The SSM multi-year plan for ICAAP and ILAAP

The SSM multi-year plan for ICAAP and ILAAP

By Dr. Armin Leistenschneider, Head of Section, DG Micro-Prudential Supervision IV, European Central Bank.

Armin, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

Currently, I am head of Section in the Methodology and Standards Development Division. I am responsible for the implementation of the SSM processes, as well as for major supervisory projects like for instance the SSM multi-year plan on ICAAP and ILAAP. A related key focal point of my current activities relates to the further development of the SSM SREP, in particular with regard to capital and liquidity quantification and with regard to the role of the ICAAP and the ILAAP in the SREP.

Before joining the ECB, I worked in private banks in different positions, starting as expert on liquidity risk control. Later, I worked as Head of ALM Risk Control, Head of Treasury Models & Analytics and Head of CEE Funding. Right before joining the ECB in 2015, I acted as Head of the Central and Eastern Europe Head Office in a private bank.

At the Liquidity Risk Management Forum, you will be sharing your insight on the SSM multi-year plan for ICAAP and ILAAP. Why do you believe this is a key talking point in the industry right now and what can risk professionals gain from this insight?

The SSM as a whole is of the opinion that ICAAP and ILAAP are of fundamental importance for institutions in managing capital and liquidity adequacy. From 2016 and 2017 reviews, we know that there is a need for improvements in those fundamental internal processes of banks across the board. 

The ECB initiated in 2017 a multi-year plan to promote these necessary improvements and published a first draft version of the ICAAP and ILAAP guides.ICAAP and ILAAP are also reflected in the ECB’s supervisory priorities for 2018.

As changes in ICAAPs and ILAAPs may take some time institutions should be aware of their weaknesses and go into the direction they are expected to move to and this is outlined in the multi-year plan I will present.

Can you explain some of the business challenges that are created from the SSM multi-year plan?

The SSM multi-year plan will require significant additional work and investments from the banks overall and certain banks in particular. And banks should already work on them  now in order to be ready when the final ICAAP and ILAAP guides will be used from SREP 2019 on.

Any existing deficiencies in their capital and liquidty risk management and discuss with their Joint Supervisory Team (JST) where they stand and what further steps they need to take to arrive at adequate processes.

Challenges the banks are facing include, amongst others, the need for a consistent integration of ICAAP and ILAAP and of these two process into the bank overall, the stress testing frameworks (e.g. adequacy of assumptions underlying scenarios), the key role ICAAPs / ILAAPs should play in decision making and, last but not least, data quality is key for ICAAPs and ILAAPs and many banks need to improve in that area.

Why is it important to develop a joint understanding of key risk management processes for banks?

The ECB assesses banks’ ICAAPs and ILAAPs as part of the supervisory review and evaluation process (SREP). The SREP is performed by the Joint supervisory teams (JSTs) where supervisors from the ECB as well as NCAs are taking the role in the assessment, with different supervisory approaches and practices.

The development of a joint understanding of key risk management processes creates the grounds for a harmonized approach assessing bank’s ICAAPs and ILAAPs. It will enable the supervisors to have a common understanding of different ingredients of the processes which will result in more efficient and effective SREP assessments.
At the same time, a common understanding of the ICAAP and the ILAAP will finaly result in a better communication between banks and supervsiors.

Please provide an overview of the supervisory guides under consultation?

Consultation is a common instrument to collect feedback on ECBs supervisory expectations. Received comments help to improve our guides, for instance in case the draft consulted was not clear enough.

At the same time, the published draft guides provide banks early on with information on what the ECB works on, showing them where the banks can expect new communications soon and what direction those communications are going to. This allows them more time to prepare before the new expectations will be applied by the ECB.

Until 4 May 2018, there were two guides on ICAAP / ILAAP under consultation:
–       ECB Guide to the internal capital adequacy assessment processes (ICAAP)
–       ECB Guide to the internal liquidity adequacy assessment processes (ILAAP);

For both guides, the consultation started on the 2ndof March 2018 and ended 4 May 2018.
In addition, I’d like to mention the Draft ECB guide to internal models – General topics chapter- for which the consultation will end on the 28thof May 2018.

What, in your opinion does the future hold for liquidity risk professionals, and how can they keep up with the increasing change?

It is a lesson from the crisis that many risks in the banks are interconnected. Liquidity risk as well as other risk professionals should stop acting in silos for those aspects between liquidity and capital risks that are impacting each other.

It is already a challenge to handle the needed changes in the liquidity risk area itself. All the more, it is challenging to understand the impact of other risks on the liquidity risk and vice versa. And this is the area where in our opinion liquidity and other risk professionals should grow.

In addition, though it is very easy for most banks to get sufficient refinancing under the current market conditions, we encourage all institutions, however, to assess what and how changes in the market conditions would impact their capital and liquidity situations.

For such banks that feel not well prepared for changing refinancing conditions an improved ILAAP could be used as mitigating factor.

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