D. Supervisory Review and Evaluation Process (SREP)
11. The guidance provided in this section of the BPG, covers the evaluation criteria and methodology (referred to as a SREP) that the AFSA may use when reviewing and evaluating the ICAAP of a Bank.
12. The documented results of the ICAAP assessment is required to be submitted to the AFSA. The AFSA then applies a process known as the SREP which is detailed in the later parts of this Chapter. As part of the SREP, the AFSA will evaluate the quality, completeness and consistency of the ICAAP of the Bank, to form a view on the overall risk profile of the Bank and whether the capital held by the Bank is sufficient to deal with the risks.
13. Following review of the ICAAP of a Bank, the AFSA may engage in a dialogue with the Bank to evaluate the assessment of risks and where relevant, additional capital which the AFSA considers that the Bank should hold resulting from the ICAAP or SREP.
14. The AFSA may conduct a SREP to review and evaluate the assessments carried out by a Bank under its ICAAP. The AFSA may engage with a bank in a dialogue where, following an SREP, the AFSA considers that it is or may be appropriate to impose an Individual Capital Requirement on the Bank. It is important that a Bank cooperates in an open and co-operative manner with the AFSA in the course of its conduct of the dialogue.
The SREP in detail
15. A SREP of an IRAP and an ICAAP forms an integral part of the overall supervisory approach of the AFSA. A SREP is expected to enable assessment of the effectiveness, completeness and quality of an IRAP and ICAAP in relation to the overall risk profile of the Bank. It leverages from information collected and assessments carried out as part of the wider supervisory regime, including desk- based reviews, on-site risk assessments, discussions with the Bank’s management, and reviews completed by internal and external auditors.
16. The SREP is structured to provide consistency of treatment across Banks, taking into consideration the differences in risk profiles, business strategies and management. An essential element of the SREP is the qualitative assessment of each type of risk and its management within the overall context of the Bank’s internal governance.
17. The AFSA’s assessment of the individual risk profile of a Bank will provide the context for evaluation of the Bank’s IRAP and/or ICAAP. The evaluation in turn will be used by the AFSA to augment its understanding of the overall risk profile of a Bank. Also, in relation to a Bank, the AFSA might involve such a Bank in a formalised discussion of risks and capital adequacy, which might lead to a requirement for additional capital.
18. The SREP may be used as a regulatory tool for Banks which are required to perform an IRAP and/or ICAAP. The SREP for each Bank will be proportionate in terms of the size, scale and complexity of its business and its impact on financial sector stability. The AFSA will cooperate actively with other supervisory authorities whenever a Bank is part of a Group and is prudentially regulated on a consolidated basis.
19. The SREP evaluation cycle will be determined in the discretion of the AFSA and be based on the risk assessment, developments in the risk profile and changes in the Bank’s strategy or products. The SREP is as far as possible aligned with the risk assessment process to ensure that a recent risk assessment is available for the SREP evaluation process.
20. It is envisaged that the AFSA will use a range of supervisory tools of qualitative or quantitative nature to perform the SREP. The SREP is not intended as, and should not constitute, a parallel or secondary IRAP or ICAAP. Its purpose is to evaluate the quality, completeness and consistency of the IRAP or ICAAP of the Bank.
Review of the ICAAP Assessment
21. Upon receipt of an IRAP or ICAAP the AFSA would normally:
(a) subject the data provided to an initial analysis for completeness and accuracy followed by a more detailed comparison with the relevant data held on file at the AFSA about the Bank;
(b) determine if there are material changes compared with previous submissions;
(c) determine if the submitted data contains indicators of a possible material change in the Bank’s risk profile;
(d) address and discuss any information gaps or anomalies with the Bank; and
(e) form an assessment about content and quality of the submission which will be integrated into the overall supervisory approach.
Evaluation of the ICAAP
22. The SREP evaluation of the IRAP and, where applicable, the ICAAP covers all activities of a Bank and takes all relevant data collected during the supervisory process into account. The SREP evaluation process will use desk based reviews, Bank visits and meetings to arrive at a final view. As part of the SREP, the AFSA will consider:
(a) the completeness of the ICAAP by ensuring that it covers all business areas, internal governance and all risk categories of the Bank;
(b) the soundness and quality of the ICAAP process in relation to the Bank’s size, business complexity and risk profile;
(c) soundness of qualitative calibration and quantitative methodology whenever employed by the Bank;
(d) execution of the ICAAP in terms of consistency, quality and documentation;
(e) adequacy of internal controls and quality assurance processes on the ICAAP; and
(f) adequacy of management information and whether the management had responded adequately and in a timely manner to such information.
23. Based on the SREP, the AFSA will form an assessment which will be communicated to the Bank and flow into the overall supervisory approach. The action required resulting from the ICAAP will be communicated to the Bank as part of a risk mitigation programme.
24. In relation to a Bank, where the AFSA does not agree with the results of the Bank’s ICAAP results, the AFSA will involve the Bank in a dialogue to reconcile any difference in view to arrive at a consensus estimate of the capital level required to address all risks identified either by the Bank or by the AFSA in its SREP. Such an estimate will be specified by the AFSA as the Individual Capital Requirement for the Bank. Where consensus is not possible the AFSA may impose an Individual Capital Requirement on a Bank.
Individual Capital Requirement (ICR)
25. Upon completing the SREP, the AFSA may impose an Individual Capital Requirement on a Bank as detailed in Chapter 11 of BBR. The ICR may be imposed where the AFSA concludes that the Bank should hold more capital to provide for its overall risks.