at the credit institution level.

The report will be drawn up solo level and, where appropriate, at consolidated

level.

20


III. Legal basis for ICAAP, ILAAP and SREP (6)

‣ NBR’s approach to liquidity supervision is based on the principle that a credit institution

must have adequate levels of liquidity resources and a prudent funding profile, and

that it comprehensively manages and controls liquidity and funding risks.

‣ Credit institutions shall maintain adequate levels of liquidity buffers

‣ Credit institutions shall have in place robust strategies, policies, processes and

systems for the identification, measurement, management and monitoring of liquidity

risk over an appropriate set of time horizons, including intraday

‣ Strategies, policies, processes and systems shall be tailored to business lines,

currencies, branches and legal entities and shall include adequate allocation mechanisms

of liquidity costs, benefits and risks

‣ Policies and processes for liquidity risk management shall also take into account how

other risks, such as credit risk, market risk, operational risk and reputational risk may

impact the credit institution's overall liquidity strategy

‣ Credit institutions shall have in place liquidity risk profiles that are consistent with and, not in

excess of, those required for a well-functioning and robust system

‣ The strategies, policies, processes and systems shall be approved and reviewed by the

management body at least annually

21


III. Legal basis for ICAAP, ILAAP and SREP (7)

‣ Credit institutions shall develop methodologies for the identification, measurement,

management and monitoring of funding positions for currencies in which the credit institution is

active

‣ Methodologies shall include actual or expected material funding flows arising from assets,

liabilities and off-balance sheet items, including contingent liabilities and the possible impact of the

reputational risk.

‣ Credit institutions shall consider different liquidity risk mitigation tools, including a system of

limits and liquidity buffers and an adequately diversified funding structure and access to funding

sources, and shall review them regularly.

‣ Credit institutions shall design a set of early warning indicators to aid the process for

identification, as a matter of urgency, of increased risk or vulnerabilities in the liquidity position or

potential funding needs.

‣ A credit institution shall have in place an effective information system that provides timely and

forward-looking information on the liquidity position for the management.

‣ The information system shall capture all sources of liquidity risk, including contingent risks and their

related triggers, and have the ability to deliver more granular and time sensitive information during

stress events.

22


III. Legal basis for ICAAP, ILAAP and SREP (8)

‣ Credit institutions shall consider alternative scenarios on liquidity positions and on risk

mitigants and review the assumptions underlying decisions concerning the funding position

at least annually

‣ Credit institutions shall adjust their strategies, internal policies and limits on liquidity risk and

develop effective contingency plans, taking into account the outcome of the alternative

scenarios

‣ Credit institutions shall have in place contingency funding plans for the currencies in

which the credit institutions are active.

‣ Credit institutions shall have in place liquidity recovery plans

‣ Plans shall be tested by the credit institutions at least annually, updated on the basis of

the outcome of the alternative scenarios, reported to and approved by the senior

management, so that internal policies and processes can be adjusted accordingly.

‣ Under the overall liquidity risk management framework, credit institutions shall also consider

the liquidity risk arising from the impossibility of applying some funding agreements as a result

of lack of contractual clauses and possible implicit support.

23


III. Legal basis for ICAAP, ILAAP and SREP (9)

‣ The banking law requires that NBR uses the SREP approach, which includes

provisions on corporate governance.

‣ At the institution level, SREP guidelines require that the following aspects be

reviewed:

overall internal governance framework;

corporate and risk culture;

organization and functioning of the management body;

remuneration policies and practices;

risk management framework, including ICAAP and ILAAP;

internal control framework, including internal audit function;

information systems and business continuity; and

recovery planning arrangements.

‣ The SREP establishes the expectations for banks to fully consider all risks to

capital within its ICAAP and to liquidity in the ILAAP

24


IV. ICAAP- NBR approach (1)

‣ ICAAP is a key risk-management elements for institutions and supervisors

‣ The ICAAP plays a key role in the risk management of credit institutions and in

the SREP

‣ Banks use internal capital assessment processes to manage their capital levels

‣ It is the responsibility of the institution to ensure that its ICAAP is prudent and

conservative and remain comprehensive and proportionate to the nature,

scale and complexity of its activities, bearing in mind that proportionality is not to be

applied in a way that undermines the effectiveness of its ICAAP.

‣ Bank’s board has the ultimate responsibility for the sound operation

and financial condition of the bank

‣ The NBR assesses banks’ ICAAPs as part of SREP

‣ The SREP is flexible and adjustable to ensure risk-based supervision.

