By the end of the business year, many institutes are working on their business- and capital-planning as well as on their business and risk strategies. Those activities are of high importance for the banks’ management and are also in the banking supervision’s focus. Therefore, these actions usually require a lot of resources from different parts of the bank. Based on the assumptions derived for mid-term planning and budgeting, among others, the future development of own funds needs to be projected. By doing that, also impacts of possible negative economic paths (adverse scenarios) have to be determined, including the analysis of implications for abiding by regulatory (capital-) requirements. Performing the capital-planning procedures, more often than not is time consuming, requires extensive analysis based on past experience and hypothetical assumptions and finally also have to be properly and extensively documented.
Capital planning as a central element of ICAAP
In order to secure its risk-bearing capacity, every institute needs to prepare a capital plan, which has to cover a time period of at least three years by creation date and needs to be updated yearly. Capital planning as a crucial element of ICAAP is based on the assumptions of the medium-term plan and is ought to be interlinked with it. The adequacy of the capital resources has to be verified in a standard (baseline) scenario as well as adverse scenarios. Besides that, all relevant assumptions have to be comprehensively documented and – for the broader context – matched with other steering elements, such as stress testing.
The results of capital-planning – the projection of capital- and equity ratios – is a product of various parameters (esp. pillar I and II risk measures, planned balance sheets, planned income statements and strategic assumptions) compactly displayed by a few projected values. From that, very practical challenges are emerging:
- The responsibility for single elements necessary for determining capital quotas (e.g. pillar I and II risk measures, as is and planned; as is and planned balance sheets; as is and planned income statements and strategic assumptions), often is wide-spread among several persons within different divisions and departments of the bank. What makes it even more difficult is that the underlying data for different points in time needs to be available for the plan- as well as the adverse scenarios.
- The determination resp. calculation of single elements is usually conducted decentralized and not within interconnected systems (RWA within the systems of the regulatory reporting; balance sheet and income statement within the systems of financial controlling; pillar II risks within the systems of risk controlling). This information has to be matched, determined and systematically assembled.
- Conclusively that information, originating from various systems and departments, has to be consolidated and visualized. According to our own assessment, a lot of institutes are lacking a sophisticated and efficient solution to that. The existing planning procedures usually do not allow for conducting adhoc analysis.
- Often there are no tools available to the institutes, making it possible for them to merge the input parameters for the baseline- and scenario-plan, resulting in a comprehensive capital-planning and its immediate visualization.
Referring to our professional project experience, it has proven to be successfull to question and optimize the processes of the capital planning procedure beginning at the result, i.e. the graphic preparation of the calculated figures. Following our assessment the capital planning process within a bank is tying up so many resources, because consequences of single actions or changes by individuals and the resulting interactions are not becoming apparent quick enough to the involved persons or departments.
- What impact does a change of the payout ratio in t1 in the baseline-, as well as the adverse-scenario have on the following periods t2 and t3?
- What impact does an increase of credit RWA by 0.5% in t1, resulting from an expansion of business line A, in the baseline-, as well as the adverse-scenario have on the following periods t2 and t3?
- How does an economic downturn and a thereby induced deterioration of the credit portfolio’s quality affect the necessary value adjustments in t1, t2 and t3 (especially within the IFRS stage model), the interest- and yearly-income, as well as the RWA?
According to our experience, planning sessions directed towards specifying business- and capital-planning and fixing scenario assumptions are proceeded quicker and more efficiently if their consequences – as described above – can be calculated and visualized immediately by sufficient technical support. By that the consequences can be discussed including all factors and considered for further decision-making processes. By avoiding to prepare potentially obsolete and by that useless analyses in different departments of the bank, unnecessary efforts can be reduced, whilst the number of time consuming meetings of decision makers can be organized more efficiently.
As a result, the process and comprehensiveness of the capital-planning procedure can especially be improved if it is possible to simulate impacts of changes in single parameters directly. The reason for that is that the calculated capital ratios are not merely a finding resulting from mid-term planning, but rather a fundamental input factor for determining the strategic alignment of the bank.
Why not optimize your capital-planning process now?
The right point in time for your optimization
Use 2020 to optimize and update your processes for business- and capital-planning in conjunction with the new ICAAP requirements. The targeted implementation of the new ICAAP unleashes capacities and creates an efficient and consistent control logic for internal and external purposes.
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 See principle 3 of the ECB’s ICAAP guidelines dated 9 November 2018; AT 4.1 of the MaRisk (BaFin-Rundschreiben 9/2017); Para 20 ff. of the BaFin’s ICAAP guidelines dated 24 May 2018
 See para 22 of the BaFin’s ICAAP guidelines
WP StB Michael Maifarth
Telefon +49 69 9585 2318
Mobil +49 170 786 5727
WP Dieter Lienland
Telefon +49 211 981 4929
Mobil +49 171 553 2631
Telefon +49 30 2636 5018
Mobil +49 170 473 8250
Telefon +49 211 981 4173
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