RVMS (Risk and Value Measurement Services)

EDHEC
Financial Regulation
March 2021
About PwC

PwC
PwC, a major player in auditing and advisory services in the
financial services industry
A recognized leadership position
All segments of the financial industry
# 1 worldwide in organization and
We are able to mobilize management consulting for
Investment and Private banking and multidisciplinary teams in financial services (Kennedy)
Corporate asset management, France and in our worldwide
Banking securities business, network. Worldwide, PwC has Broad market coverage in France
nearly 35,000 employees in and abroad
financial services in 151
Fortune Global 500 banks and
Retail banking in Specialized financial countries, including 1,300 in 90% financial institutions are our clients.
France and services, insurance and France (all business lines
abroad, real estate
combined).
87% Fortune Global 500 insurance
companies are our clients.

Our main clients in the financial sector in France and internationally

• BNP Paribas • Banco Santander • Macquarie Bank limited

• BPCE (including Natixis) • Bank of America Corp. • Mitsubishi UFJ Financial Group
• CM-CIC • Bank of China limited • Mizuho Financial Group
• Groupe Caisse des Dépôts • Barclays plc • Morgan Stanley
• Groupe Crédit-Agricole (including • BBVA • Nomura holding
CRCA, LCL, CACIB, Sofinco, ...) • Citigroup Inc. • The Goldman Sachs Group Inc
• La Banque postale • Credit Suisse Group • The Royal Bank of Scotland Group plc
• RCI Banque • Deutsche Bank AG • UBS AG
• Société Générale • HSBC holding plc • BEI
• AFD • J.P. Morgan Chase & Co • Banque Africaine de Développement
• SFIL • Lloyds banking group

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 1 PwC

FSRR - Financial Services Risk and Regulation

alongside financial institutions to control the regulatory agenda and risks

In the face of increasing regulation and risk, our Financial Services Risk and Regulation team helps our clients
understand the challenges they create and address them in the most efficient way possible.

Issues and our areas of intervention

Finalize the work on the implementation of IFRS 9, in
Adapting its organisation to meet regulatory
particular the Communication project financière
requirements (EMIR and Market Abuse) and the
Anticipating the implementation of IFRS 17
consequences of new transparency obligations Financial IFRS 9
(MIFID II) Markets IFRS 17

Anticipate future regulatory changes (CRR II,

Ensuring the protection of personal
CRD V, Basel IV) while meeting the evolving
data (GDPR) and their appropriate
requirements of regulators (ICAAP, ILAAP,
use in the provision of services
Customer Capital, SREP, Resolution)
(MIFID II)
Protection liquidity, Conducting the stress tests required by
Resolution regulators
Financial
Services Risk
and
Analyze the overall compliance of the Regulation Meet the multiple requirements of regulators
Financial Security system and its while exploiting synergies (BCBS 239,
operational efficiency (4th Directive AnaCredit, IFRS 9...)
LCB-FT and Sapin II) Financial Data and
Security Reporting

Adapt the Compliance function's Target Operating Adapting your organization to respond to the Targeted Review
Compliance Risk
Model and filière Risks in order to reinforce their of Internal Models (TRIM)
and Risk modeling
efficiency and positioning within the company. Anticipating the evolution of risk models
Devices

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Introduction

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Introduction

The objective of this course is to initiate a global reflection on finance by shedding additional light on the vision of a
master 2 in financial accounting and finance. It aims at giving an overview over a few sessions of the role that finance
plays in the world economy, of the interactions between the "financial" sphere and the "economic" sphere in general and
above all the challenges and methods of its regulation / regulation.
We will thus approach the role played by financial actors in the global economy and try to give some material to answer
the following questions: which entities are today covered by regulations? How are these regulations
constructed, put into practice and how do the public authorities ensure their compliance? Is it
effective, counterproductive, does it prevent, mitigate crises? What are these recent developments and
what to expect in the coming years? Due to the extent of the subjects covered, certain points can only be addressed
succinctly, but a thematic bibliography at the end of the handout will allow the main subjects to be deepened. This
course uses concepts of basic financial concepts, but is also based on legal, accounting and economic fundamentals.
The courses will consist of different conferences led by specialists in each of the subjects and
articulated around the same theme: financial regulation. Each speaker will discuss a part of the financial
system, its potential drifts and present the regulations in force or to come.

