We design, implement and review capital self-assessment (ICAAP) and liquidity self-assessment (ILAAP) processes for credit institutions and investment firms. Compliance with CRD IV, the EBA guidelines, the ECB guides and the Bank of Spain PACL Guide.
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From designing the self-assessment framework to preparing the IACL report and getting ready for the SREP.
ICAAP design and implementation: identifying and measuring material risks, estimating the own funds you need, capital planning, stress testing and drafting the self-assessment report in line with the Bank of Spain PACL Guide and the EBA guidelines.
ILAAP design and implementation: liquidity risk analysis, liquidity buffers, collateral management, the liquidity cost-benefit allocation mechanism, the contingency plan and reporting to the supervisor.
Designing adverse scenarios, calibrating parameters, and measuring the impact on capital ratios (CET1, Tier 1, Total Capital) and liquidity ratios (LCR, NSFR). Integration into the ICAAP and the ILAAP.
Drafting the Capital and Liquidity Self-Assessment Report (IACL) with the structure the Bank of Spain requires: business model, risk appetite framework, risk measurement and planning.
Defining the risk appetite framework (RAF), the ICAAP/ILAAP governance structure, the roles of the board and senior management, and alignment with the three lines of defense.
Comprehensive advice on prudential regulation: Pillar 1 and Pillar 2 requirements, capital buffers, liquidity ratios and regulatory reporting to the supervisor.
Significant institution, less significant institution, investment firm or cross-border group: the complexity and depth of the ICAAP and the ILAAP are tailored under the principle of proportionality.
"Significant institutions under the SSM must apply the ECB Guides to the ICAAP and ILAAP: economic and normative perspectives, advanced stress testing and direct reporting to the Joint Supervisory Team (JST)."
"Less significant institutions apply the Bank of Spain PACL Guide with a proportionate approach: the IACL must be submitted before April 30 with the previous year’s information."
"Investment firms subject to CRD/CRR must also prepare capital and liquidity self-assessment processes proportionate to their size, complexity and risk profile."
"Groups present in several Member States must prepare an ICAAP/ILAAP at both consolidated and individual level. Coordination between the consolidating supervisor and the local supervisors is key."
An inadequate self-assessment process can lead to additional capital requirements, operational restrictions and a loss of the supervisor’s confidence.
Higher Pillar 2 requirements: if the supervisor finds that the ICAAP does not properly identify or quantify risks, it can impose additional own funds requirements (P2R) above the regulatory minimum.
Unfavorable SREP score: a low-quality ICAAP/ILAAP has a direct impact on the overall SREP assessment. This can lead to supervisory measures, restrictions on dividend distributions or limits on growth.
Unmanaged liquidity risk: an insufficient ILAAP can hide weaknesses in the liquidity profile that only surface in times of stress, putting the institution’s viability at risk.
The ECB has declared the ICAAP and the ILAAP a multi-year supervisory priority. Institutions must show continuous improvement in their self-assessment processes in each SREP cycle.
Articles 73 and 86 of CRD IV (transposed in Arts. 41 and 42 of Law 10/2014) require institutions to have sound internal processes for assessing capital and liquidity.
Guidelines EBA/GL/2016/10 on the ICAAP and ILAAP for SREP purposes are mandatory. The Bank of Spain adopted them as its own in April 2017.
We design, review or audit your capital and liquidity self-assessment processes: risk identification, quantification, stress testing, the IACL report and SREP preparation.
The ICAAP (Internal Capital Adequacy Assessment Process) is the internal process through which a credit institution or investment firm assesses whether its capital is adequate for the risks it is exposed to. In Spain it is called the Capital Self-Assessment Process (PAC).
The ICAAP must cover all material risks (credit, market, operational, interest rate, concentration, reputational, etc.), quantify them and integrate them into forward-looking capital planning with stress scenarios.
The ILAAP (Internal Liquidity Adequacy Assessment Process) is the equivalent process for liquidity: the institution assesses whether its liquidity buffers are enough to meet its needs under normal and stressed conditions. In Spain it is called the Liquidity Self-Assessment Process (PAL).
