The Monetary Authority of Macao (AMCM) published a guideline on the supervisory review process that helps banks assess risks and capital adequacy.
The guideline sets out the principles and arrangements of the supervisory review process, describes the general requirements and elements that should be included in the Internal Capital Adequacy Assessment Process (ICAAP), and defines the principles and methodologies of the Supervisory Review and Evaluation Process (SREP) of a bank. The guideline provides a transparent and informative description of the methodology and the supervisory procedures that the AMCM will adopt for capital assessment of banks and that will be integrated into a risk-based supervision framework. The guideline follows a principle-based approach and the requirements set out in this guideline apply to all banks incorporated in Macao on solo and consolidated basis. Below are the four key principles of the supervisory review process:
- Principle 1—Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital level.
- Principle 2—AMCM has the responsibility and power to review and evaluate banks’ internal capital adequacy assessments and strategies as well as their ability to monitor and ensure their compliance with regulatory capital ratios. AMCM will take appropriate supervisory action if they are not satisfied with the result of this process.
- Principle 3—AMCM expects banks to operate above the minimum regulatory capital ratios under Pillar 1 and has the ability to require banks to hold capital in excess of the minimum.
- Principle 4—AMCM will seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and will require rapid remedial action if capital is not maintained or restored.
Under the ICAAP, a bank should carry out internal capital adequacy assessment based on its risk assessment results of the last financial year. A capital planning with stress testing should also be conducted, covering a period of at least three years following the last financial year. The above results should be presented in a report and submitted to AMCM no later than April 30 of each year following the last financial year. With regard to SREP, the guideline states that AMCM will carry out an overall assessment of a bank’s risk profile and the capital needs derived from its risk profile, to determine the total capital requirement of the bank. The total capital requirement set by AMCM comprises the regulatory capital requirement under Pillar 1 plus a capital add-on required by Pillar 2 to address the overall risks and uncertainties, including a capital buffer to cover stress testing; this total capital requirement also includes a supervisory capital add-on imposed by AMCM when considered necessary under the SREP.
Related Link: Guideline (PDF)
Keywords: Asia Pacific, Macao, Banking, Basel, Regulatory Capital, SREP, ICAAP, Stress Testing, Pillar 2, AMCM
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