ECB ILAAP principles: A key guide

This paper explains the European Central Bank internal liquidity adequacy assessment process principles, which aim to introduce safeguards against liquidity contingency risk from a crisis prevention perspective.

Dalvinder Singh

This paper explains the European Central Bank (ECB) internal liquidity adequacy assessment process (ILAAP) principles, ¹ which aim to introduce safeguards against liquidity contingency risk from a crisis prevention perspective. While the strategic direction of liquidity management resides with a bank’s management body, it requires delegation down to technical experts to ensure it is operationalised as efficiently as possible. The paper argues that the crisis prevention narrative is delegated to banks to discharge their obligation in bank supervision so as to minimise the asymmetry of information problems created by their business and improve the way they manage adverse scenarios and the risks to depositors and markets. The ECB ILAAP Guide is simply one component of a complex web of supervisory instruments and tools for banks’ liquidity management. In view of this, it is also important to consider the European Banking Authority (EBA) findings on internal governance from its convergence assessment, considering how these inform various decision-making processes within the Single Supervisory Mechanism (SSM), such as the work of the Joint Supervisory Teams (JSTs) and supervisory review and evaluation process (SREP), as the ECB ILAAP Guide specifically emphasises the traditional qualitative approach to the supervision of liquidity management.