Implementing ICAAP

Day One

Introduction

• ICAAP framework and its link to SREP
• ICAAP key objectives
• Pillar 1 vs. Pillar 2

ICAAP Supervisory Expectations

• Historical regulatory timeline
• EBA’s guidance on ICAAP and ILAAP
• ECB’s seven principles on ICAAP

ICAAP Report Structure

• Main sections of an ICAAP report
• General information common to ILAAP
• ICAAP specific information

Business Model and Strategy

• Current business model
  • Core business lines, markets, geographies, subsidiaries and products
  • Main income and cost drivers allocated to core business lines, markets and subsidiaries
• Forward-looking business strategy
  • Planned changes to the current business model and its underlying activities
  • Projections for key financial metrics
  • Link with ICAAP

Case study: Bank ABC business model and strategy

Risk Governance and Management Framework

• Overall framework
  • Roles and responsibilities for risk taking, risk management and risk control
  • Key components of ICAAP on risk
• Principles of risk management
• Three lines of defense
• Governance, roles and responsibilities – Reporting lines and frequency of regular risk management and control reporting to the management body
• Interaction between risk measurement and monitoring and actual risk taking practice (limit setting, monitoring, dealing with breaches, etc.)
• Risk management architecture

Case study: Bank ABC risk governance and management framework

Risk Data, Aggregation and IT Systems

• Framework and process used to gather, store and aggregate risk data across various levels of the bank, including flow of data from subsidiaries to the group
• Data flow and data structure of risk data used for ICAAP
• Data checks applied for risk data used for ICAAP
• IT systems used to gather, store, aggregate and disseminate risk data used for ICAAP 

Risk Appetite Framework

• Risk appetite framework – Summary and objectives
• Correspondence with the strategy and business model
• Process and governance arrangements on the design and implementation of the risk appetite framework
• Identification of the current or potential material risks
• Risk limits, management action triggers and risk tolerances
• Limit allocation framework within the group and across core business lines, markets and subsidiaries
• Integration and use of the risk appetite framework in the risk and overall management (e.g. links to business strategy, risk strategy, ICAAP and ILAAP, including capital and liquidity planning)

Case study: Bank ABC risk appetite framework

Day Two

Internal Capital Requirements – Risks Not Fully Captured and Covered in Pillar

• Material risks not fully captured by Pillar 1
  • Sovereign risk
  • Additional operational risk
  • Other potential risks
• Material risks not covered by Pillar 1
  • Interest rate risk in the banking book
  • Concentration risk
  • Pension obligation risk
  • Other potential risks
• Other risks: no capital required

Case study: Calculating concentration risk using the Herfindahl Hirschmann Index

Case study: Calculating additional operational risk using confidence intervals

Internal Capital Requirements Stress Testing and Reverse Stress Testing

• Stress-testing program (e.g. types of stress tests undertaken, their frequency, methodological details and models used, the range of assumptions and relevant data infrastructure)
• Governance arrangements of the ICAAP stress-testing program
• Interaction (integration) between solvency and liquidity stress tests, and in particular of ICAAP-specific stress testing, and the role of reverse stress tests
• Uses of stress testing and its integration into the risk management and control framework
• Role of the reverse stress testing (RST)
• RST scenario selection
• Quantitative impact

Case study: Bank ABC stress-testing framework

Case study: Peculiarities of mortgage portfolio stress testing

Case study: Bank ABC reverse stress testing

Capital Planning

• Capital planning framework
• Main assumptions underlying the capital planning
• Forward-looking view on the development of risks and capital in terms of both internal capital and regulatory own funds
• Conclusions from capital planning such as planned issuances of various capital instruments, other capital measures (e.g. dividend policy) and planned changes to the balance sheet (e.g. sales of portfolios, etc.)

Case study: Bank ABC capital planning buffer

Case study: Calculation of the capital planning buffer

Note: The regulatory capital and accounting considerations set out in this program are based on the teacher’s interpretation of Basel and IFRS. Institutions that the author is affiliated to can therefore by no means be associated with his interpretation.