A supervisory stress test projects a bank's capital under a common adverse macroeconomic scenario over several years. The EBA coordinates the EU-wide exercise every two years, and the results inform Pillar 2 guidance. Banks also run internal stress tests for the ICAAP and ILAAP.
Pillar 2 (P2R and P2G)Pillar 2 covers risks not captured, or not fully captured, by Pillar 1. Supervisors set a binding Pillar 2 requirement (P2R) after the SREP, and a non-binding Pillar 2 guidance (P2G) informed by stress tests. Both are expressed as a share of risk-weighted assets.
ICAAP (Internal Capital Adequacy Assessment Process)The ICAAP is a bank's own process for identifying its material risks and assessing whether its internal capital is adequate to cover them now and under stress over a forward-looking horizon. It is required by Article 73 of the CRD and is a key input to the SREP.
SREP (Supervisory Review and Evaluation Process)The SREP is the annual review in which supervisors assess a bank's business model, governance, capital and liquidity risks. It ends with a decision setting the Pillar 2 requirement, Pillar 2 guidance, liquidity measures and qualitative measures. In the euro area the ECB runs it for significant banks.
Pillar 2 (P2R and P2G)Pillar 2 covers risks not captured, or not fully captured, by Pillar 1. Supervisors set a binding Pillar 2 requirement (P2R) after the SREP, and a non-binding Pillar 2 guidance (P2G) informed by stress tests. Both are expressed as a share of risk-weighted assets.
ICAAP (Internal Capital Adequacy Assessment Process)The ICAAP is a bank's own process for identifying its material risks and assessing whether its internal capital is adequate to cover them now and under stress over a forward-looking horizon. It is required by Article 73 of the CRD and is a key input to the SREP.
ILAAP (Internal Liquidity Adequacy Assessment Process)The ILAAP is a bank's own process for identifying, measuring and managing its liquidity and funding risks and assessing whether its liquidity buffers and funding profile are adequate, including under stress. It is required by Article 86 of the CRD and feeds into the SREP.