It includes collateral management, the liquidity contingency plan, intraday liquidity risk management and the liquidity cost allocation mechanism.
The SREP (Supervisory Review and Evaluation Process) is the process through which the supervisor assesses the institution’s risk profile and sets its Pillar 2 requirements. The ICAAP and the ILAAP are key inputs to the SREP.
The supervisor assesses the quality of both processes. If it finds them insufficient, it can impose additional capital or liquidity requirements, operational restrictions or other supervisory measures.
Under the ECB Guides, the ICAAP must cover two complementary perspectives:
The IACL (Capital and Liquidity Self-Assessment Report) is the document the institution prepares every year with the results of the ICAAP and the ILAAP. The Bank of Spain PACL Guide organizes its content into three blocks: information common to both processes, information specific to the PAC and information specific to the PAL.
Less significant institutions must submit it before April 30 of the following year. Significant institutions send it to their ECB Joint Supervisory Team.
The ICAAP must identify and quantify all of the institution’s material risks, including at least: credit risk, market risk, operational risk, interest rate risk in the banking book (IRRBB), concentration risk, business/strategic risk and reputational risk.
The institution must justify why it has included or excluded each type of risk, with a documented methodology that can be reviewed.
Yes. CRD IV, the EBA guidelines and the ECB Guides all state that the complexity and depth of the ICAAP and the ILAAP must be proportionate to the size, nature, scale and complexity of the institution’s activities.
A small, non-complex institution can use simpler methodologies, as long as it covers all material risks and shows prudent management of capital and liquidity.
The board of directors (or equivalent body) has ultimate responsibility for the ICAAP and the ILAAP. It must approve the risk appetite framework, capital and liquidity planning, and the IACL report. The ECB and the Bank of Spain expect the board to show sufficient understanding of the processes and their results.
Senior management is responsible for operational implementation, and internal audit must carry out an independent review of the design and consistency of both processes.
An effective ICAAP/ILAAP combines quantitative rigor, a forward-looking view and sound governance. These are the three pillars we assess.
Identifying all material risks, quantifying them with in-house methodologies, stress testing under adverse scenarios and medium-term capital planning. The ICAAP must show that the institution is viable at all times.
Assessing the liquidity profile, designing buffers, the liquidity contingency plan, collateral management and funding cost allocation. The ILAAP must show the ability to withstand liquidity crises.
The ICAAP and the ILAAP are not isolated exercises. They must be embedded in the institution’s day-to-day management, approved by the board and reviewed by internal audit. The risk appetite framework (RAF) is the cornerstone.
If you need help with your ICAAP or ILAAP, see our financial regulation services or request a free consultation.
An effective ICAAP and ILAAP are not just annual reports. They are ongoing capital and liquidity management processes embedded in the institution’s decision-making.
1) RisksComplete inventory of material risks, quantification with internal methodologies and aggregation to determine the total capital needed.
2) CapitalProjecting solvency ratios over the medium term under baseline and adverse scenarios. Response actions if the ratios deteriorate.
3) LiquidityAssessing the liquidity profile, designing buffers, collateral management, funding cost allocation and the contingency plan.
4) GovernanceBoard-approved risk appetite framework, ICAAP/ILAAP governance structure, annual IACL report and independent review by internal audit.
By institutionECB Guides. Economic and normative perspectives. Advanced stress testing. Reporting to the JST.
Bank of Spain PACL Guide. Proportionate approach. Annual IACL before April 30.
CRD/CRR + IFR/IFD. Proportionate to complexity. CNMV / Bank of Spain supervision.
Ensure that the institution has enough own funds to cover all its material risks at all times.
Ensure that the institution has adequate liquidity buffers to meet its needs under normal and stressed conditions.
Credit, market, operational, IRRBB, concentration, business, reputational and other Pillar 2 risks.
Short- and long-term liquidity risk, funding risk, intraday liquidity, concentration risk in funding sources.
CET1 ratio, Tier 1 ratio, Total Capital ratio, leverage ratio, internal economic capital.
LCR, NSFR, survival period, liquid asset buffer, contingency indicators.
Impact of adverse scenarios on solvency ratios. 3-year projection. Capital recovery actions.
