The Financial Supervisory Authority (FIN-FSA) monitors and assesses supervised entities’ capital adequacy on a continuous basis as part of its regular supervision activities. In addition, FIN-FSA’s tasks include to regularly conduct more detailed reviews of the capital and liquidity adequacy and risk management of the supervised entities. The reviews also address the viability of the business models, corporate governance issues as well as the outcomes of stress testing.
The frequency and depth of the reviews take into account the nature, scale and complexity of the supervised entity’s business and its importance to financial market stability. Typically the review is conducted on an annual basis but depending on the business model, internal governance, financial and risk position and their material changes the review can be conducted even more frequently.
Capital adequacy regulations for the financial sector require supervised entities to have an internal capital adequacy assessment process (ICAAP) that evaluates their strategies and procedures to maintain capital adequacy in a comprehensive manner. Similar requirements are in place for insurance sector entities. The assessment must take into account all material risks arising from business operations and the operating environment. Capital adequacy management and capital planning must be closely linked to supervised entity’s business strategy and take into account the nature, scale and complexity of its operations. Therefore capital planning is part of the supervised entity’s internal governance and internal control and risk management.
The supervisory review for supervised entities in the financial sector draws on the supervised entity’s internal capital adequacy assessment (ICAAP) which should include the assessment of material risks, how those risks are managed and how much capital is allocated to cover the risks. Similar aspects are covered in the insurance sector entities’ assessments. For both type of assessments FIN-FSA utilizes various information sources like inspection reports, risk reports and information gathered during the ongoing supervision activities.
The assessment of capital and liquidity adequacy also relies on stress tests. Stress tests are used to assess the impact of extreme but plausible external changes in the operating environment on supervised entities’ own funds. As a main rule, FIN-FSA conducts stress tests on an annual basis for its most significant supervised entities in the financial and insurance sector. The tests lead to an overall assessment of the adequacy of the supervised entity’s own funds in an exceptional but possible stress scenario. The test results constitute a universal indicator of the adequacy of own funds for supervised entities.
The outcome of the review is an internal assessment of the capital, liquidity and risk position of the entity. The key conclusions and corrective actions possibly required from the supervised entity are submitted to the supervised entity. The structure of the assessment is based on the frameworks created by the European Banking Authority (EBA) and European Insurance and Occupational Pensions Authority (EIOPA) which FIN-FSA applies to the extent possible. The frameworks consists of several assessment categories, each of which comprises many different subcomponents. A numeric score between 1 and 4 is given to each assessment category where 1 = best and 4 = weakest.
FIN-FSA creates supervisory examination plan on annual basis. The plan contains the main elements of the supervisory activities for the upcoming period. It is based on wide range of information but the outcomes of supervisory reviews are key background information source for the plan.