ECB report on banks’ ICAAP practices

Earlier in August, the ECB / SSM (Single Supervisory Mechanism) published a report on banks’ ICAAP practices.  The report summarises the results of the analysis conducted by the ECB / SSM, based on a sample of 2019 ICAAP submissions.

The report highlights particular areas of concern, it should be noted that these concerns have also been raised as part of the annual SREP results, which make these findings especially concerning.

3 particular areas of concern are listed in the report:

  1. Data Quality – The lack of timely, available, and reliable figures, is cited as a threat to banks’ continuity
  2. Economic ICAAP perspective – The determination of Internal Capital, including the determination of thresholds and the use of the economic perspective in the decision-making, as reflected in the limit system and internal reporting
  3. Stress Testing – Frequency of application, ad-hoc capabilities, follow-up actions and lack of agile and responsive instrument for stress testing

These are areas of particular concern high-lighted in the report and as mentioned they have been raised in a similar context in the annual SREP reports. As the SREP score for Internal Governance and Risk Management has deteriorated continuously for the past few years, this might unfortunately indicate a continuation of this trend.

We would further like to comment on 2 of the mentioned areas of concern, as follows.

Firstly, regarding Data Quality, the report also high-lights development concerning BCBS239 and it seems evident that although progress has been made, banks are still behind the curve.

From an integrated planning and stress testing perspective, banks are struggling with data quality and re-conciliation problems. Legacy structures often mean that risk data is siloed. Thus Credit, Earnings & EVE, and Liquidity risk data are based on different and in many cases pre-aggregated source data.

Secondly, regarding Stress Testing and having an agile, flexible, and responsive instrument and process that allows banks to perform ad-hoc stress tests and what-if scenarios at will, is clearly impeded by the cited Data Quality issues.

Here, at MORS Software we offer a unique data management process at the core of our solution. Hence all risk data can effortlessly be based on unique transactional source data, without compromising frequency and performance for data-intensive calculations and forecasts, such as NII projections.

Thus, MORS users have an agile and responsive instrument at their disposal, at all times, helping them to navigate treacherous waters, in particular at times of stress.

Would you like to know more about how MORS Software could help you to improve your Internal Governance and Risk Management framework?