Pillar II and Supervisory Review: A New Approach to Regulation?

Transcription

1 Pillar II and Supervisory Review: A New Approach to Regulation? David Campbell June 2006

2 Contents Pillar II objectives Key themes Implications for companies and supervisors Key challenges Conclusion

3 Pillar II objectives Pillar II Key objectives Increase harmonisation of supervisory methods, tools and processes Evaluate Pillar I requirement - Judgement risk profile of insurance undertakings - Pillar II capital add-on Ensure consistency between financial sectors Encourage risk management and governance - Link to fit & proper requirements

4 Pillar II objectives Pillar II Policy context Level 1 Framework Directive for Solvency II Level 2 Regulation (implementing measures) Level 3 Supervisory Guidance

5 Pillar II objectives Pillar II process Aim of Pillar II review process Ensure firm is well run and meets adequate risk management standards; and To help ensure that the firm is adequately capitalised Firm Risk management & capital adequacy assessment Supervisor Review process Supervisor Discretionary Pillar II capital requirement

6 Pillar II objectives Basel II - Pillar 2, Principle 1 The Internal Capital Adequacy Assessment Process (ICAAP) Banks should have a process for assessing overall capital adequacy in relation to risk profile and a strategy for maintaining capital levels Board and senior management oversight Sound capital assessment - Policies and procedures.. to measure.. all material risks - Process to relate capital to level of risk Comprehensive assessment of all risks Monitoring and reporting Internal control review

7 Pillar II objectives Basel II - Pillar 2, Principle 2 Supervisory review review and evaluate banks internal capital adequacy assessments and strategies, as well as ability to monitor and ensure compliance with regulatory capital ratios. take appropriate action if not satisfied with the result of the process Review of adequacy of risk assessment Assessment of capital adequacy Assessment of control environment Supervisory review of compliance with minimum standards Supervisory response

8 Contents Pillar II objectives Key themes Implications for companies and supervisors Key challenges Conclusion

9 Key themes Solvency II The quantitative requirements & link to Pillar II Solvency I Solvency II Pillar I Pillar II Technical provisions Solvency I Best estimate Risk margin Minimum Capital Requirement (MCR) Solvency Capital Requirement (SCR) Use of Internal model Pillar II add-on (potential)

10 Key themes Key themes Pillar II Risk management Use tests Internal controls Evidence/ documentation Compliance Senior Management Responsibilities Regulatory relationship

11 Contents Pillar II objectives Key themes Implications for companies and supervisors Key challenges Conclusion

12 Implication for companies and supervisors Implication for companies Internal information Business plans Strategy for the firm Business capital requirement Further Pillar II requirements SCR calculation Policy on solvency capital Quantitative analysis of difference between SCR and business capital requirement - Potential for minimum standards - Link to risk register

13 Implication for companies and supervisors Implication for companies Articulate risk appetite for business vs regulatory purpose Strengthen link between risk and capital management Internal model considerations Process for monitoring capital performance

14 Implication for companies and supervisors Implication for supervisors The Basel view SUPERVISORY REVIEW PROCESS ICAAP SREP INTERNAL GOVERNANCE Identify and assess all material risks; identify controls to mitigate the risks *Identify amount and quality of internal capital in relation to risk profile, strategies and business plan PRODUCE ICAAP NUMBER AND ASSESSMENT DIALOGUE CHALLENGE Identify, review and evaluate all risk factors and control factors/ras *Assess, review and evaluate the ICAAP Assess, review and evaluate compliance with minimum standards set in Directive SREP CONCLUSIONS Supervisory evaluation of on-going compliance with minimum standards & requirements *Narrow scope supervisory review CAPITAL ICAAP results Pillar 1 minimum regulatory capital Capital allocated for Pillar 2 Specific own funds requirement ICAAP process/results fully satisfactory ICAAP process/results not fully satisfactory Whole ranged of available prudential measures (Art 136) including own funds Systems & Controls Provisioning Restriction of Business Reduction of inherent risk Source: CEBS CP03 revised 26 January 2006

15 Contents Pillar II objectives Key themes Implications for companies and supervisors Key challenges Conclusion

16 Key challenges Key areas of discussion Rules vs principle based Diversification allowance - Between risk categories - Between entities Group issues including movement of capital Treatment of reinsurance/ allowance for wider risk mitigation Consistency by supervisors in Pillar II treatments

17 Contents Pillar II objectives Key themes Implications for companies and supervisors Link to the Arrow visits Key challenges Upcoming Quantitative Impact Study Conclusion

18 Conclusion Pillar II and Supervisory Review: A New Approach to Regulation?