ECB publishes final guides for banks on their capital and liquidity management

The European Central Bank (ECB) published its expectations regarding institutions’ internal capital and liquidity adequacy assessment processes (ICAAPs and ILAAPs). The guides, which are not legally binding, will be applied from 1 January 2019 and replace the expectations published in January 2016. They aim to assist banks in strengthening their ICAAPs and ILAAPs, and to encourage the adoption of best practices.

Adequate levels of capital and liquidity are essential for the resilience of individual banks. Banks are expected to assess the risks they face and, in a forward-looking manner, ensure that all material risks are identified, effectively managed and covered by adequate capital and liquidity levels at all times.
ECB Banking Supervision reviews the quality of institutions’ ICAAPs and ILAAPs as a fundamental part of the Supervisory Review and Evaluation Process (SREP). ICAAPs and ILAAPs are assessed annually by Joint Supervisory Teams and feed into the assessments of all SREP elements. The ECB aims to incentivise banks to improve their ICAAPs and ILAAPs. In this context, it will intensify its supervisory assessments and it will further increase the role the ICAAP and ILAAP play in the SREP. For example, the ICAAP will play an enhanced role in the determination of Pillar 2 own funds requirements on a risk-by-risk basis, following an individual assessment of each bank.
In 2016 the ECB published its expectations regarding the ICAAPs and ILAAPs of supervised institutions. Following a careful assessment, it identified significant differences in the approaches taken by individual banks and a need for improvements at all banks. It therefore launched a multi-year plan for ICAAPs and ILAAPs in early 2017. The plan sets out a more detailed set of supervisory expectations, taking into account two rounds of feedback from institutions and other industry participants. In total, the ECB received around 800 comments on the guides, which were assessed and subsequently used to clarify the ECB’s expectations regarding institutions’ ICAAPs and ILAAPs. A feedback statement on the comments received during the 2018 consultation has been published on the ECB’s banking supervision website, together with the final guides and a document containing frequently asked questions.
Source: https://www.bankingsupervision.europa.eu