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Introduction

Money creation and banking functions

Interaction between banks, financial markets and money creation

To extend and update the definition of bank given in the historical example, it is necessary to introduce the very paradigm of a
credit institution: its capacity for "money creation". Money in our economies is essentially made up of current accounts managed
by commercial banks. These banks create money by making loans: contrary to popular belief, banks do not simply
re-lend the money deposited in the accounts they hold, they initiate the creation of money (what economists
translate as "loans make deposits").

The refinancing of banks takes place on a so-called "interbank" market, on which a rate is set for the liquidity that banks lend each
other on a day-to-day basis. It is on this rate that central banks intervene: the central bank is in fact a kind of "bank of banks",
which creates "central money" by lending to commercial banks. Since the rate at which banks lend to households is directly linked
to the rate at which banks refinance themselves, it is through this rate that central banks can influence economic activity.

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Introduction
Banking functions and associated risks

Banks thus perform two essential economic functions: the organisation of the payments system between economic agents and the
financing of projects through credit. Because of these two functions, one of the objectives of the public authorities is to prevent a
crisis in the banking system. This crisis can take different forms: for example, we speak of "liquidity" or "solvency" crises.

A bank's liquidity risk is a "transformation" risk, which materialises when short-term liabilities are claimed while assets are
generally of a longer-term nature (the most serious liquidity crisis being the "bank run": economic agents lose confidence in bank
money and try to withdraw their deposits from banks). Another form of liquidity crisis occurs when banks no longer "trust" each
other and refuse to lend to each other on the interbank market: this is the scenario we saw in 2008-09. Banks stopped lending
liquidity to each other because they feared that the bank to which they were lending was in near-bankruptcy (led by the collapse of
Lehman Brothers or by the holding of "toxic assets" whose existence and volume were not yet identified). Central banks then
opened their refinancing windows wide, accepting as collateral for their loans to commercial banks claims of lower quality than
usual. In other words, central banks played their role as lender of last resort to the banking system.

Finally, a bank may fail when it experiences a significant loss: a large volume of "non-performing" loans, trading losses, etc. If a
very large bank fails, it is unlikely that private capital will be sufficient to recapitalize it and the State may have to take over the
recovery. At the level of a bank, the problem is exactly similar to the following: if you owe your bank 1,000 euros, that's your
problem. If you owe EUR 100 million to your bank, it is your bank that has a problem. If the bank is too "big" in the economy then
it is very likely that it will receive state support in case of problems. Hence the saying "too big too fail".

So the banking system is a central part of the economy. Moreover, the problem has become more complex with the evolution of our
economic system over the last 20-30 years, as banks have become global players in the financial markets. We will therefore see in a
dedicated session how banking regulation was conceived and what the current challenges are.

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Why banks need to be regulated ? (1/2)
A credit institution, under French law, is a legal person that carries out banking transactions as a regular occupation. Banking
operations include
1) Receipt of funds from the public;
2) Credit transactions;
3) Making available to customers or managing means of payment.
Level of
Assets Liabilities outstanding lost
assets
What would happen if the bank lost the outstanding
Interbank amounts at the levels corresponding to cases 1, 2 and 3?
borrowing
Interbank loans
Case 1: The bank will be able to absorb the level of loss
with its own funds.
Customer
deposit Case 2: The bank will no longer be able to absorb the
Customer
Case 3 level of loss with its own funds. Part of the losses will
loans
be borne by the debt investors.
Miscellaneous
Case 3: Even its deposit customers will have to bear the
Miscellaneous
Certificates of credit losses.
deposit
Securities
Case 2 How could a bank cope with a severe deposit outflow?
portfolio Bonds What would happen if the bank could not cope with this
illiquidity crisis?
Case 1
Equity
Fixed assets

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Why banks need to be regulated ? (2/2)

Thus, one of the main objectives in regulating a bank is to strengthen the bank's solvency in order to avoid its default, but
above all to avoid the negative impacts on the market and customers that its default would have.