Impact of liquidity stress scenarios. Survival period under combined scenarios. CFP activation.
CRD IV Art. 73 → Art. 41 of Law 10/2014. ECB ICAAP Guide. EBA/GL/2016/10.
CRD IV Art. 86 → Art. 42 of Law 10/2014. ECB ILAAP Guide. EBA/GL/2016/10.
If the supervisor spots any of these signs, it can impose additional measures.
If you are designing or reviewing an ICAAP or ILAAP, these are the terms you need to master.
Internal process for assessing capital adequacy. In Spain: PAC (capital self-assessment process). Required by CRD IV Art. 73.
Internal process for assessing liquidity adequacy. In Spain: PAL (liquidity self-assessment process). Required by CRD IV Art. 86.
The supervisor’s review and evaluation process. The supervisor assesses the institution’s risk profile and sets its Pillar 2 requirements based on, among other things, the ICAAP and the ILAAP.
Capital and liquidity requirements that the supervisor can impose above the Pillar 1 minimum, based on its assessment of the institution’s individual risk profile (SREP).
Regulatory ratio that measures the institution’s ability to cover its net liquidity outflows over 30 days with high-quality liquid assets (HQLA). Minimum: 100%.
Ratio that measures the stability of long-term funding sources against stable funding needs. It complements the LCR with a one-year view.
Risk appetite framework: the set of metrics, limits and statements that define how much risk the institution is willing to take. Approved by the board. A core part of the ICAAP and the ILAAP.
Annual document setting out the results of the ICAAP and the ILAAP. It is submitted to the supervisor (the Bank of Spain for less significant institutions, the ECB/JST for significant ones).
Directive 2013/36/EU, which sets the prudential framework for credit institutions and investment firms in the EU. Articles 73 and 86 require the ICAAP and the ILAAP respectively. Transposed in Spain by Law 10/2014.
ICAAP / ILAAP REVIEW CONSOLE
The quality of the ICAAP and the ILAAP is measured on three axes: risk coverage, stress testing and governance. This panel summarizes the level of requirements by type of supervised institution.
The depth and complexity of the ICAAP/ILAAP vary with the supervisory classification.
Tell us about your situation and we will explain how we can help you design, review or audit your ICAAP and ILAAP.
The ICAAP (Internal Capital Adequacy Assessment Process) and the ILAAP (Internal Liquidity Adequacy Assessment Process) are the internal processes through which credit institutions and investment firms assess whether their capital and liquidity are adequate for the risks they are exposed to. They are the core of Pillar 2 of the Basel prudential framework and a key input to the supervisory review and evaluation process (SREP).
The obligation to have an ICAAP and an ILAAP is set out in Articles 73 and 86 of Directive 2013/36/EU (CRD IV). These articles require institutions to have sound strategies and processes to assess and maintain, on an ongoing basis, the amounts, types and distribution of internal capital and liquid assets that they consider adequate to cover the nature and level of the risks to which they are or might be exposed.
In Spain, CRD IV was transposed by Law 10/2014 of June 26 on the Organization, Supervision and Solvency of Credit Institutions (Articles 41 and 42), implemented by Royal Decree 84/2015 (Articles 45 and 53) and Bank of Spain Circular 2/2016. In 2017 the Bank of Spain published the PACL Guide (Capital and Liquidity Self-Assessment Process) as supervisory guidance for the less significant institutions under its direct supervision.
For significant institutions supervised by the ECB under the Single Supervisory Mechanism (SSM), the ECB published its Guides to the ICAAP and ILAAP, which set out seven principles on how it understands the CRD IV requirements. These guides stress that both processes must cover two complementary perspectives: the normative perspective (regulatory compliance) and the economic perspective (internal view of risks and capital).
The supervisor assesses the ICAAP and the ILAAP every year as part of the SREP. The quality of both processes directly affects the setting of Pillar 2 requirements (P2R and P2G), liquidity recommendations and the institution’s overall SREP score. The ECB has placed improving the ICAAP and the ILAAP among its multi-year supervisory priorities.
Key legislation, linked to the official text:
Legislation and links reviewed in .