Specifications to the procedures for supervisory review of the capital adequacy assessment
The Financial Supervisory Authority has specified its procedures for the supervisory review of supervised entities’ internal capital adequacy assessment. The principles published as an annex to the Supervision release 2/2009 “Capital adequacy assessment of supervised entities in the financial sector” (28.1.2009) have been updated to correspond to FIN-FSA’s present procedures for the assessment of capital adequacy, or the so-called Supervisory Review and Evaluation Process 1.
The objective of FIN-FSA’s activities is the stable operation credit, insurance and pension institutions and other supervised entities required for the stability of the financial markets. To achieve this objective, FIN-FSA monitors and assesses its supervised entities’ risks, organisation of risk management, liquidity position and capital adequacy on a continuous basis. In addition to the continuous monitoring and assessment, FIN-FSA compiles more detailed evaluations of the above matters concerning individual supervised entities. This individual assessment is known as the supervisory review.
FIN-FSA observes uniform principles in the capital adequacy assessment for all supervised entities. The review procedures for supervised entities in the financial sector are primarily based on recommendations provided by the Basel banking supervision committee on the assessment of the sufficiency of own funds, provisions laid down in the Capital Requirements Directive for credit institutions and specifying guidelines of the European Banking Authority (EBA/CEBS) on procedures concerning risk management, sufficiency of own funds and assessment of the liquidity position. Evaluation of capital adequacy of supervised entities belonging to other sectors is also based on an assessment of the risks related to the operations of the supervised entities concerned and an evaluation of the sufficiency of capital. However, the structure of regulation for other sectors is different and it lacks the pillar structure applied to supervised entities applying the Credit Institutions Directive.
Capital adequacy assessment also relies on stress tests. Stress tests are used to assess the impact of unexpected but possible external changes in the operating environment on the own funds. As a rule, FIN-FSA conducts stress tests on an annual basis for its most significant supervised entities in the financial and insurance sector.
The Basel Committee on Banking Supervision has published a Basel III capital adequacy framework, and the Commission has given a proposal for a new Capital Requirement Directive and Regulation. The Solvency II regulation applicable to insurance institutions is also about to enter into force. FIN-FSA monitors the development of regulation and updates the description of its procedures when the regulation initiatives are completed.
The annexed description of procedures does not repeal the provisions laid down in FIN-FSA Standard 4.2 Internal Capital Adequacy Assessment Process. The regulations and guidelines provided in Standard 4.2 remain in force, and the presently published procedures supplement the provisions of Standard 4.2.
Jaakko Louekari, Senior Banking Supervisor, tel. +358 10 831 5322 or jaakko.louekari(at)fiva.fi.
1) In the financial sector, the supervisory review process is also known as SREP = Supervisory Review and Evaluation Process.