Internal Capital Adequacy Assessment Process -
What should a firm include in the ICAAP report about stress testing and stress test scenarios?
One of the key elements of a firm’s assessment of its ICAAP is the stress testing and scenario analysis section recorded within the ICAAP Document. This section details the firm’s forecasts and focuses upon their stress testing assumptions.
Much will depend upon the type of business and how well it is established. For example, a small start-
Within the FCA Handbook IFPRU Rule 2.2.1 R the regulator informs:
“As part of its obligations under the overall Pillar 2 rule, a firm must :
(1) make an assessment of the firm-
(2) take into account the stress tests that the firm is required to carry out as follows:
(a) (for a significant IFPRU firm) under the general stress and scenario testing rule (including SYSC 20 (Reverse stress testing));
(b) (except a firm in (a)) under SYSC 20 (Reverse stress testing);
and any stress tests that the firm is required to carry out under the EU CRR;
(3) have processes and systems that:
(a) include an assessment of how the firm intends to deal with each of the major sources of risk identified in line with IFPRU 2.2.7 R (2); and
(b) take account of the impact of the diversification effects and how such effects are factored into the firm's systems for measuring and managing risks”
The FCA will expect for firms to demonstrate what they have learnt from recent currency and commodity price fluctuations in addition to the firm's assessments about what could potentially go wrong.
Has your firm, for example, considered the impact of negative interest rates or the exit of the UK from the EU?
In addition, firm's will need to explain within their ICAAP Document / ICAAP Report how they might move into a position of recovery from a stress scenario and what their considerations and plans would be for resolution or an orderly wind down of the business.
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Comment by the FCA:
“a firm should make its assessment of adequate financial resources on realistic valuation bases for assets and liabilities, taking into account the actual amounts and timing of cash flows under realistic adverse projections”
FCA Handbook IFPRU 2.2.5 G: