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” . Key regulatory elements include:

  • Prudential Regulation: Capital adequacy requirements.

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

  • Transparency Obligations: Disclosure requirements under Pillar 3.

7.2 Mandated Risk Management Tools

The Macquarie University course identifies several mandated risk management 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.

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

  • Stress Testing (ST): Assessing resilience to adverse scenarios.

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

7.3 Translating Strategy into Operational Limits

The Macquarie University course requires students to “translate [strategies] further into risk appetite settings that can be cascaded into business performance measures and operational limits” . This ensures that strategic objectives are operationalised through risk limits and performance metrics.

 

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