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Update on ICAAP and ILAAP

Update on ICAAP and ILAAP

The CSSF updates their expectations regarding ICAAP / ILAAP practices in the newly published circular 20/753.

With the new circular 20/753 the CSSF aligns the local ICAAP, ILAAP requirements with the corresponding ECB guidelines.

The background: ECB published ICAAP, ILAAP requirements for large banks in 2018, CSSF now follows suit

  • November 2018: ECB published ICAAP and ILAAP guidelines for the banks under their immediate supervision; from the point of view of most SSM member states these guidelines introduced significant changes;

  • October 2020: CSSF publishes new circular on ICAAP and ILAAP that transposes the ECB guidelines on ICAAP and ILAAP in a proportionate manner into local requirements for institutions under direct supervision by the CSSF;
  • The new requirements apply from 31 October 2020 and should be reflected in institutions’ governance and operating frameworks from 31 December 2020;

  • For some institutions the new requirements will look familiar, e.g. if HQ is in Germany or under ECB supervision;

  • For others, the implementation of the updated ICAAP, ILAAP requirements will be a challenge.

The present: Current ICAAP, ILAAP requirements by CSSF emphasise internal economic perspective

  • The considerations underlying the old ICAAP, ILAAP requirements for institutions under CSSF supervision are economically driven and emphasise the institutions’ own view towards its risks to capital and liquidity;

  • The general idea of ICAAP, ILAAP is that institutions should develop an individual risk quantification approach adapted to their specifics, as well as an individual approach towards quantifying internal own funds/ liquidity buffer, counterbalancing capacity;
  • Standardisation across institutions is not an objective; focus is on adherence to general principles that leave institutions with significant leeway to tailor ICAAP, ILAAP to their specific risk profile, business model, and risk strategy.

The future starts now: New ICAAP, ILAAP introduces normative perspective, strengthens forward-looking view

  • An additional normative perspective will complement the current economic perspective towards capital and liquidity adequacy;

  • Institutions will have to show that supervisory capital and liquidity metrics will stay above statutory minimums over a multi-year horizon;

  • Metrics in scope of normative perspective: Total capital ratio, T1-ratio, CET1-ratio, leverage ratio, MREL/TLAC, large exposure, LCR, NSFR;

  • Institutions may have to be more prudent regarding the definition of their internal capital;

  • Documentation requirements for ICAAP and ILAAP are strengthened and have to cover ICAAP/ILAAP results, relation to business model, strategy, methods, IT, data infrastructure;

  • Consistency between ICAAP, ILAAP and recovery planning will be demanded increasingly.

How can institutions prepare for this update of the local ICAAP and ILAAP regulation?

The update of domestic ICAAP, ILAAP requirements may pose challenge for many institutions across a wide range of topics

1. Normative perspective requires multi-year projections for balance sheet and P&L

Projecting statutory capital and liquidity metrics over multi-year horizon requires multi-year view on balance sheet, P&L under base and adverse conditions, thus bringing risk and planning closer.

2. Possibly more restrictions on internal capital

Alignment with ECB regulation may - for many institutions - lead to decrease in available internal capital.

3. Increased documentation requirements

Implications for internal documentation of ICAAP, ILAAP and related frameworks, but also with respect to periodical submissions to CSSF.

4. Increased demand for consistency to recovery planning

Possibly wide range of implications covering governance, indicators, scenarios, depending on the specific setup of individual institutions.

What can institutions do to prepare for the update of the local ICAAP and ILAAP regulation?

Impact assessment

Understand the impact of the update of local ICAAP and ILAAP regulation and the individually resulting challenges.

Proactive implementation

Proactively navigate the challenges posed by this update across all affected areas, in particular tools and methods, governance and processes, as well as the underlying IT infrastructure.

Seize opportunities

Seize the opportunity to identify synergies and possible inconsistencies between ICAAP, ILAAP, RRP, business planning, capital and liquidity planning and thereby seek to improve and streamline arsenal of forward-looking risk management tools.

Contact us

Jean-Philippe Maes

Risk & Regulatory Partner, PwC Luxembourg

Tel: +352 49 48 48 2874

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