EBA and ECB observe challenges in integrating ILAAP in the SREP assessment, signalling additional buffers to Pillar II capital

Adequacy Assessment Process (ILAAP) will remain at the forefront of the Single Supervisory Mechanism (SSM)’s priorities in 2017.

ILAAP is reviewed and scored by competent authorities in the context of the SREP’s risk assessment in parallel with the review and assessment of ICCAP and other institutions organizational aspects.

Week scores in the SREP linked to ILAAP are expected to lead to additional liquidity requirements, requests for qualitative adjustment of the business model or other sanctions.

Banks need to assess and plane urgently changes brought by the ECB guidelines for which consultation period ended on 31 May 2017, as full implementation is required by the end of 2018:

·         The management body shall have overall responsibility for the sound governance of the ILAAP.

·         The ILAAP should be an integral part of the risk management and decision-making process

·         ILAAP should be used as a tool for maintaining the viability of the institution, by ensuring an adequate supply of liquidity and stable funding on the short and medium term.

·         At least annually, institutions should identify all the material risks and should take them into account in the ILAAP.

·         Institutions should define internal liquidity buffers and stable sources of funding that should be consistent with economic/business needs of liquidity, regulatory and stress perspective (of high quality, well diversified, stable sources of funding).

·         Institutions have to implement risk quantification methodologies that should be adequate for their risk appetite, market expectations, business model, and risk profile.

·         Regular stress testing have to be performed aimed at ensuring that sufficient liquidity is available to withstand periods of severe stress.

We can assist in developing and integrating your ILAAP process conducting:

·         A diagnostic review of the bank’s liquidity risk management framework against Basel Principles, regulatory guidelines (including SREP).

·         A Review liquidity risk drivers and liquidity stress testing scenarios,

·         An assessment of the adequacy of risk appetite and contingency funding plan.

Should you be interested in any of our solutions, including organising a workshop with our team, please do not hesitate to contact us.