‣ Frequency, scope and depth with which the elements of the SREP are

assessed can vary, depending on the level of the supervisory engagement

(annually according to Romanian framework).

25


IV. ICAAP- NBR approach (2)

‣ NBR periodically review (at least annually) the institution’s ICAAP and

determine their:

Soundness (policies, processes, inputs and models constituting the

ICAAP are proportionate to the nature, scale and complexity of the

activities of the institution)

Effectiveness (examine ICAAP use in the decision-making and

management process at all levels in the institution)

Comprehensiveness (assess the ICAAP coverage of business lines,

legal entities and risks to which the institution is or might be exposed,

and the ICAAP compliance with legal requirements)

26


IV. ICAAP- NBR approach (3)

‣ NBR assess how ICAAP is integrated into overall risk management and strategic

management practices, including capital planning, these contribute to the calculation

of additional own funds requirements and the assessment of capital adequacy (when

set up TSCR)

‣ When performing our assessments, we use all available information sources,

including regulatory reporting, ad-hoc reporting agreed with the institution, the

institution’s internal metrics and reports (e.g. internal audit report, risk

management reports, information from the ICAAP), on-site inspection reports etc.

‣ The assessment is intended to be institution-specific, but comparison with peers

are considered in order to identify potential exposure to risks to capital.

‣ In the assessment of risks to capital, we also evaluate the accuracy and prudency

of the calculation of minimum own fund requirements to identify situations where

minimum own funds calculations may underestimate the actual level of risk

‣ Both the ICAAP and stress testing processes and results comprise part of the

framework used by NBR supervisors to assess the capital adequacy of banks.

27


IV. ICAAP- NBR approach (4)

28


IV. ICAAP- NBR approach (5)

Risk type Risk sub- category Risk level Details (in case non

significant risk)

Risk assessment

methodology

Credit risk Default risk High IRB foundation

Securitization risk Non significant No securitization

transactions

Immaterial

Residual risk from CRM Medium Qualitative measures

(standard contracts , four

eyes principles, collateral

reevaluation)

Market risk FX risk in banking book Medium Standardize approach

Operational risk Medium BIA

Liquidity risk Low Qualitative measures

29


IV. ICAAP – NBR approach (6)

‣ NBR formalized a procedure concerning the methodology for determining additional

own funds requirement Pillar II and the method of determining and expressing it in the

capital evaluation process SREP

‣ NBR has implemented a monitoring system based on quantitative risk indicators (Key

risk indicators) which allows the identification of deterioration of the risk profile of each

entity, the results of the monitoring system being used both for on-site and off-site supervisory

activities.

‣ 26 KRIs are used for scoring with thresholds for each rating (1- 4) from the total of 34

KRIs. These scores are a starting point for the SREP scores and are automatically updated

based on the availability of new reported data.

‣ KRI thresholds may also trigger an update of SREP elements outside the annual cycle.

‣ All indicators are split into groups (risk categories) which also allows to assign automated

scores for SREP elements and risk categories (e.g. credit risk score), which serves a starting

point for further analysis

‣ For every bank there is a quarterly risk dashboard, providing bank-specific data, and sector

and peer group details

30


IV. ICAAP – NBR approach (7)

Memoranda items

SREP elements

Pillar 1 capital requirements,

where applicable

(in mln EUR)

ICAAP estimate

(in mln EUR)

Overall SREP capital requirement/estimate

(including supervisory proxy, where applicable)

(in mln EUR)

A. Business Model (viability and sustainability) NA NA

B. Internal governance arrangements NA

C. Risks to solvency (risks and controls)

C.1 Credit and counterparty risk 50.0 45.0 50.0

C.2 Settlement / Delivery risk NA NA NA

C.3 Inter-concentration risk NA NA

C.4 Market risk 0.0 1.0 1.0

C.5 IRRBB 2.0 2.0

C.6 Operational risk 9.0 7.0 9.0

C.7 Risk of excessive leverage 0.0 0.0

C.8 Other risks material to the institution, as applicable (FX lending risk) 1.2 4.0

C.9 Other risks material to the institution, as applicable (legal risk) 1.3 1.3

C.10 Other risks material to the institution, as applicable (strategic risc) 0.0 3.6

C.11 Other risks material to the institution, as applicable (credit concentration risk) 1.0 1.4

D.