One of the ways of strengthening a bank's solvency is to require an adequate level of capital
corresponding to its risk profile.

Types of losses that can be mitigated by equity capital

1. Losses related to unfavourable movements in asset prices to which the bank is exposed (market risk),
2. Credit losses (credit risk),
3. Losses generated by the default of one or more counterparties (counterparty credit risk),
4. Losses related to operational risk (operational risk).

Strengthening is one of the means to mitigate the risks to which a bank is exposed. There are also other means of ensuring
a bank's solvency and the soundness and stability of the banking system, e.g. provisioning for risks, strengthening the
management of the risk profile, etc.

In order to be able to cope with a liquidity crisis, a bank must either have the means to finance itself
from the market within a short period of time or keep at its disposal a portfolio of securities that can
be easily resold to the market.

To do so, a bank must have a system to steer its liquidity risk profile and monitor its potential funding capacity, especially
its funding capacity in the event of a crisis. (Asset Liability Management, ALM)

14 mars 2019
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Introduction
The insurance sector

To understand the current insurance market, it is necessary to distinguish between two very different types of players: so-called
"damage" or P&C (property and casualty) insurers and "life" insurers. During the dedicated session, we will see what the economic
functions of insurers are, what links they have with banks and how regulation and supervision concerning these players is
constructed.

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Schedule

I Introduction – G.Kalaydjian 11/03 morning

II Insurance regulation –E.Perrin 16/03 morning

III Banking regulation – G.Rabineau 07/04 morning

IV Banking regulation (focus on credit risk) – R.Herfray 07/04

afternoon

V Fintech & Blockchain regulation – K.Sok 15/04

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Exam details

Exam type :
• 1 assignment to hand in by groups. You will have to find a subject inspired from the different classes that we
will either validate or rephrase if necessary. We would like to see in this report a research and a reflection from
your part. Please remember to include the references used in the dissertation. More details will be provided
later.
Next steps :
• Subjects chosen must be sent for validation after the last intervention
• The deadline will be communicated later

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The role of the bank in the COVID-19
crisis

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Covid-19 Calendar
Actions by Regulators and Governments

11 March 2020 – 17 March 2020 19 March 2020 – US 20 March 2020 - BoE March 19, 2020 - State of
WHO – France Accounting Flexibilities Bank of England publishes California
WHO declaration of Start of Requested by the FDIC measures to deal with the 22 March 2020 - State of
the covid-19 containment from the FASB economic shock linked to California
COVID-19 23 March 2020 – UK
Start of containment

300 billion in Exemptions for Flexibility in the Flexibilities Additional

government not definition of taken into measures
assistance in downgrading NPLs account in under
the form of new restructured forward looking consideration
money credits to stage Possible use of to maintain
2 or 3 due to transient device Transfer in bank resilience
3 billion in COVID-19 filters stage 2 of
assistance by outstandings
BPI on new Publication of that have been
loans scenarios the subject of
non-automatic
measurements
20 March 2020 -
9 March 2020 - 19 March 2020 - 20 March 2020 - Basel
ECB
Italy France Committee
Prudential
14 March 2020 - Announcement of Measures allowing the use of
relaxations for the
Spain economic support liquidity buffers to support the
calculation of
Start of containment by the French real economy
regulatory capital
government

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Prudential measures and accounting interactions
• Flexibility in the level of regulatory capital that can be below the level required in P2G (Pillar 2 Guidance)
• Flexibility in the calculation of P2R (Pillar 2 Requirements) by including in the calculation items that were not eligible for
Regulatory capital
CET 1 (e.g. additional instruments of CET 1 and CET 2)
exemption measures ➔ These measures should make it possible to increase the banks' CET 1 by 120 billion in order to absorb future losses and to
cover the additional financing needs of borrowers to the tune of 1800 billion.

Capital Concervation • Flexibility on the Capital Conservation Buffer (CCB), which can be less than 2.5% to withstand the deteriorated economic
Buffer environment.

