Prudential supervision is one of the key tasks of the FIN-FSA as risk-taking is inherently related to operations by supervised entities active in financial markets. The stability of the markets and public confidence require that supervised entities take risks in a controlled manner, and within the limits of their risk-bearing capacity.
Materialization of risks may cause severe financial losses to supervised entities, affecting their financial results and thereby the level of own funds and capital adequacy. In certain cases financial losses may even jeopardise the minimum capital requirements set by the legislation. Therefore legislation provides for an obligation to maintain capital adequacy assessment and management procedures, which on the other hand restrict risk-taking by supervised entities: they are not permitted to take such risks that would materially jeopardise their capital or liquidity adequacy.
FIN-FSA monitors on continuous basis all risk-taking by its supervised entities and their risk-bearing capacity, for example, by assessing their capital adequacy assessment procedures, the level of liquidity and capital within the supervisory review and evaluation process. FIN-FSA aims to ensure that capital adequacy remains at least at the level of regulatory minimum.
FIN-FSA is the national competent authority (NCA) in Finland and participates to Single Supervisory Mechanism (SSM). FIN-FSA conducts supervision in cooperation with the European Central Bank (ECB) banking supervision arm. In the SSM national competent authorities continue to conduct day-to-day supervisory activities also with regards to institutions which have been classified as significant e.g. by assessing their capital adequacy assessment procedures and the level of own funds in cooperation with the ECB.
Capital adequacy framework emphasises supervised entity’s own responsibility
Capital adequacy related legislation has changed remarkably both in the banking and insurance sectors during the recent years. In both sectors the legislations highlights the need for adequate risk bearing capacity which in turn is the outcome of viable business models, sound internal governance and risk management arrangements and adequate levels of capital.
The aim of the regulations is to encourage supervised entities to develop and improve their risk management systems, business models and capital management strategies, while also seeking to safeguard the adequacy of capital positions. The basic requirement is that supervised entities’ own funds must cover all essential risks related to their operations.
The capital adequacy framework lays emphasis on supervised entities’ own responsibility. Supervised entities are required to assess their risks by themselves and the level of own funds needed to cover such risks. The FIN-FSA, in turn, must ensure that supervised entities assess their risks and the capital needed to cover such risks in a reliable manner. Here the supervisory review and evaluation process (SREP) plays an important role.