Risks to liquidity

-Funding risk (cost of funding perspective)

0.0 0.0

E. Systemic risk (risk that institution poses to financial system) NA NA

F. Inter-risk diversification effects NA NA

G. Capital planning / stress test buffer (where applicable) 14.0 14.0

SREP capital outcome

Overall capital requirement/estimate 59.0 72.5 86.3

H.

Capital adequacy assessment (capital is assessed as adequate/inadequate)

Adequate

Additional own funds requirement 11.70%

31


V. ICAAP- questionnaire (1)

Information regarding the general ICAAP framework

‣ What is the main purpose of the ICAAP in your credit institution

‣ What is the field of application of the ICAAP in your credit institution

‣ What is the level of the capital surplus/deficit resulting from the ICAAP

‣ Indicate the similitudes and differences between the ICAAP and regulated capital

requirements.

‣ Describe the risk identification approach (including the concentration risk

approach) as well as the identified risks included in relevant categories and subcategories

of risk covered by ICAAP, inclusively the approach on determining of

the materiality (significance) of risks within your credit institution.

‣ Describe the main objectives/principles and presumptions of ICAAP, inclusively

the way they ensure capital adequacy.

‣ Mention which is the ICAAP time horizon defined by your institution.

32


V. ICAAP- questionnaire (2)

Information regarding the risk measurement as well as their

evaluation and aggregation

‣ Describe the quantification/measurement methods and models,

inclusively the values, hypothesis and parameters used (such as

confidence level, holding periods, etc.) for all categories and subcategories

of risks.

‣ Describe the main differences between the

quantification/measurement methods and models used for the

purpose of the ICAAP and those used for the calculation of the

minimum requirements of the own funds for the covered risks.

‣ Describe the methodology of aggregation of the internal capital

estimations for the covered entities and risks.

33


V. ICAAP- questionnaire (3)

Information regarding the internal capital and its allocation

‣ Define the internal capital used to cover the capital estimations within ICAAP, also

providing a detailed description of the capital elements/instruments had in view.

‣ Describe the main differences between internal capital items/instruments and

regulated capital items / instruments.

‣ Describe the methodology and assumptions / hypothesis used by the credit institution

to allocate internal capital on business lines

‣ Describe the monitoring process (comparison between the estimates of internal

capital and the allocated capital), including the escalation procedures

Information regarding capital planning

‣ Make a general description of the capital planning process, including the dimensions

envisaged (e.g., internal, regulatory), time horizon, capital elements / instruments,

capital measures, etc.

‣ Make a description of the main assumptions underlying capital planning.

34


V. ICAAP – questionnaire (4)

Information regarding the stress tests in ICAAP

‣ Make a description of the management framework for conducting,

approving and using stress tests in ICAAP.

‣ Make a description of how to integrate ICAAP stress tests into your

credit institution's general stress test program and the interaction

between ICAAP stress tests and other stress tests, as well as

integration of the stress tests into risk management and control.

‣ Make a description of the adverse scenarios considered under

ICAAP, including mentioning their assumptions and the main

macroeconomic variables.

‣ Make a description of the main assumptions used in the scenarios

envisaged, reference data, time horizons, etc.

35


VI. ICAAP disclosure (1)

• The ICAAP and Risk Bearing Capacity Calculation (RCC) form

a part of the Pillar II requirements, according to Basel Accord

• The risk side of the calculation serves to determine the

economic capital requirement for unexpected losses in

respect of credit, market and operational risk. Besides credit,

market and operational risk, the economic capital requirement for

31 December 2018 includes also FX induced credit risk and

business/strategic risk.

36


VI. ICAAP disclosure (2)

• The economic capital requirement is compared to the capital held as

coverage (broken down into equity, subordinated capital, reserves and

retained earnings), thus determining the Group’s ability to absorb these

potential unexpected losses.

• The risk is calculated at a confidence level of 99.9%. The calculation of

RCC is designed in accordance with the business strategy and risk profile of

Bank Group and is accounted for in its risk appetite.

• The Management Body is informed on a quarterly basis on the basis of

the results of the determined risk bearing capacity of the bank, the degree

of utilization of the risk limits, about the level of risks and the capital/coverage

potential going forward.

• The calculation of the risk-bearing capacity is a vital part of the management

of risk and capital at the level of Bank Group.

