As we kick off the new year, the ICARAP season for investment firms is also coming up again. This ICARAP season promises to be a complex one requiring Dutch investment firms to navigate between three differing perspectives:

(1) existing DNB ICAAP Policy Rule and DNB ICAAP guidance (June 2015 and November 2018, respectively),
(2) EBA/ESMA ‘Guidelines on common procedures and methodologies for the SREP’ (July 2022), and
(3) EBA’s final report ‘RTS on Pillar 2 add-ons for investment firms’ (September 2022). 

What could change?

The upcoming ICARAP is, for most firms, the first ICARAP to be subject to the 2022 EBA/ESMA Guidelines and the specification of the RTS. Both documents address the supervisor, and provide, amongst other things, guidance on determining the Pillar 2 capital. As such, these Guidelines are expected to indirectly impact investment firms by changing the supervisor’s approach to ICARAP. 

There are two important elements to consider in the ICARAP preparation:

  • For calculating the Pillar 2 requirement (P2R), the Guidelines introduce, under risks related to ongoing activities, a risk calculation for risks not (sufficiently) covered by the K-factors, mentioning assessment on RtC, RtM, RtF and other risks. Considering the EBA final RTS report, this could be interpreted as a sum of:
    • Risks not fully captured by the K-factor requirements (but not lower than the K-factor requirements); and
    • Other (elements of) risks not included in the K-factors (e.g., operational risk).

The DNB ICAAP guidance presents a perspective for the risk calculation that does not refer to IFR or K-factors, and potentially causes firms to misalign their risk calculation with supervisory expectations.

  • While the current ICAAP Policy Rule guidance presents ICARAP capital as the highest of the wind-down scenario and risk calculation related to ongoing activities, the new Guidelines could position the ICARAP capital as the sum of Pillar 1 and the highest of the P2R from wind down or the P2R from the risk calculation. The EBA final RTS presents a calculation approach (slightly) closer to the DNB ICAAP Policy Rule.

What is the problem?

Although the three perspectives appear to be comparable, the differing nuances (can) have significant impact on the resulting ICARAP calculation. At best, the differing perspectives that are out there pose a challenge for firms on how to present their ICARAP to the supervisor. At worst, firms are at risk of not meeting supervisory expectations and being confronted with an unexpected ICARAP capital.

What to do next?

Firms would do well to be aware of the new Guidelines and RTS report addressed to the supervisor and reconsider their current ICARAP approach to (better) align with the (potentially evolving) supervisory expectations. Additionally, we can imagine that the sector would welcome further guidance or an update of the 2015 Policy Rule and 2018 guidance from the supervisor on how to approach the upcoming ICARAP season.