ICAAP / ILAAP - Design, implementation and Steering

THE CLIENT

The client is a former subsidiary of one of the largest UK banking groups and has recently undergone a change of ownership. The client’s activities cover retail banking, wealth management and insurance.

THE CHALLENGE

Following the acquisition of the bank by a new shareholder, the Prudential Control and Resolution Authority (‘ACPR’) conducted an in-depth assessment of the bank’s strategic, financial and risk profiles. In this context, the regulator challenged the bank on its capital and liquidity capabilities and requested them to implement their first Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). In this context, Avantage Reply was engaged to design, implement and steer these 2 strategic processes.

APPROACH AND SOLUTION

Our approach consisted of assessing the client’s current abilities to develop and implement both ICAAP and ILAAP processes. To do so, three steps were conducted, including (i) a gap analysis on key identified blocks, (ii) an action plan to design and implement both processes, and (iii) the full implementation of both overall frameworks. In practice, the first phase consisted of an in-depth analysis of the business model and internal governance, the existing risk profile, methodologies and risk management tools. This allowed the Avantage Reply team to draw conclusions and identify area of improvement for methodological, operational and governance components of the Bank’s capital and liquidity management frameworks. Subsequent to this, action plans were defined for both ICAAP and ILAAP frameworks in line with supervisory expectations and market practices. To complete the project, implementation phase work

For the ICAAP, the process was structured around the below:

• Business model and strategy
• Governance and internal control
• Risk management framework
• Risk identification and materiality assessment
• Normative and economic methodologies
• Capital adequacy, steering and allocation

For the ILAAP, the process was structured around the below

• Business model and liquidity strategy
• Funding and Liquidity governance and risk management
• Balance sheet and risk driver analysis
• Normative and economic methodologies
• Liquidity contingency plan
• Fund transfer pricing

Further to the above, Avantage Reply provided subject matter expertise on the following key topics:

• Design and implementation of ICAAP/ILAAP governance (steering and project committees, methodological workshops…)
• Design and implementation of the material risk identification process
• Support and development of methodologies (Pillar 2 models, solvency and liquidity stress tests)
• Simulation/analysis of results and verification of consistency
• Drafting the ICAAP and ILAAP report including key policies and procedures

RESULTS AND BENEFITS

The client was able to demonstrate and present the system implemented in-house to monitor and control the level of its risks in relation to the adequacy of its internal capital and liquidity, its financial structure and its prudential environment.

• Validation and submission phase. This phase concerned the validation of ICAAP and ILAAP reports and submission to the ACPR
• Streamlining results
• Writing the Capital Adequacy Statement ("CAS") and the Liquidity Adequacy Statement ("LAS")
• Consolidation of the ICAAP/ILAAP package for the ACPR