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ICAAP Key Risks: Risk of Excessive Leverage

What is Risk of Excessive Leverage?

What should be considered when assessing your risk of excessive leverage?

Risk of Excessive Leverage

In IFPRU, the FCA notes that a firm must have policies and procedures in place for the identification, management and monitoring of the risk of excessive leverage (IFPRU 2.2.35R)

In addition, those policies and procedures must include, as an indicator for the risk of excessive leverage, the leverage ratio determined in accordance with the EU CRR (in particular the Calculation of the leverage ratio in CRR Article 429) and any mismatches between assets and obligations.

Furthermore, a firm must address the risk of excessive leverage in a precautionary manner by taking due account of potential increases in that risk caused by reductions of the firm's own funds through expected or realised losses, depending on the applicable accounting rules.

To that end, a firm must be able to withstand a range of different stress events with regards to the risk of excessive leverage.

Risk of Excessive Leverage Definition:

Within the EU Capital Requirements Regulations (CRR), the Risk of Excessive Leverage means:

“the risk resulting from an institution's vulnerability due to leverage or contingent leverage that may require unintended corrective measures to its business plan, including distressed selling of assets which might result in losses or in valuation adjustments to its remaining assets”

EU CRR 4.1 (94)

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