Bank management 4.0

In 2018, the ECB published the new ICAAP & ILAAP guidelines, which it will use as the basis for its SREP from 2019 when assessing the banks it supervises (SIs). BaFin also updated its ICAAP guidelines for banks under its supervision (LSI).

With immediate effect, banks are therefore expected to evaluate the ICAAP from an economic and a normative perspective. Methodologically, the two perspectives are similar to the previous gone-concern approach and the already required capital planning. However, the requirements for the normative perspective are in some cases significantly higher compared to capital planning, particularly with regard to the severity of the adverse scenarios to be considered and the detail of the modelling in the respective simulations.

Alternatively, BaFin-supervised banks can continue to use the previous going-concern approach if they have already implemented a well-positioned capital plan. Irrespective of this, however, we recommend that all banks review the changeover to the new turnover, as it can be assumed that this will also be required for BaFin-supervised banks in the medium term.

For German banks, the ICAAP will in many cases focus on the following areas when implementing the new approaches:

• Revision of the governance model and adjustment of the written regulations
• Adjustments to the risk inventory to reflect the newly required "gross view"
• Further development of model validation
• Further development and consolidation of planning, forecasting & stress testing for the normative perspective
• Selective methodological adjustments to implement the economic perspective (complete reorganisation if necessary if only a going-concern approach in accordance with the BaFin guidelines was previously used).

When implementing the ILAAP for the ECB-supervised banks, similar issues arise in some cases, as an economic and a normative perspective must also be considered here.

Overall, the ECB strongly emphasises in its ICAAP and ILAAP guidelines that it expects the concept of the three lines of defence to be implemented in governance.

As effective resource management (balance sheet, capital and liquidity) is also becoming increasingly important for banks from a business perspective, we are observing a trend towards the establishment and expansion of so-called strategic treasuries as a business area (first line of defence) in order to bundle the management activities for all of the aforementioned resources.

The core challenge here is certainly to clearly delineate the areas of responsibility between the functions involved in the first and second lines of defence and to adapt the business processes accordingly without creating new duplications and other inefficiencies.

Financial controlling at banks has always played a key role in the implementation of strategy and the monitoring of business planning. With the new SREP and, associated with this, the new design of the ICAAP and ILAAP as multi-year plans in the normative perspective, financial controlling is also becoming the focus of the ECB's supervisory activities.

In addition to the challenges of digitalisation to leverage the associated efficiency gains, this will result in the following key areas for financial controlling in the future:

• Stringent implementation of the concept of the three lines of defence
• Integration of financial controlling models (especially for planning) into the model risk framework
• Stronger integration of planning with stress testing activities with further development into scenario-based planning (see next section)
• Stronger integration of the data budget and the IT architecture of finance and risk controlling
• Review and adjustment of the role of financial controlling in overall governance, in particular with regard to ICAAP and ILAAP

Comprehensive scenario and simulation capabilities are a key success factor for modern overall bank management. Both business management in a world of increasing uncertainty and the requirements of supervisors and regulators make it necessary to merge and significantly develop the frameworks for planning and stress testing in order to become more effective and, above all, more efficient on this basis:

• Regular external stress tests by EBA/ECB and BaFin (annually or biennially) with extensive reporting requirements
• Regular internal scenario analyses for ICAAP and ILAAP (at least quarterly) and the planning process
• Consideration of the development of new business in the internal scenario analyses ("dynamic balance sheet") vs. assumption of a constant balance sheet in external EBA/ECB stress tests ("constant balance sheet")

Multi-year scenario analyses along all relevant business and regulatory KPIs will therefore be a core element of bank management over the next ten years. In this respect, we are increasingly seeing a willingness in the market to invest in the necessary infrastructure in order to make what are currently often still highly manual processes more efficient and perform better.

Regulatory stress tests have become an integral part of supervisory activities. However, due to a lack of suitable infrastructure, these are often associated with high costs for the banks concerned.

With our consultants experienced in various stress tests and our comprehensive, ready-to-use support tools, we help you to pass regulatory stress tests effectively and efficiently while giving you the freedom to further develop your stress test framework and prepare for the next regulatory stress test.

The modules mentioned above have a significant impact on the overall bank management framework. In this context, we therefore recommend always adapting the entire framework. Key areas of action often include:

• Method and approach to capital allocation to reflect the greater impact of stress scenarios
• Review and adjustment of the consideration of capital costs in product pricing and performance measurement (e.g. RAROC or shareholder value concepts)
• Limit system and limit allocation to the operating divisions
• Review of the management approach to strategic and business risks, insofar as these are given greater weight in the ICAAP and ILAAP due to the multi-year considerations