Slovene experience and practical guidelines for banking supervisors on SREP, ICAAP & ILAAP

ICAAP and ILAAP
role in SREP
Katja Ciglar
Bank of Slovenia, Banking supervision
14.4.2020

Agenda
‣ Regulatory aspect of ICAAP and ILAAP role in SREP
‣ Practical aspect of ICAAP and ILAAP role in SREP
‣ What I will not tell you: ˝Recipe for a perfect ICAAP and ILAAP˝!
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Regulatory aspect of ICAAP and ILAAP role in SREP
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Overview of EU regulation
Basel – Pillar 2 framework – The four principles of Pillar 2
✓ Principle 1 (bank responsibility)
✓
✓
Banks should have a process that assesses their overall capital adequacy in relation to their risk
characteristics, as well as a strategy for maintaining their capital levels.
Those strategies and processes shall be subject to regular internal review to ensure that they remain
comprehensive and proportionate to the nature, scale and complexity of the activities of the institution
concerned.
✓ Principle 2 (supervisory responsibility)
✓
Supervisors should review a bank’s internal capital adequacy assessments and follow up as needed.
✓ Principle 3 (supervisory responsibility)
✓
Supervisors should specify their expectation for banks to operate above the minimum regulatory capital
ratios.
✓ Principle 4 (supervisory responsibility)
✓
Supervisors should intervene at an early stage to prevent capital from falling below the level required to
support a bank’s risk profile.
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Overview of EU regulation
Basel – Principles for Sound Liquidity Risk Management and Supervision
Fundamental principle for the management and supervision of liquidity risk:
✓ Principle 1: A bank is responsible for the sound management of liquidity risk. A bank should
establish a robust liquidity risk management framework that ensures it maintains sufficient
liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range
of stress events, including those involving the loss or impairment of both unsecured and secured
funding sources. Supervisors should assess the adequacy of both a bank's liquidity risk
management framework and its liquidity position and should take prompt action if a bank is
deficient in either area in order to protect depositors and to limit potential damage to the
financial system.
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Overview of EU regulation
CRDIV
✓ Article 73 - ICAAP
✓
✓
CRDV
Institutions shall have in place sound, effective and comprehensive strategies and processes to assess
and maintain on an ongoing basis the amounts, types and distribution of internal capital that they
consider adequate to cover the nature and level of the risks to which they are or might be exposed.
Those strategies and processes shall be subject to regular internal review to ensure that they remain
comprehensive and proportionate to the nature, scale and complexity of the activities of the institution
concerned.
✓ Article 104b – Guidance on additional own funds (SREP)
SREP
✓
✓
✓
Pursuant to the strategies and processes referred to in Article 73, institutions shall set their internal
capital at an adequate level of own funds that is sufficient to cover all the risks that an institution
is exposed to and to ensure that the institution's own funds can absorb potential losses resulting
from stress scenarios, including those identified under the supervisory stress test referred to in Article
100.
Competent authorities shall regularly review the level of the internal capital set by each institution
in accordance with paragraph 1 of this Article as part of the reviews and evaluations performed in
accordance with Articles 97 and 101, including the results of the stress tests referred to in Article 100.
Pursuant to that review, competent authorities shall determine for each institution the overall level
of own funds they consider appropriate.
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Overview of EU regulation
CRDIV
✓ Article 86 - ILAAP
✓ Competent authorities shall ensure that institutions have 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, so as to ensure
that institutions maintain adequate levels of liquidity buffers.
✓ Article 105 – Specific liquidity requirements (SREP)
✓ For the purposes of determining the appropriate level of liquidity requirements on the
basis of the review and evaluation carried out in accordance with Section III, the
competent authorities shall assess whether any imposition of a specific liquidity
requirement is necessary to capture liquidity risks to which an institution is or might be
exposed, taking into account the institution's arrangements, processes and mechanisms
referred to in Section II and in particular in Article 86.
