ICAAP and ILAAP

Article

Is there enough “I” in your ICAAP and ILAAP?

Strategic management of capital, liquidity and risk in banks

As part of their scrutiny of capital and liquidity, supervisors increasingly expect the Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) to be fully integrated and embedded into banks’ internal risk management and business decision-making processes. Deloitte’s 2018 Banking Union Supervisory Survey finds that many have not grasped the depth of this supervisory expectation nor the business benefits that responding positively to it will bring.

Supervisory expectations of the ICAAP and ILAAP continue to evolve. The latest guidance papers from the European Central Bank (ECB) and the European Banking Authority (EBA) on them seek to enhance their thoroughness and explore how “internal” the processes are – that is, ensuring that they are fully embedded within a bank’s operations and business decision-making, and integrated with the supervisory and risk management framework, and “strategic steering”. Banks are being challenged to move beyond a pure compliance mindset and invest resources to enhance how strategy and risk are jointly managed within the business.

Deloitte’s third Banking Union Supervisory Survey examines the current approach of 52 banks from 15 Eurozone countries supervised by the ECB’s Single Supervisory Mechanism (SSM), and in particular explores whether Boards and senior management teams are sufficiently focused on the demand from supervisors, and the benefit to their businesses, of better integration and embedding of the ICAAP and ILAAP.

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In this paper, we consider why, given the potential benefits, SSM supervised banks have not yet made the required investment to better integrate and embed the ICAAP and ILAAP, and what could be done to catalyse change. We identify a number of enablers to achieve alignment between the objectives of the bank and its supervisors. These include risk data and IT infrastructure, risk-adjusted performance measurement, alignment of management incentives, and governance. We further examine the management of non-financial risk (NFR) as a case study, an area where supervisors are developing their expectations.

Key observations from the 2018 Deloitte Banking Union Supervisory Survey

  • Almost all survey respondents said that the Board used the ICAAP and ILAAP to challenge and assess capital and liquidity adequacy.
  • Respondents reported a strong link between the outputs of the ICAAP/ILAAP and the review and calibration of the risk appetite statement (RAS). However, feedback loops between the RAS and the ICAAP/ILAAP in the event of a breach of the RAS were not as strong.
  • The majority of respondents initially reported that the outputs of the ICAAP/ILAAP were a critical input into the business decision-making process, but some then found it difficult to provide specific examples of the link between business decision-making processes and the ICAAP and ILAAP.
  • Integrating NFR into ICAAP remains a challenge, with many respondents still working to develop models to quantify NFR or using existing quantitative and qualitative methodologies to account for NFR.
  • Only about half of the respondents agreed that supervisory expectations are transparent and support/correspond to their internal view on ICAAP and ILAAP design and governance.

 

Key observations from the 2018 Deloitte Banking Union Supervisory Survey

About the EMEA Centre for Regulatory Strategy

The Deloitte Centre for Regulatory Strategy is a powerful resource of information and insight, designed to assist financial institutions manage the complexity and convergence of rapidly increasing new regulation. With regional hubs in the Americas, Asia Pacific and EMEA, the Centre combines the strength of Deloitte’s regional and international network of experienced risk, regulatory, and industry professionals – including a deep roster of former regulators, industry specialists, and business advisers – with a rich understanding of the impact of regulations on business models and strategy.

regulatory strategy EMEA

About the Banking Union Centre in Frankfurt

The Deloitte BUCF was established to provide an expert team to support banks with tackling the challenges, as well as respond to the needs of, the SSM in the most efficient and effective manner. It works closely with Deloitte’s Single Resolution Mechanism team based in Brussels.

Banking union centre in Frankfurt

Contacts

Deloitte Luxembourg

Laurent Berliner
Partner
EMEA FSI Risk Advisory Leader
T +352 45145 2328
lberliner@deloitte.lu

Jean Philippe Peters
Partner
Risk & Capital Management
T +352 45145 2276
jppeters@deloitte.lu

Martin Flaunet
Partner
Banking Audit Leader
T +352 45145 2334
mflaunet@deloitte.lu

Pascal Martino
Partner
Banking Leader
T +352 45145 2119
pamartino@deloitte.lu

Arnaud Duchesne
Director
Risk Advisory
T +352 45145 4852
aduchesne@deloitte.lu

 

Centre for Regulatory Strategy

David Strachan
Partner 
Head, EMEA Centre
dastrachan@deloitte.co.uk

Simon Brennan
Director
simbrennan@deloitte.co.uk

Elizaveta Barner
Senior Manager
ebarner@deloitte.de

Katelyn Geraghty
Assistant Manager
kgeraghty@deloitte.co.uk

 

Banking Union Centre in Frankfurt

Gerhard Schroeck
Partner
BUCF Leader
gschroeck@deloitte.de

Thomas Gruenwald
Director
BUCF survey lead
tgruenwald@deloitte.lu

Vishwas Khanna
Director
BUCF SREP lead
viskhanna@deloitte.co.uk

 

 

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