37


VI. ICAAP disclosure (3)

• The RAF is closely linked with the ICAAP and the ILAAP and sets the

concentration risk limits for the risk types identified as significant in the risk

assessment. There is also a connection to the recovery plan as the risk capacity

and risk tolerance limits in the RAF are aligned with the corresponding trigger

monitoring limits

• Economic capital - Risk that unexpected losses from the economic point of

view exceed the internal capital. The unexpected loss for the risk horizon of

one year (economic capital) may not exceed the current value of the tier 1

capital confidence level 99.90 per cent

• Economic capital is calculated as the sum of unexpected losses stemming

from different Group units and different risk categories .In addition, a general buffer

is held to cover other risk types not explicitly quantified.

• The Group uses a confidence level of 99.90 per cent (2018: 99.92 per cent) to

calculate economic capital as at year-end 2019. In compliance with the ICAAP

Directive published by the European Central Bank, the tier 2 capital will no longer

be used to calculate the internal capital as at year-end 2019.

38


VI. ICAAP disclosure (4)

• Economic capital is an important instrument in overall bank risk

management. Economic capital limits are allocated to individual business

areas during the annual budgeting process and are supplemented in dayto-day

management by volume, sensitivity, and value-at-risk limits.

• The Group planning process is undertaken on a revolving basis for the

coming three years and incorporates future changes in economic capital

as well as available internal capital. Economic capital thus substantially

influences plans for future lending activities and the overall limit for market risk.

• Economic perspective – value-at-risk approach. Parallel to the economic

capital approach, internal capital adequacy is assessed with a focus on the risk

taking capacity with regard to regulatory capital and total capital requirements.

• The figure for risk-taking capacity is compared to the overall value-at risk

(including expected losses), which is calculated using similar techniques as

those used under the economic capital approach (albeit using a lower

confidence level of 95 per cent)

39


VII. ILAAP - NBR approach (1)

‣ NBR annually assesses the quality of liquidity risk management of bank, following items being taken into

consideration (Reg. no.5/2013 and SREP guidelines):

the analysis of the liquidity risk strategy and tolerance to be approved by the management body and

updated at least annually, to be effectively communicated to relevant staff, to be clearly defined, objectives

stated into the strategy be realistic, properly documented and correlated with its business model;

to what extent the risk profile captures the exposure of the bank to liquidity risk, whether the indicators

and thresholds used are appropriate, a comparison with supervisory benchmarking;

whether banks have appropriate policies and procedures for the management of liquidity and funding

risk, whether there are sufficient human and technical resources;

assessing the key risk indicators system developed by credit institutions for identifying and

measuring liquidity and funding risk, the frequency of which this indicator is calculated and reported;

the way banks monitor cash flows and liquidities in order to meet intraday obligations, existence of

funding agreements for intraday liquidity purposes, internal limits for holding unencumbered treasury bills to

fill the liquidity shortfalls;

the number of liquidity stress scenarios used, the severity levels, the plausibility of the assumptions

taken into consideration, whether the liquidity buffer covers the potential outflows calculated for the survival

period set by the banks.

whether the risk limits and monitoring systems of the bank are consistent with its liquidity risk

tolerance and regularly reviewed, as well as whether they incorporate the outcomes of internal liquidity

stress tests.

40


VII. ILAAP - NBR approach (2)

• During the on-site inspection (following SREP), the NBR assesses and determines that

banks have robust liquidity contingency funding plans. The NBR also assesses whether

banks have adequate procedures with respect to communication within the institution and with

external parties (including communication with the NBR). In addition, the appropriateness of

assumptions regarding the role of central bank funding in the liquidity funding plan is also

assessed.

• According to art. 220 and 221 of Regulation no.5/2013, credit institutions are required to

analyze the impact of alternative scenarios on liquidity buffers. The market-wide alternative

scenario should be considered and it might assume a decline in the liquidity value of some

assets and deterioration in funding market conditions in addition to market disruptions or

changes in the macroeconomic environment in which the credit institution is operating. Credit

institutions also shall consider different time periods and varying degrees of stress conditions.

• Regarding the use of stress test results, according to the EBA guidelines, the NBR assesses

whether the outcomes of stress testing are integrated into the institution’s strategic planning

process for liquidity and funding.

41


VII. ILAAP - NBR approach (3)

ILAAP report content (e.g.)

