ICAAP / ILAAP / Stress testing: self-assessment under Basel Pillar II

What it is about

Jorge Mogrovejo González, deputy superintendent of Banking and Microfinance at Peru's SBS, explained at the First Annual Risk Conference (September 2023) how Peru supervises the capital and liquidity management of financial institutions under Basel Pillar 2.

The 34 slides cover the implementation of Pillar 2 in the Peruvian financial system (capital adequacy self-assessment report, supervision, capital buffers and early supervisory actions), the liquidity contingency plan, the actors in capital and liquidity management, the 2023 solvency and liquidity stress exercises, and the challenges and expectations.

Objectives

• Explain how the capital adequacy self-assessment and supervision process works in Peru.
• Describe how institutions are checked for liquidity contingency plans and who is responsible.
• Share the results of the 2023 solvency and liquidity stress exercises and the pending challenges.

Key takeaways

1. The goal of the self-assessment is to ensure and preserve an adequate relationship between capital and the risks each institution takes on, and the 2023-2025 report structure integrates capital management, solvency level, stress tests, strengthening actions and internal control.
2. If capital falls below certain levels, the supervisor triggers early supervisory actions; the Peruvian system also has capital buffers.
3. The risk unit and the business areas are responsible for designing and implementing the liquidity contingency plan; liquidity supervision results feed into institutions' risk rating.
4. In the solvency stress exercise, the financial system as a whole would remain solvent even in the severe scenario; in liquidity, the severely adverse scenario implies a deficit of 4.1% of liabilities.
5. Corporate governance is highlighted as a key element of financial stability, and the supervisor's challenge is to integrate the process with institutions' strategic planning.