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August 2021

As Europe moves through the cycle of downturn and recovery, capital and liquidity positions will have major implications for individual banks, systemic resilience, and the health of the whole economy. In fact, recent months have raised doubts about how well-prepared banks’ capital and liquidity management frameworks are to cope with crises and transformations such as pandemics, climate change, digitalisation or other threats to operational resilience.

The Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) – or together, simply ICLAAP are key tools for managing banks’ capital and liquidity. Banks should not see ICLAAPs as a supervisory test, or a compliance headache. Instead, we believe banks should view them as a valuable planning mechanism, as a basis for sound decision-making, and as a vital tool for building trust and understanding with investors, supervisors, and other stakeholders.

This report aims to help banks critically reflect on the observed value of their ICLAAP over the recent months - their “ICLAAP performance”. It identifies two important lessons learned from the COVID-19 pandemic, and closes with some key fields of action to improve banks’ ICLAAP approach in the post COVID-19 world.

If you wish to discuss any of the findings in our report, do get in touch to see how KPMG ECB Office can support you.

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