• General principles regarding liquidity risk tolerance and strategy (risk tolerance is set as 30

days survival period)

• Governance

• Assets and liabilities structure

• Funding Plan

• Funds Transfer Pricing

• Identification, calculation, measuring, monitoring, control, reporting and management of

the liquidity risk

• Risk appetite framework (LCR, NSFR, etc.) and liquidity risk limits

• Instruments and liquidity risk reports

• Stress test

• Intraday liquidity management

• Liquidity buffer and other liquid assets

• Alternative plans

• Liquidity position analysis for x year

• Liquidity gap

• ILAAP assessment

42


VII. ILAAP - NBR approach (4)

ILAAP assessment example

Risks, deficiencies and concerns relating to the liquidity and funding risk management and the

ILAAP:

Referring to the monitoring of the LCR and NSFR, certain inconsistencies were

identified as regard the limits applicable to these two indicators, included in different

internal regulations;

Bank has to redefine the thresholds established for the key-indicators used in the risk

appetite framework, in order to reflect in a proper manner the medium risk profile

undertaken for the liquidity risk;

The Bank did not perform an adequate estimation in relation with the stressed LCR,

therefore it has to correct the calculation and to revise the assumptions applied in

performing the stress test exercise;

Due to the importance of the early warning indicators in managing the liquidity risk

and in anticipating the crisis, the bank has to revise their calculation and to review the

internal applicable framework;

According to the ‘EBA/GL/2016/10 Guidelines on ICAAP and ILAAP information

collected for SREP purpose’, the bank should make available the ‘reader’s manual’.

43


VIII. ILAAP disclosure (1)

• Bank has implemented an ILAAP in accordance with regulatory requirements and guidelines as

set out by the BCBS, the European Commission and the European Banking Authority

• Internal Liquidity Adequacy Assessment Process, summarizing the liquidity and funding risk

management framework, methodologies and processes and provide links to more detailed

information on individual components of the ILAAP

• The governance framework ensures the distinction between liquidity management (first line

of defence) and liquidity risk management, a ‘second line of defence for liquidity risk.

• The organizational structure has to provide the segregation of duties between:

• Liquidity management function, responsibilities on:

– Strategic liquidity management including coordinating the activity of subsidiaries with respect

to management of liquidity, funding needs, FX positions and investments;

– Operational Liquidity Management;

– Crisis Liquidity Management;

– Pricing.

• Liquidity risk management function, responsibilities on:

– Development of methods and models;

– Measurement/ Monitoring/ Reporting;

– Liquidity risk limits proposal.

44


VIII. ILAAP disclosure (2)

Bank has an appropriate reporting framework for liquidity and funding risk

management which includes the scope, manner and frequency of liquidity and

funding risk reporting, and which also designates the entity responsible for

preparing the reports

Monthly liquidity indicator reported to the NBR:

Immediate liquidity indicator

Liquidity Coverage Ratio

Net Stable Funding Ratio

Additional Liquidity Monitoring Metrics

Internal liquidity indicator:

Survival Period Analysis

Structural Liquidity Ratio.

45


VIII. ILAAP disclosure (3)

Other policies implemented by the bank in order to mitigate the liquidity risk

Liquidity Risk Manual- sets minimum standards for the identification,

calculation, measuring, monitoring, steering, reporting and management of

the liquidity risk

Methodology Handbook for Survival Period Analysis - SPA represents a key

instrument for assessing the insolvency risk

Funds Transfer Pricing (FTP) Policy - FTP system covers all liquidity-relevant

pricing components to ensure all liquidity risks are adequately transfer-priced

to business lines across major subsidiaries and currencies

Asset Encumbrance Management Policy - provide an overarching framework

on governance, responsibilities and principles for managing, monitoring and

reporting asset encumbrance

Liquidity Management Policy - describe requirements that would ensure an

appropriate liquidity management by establishing a robust liquidity

management framework and requirements

46


VIII. ILAAP disclosure (4)

• The cornerstones of the economic liquidity risk framework are the Going

Concern (GC) and the Time to Wall (TTW) scenario. The Going Concern

report shows the structural liquidity position.

• The Time to Wall report shows the survival horizon for defined adverse

scenarios and stress models (market, reputational and combined crisis)

and determines the minimum level of the liquidity buffer (and/or the

counter-balancing capacity)

• The time to wall concept has established itself as the main control

instrument for day-to-day liquidity management and is therefore a central

component of funding planning and budgeting. It is also fundamental to

determining performance ratios relating to liquidity.

47

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