The FSA's Pillar 2 assessment framework
24 May 2007
The Financial Services Authority (FSA) today publishes details of its Pillar 2 assessment framework, also known as the Supervisory Review and Evaluation Process (SREP).
What is it?
The framework is designed to enable our supervisors to review and evaluate a firm's Internal Capital Adequacy Assessment Process (ICAAP) so that we can be sure firms understand the risks to which they are exposed and hold capital proportionate to these risks. Ultimately this should reduce the probability of financial failure and thus protect both consumers and help to maintain confidence in the financial markets.
This paper will give firms an insight into what they can expect of our Pillar 2 assessment process and how this will be applied proportionately according to the risks to our objectives. This should help firms to understand better the rationale for various aspects of our review process and more efficiently manage their dealings with us during the SREP.
In publishing this paper we are also meeting our obligation under Article 144 of the Capital Requirements Directive (CRD) to disclose the general criteria and methodologies we use in our review and evaluation of firms' ICAAPs.
Who is it relevant to?
The requirement to produce an ICAAP applies to those banks, building societies and investment firms subject to the CRD. Firms have the option during 2007 to move on to Basel 2 but as of 1 January 2008 all firms subject to this Directive will have to move onto the new regime.
We place great emphasis on senior management's involvement in and ownership of the ICAAP process so this paper is most likely to be of relevance to members of firms’ senior management (including Board members) as they will be closely involved in the ICAAP process. It will also be of interest to other individuals in firms who are involved in the ICAAP process (e.g. heads of finance, risk, compliance and internal audit functions).
What does it involve?
Conducting a Pillar 2 assessment includes a range of things, some of which include analysing:
- a firm's exposure to risks;
- the processes it uses for identifying, measuring and controlling risks;
- its capital resources; and
- ongoing compliance with standards laid down in the CRD.
Through the Pillar 2 assessment framework we will seek to identify any weaknesses or inadequacies which might require a regulatory response from us.
What might the outcome of an assessment mean for a firm?
The sort of things we might do as a result of an assessment could include:
- giving Individual Capital Guidance (ICG) that reflects the amount of capital that we believe is adequate for a firm's risk profile and strategy, after taking into account its internal governance and risk management infrastructure;
- giving individual guidance reaffirming or amending any existing liquidity ratios, limits or behavioural concessions; and
- resultant prudential or other measures.
Giving us feedback
Because this paper sets out information about our internal Pillar 2 assessment process, it is not subject to formal consultation. However, we are interested in feedback on the contents of this paper and are always happy to receive any comments on our Pillar 2 assessment process more generally.
Main document
Our Pillar 2 assessment framework [PDF]
