1. ICAAP – what you really need to know
Fiona Raistrick, Senior Manager, Financial Services Regulatory Practice

2. Agenda • Background to Basel II • Outline of Pillar 1 requirement
• Purpose of ICAAP/Pillar 2
• Structure of ICAAP
• Risk considerations required
• ICAAP document
• Ongoing ICAAP procedures
• FSA Supervisory review (SREP)
• Q&A

3. Background to Basel II

4. Outline of Pillar 1 requirement
Capital resources vs Capital resource requirement
Capital resource requirement:
Credit risk
Credit risk component
Counterparty risk component
Concentration risk component
Market risk
Operational risk or Fixed Overhead Requirement (FOR)

5. Purpose of Pillar 2
Identify any risks not previously considered within Pillar 1 requirements
Identify capital relating to these risks
Ensure business has sufficient capital to cover all relevant risks

6. ICAAP BIPRU 2.2 Different methods possible
Pillar I Plus - take Pillar I capital and assess additional capital proportionate to non-pillar I risks
Building block approach – Start with zero and build own capital structure
Start with actual capital - break down into material risks

7. ICAAP
Steps to be taken
Risk identification – prepare a list of all material risks, interview relevant staff, assess likelihood of risks occurring
Capital assessment – consider how much capital a risk would absorb were it to materialise
Forward capital planning – assess how firms capital calculated in 2) might change in line with its business plans and how it might respond to these changes – perform stress testing/sensitivity analysis
ICAAP outcome – document ranges of capital identified and form an overall view on the amount of internal capital firm should hold

8. Structure of the ICAAP 1. Executive Summary
2. Background – the ICAAP Process
3. Statement of risk appetite
4. Business strategy
5. Material risks
6. Capital planning and Stress and scenario tests
7. Challenge and adoption of the ICAAP

9. Risks to consider Credit risk Market risk Operational risk
Liquidity risk
Insurance risk
Concentration risk
Residual risk
Securitisation risk
Business risk
Interest rate risk
Pension obligation risk; and
Any other risks identified

10. ICAAP documentation

12. Ongoing ICAAP procedures
Regular review
Procedures to identify when a risk arises and the impact this will have on the overall capital adequacy
Annual review of ICAAP document
FSA019 questionnaire - annual

13. FSA Supervisory Review Evaluation Process (SREP)

14. Any questions? Fiona Raistrick – Senior Manager, Regulatory Practice
Tel:
Peter Chidgey – Head of Financial Services
Tel:

15. ‘Global Firm of the Year’ 2006 ‘Employer of the Year’ 2007
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