• Possibility for the regulator to apply the transitional capital framework for the calculation of prudential own funds
Prudential filter • 0% weighting of legislated moratoriums

Liquidity • Flexibility on the level of the Liquidity Coverage Ratio (LCR)

Prudential measures with accounting interactions

• ECB encourages banks to avoid excessive pro-cyclicality by applying International Financial Reporting Standards
Recommendation IFRS 9
• ECB supports providing sustainable solutions to temporarily distressed debtors in the context of the current outbreak

• Flexibility in classifying debtors as "unlikely to pay" when they benefit from government measures
Non performing loans • Possibility of taking government aid into account in determining provisions

Macro-economic • Publication of macroeconomic scenarios by the ECB with the aim of limiting volatility and allowing banks to use them
scenario to determine their forward looking accounting approaches.

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French government measures– COVID-19
State guarantee granted to credit institutions and finance companies
(Article 4 of the Amending Finance Act No. 2020-289 of 23 March 2020)

Guaranteed amounts and Date of grant, type of loans and

Eligible Amount
remuneration eligible counterparties
• Coverage of a percentage of the amount of • Granted between 16/03/20 and 31/12/20 • Notification to BPI of loans
principal, interest and other outstanding without any other guarantee or security.
amounts on eligible loans: percentage of • Limit on amounts guaranteed per
90, 80 or 70% depending on the size and • Contest after grant > Contest as at 16/03 borrowing company:
turnover of the borrower companies. adjusted for contractual repayments
→ Enterprises created after 1 January 19:
• Amount eligible for compensation: Loss • With a minimum 12-month grace period guaranteed amount capped at the
recognised following the exercise of and a clause giving borrowers the option, estimated wage bill for the first 2 years of
amicable or legal recovery measures at the end of the first year, to amortize activity.
taking into account actuarial losses due to them over an additional period of 1 to 5
restructuring years. → Companies created before 1 January
2019: guaranteed amount capped at 25%
• Increasing remuneration according to a • Borrower: non SCI companies, credit of the turnover in 2019.
scale defined according to the size of the institutions and companies subject to
borrowing company and the maturity of the collective proceedings.
guaranteed loan to be re-invoiced to the
borrower. • Must not have been subject to credit
events within 2 months of loan
disbursement.

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 Comprehensive economic approach – COVID-19
Impact on staging

Deterioration of the credit environment due to COVID-19

Counterparties that do not benefit from Counterparties that benefit from

Counterparties who will not suffer loss of
government liquidity management government measures to manage their
income (bakeries, supermarkets, etc.) or
measures liquidity (maturity extensions)
who will be compensated (short-time
working measures, etc.).
For what reason?

Increase in net indebtedness of the

Counterparty Because there
counterparty
too degraded is no need
(maturity extensions and new financing)

Is this increase in debt sustainable?

Approach in line with ESMA No Yes

Stage 3 Stage 1 Stage 2

Yes, but a fragile situation

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 April 2020
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 April 2020
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 April 2020
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 April 2020
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 April 2020
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 April 2020
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 Juin 2013
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Break

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Norms hierarchy & Supervisory
mechanism

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Standard-setting institutions

Actors at different levels with normative power

International level
• The Basel Committee
• Financial Stability Board (FSB)
• International Organisation of Securities Commission (IOSCO)

European level
• The European Commission
• The European Parliament
• The Council
• European Supervisory Authorities (EBA, ESMA, EIOPA)
• The European Central Bank
• Single Resolution Board (SRB)

France’s level
• Le Parlement
• Le Haut Conseil de Stabilité Financières
• L’ACPR
• L’AMF

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The nomenclature of European acts

European legislative acts

Text type Example

The regulation
• Compulsory in all its elements and directly applicable in any Member State. It is CRR
an instrument of legal standardisation.

