SREP Action plan – BMA, ICAAP and Capital Management

In order to improve institutions’ ICAAP framework, the client has requested Avantage Reply to design and implement an action plan focusing on the link between the Business model and the risk profile, risk identification and quantification methodologies and capital management governance.

The client

The client is the subsidiary of a large banking group in France, which is active in Asset & Wealth Management, Corporate & Investment Banking, Insurance and Specialized Financial Services and Payments areas.

The challenge

Following the submission of its first ICAAP to the ECB, the client has decided to set up an action plan to improve key components and items related to the ICAAP framework. This remediation plan has been defined to achieve a sound capital management framework and to integrate the ICAAP process into the institution’s strategic decision-making process. Avantage Reply was mandated to carry out this mission, bringing its subject matter expertise and its views of regulatory expectations. The following concepts were to be covered:

• Define and implement the capital management framework.
• Risk coverage and subject matter support to improve risk quantification methodologies (mainly Pillar 2 risks).
• Define and implement a Risk-to-Capital process to better formalise the link the BMA and the ICAAP.
• Identify a formal link between both ICAAP quantification approaches (normative and economic).

Approach and solution

The approach retained by Avantage Reply and validated by the client’s management was divided into the following buildings blocks. To succeed, a very senior and experienced team was deployed, including a Director, a Manager and two Senior Consultants to provide subject matter expert and project management on each building block described below:

• Internal capital and risk quantification:
• Set up the internal capital definition.
• Methodology support and development for risk quantification methodologies.
• Business model and risk to capital assessment:
• Framing and drafting the Business Model Analysis to describe the viability and sustainability of the business model.
• Identification of businesses’ vulnerabilities and associated risks drivers.
• Preliminary mapping of the couple (vulnerability, risk drivers) to the risks to be quantified and capitalised in the economic approach.
• Capital allocation and risk/return:
• Set up of internal capital allocation approach.
• Design and calibration of internal capital-related metrics.
• Linkage:
• Reconciliation between internal capital outcomes and internal stress tests outcomes.
• Integrate the ICAAP outcomes through the budget process.

Results and benefits

The action plan has been fully implemented, allowing the client to improve the governance related to capital management and the ICAAP, to enlarge and strengthen risk quantification methodologies, and to better describe the linkage between the BMA and the ICAAP. All these improvements have also allowed the client to better prepare for the next ICAAP submission.