Capital management and future regulations: elements to be considered by the financial supervisor

What it is about

Joshua Kolling, Principal Examiner at the Federal Reserve Bank of Cleveland, explained at the Second Annual Risk Conference (September 26, 2024) what a supervisor should consider when evaluating banks' capital planning processes. The slides are in English and the views are personal, not those of the Federal Reserve.

The 15 slides pose seven questions a supervisor should ask: what the ICAAP is for, which aspects to evaluate in a capital planning process, what is enough in risk identification, what is expected of governance and board oversight, what role independent risk management (including model risk) and internal audit play, and what to consider at the conclusion of the adequacy assessment.

Objectives

• Explain the purpose of the capital planning process (equivalent to the ICAAP) for the bank and its board.
• Detail the key aspects a supervisor evaluates: governance, risk management, internal controls, capital policy, scenario design and projection methodologies.
• Set out the role of independent model validation and internal audit.

Key takeaways

1. The capital planning process helps the board make informed decisions (capital goals, dividends), understand material risks and assess in a forward-looking way the impact of stress events.
2. Supervisory expectations are applied in proportion to each bank's size, complexity, activities and risk profile.
3. It should be assessed whether the bank captures emerging risks, such as climate, cyber and geopolitical risks, and whether it has robust systems to identify all material risks.
4. The board must regularly review ICAAP results and take corrective action; models must be independently validated and internal audits must evaluate the process.
5. An effective aggregation process is transparent, repeatable and well documented, with review and challenge at several levels; there is no single correct answer, and supervisors look for a thoughtful process.