ICAAP stress testing and scenario analysis: five key learning points

As part of its Internal Capital Adequacy Assessment Process (ICAAP), a firm must have in place sound, effective and comprehensive strategies, processes and systems to assess and maintain the amounts, types and distribution of financial resources, own funds and internal capital adequate to cover the risks it is exposed to. 

Stress testing and scenario analysis
A firm must carry out stress tests and scenario analysis against their ICAAP that is appropriate to the nature, scale and complexity of the major sources of risk and to the nature, scale and complexity of the firm’s business. The scenarios must be based on plausible assumptions and include circumstances and events occurring over a protracted period of time, as well as sudden and severe events. One mandatory scenario to be included in the ICAAP is a standalone wind-down scenario to assess the expected financial impact and determine the potential risks posed to an orderly wind-down process. 

The FCA Wind-down Planning Guide
The FCA has been focusing on ensuring firms maintain a detailed and actionable wind-down plan  prepared on the basis of the guidelines in the Wind-down Planning Guide (WDPG) found in the FCA Handbook. The WDPG recommends that firms consider the potential scenarios that could lead to a decision by the firm’s governing body to wind down the business and notes that firms should take the WDPG into account to strengthen their processes and ensure consistency with other related documents such as their ICAAP, their Recovery and Resolution Plan (RRP) or their CASS Resolution Pack (CASS RP) as applicable.

Accordingly, stress testing, scenario analysis and wind-down planning are an increasingly important issue for firms, and a key requirement for banks, brokers and asset managers. 

Key learning points
Moore Stephens’ Insolvency Practitioners have advised a number of firms on their wind-down plans. Five key observations our team has identified are:
  • Firms should consider a full range of scenarios including loss making activity in the short and medium term, a shock to the business such as a large claim or the loss of key clients, staff or infrastructure.
  • The scenarios should be supported by the appropriate financial statements which can be stress tested using the scenarios and the appropriate KPIs identified, and used to set warning indicators.
  • Detail is required regarding the operational steps required to wind down the business including the timings and responsibility for each scenario. 
  • A detailed assessment of the resources is required including staff, systems, premises, professional advice and the associated costs for the duration of the wind-down. 
  • The plan should be consistent with the ICAAP and the RRP, and work in conjunction with the CASS RP. 
How we can help
Moore Stephens’ regulatory and restructuring specialists can help you with scenario planning and stress testing as well as advising you on your ICAAP, Recovery and Resolution Plan, standalone Wind-down Plan and CASS Resolution Pack.

If you would like to discuss how the issues raised in this article affect your business please contact one of the team

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