The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)

Supervisory Statement 31/15

Update 12 December 2017

This SS was updated following updates to Policy Statement (PS)30/17 ‘Pillar 2A capital requirements and disclosure’

Overview

This Prudential Regulation Authority (PRA) supervisory statement (SS) is aimed at firms to which CRD IV applies and replaces PRA SS5/13 and PRA SS6/13. It provides further detail on the high-level expectations outlined in ‘The Prudential Regulation Authority’s approach to banking supervision’. 

The SS has five chapters, including:

  • Chapter 2: Expectations of firms undertaking an Internal Capital Adequacy Assessment Process (ICAAP). This sets out our expectations in relation to the ICAAP and the requirements set out in the ICAA part of the PRA Rulebook.
  • Chapter 3: Stress testing, scenario analysis and capital planning. This sets out our expectations of firms in relation to stress testing, scenario analysis and capital planning, and the requirements set out in Chapter 12 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook.
  • Chapter 4: Reverse stress testing. This sets out our expectations of firms in relation to reverse stress testing, and the requirements set out in Chapter 15 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook.
  • Chapter 5: The Supervisory Review and Evaluation Process (SREP). This sets out the factors that we take into consideration to assess a firm’s ICAAP, including the setting of form-specific capital requirements and the PRA buffer.

This SS should be read in conjunction with the Statement of Policy ‘The PRA’s methodologies for setting Pillar 2 capital’. For ring-fenced bodies (RFBs), as defined in the Financial Services and Markets Act 2000 (FSMA), section 142A, and banking groups containing RFBs, this statement should be read alongside SS8/16 ‘Ring-fenced Bodies (RFBs)’.

Updates

December 2017

On 12 December 2017, this SS was updated following updates to PS30/17 ‘Pillar 2A capital requirements and disclosure’. See under ‘Future version’ below.

Date of publication Supervisory statement  Update detail  Effective from 
Current version
December 2017  PDF Supervisory Statement 31/15 UPDATE - December 2017 This SS was updated following updates to PS30/17 'Pillar 2A capital requirements and disclosure'  1 January 2018
The parts relevant for ring-fenced banks apply from 1 January 2019. 
Past versions 
 August 2015
  PDFSupervisory Statement 31/15 UPDATE - August 2015  This SS was updated following publication of PS19/15 - The PRA Rulebook: Part 3   No longer effective (superseded by December 2017 version) 
October 2017  PDF Supervisory Statement 31/15 UPDATE - October 2017 This SS was updated following publication of PS22/17 'Pillar 2A capital requirements and disclosure'   No longer effective (superseded by December 2017 version) 
February 2017  PDF Supervisory Statement 31/15 UPDATE - February 2017 This SS was updated following publication of Policy Statement 3/17, ‘The implementation of ring-fencing: reporting and residual matters – response to CP25/16 and Chapter 5 of CP36/16’ No longer effective (superseded by October 2017 version) 
July 2015  PDF Supervisory Statement 31/15 Initial publication following PS17/15 'Assessing capital adequacy under Pillar 2'  No longer effective 

 

For information only SS5/13 and SS6/13 are available below

Published on 19 December 2013

This Supervisory Statement outlines the expectations that the Prudential Regulation Authority (PRA) has of firms required to undertake the Individual Capital Adequacy Assessment Process (ICAAP) in accordance with the requirements set out in the PRA Rulebook.  It also explains how the PRA will subsequently undertake the Supervisory Review and Evaluation Process (SREP).

The ICAAP is that part of the Pillar 2 assessment undertaken by firms.  The ICAAP should allow firms to assess the level of capital that adequately supports all relevant current and future risks in their business.  In undertaking an ICAAP, a firm should be able to ensure that it has appropriate processes in place to ensure compliance with the CRDIV.  This requires firms to develop and use appropriate risk management techniques.

The SREP is that part of the Pillar 2 assessment undertaken by the PRA.  The supervisory statement points out some of the factors that the PRA will take into consideration when reviewing an ICAAP as part of the SREP and setting Individual Capital Guidance and the Capital Planning Buffer.

PDF Supervisory Statement 5/13

29 July 2015 - SS5/13 was superseded by SS31/15

Published on 19 December 2013

This supervisory statement clarifies how the Prudential Regulation Authority (PRA) expects firms to undertake stress testing, scenario analysis and capital planning in accordance with Chapter 12 of the Internal Capital Adequacy Assessment rules in the PRA Rulebook.

The effective and meaningful use of stress testing and scenario analysis by firms is a critical factor in allowing them to identify the risks to which they might be exposed in the future. And to assess the appropriate capital that might be required to address those risks, thereby informing firms’ capital plans.

The supervisory statement sets out our expectations of firms in relation to stress testing and scenario analysis including:

  • scenarios appropriate to the firm’s nature, scale and complexity must be used to assess its potential vulnerabilities;
  • the governing body of the firm must be actively involved and engaged at all relevant stages; and
  • the results should feed through into the Internal Capital Adequacy Assessment Process (ICAAP).

PDF Stress testing, scenario analysis and capital planning - SS6/13

29 July 2015 - SS6/13 was superseded by SS31/15

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