Monday, 9 April 2012

ICAAP vs ORSA - looking at lessons learned from bank regulators

A fascinating document hit my RSS aggregator account the other day from KPMG regarding ICAAP experiences across Europe, split by key countries.

It isn't too much to suggest that these experiences will be mirrored to some extent in the ORSA process (indeed in many countries the supervisory staff examining ORSA submissions will be in the same building!). I noted the following;

  • Degree of regulatory influence over management varies widely
  • As far as pillar 2 goes, both banks and regulators are in a "state of experiment"
  • UK noted as less keen on full economic capital modelling (the opposite would be true for insurance I would hope)
  • Regulatory pressure from some countries (Germany and Belgium) much higher than others when it comes to adjusting the ICAAP
  • Significant pressure to integrate ICAAP into overall bank management (as per ORSA)
  • Pressure on banks to include strategic and reputational risks in pillar 2 (these obviously stand out as non-quantifiable risks for inclusion in the written policies under Solvency II).
  • UK and Swiss happy to cover business risk in stressed planning assumptions under ICAAP, where in Belgiun and Germany there is pressure to include it as an ICAAP category in isolation.
  • Projections of capital requirements requested over the "medium term horizon", which is 3-5 years ( a useful benchmark)
  • Potential to increase capital via company-specific Individual Capital Guidance (ICG) highlighted as a particularly onerous concern in the UK (contrasted with a more lenient France).
  • Firms not expected to hold capital against non-quantifiable risk, instead demonstrating that they have factored it into the planning process.
I don't know how much stock I would put in the lessons from the banking industry experience, but bearing in mind the regulator is, at least for now, all in one house, I would factor in lessons learned here with no qualms.

PS This document is also a great advert for regulatory arbitrage!

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