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In the ECB’s view, a sound, effective and comprehensive ILAAP is based on two pillars: the economic and the normative perspectives. Both perspectives are expected to complement and inform each other. The ILAAP is also an important input factor in the SSM Supervisory Review and Evaluation Process (SREP).
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- What Is Icaap? Internal Capital Adequacy Assessment.
- What Is Ilaap? Internal Liquidity Adequacy Assessment.
- Common Framework.
- European Banking Authority EBA – Consultative Document on ICAAP and Ilaap.
- Governance and Frequency
- Structure of Risks Reviewed
- Risks Specified
- Internal Capital and Liquidity Buffers
- Consistent Assumptions
- Inter Risk Diversification
Internal Capital Adequacy Assessment Process (ICAAP) is an internal review requirement that evaluates capital adequacy, capital management and planning at banks with a specific focus on core risk factors. Expected to be reviewed at least quarterly at a board level and submitted annually to the regulator, the ICAAP analysis supplement risk managemen...
Internal Liquidity Adequacy Assessment Process or ILAAP is a similar process focused on liquidity risk, funding mismatch and management of both risks at a bank, using processes and frameworks similar to ICAAP. ILAAP to date is primarily a European standard sponsored by European Banking Authority (EBA) with implementation guidelines issued by a numb...
The common framework in use with both guidelines (ICAAP and ILAAP) is the risk governance framework that requires that management analysis is produced based on a policy document approved by the board with the requisite process and policy guidelines. This implies assignment of the role to a senior team at the bank with a direct reporting line to the...
The EBA consultative paper on ICAAP and ILAAP implementation guidelines was issued and circulated in December 2015 with a suggested implementation deadline of 30thJune 2016. The consultative document highlights a number of key requirements.
ICAAP and ILAAP external reporting to the regulator (possibly public disclosure) is limited to an annual submission but quarterly internal reviews and presentation to management and board are recommended.
All risk reviewed that may have material impact on capital and liquidity. Review of risks, available stock and access to capital and liquidity on demand. To be linked with internal planning, modeling, assessment and review processes with active participation from business. Not a standalone or isolated exercise to be conducted by firm wide risk in a...
Recommended commentary and analysis on the following key risks unless there is sufficient documentation and analysis to suggest that they do not represent a significant risk to the institution 1. Credit risk (also including: FX lending risk, country risk, credit concentration risk, migration risk) 2. Market risk (also including: credit spread risk,...
Quality, availability and source of internal Capital and Liquidity over quantity. Testing converitability into cash using market based and market driven assumptions for instance testing High Quality Liquid Assets (HQLA) buffers with trade weighted liquidity analysis.
Assumptions consistent and in alignment with internal business plans and models. Assumption should be reviewed, disclosed and signed on by all stakeholders.
Requirement to present both Net (of risk and diversification benefit) and Gross figures in the analysis. Board advised to consider scenarios and capital plans under zero correlation and perfect correlation (zero diversification benefit) between risk types. The perfect correlation stress test (when things go wrong, they will go wrong together; even ...
• Identify the amount and quality of internal capital and liquidity resources in relation to its risk profile, business strategy and plan; • Demonstrate capital and liquidity adequacy. Principles and steps of ICAAP and ILAAP • Credit risk; • Counterparty Risk & Counterparty Credit Risk • Market risk ; • Operational risk;
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Internal Capital Adequacy and Assessment Process (ICAAP): Report – main elements ; Sample ICAAP report format and table of content; Internal models. Under ICAAP, the bank will make use of internal models to assess, quantify and stress test risk drivers and factors and the amount of capital required to support them.
One of the main lessons learned is that their liquidity risk management has to ensure their ability to fulfil their payment obligations at all times, even under adverse conditions. Accordingly, the internal liquidity adequacy assessment process (ILAAP) plays a key role in the risk management of credit institutions.
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Firms must undertake an Internal Liquidity Adequacy Assessment Process (ILAAP). This is their assessment of the liquidity risk they face. The regulator evaluates this process and subsequently issues the Internal Liquidity Guidance (ILG).
Starting right from business decision making, ILAAP is an ongoing process that considers the complexity, business size, models, macroeconomic variables and risk components of the firm. This paper introduces ILAAP and the importance of its implementation within banks.