The directive
• Binding on any recipient Member State as to the result to be achieved
CRD IV
• Must be transposed into national law in order to produce its effects (instrument
of approximation of laws)

The decision
• Compulsory in all its elements
SREP
• Is intended to address a particular situation
• Intended for recipients: one or more Member States and legal persons

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The nomenclature of European acts

European non-legislative acts

Text type Example

The delegated act

• Non-legislative act of general scope which supplements or amends certain non-
An Act to amend the
essential elements of the basic legislative act.
calculation of the Leverage
• The adjective "delegated" must be mentioned in the title of any delegated act. Ratio of the CRR Settlement
• However, it is a binding act: establishments are required to comply with it in the
same way as all other regulations, directives or decisions.

The implementing act

• Non-legislative act intended to ensure uniform conditions for the implementation
of the basic legislative act. EBA technical standards on
• Which may also be adopted for the implementation of a regulatory technical reporting resolution (ITS
standard or delegated act. 2015/06)
• But binding act: the establishments are obliged to respect them in the same way
as all other regulations and decisions.

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Synthesis

Creation of a standard, example of the Fundamental Review of the Trading Book

(“FRTB”)

Basel • FRTB
Committee publication

• Amendment
European of the CRR
Union and the
CRD

•Application of
the RRC
France •Transposition
of the CRD

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Single Supervisory Mechanism (SSM)

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Pillar of the banking union

Overview of the banking union

Breakdown of supervision at the State level

4 November 2014, the European Central Bank becomes the
direct supervisor of more than 100 credit institutions in
Banking Union Europe.
This is the concrete realisation of one of the three pillars of
the Banking Union, the other two being: the single resolution
mechanism and the harmonised deposit guarantee fund.

Precise roles
Harmonized Regulation: Commission and Parliament via
Deposit
Single Guarantee Directives and Regulations
Monitoring Fund
Mechanism Convergence: EBA via technical standards and guidelines
Supervision:
Single
resolution Euro area: Single Supervisory Mechanism
mechanism
Outside the euro zone: National Control Authorities

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Pillar of the banking union

Overview of the Single Oversight Mechanism

Grants and ECB

Withdraws JST: ECB /
Approvals / Reviews
oversees the ACPR teams
Qualifying Interests system

Grants and Withdraws

May 'take over' direct Approvals / Reviews
supervision Qualifying Interests

Smaller Banks ACPR G-SIBs

Direct Direct
supervision by supervision by
ACPR the ECB

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Pillar of the banking union

The competences of the ECB and the ACPR

Significant
Powers Other institutions
institutions
Accreditation ECB AND ACPR

Prudential supervision
• Compliance with prudential requirements (CRR) -
Equity, leverage, liquidity, large risks, etc.
• Compliance with the requirements of governance, ECB OR ACPR
risk management, internal control, compensation,
internal models (CRD4)
• Supervision on a consolidated basis and
supplementary supervision of financial conglomerates

Other controls
• Insurance
• Resolution
• Separation Act
• Customer protection and marketing ACPR
• LCB-FT
• Investment and payment services
• Financing companies

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Oversight by the ECB

Prudential supervision

Ongoing Supervision

Governance and Assessment of Supervisory Review and

Business Model Assessment of Evaluation process (SREP)
Risk Management Liquidity &
Assessment risks to Capital
Assessment Funding
The SREP summarises the
1 2 3 4 findings of the prudential
authorities over the course of a
Categories : eg. year and requires banks to make
Adequacy of Categories : eg.
Viability and Short term certain improvements.
internal Credit, Market,
sustainability of liquidity Risk,
governance and Operational Risk, The EBA published guidelines for
the business model Funding
risk management IRRBB the SREP in December 2014. The
sustainability
guidelines set out the structure
Overall SREP Assessment – Holistic approach and objectives of the SREP to
Score + Rationale/main conclusions ensure consistency and
comparability across countries.

