Learning Objectives:

  • Explain the overlapping constraints imposed on banks’ balance sheets.

  • Understand mandated risk management tools.

  • Apply ICAAP, ILAAP, and Recovery and Resolution Plans.

7.1 The Overlapping Regulatory Framework

The Macquarie University course examines the “overlapping constraints now imposed on banks’ balance sheets, including prudential and liquidity regulation, accounting and transparency obligations, and risk appetite settings”. The University of Genoa course covers “regulation” and the “framework of supervision and main regulatory issues on risk supervision” as core topics.

Key Regulatory Elements:

  • Prudential Regulation: Capital adequacy requirements under Basel III/IV.

  • Liquidity Regulation: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

  • Transparency Obligations: Disclosure requirements under Pillar 3.

  • Accounting Standards: IFRS and GAAP requirements for financial reporting.

  • Risk Appetite Settings: The bank’s own risk appetite framework.

7.2 Mandated Risk Management Tools

The Macquarie University course identifies several mandated risk management tools. The University of Milano-Bicocca course covers the “consistency between RAF, ICAAP/ILAAP and corporate strategy” and “Supervisory expectations and market best practices”.

Key Tools:

  • Risk Management Framework (RMF): The overall system for managing risk.

  • Risk Appetite Statement (RAS): Defining the bank’s risk appetite.

  • Internal Capital Adequacy Assessment Process (ICAAP): The bank’s assessment of its capital needs. The University of Milano-Bicocca course covers “ICAAP, ILAAP, RAF and Recovery Plan” and “Integration between capital and liquidity within the risk framework”.

  • Internal Liquidity Adequacy Assessment Process (ILAAP): The bank’s assessment of its liquidity needs.

  • Stress Testing: Assessing resilience to adverse scenarios.

  • Recovery and Resolution Plans (RRP): Plans for recovery from stress or orderly resolution.

7.3 The Supervisory Review and Evaluation Process (SREP)

The University of Milano-Bicocca course covers “ECB supervisory priorities and the SREP process” and “Asset quality and NPL management”. The University of Genoa course covers “The measurement of Second Pillar risks. The prudential supervision through ICAAP and SREP”.

Key Components of SREP:

  • Business Model Assessment: Evaluating the sustainability of the bank’s business model.

  • Internal Governance Assessment: Evaluating the bank’s governance and risk management.

  • Risk Assessment: Evaluating the bank’s exposure to various risks.

  • Capital and Liquidity Assessment: Evaluating the adequacy of capital and liquidity.

  • Overall Assessment: A comprehensive assessment leading to supervisory measures.

7.4 Capital and Liquidity Integration

The University of Milano-Bicocca course covers “Integration between capital and liquidity within the risk framework” and “Consistency between RAF, ICAAP/ILAAP and corporate strategy”. This integration is essential for effective risk management.

Regulatory Strategies and Optimisation Levers: The University of Milano-Bicocca course covers “Regulatory strategies and optimisation levers” as part of its bank management curriculum, recognising that banks must actively manage their capital and liquidity positions within the regulatory framework.

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