On 12 November 2018, the European Central Bank (ECB) published its expectations regarding institutions’ internal capital and liquidity adequacy assessment processes. Two guides were published:
- ECB guide to the internal capital adequacy assessment process (ICAAP); and
- ECB guide to the internal liquidity adequacy assessment process (ILAAP).
The purpose of both guides are to provide transparency by making public the ECB’s understanding of the ICAAP / ILAAP requirements following from Articles 73 and 86 CRD IV respectively. The guides are aimed at assisting institutions in strengthening their ICAAPs / ILAAP and at encouraging the use of best practices by explaining in greater detail the ECB’s expectations of the processes.
Both guides are formed round seven similar key principles:
- the management body is responsible for the sound governance of the ICAAP / ILAAP;
- the ICAAP / ILAAP is an integral part of the overall management framework;
- the ICAAP / ILAAP contributes fundamentally to the continuity of the institution by ensuring its liquidity adequacy from different perspectives;
- all material risks are identified and taken into account in the ICAAP / ILAAP;
- internal capital is of high quality and clearly defined (ICAAP guide) / the internal liquidity buffers are of high quality and clearly defined; the internal stable sources of funding are clearly defined (ILAAP guide);
- ICAAP / ILAAP risk quantification methodologies are adequate, consistent and independently validated; and
- regular stress testing is aimed at ensuring liquidity adequacy in adverse circumstances.