SREP decision

Quantitative Quantitative Other Supervisory

Capital Measures Liquidity Measures Measures

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SREP Methodology - Activity Model
The assessment of the business model
consists of :
Identification of Assessment of the Analysis of strategy Assessment of key
priority target areas business environment and forward-looking vulnerabilities Evaluation of the business
financing plans model :
• Viability (within one
year),
• Durability (less than 3
years)
Examples of a bank's business models:
✓ Traditional bank
✓ Specialised finance bank
✓ Central Bank of Savings Note on Governance and Risk Management
Banks/Cooperatives
✓ Investment Banking 50%

✓ Financial market infrastructure 40%

30%
Examples of Evaluation Questions :
20%
❑ From a prudential point of view, is the institution capable of
generating sufficient returns over the next twelve months? 10%
❑ Does the institution's strategy address the identified threats
to its viability? 0%
1 2 3 4
❑ How does the institution plan to earn a profit in the 2016 3% 41% 43% 13%
medium/long term?
2017 2% 48% 38% 12%
❑ Are the assumptions made by the institution in its strategy
and forecasts plausible and consistent?

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SREP Methodology - Internal governance and risk management

Evaluation of internal governance and risk management :

Gathering of information Evaluation of risk management Prudential assessment

The information to be collected

includes: ➢ Monitoring compliance with the
provisions of the CRD Final note on
➢ Internal governance framework ➢ In-depth analysis internal
implemented at national level
➢ Risk Management Framework and governance and
➢ Adjustment of the Phase 2 rating risk management
Risk Culture ➢ Specific analysis, e.g.
taking into account the bank's
➢ Risk infrastructure, internal data organizational structure, internal
specificities
and reporting audit, compliance, risk appetite,
compensation, risk infrastructure,
➢ Compensation Policies and reporting, etc.
Practices

Note on Governance and Risk Management

Examples of questions to be asked by the
supervisor: 60%
50%
➢ Is the compliance function in place functionally and
hierarchically separate and operationally independent from 40%
responsibilities arising from other activities? 30%

➢ Are there mechanisms in place to ensure that senior 20%

management can act in a timely manner to effectively manage 10%
and, where appropriate, reduce significant risk exposures,
including those that are close to the levels set out in the risk 0%
appetite statement or risk limits? 1 2 3 4
2016 1% 35% 51% 13%
2017 0% 33% 57% 10%

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SREP methodology - Risks to equity capital

The process of the three assessment phases is always followed for the assessment of capital risks.

Overview: Three strands of different perspectives

1: Prudential viewpoint 2. The bank's point of view 3. Forward-looking perspective
Gathering of
information

➢ Each capital risk category is assessed ➢ ACPR collects ICAAP information in ➢ Flexibility allows ACPR to conduct
and rated separately in three assessment accordance with EBA guidelines and Top-Down or Bottom-Up stress tests,
phases. national regulations. or a combination of both.
➢ Depending on their importance, the four ➢ The ICAAP figures, if reliable, will form ➢ The approach taken should take into
categories of capital risk are credit risk, the basis for the quantification of account minimum quality assurance
market risk, operational risk, and capital in Component 2. requirements.
overall interest rate risk (IRRBB).
➢ ACPR has the option of using national ➢ ACPR has the flexibility to interpret a
approaches to assess the institution's scenario into shocks.
Anchor Note
Automated

quantification of capital

Note on risks to shareholders' equity

Scope of ICAAP reliability assessment
50%

➢ ICAAP Governance 40%

assessment
Prudential

➢ Capital planning 30%

➢ Scenario development and stress tests 20%
➢ Internal control, independent controls and 10%
ICAAP documentation
0%
➢ Data and Infrastructure 1 2 3 4
➢ Risk identification, management and aggregation 2016 15% 46% 34% 5%
2017 21% 44% 30% 5%

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SREP methodology - Liquidity and funding risks

The process of the three assessment phases is always followed for the assessment of liquidity risk.

Overview: Three strands of different perspectives

1: Prudential viewpoint 2. The bank's point of view 3. Forward-looking perspective

➢ Each category of liquidity risk is ➢ ACPR collects ILAAP information in ➢ The valuation uses a top-down stress
Gathering of
information

assessed and rated separately in three accordance with EBA guidelines and test methodology based on prudential
assessment phases. national regulations. reporting (COREP).
➢ The two categories of liquidity risk are ➢ ACPR has the option of using domestic ➢ The ACPR may require specific
short-term liquidity and sustainability approaches to assess liquidity needs. liquidity measures, such as a LCR
of funding. greater than the regulatory minimum, a
specific minimum survival period and a
minimum amount of liquid assets.
Anchor Note
Automated