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Overview of EU regulation
✓ EBA Guidelines on common procedures and methodologies for the supervisory review and
evaluation process (SREP) – framework overview
Assessment
Additional
information
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Overview of EU regulation
✓ EBA Guidelines on common procedures and methodologies for the supervisory review and
evaluation process (SREP)
✓ Assessing internal governance and institution-wide controls – ICAAP and ILAAP
frameworks
✓ Soundness of the ICAAP and ILAAP
✓ Effectiveness of the ICAAP and ILAAP
✓ Comprehensiveness of the ICAAP and ILAAP
✓ SREP capital assessment – Determining additional own funds to cover unexpected losses
✓ The ICAAP calculations – where deemed reliable or partially reliable – should be the
starting point for the determination, supplemented by the outcome of supervisory
benchmarks and other relevant inputs as appropriate.
✓ Assessment of the reliability of the ICAAP:
✓ Granular (broken down by risk type)
✓ Credible (demonstrably cover the risk, based on appropriate models and prudent
assumptions, no ‘black box’)
✓ Understandable (drivers of the calculations/methodologies clearly specified)
✓ Comparable (holding period/risk horizon and confidence levels)
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Overview of EU regulation
✓ Guidelines on common procedures and methodologies for the supervisory review and evaluation
process (SREP) – Interaction between the elements of ICAAP/ILAAP, SREP and recovery plan
assessment
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Overview of EU regulation
✓ Guidelines on ICAAP and ILAAP information collected for SREP purposes
(EBA/GL/2016/10)
✓ Guidelines specify what information regarding ICAAP and ILAAP competent
authorities should collect from the institutions in order to perform their
assessments following the criteria specified in the SREP Guidelines
✓ Guidelines refrain from setting specific ICAAP/ILAAP requirements, or
prescribing any new criteria for the supervisory assessment of ICAAP or ILAAP
✓ Aim to enhance consistency in the supervisory assessment and use of the
ICAAP and ILAAP frameworks
✓ Competent authorities organise collection of ICAAP and ILAAP information
from institutions - the principle of proportionality in relation to the frequency,
reference dates and remittance dates, and scope in relation to the SREP
categorisation of institutions, minimum supervisory engagement model and
supervisory examination programmes
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Overview of EU regulation
✓ Guidelines on ICAAP and ILAAP information collected for SREP purposes
(EBA/GL/2016/10)
✓ Guidelines specify what information, regarding ICAAP and ILAAP, competent
authorities should collect from the institutions in order to perform their assessments:
✓ an overarching document (‘reader’s manual’) that facilitates the assessment of ICAAP and
ILAAP documents and provides an extended index of the documents and their status
✓ general information about ICAAP and ILAAP frameworks, business model and strategy,
as well as governance arrangements, and stress testing programmes
✓ ICAAP-specific information
✓ ILAAP-specific information
✓ summary of main conclusions from ICAAP and ILAAP and quality assurance information
(Capital adequacy statement and Liquidity adequacy statement)
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Overview of EU regulation
✓ EBA RISK REDUCTION PACKAGE ROADMAPS (tasks arising from CRD 5 – CRR 2 – BRRD 2)
✓ The EBA’s policy strategy on Pillar 2 deliverables
✓ a focus on proportionality
✓ the potential inclusion of
environmental, social and governance
(ESG) risks in the SREP review
✓ complementing the role of anti-money
laundering (AML) authorities
✓ capital add-ons are confined to a
purely microprudential perspective
✓ conditions for applying Pillar 2 capital
add-ons to cover specific risks
✓ the conditions for the use of ICAAP
calculations for the determination of
the capital add-ons will be clarified
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Implementation in the national regulation - ICAAP
✓ Bank of Slovenia – REGULATION on Internal Governance Arrangements, the Management
body and the Internal Capital Adequacy Assessment Process for Banks and Savings banks (link)
✓ Early implementation of SSM requirement into national regulation
✓ This national regulation puts more clarity on the supervisory expectations
✓ Withdrawal of BoS ICAAP guidelines that prescribed a fall-back approach
✓ Dedicated chapter on ICAAP that covers the following aspect:
✓ ICAAP as integral part of risk management processes (the bank shall apply the same
systems, processes, methodologies, data and definitions of risks as those applied in the
identification, assessment or measurement, management, monitoring and controlling of
risks; Management body’s responsibility for approval of ICAAP, MB detailed knowledge
and SB general awareness of the concept and objectives of the ICAAP, including an
understanding of the importance of its results and the corresponding measures, planning
and implementation of ICAAP)
✓ Application of results of ICAAP to setting of risk strategies and capital planning
(inclusion of identified risks in ICAAP, risk measurement and use of economic capital
models, internal assessment of risk-based capital requirement)
✓ Internal capital assessment (objectives for maintenance of risk bearing capacity, capital
planning, analysis of risk bearing capacity, use of stress tests, capital allocation process)
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Implementation in national regulation - ILAAP
✓ ILAAP – Appendix 2: Liquidity risk of REGULATION on Internal Governance Arrangements
✓ This appendix defines the additional requirements with regard to liquidity risk
management referred to in Articles 158, 159 and 160 of the ZBan-2 (Banking act) for the
purpose of a bank being able at any moment to meet its obligations in timely fashion by
ensuring:
1. an adequate level of liquidity buffers, and
2. stable funding structure.
