What does ILAAP cover and how does it differ from ICAAP?

Question

AcadiFi · Accepted Answer

ILAAP (Internal Liquidity Adequacy Assessment Process) is the liquidity counterpart to ICAAP. It documents how the bank identifies, measures, manages, and monitors liquidity risk — including intraday liquidity — and demonstrates that available liquidity resources cover survival horizons under baseline and stressed scenarios.

Core components:
- **Liquidity risk identification**: wholesale funding concentration, retail deposit stickiness, contingent funding from committed lines, intraday needs, FX mismatches.
- **Funding plan**: diversification by source, tenor, currency, counterparty.
- **Contingency funding plan (CFP)**: triggers, escalation, available counterbalancing capacity (HQLA sales, repo, central bank facilities).
- **Internal liquidity metrics**: alongside regulatory LCR (30-day) and NSFR (1-year), banks run 3-month and 12-month survival metrics, sector/counterparty concentration ratios, and intraday liquidity monitoring.
- **Liquidity stress testing**: idiosyncratic (rating downgrade, deposit flight), market-wide (frozen funding markets), combined.
- **Transfer pricing**: internal FTP charges reflect liquidity cost by tenor.

```mermaid
flowchart LR
  A[Liquidity Risks] --> B[LCR 30-day]
  A --> C[NSFR 1-year]
  A --> D[Internal Survival Horizons]
  B & C & D --> E[Stress Testing]
  E --> F[Contingency Plan]
  F --> G[HQLA Buffer + Funding Mix]
```

Example: Tridelmar Banking reports LCR of 135% and NSFR of 121%. ILAAP stress test simulates a Silicon-Valley-Bank-style deposit run: 40% uninsured deposit outflow in 5 days. Tridelmar's counterbalancing capacity (unencumbered Treasuries + FHLB availability) covers 28 days — meeting internal 21-day minimum but revealing dependence on committed lines. Remedial actions: raise insured-deposit share, shorten asset duration, increase HQLA.

ILAAP quality is a major SREP determinant; weak ILAAPs trigger P2G liquidity add-ons.

What does ILAAP cover and how does it differ from ICAAP?

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