Note on liquidity and funding risks

Scope of the ILAAP reliability assessment

50%
➢ Governance of ILAAP
40%
➢ Funding strategy and liquidity planning
30%
➢ Scenario development, stress tests, and emergency
financing plan 20%
assessment
Prudential

➢ Internal controls, independent controls, ILAAP 10%

documentation
0%
➢ Data and Infrastructure 1 2 3 4
➢ Risk identification, management and aggregation 2016 15% 46% 34% 5%
2017 21% 44% 30% 5%

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SREP Methodology - Overall Assessment

Provide a comprehensive, synthetic view of an institution's risk

profile

▪ Based on the assessment of all four elements of the SREP.

Risk Profile
▪ In the first instance, all four elements of the SREP are considered to be of equal
importance.

Take into account

▪ Capital planning and liquidity of the institution to ensure a sustainable trajectory for
the full implementation of CRD IV/RRC.
Other Items
▪ Horizontal comparisons between institutions.

▪ The macroeconomic environment in which the institution operates.

SREP Evaluation Score

Overall In line with EBA guidance on SREP, the overall rating reflects the overall assessment of
assessment the sustainability of the institution.

High ratings mean an increased level of risk to the viability of the institution due to one
or more characteristics of its risk profile, including its business model, internal
governance framework, individual risks to solvency and liquidity position.

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SREP Methodology - Decisions

SREP's decision is taken by the Supervisory Committee.

The SREP decision includes:

➢ Capital requirement :

▪ Total capital requirements under the SREP comprising a minimum capital requirement (8%) and additional capital
requirements (P2R)
▪ Aggregate Capital Cushion Requirements (CBR, Combine Buffer Requirement)
▪ Recommendation to institutions to meet capital requirements

➢ Liquidity requirement :

▪ LCR greater than the regulatory minimum

▪ Extended survival periods
▪ Other measures

➢ Other qualitative prudential measures :

▪ Additional prudential measures such as the restriction of economic activity, the requirement to reduce risk and the
imposition of additional or more frequent reporting requirements.

ACPR has the opportunity to implement the P2G concept in 2018 if national
legislation provides for it.

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Example : Internal capital adequacy
assessment processes (“ICAAP”)
mission

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ICAAP (1/3)

Article 73 CRD IV:

“Institutions shall have in place sound, effective and comprehensive

strategies and processes to assess and maintain on an ongoing basis the
amounts, types and distribution of internal capital that they consider
adequate to cover the nature and level of the risks to which they are or
might be exposed.”

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ICAAP (2/3)
ICAAP is considered a key element of the SREP methodology, feeding into assessments on the Pillar 2 capital determination process, the business model,
internal governance and overall risk management, capital risk assessments.

Appropriate documentation is essential; it must

show the coherence and integration of ICAAP in
the validation processes of the governing body.
Process
The management body must
The indicators used in the ensure overall consistency,
different processes should be participate in the design,
consistent. Process Indicators Governance validation and controls to be
coordination is the key to put in place. Cooperation
calibrating the indicators. between the different
Strategy & business lines is crucial.
Process
Integration The internal capital
Integration of stress-test projection of balance sheet
results into the Bank's and income statement items
decision-making processes Stress-test
Methodology must take into account
and policy: Capital planning scenarios
liquidity and risk impacts on
must take into account the capital planning
results of stress-tests. performance.
Measures
The risk measures proposed according to the
various planning works must be progressive
and aligned with management.

PwC - RVMS
 ICAAP (3/3)

• Defined bank’s major risk, and how they could be stressed ;

• Calibrated associated shocks, from a quantitative perspective ;
• Adjusted severity for probable outcomes ;
• Ensured capital ratios were not threatened with such stress, as regards to either
regulatory ratios and internal thresholds.
• Proposed management actions to smoothen shocks.

PwC - RVMS
Risk Appetite Framework (“RAF”)

PwC
RAF

PwC - RVMS
RAF

PwC - RVMS
PwC - RVMS
PwC - RVMS