✓ The additional minimum requirements referred to in the first paragraph include
requirements in connection with:
1. the organisation of liquidity risk management;
2. the management of intraday liquidity;
3. the management of collateral assets and asset encumbrance;
4. the allocation of costs, benefits and risks in the provision of liquidity;
5. the mitigation of liquidity risk; and
6. measures to prevent and eliminate the causes of liquidity shortfalls.
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Implementation in national regulation - SREP
✓ Governing Board of the Bank of Slovenia decided at the time of the SSM
establishment to follow the SSM SREP methodology for the LSI being under
BoS direct supervision in order to have a consistent approach to ensure a level
playing field within Slovenian market
✓ SREP is conducted in accordance with EBA SREP guidelines and SSM SREP
manual for LSI which follows the SSM methodology for SI
✓ Technical guidelines on the minimum required information on ICAAP and
ILAAP with prescribed templates (implementation of EBA GL)
✓ Taking advantage of some methods and metrices from before SSM
✓ Ensuring compliance of SREP with the principle of convergence within SSM to
support minimum level of harmonization and continuum
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SSM regulation – ICAAP and ILAAP guide
✓ The ECB published its expectations on the ICAAP and the ILAAP in its ECB Guides
to ICAAP and ILAAP which are aimed at assisting institutions in strengthening their ICAAPs
and ILAAPs and at encouraging the use of best practices by explaining in greater detail the
ECB’s expectations of the ICAAP and the ILAAP, leading to more consistent and effective
supervision.
✓ The ICAAP and ILAAP are expected to play an even greater role in the SREP in the future,
which should encourage banks to continuously improve these processes. Among other things,
both the qualitative and quantitative aspects of the ICAAP – the latter focusing on identifying and
quantifying risks – could play an enhanced role in the calculation of additional capital
requirements on a risk-by-risk basis.
On a good track towards consistency and harmonization.
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Practical aspect of ICAAP and ILAAP role in SREP
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SSM Supervisory Priorities
ECB Banking Supervision – SSM supervisory priorities 2020
Source: https://www.bankingsupervision.europa.eu/banking/priorities/html/ssm.supervisory_priorities2020~b67449d936.en.html#toc8
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Bank of Slovenia Supervisory Priorities 2020
✓ ICAAP and ILAAP are on the map of supervisory priorities of Bank of
Slovenia for a few years now
✓ On-going supervision will focus among others on:
✓ Bank‘s liquidity and capital management as ICAAP‘s and ILAAP‘s are
still not of a good quality (use in decision making, connection to other risk
management aspects – RAF, strategies, limits, business plans) – meeting
with MB to discus on ICAAP and ILAAP
✓ On-site supervision:
✓ Continuation of on-site inspections of ICAAP and ILAAP – included in
SEP planning
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SREP in Bank of Slovenia
SSM LSI SREP Methodology
Source: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.srep_methodology_booklet_lsi_2019~15ce18ff7f.en.pdf
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SREP in Bank of Slovenia
SSM LSI SREP Methodology
Source: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.srep_methodology_booklet_lsi_2019~15ce18ff7f.en.pdf
Dialog!
