The Financial Services Authority (FSA) has become the first national financial services supervisor to publish details of its Basel II Pillar 2 assessment framework, the Supervisory Review and Evaluation Process (SREP). This paper, "Our Pillar 2 Assessment Framework", is designed to give firms an insight on how the FSA supervisors will review their Pillar 2 requirements.
The document will help regulated firms understand the FSA’s Pillar 2 assessment process, how this will be applied and how their Internal Capital Adequacy Assessment Process (ICAAP) will be carried out. The FSA say that this should help firms to understand better the rationale for various aspects of the review process and more efficiently manage their dealings with the FSA during the SREP.
A Pillar 2 assessment will include analysing overall exposure to risks (the risk profile); the processes used for identifying, measuring and controlling risks; verifying capital resources; and compliance with standards laid down in the European Union’s interpretation of Basel II, the Capital Requirements Directive (CRD). The SREP will seek to identify weaknesses or inadequacies which might require regulatory intervention. Key areas for investigation will include assessing capital strategies, and investigating existing liquidity ratios, limits or behavioural concessions.
The publication of this paper meets the European Commission obligations, under Article 144 of the CRD, to disclose the general criteria and methodologies used by national supervisors in their review and evaluation of firms' ICAAP. In it, the FSA stress their powers to impose additional capital requirements, over and above those calculated under Basel II’s Pillar 1 approaches, should individual firms not fit the required risk profile – but they also say that the process will not be used to claw back the capital benefits that some firms will obtain under Basel II. Firms have the option during 2007 to move on to Basel II, but, as of the start of 2008, all firms subject to CRD must move onto the new regime.
Because this paper is a clarification of the FSA’s internal assessment processes, there is no consultation required and there will be no formal review.
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