Supervisory review 

The Financial Supervisory Authority (FIN-FSA) assesses supervised entities’ capital adequacy annually. It then draws up an internal report (supervisory review) on the basis of this assessment and presents the key conclusions to the supervised entity. The assessment is in proportion to the nature and scale of the credit institution’s business and its importance to financial market stability. A supervisory review can also be drawn up for an individual supervised entity more than once a year, as necessary.

The supervisory review draws on the supervised entity’s own capital adequacy assessment (ICAAP report) and any other available material. Information sources include FIN-FSA inspections, reports and other ongoing supervision. Based on the supervisory review we specify the risk areas and supervised entities we will focus on in our supervision in subsequent periods.

The supervisory review is based on our own evaluation framework. This consists of seven assessment categories, each of which comprises many different subcomponents. A numeric value between 1 and 5 is given to each assessment category.

	Risk exposure	Risk management
Internal governance		1–5
Business risk and operating environment risk	1–5	1–5
Credit risk	1–5	1–5
Market risk	1–5	1–5
Liquidity risk	1–5	1–5
Operational risk		1–5
Capital adequacy	1–5	1–5

Capital adequacy regulations require supervised entities to have an internal assessment process that evaluates their capital adequacy in a comprehensive manner (ICAAP). The assessment must take account of all risks arising from business operations and the operating environment. Capital planning must be closely linked to business strategy. It is therefore part of the supervised entity’s internal governance, internal control and risk management.

The supervisory authority is responsible for evaluating the sufficiency of a supervised entity’s ICAAP. The supervisor assesses the process, ie its comprehensiveness, capital allocation and the connection of capital strategy to business strategy. The supervisor also assesses the reliability of the supervised entity’s ICAAP in evaluating the adequacy of its capital to cover its risks.

If the supervisor considers a supervised entity has not allocated sufficient capital to cover its various risks or that its risk management or ICAAP is insufficient, it can require the entity to increase its capital or improve its systems.

17 December 2009