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SREP in Bank of Slovenia
SSM SI SREP Methodology
Source: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.srep_methodology_booklet_2018~b0e30ced94.en.pdf
Similar for ILAAP!
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SREP in Bank of Slovenia
SSM LSI SREP Methodology
Source: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.srep_methodology_booklet_lsi_2019~15ce18ff7f.en.pdf
Dialog!
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SREP in Bank of Slovenia
✓ SSM SREP manual for LSI – looking beyond
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SREP in Bank of Slovenia and SSM
✓ BoS SREP outcome - ICAAP/ILAAP related measures adressing further improvements needed
(integration in decision making, consistency with on-going risk management, interlinkage with other
aspects – RAF, strategy, limit system).
✓ SSM SREP outcome
Overall SREP 2019 key messages
✓ Overall, the two key risk management processes for capital and
liquidity – ICAAPs and ILAAPs – show significant need for
improvements, also in light of their role in the SREP which will
increase in the future.
ICAAP/ILAAP key messages
✓
✓
2019 2018
Overall ICAAPs and ILAAPs show significant need for
improvements.
The biggest areas of concern are risk data and IT. Indeed,
ICAAP approaches are very heterogeneous across banks,
ICAAP figures reflect massive data quality issues and the
quality of banks’ ILAAP submissions has not improved.
ICAAP and ILAAP deficiencies are reflected in other parts of
the SREP and in qualitative supervisory measures.
Overall SREP 2018 key messages
✓ ICAAPs and ILAAPs need to be further
improved.
ICAAP/ILAAP related measures
adressing further improvements needed.
Source: https://www.bankingsupervision.europa.eu/banking/srep/srep_2019/html/aggregate_results_2019.en.html#toc3
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.srep_methodology_booklet_2018~b0e30ced94.en.pdf
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SREP in Bank of Slovenia
✓ Potential ‘show-stoppers’ and how to look for them
✓ New product approval or entering a new market – did the bank assess the effect on
internal capital? – potential weak link to decision making
✓ Important risk not covered within ICAAP – where to look for them: strategy, IA
report, validation reports, other reports, project management, discus with the MB
about their concerns
✓ Weak ICAAP framework because the bank heavily relays on conservative (high!)
internal capital demand (risks have to be managed and/or mitigated not only
covered with capital – for example Operational risk)
✓ Model validation is performed by the same unit that developed the model – in this
case it has to be performed by a different individual from the one that developed
the model (important that validation covers also data preparation because of ever
persisting issue of data quality)
✓ Use of different systems, methodologies, data, etc. for ICAAP/ILAAP then in ongoing
risk management – reporting, monitoring, limiting, granting
✓ Highly sophisticated or black box ICAAP/ILAAP models put to the question the
required understanding of methodologies from the MB in order to use it in decision
making
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Final thoughts
✓ Finding the right balance between being to prescriptive and having
ICAAP/ILAAP that can be used for SREP in a consistent way
✓ Most used expression in relation to ICAAP/ILAAP expectations = Common
sense!
✓ Most used question from the supervisor when assessing ICAAP/ILAAP = Does
this make sense for this bank?
✓ Let the bank explain/convince you why something makes sense for them
✓ There is no one size fits all – high diversity – something that works good for
one bank could not be suitable for others – each bank has to design its own
framework
✓ Never-ending process of updating the quality of ICAAP/ILAAP (in the world
where the change is the only constant) – supervisors will never stop pushing
for a better ICAAP/ILAAP framework
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Inspiration
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Question – discussion point
The bank argues that if they would calculated a
higher internal capital demand that would
result in a higher regulatory (SREP)
requirement.
What would you answer or tell the bank in
this case?
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Any questions or thoughts?
Thank you for your attention!
Katja Ciglar
On-site supervision
Bank of Slovenia
katja.ciglar@bsi.si
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