1. Course Content

GLOSSARY: DEFINITIONS AND TERMINOLOGY

1.1 Unconditional and Conditional Transition Matrix

1.2 Homogeneity

1.3 Probability of Default (PD)

1.4 Stressed PD

1.5 Loss Given Default (LGD)

1.6 Stressed LGD

1.7 Exposure at Default (EAD)

1.8 Stressed EAD

2. BACK GROUND

2.1 The Great Depression and Regulation Q

2.2 Basel I & Amendments to the Capital Accord

2.3 Basel II

a. Minimum Capital Requirements
b. Supervisory Review
c. Market Discipline
d. Thoughts going forward

3. INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) REQUIREMENT

4. ICAAP REPORT

4.1 Executive Summary

4.2 Internal Capital Adequacy

4.3 Aggregation

4.4 Capital Planning

4.5 Sample ICAAP

• ICAAP Document Review
• Methodology
• Risk Aggregation

5. PROCESS AND RISKS OF MODEL BUILDING

5.1 Introduction

5.2 The Model Building Process

5.3 Model Risks

5.4. Prevention / Limitation of Model Risks

6. CALCULATION OF PROBABILITY OF DEFAULT

7. STRESS TESTING

7.1 Credit Risk

• Non-performing loan (NPL) stress test
• Simple Sensitivity Analysis
• Transition matrix stress test
• Profitability Analysis Stress Test

7.2 Market Risk

• Simple Sensitivity Analysis
• Worst case MTM Stress Tests

7.3 Liquidity Risk

• Simple Sensitivity Analysis

REFERENCES

ANNEXURE: COMPARISON OF ICAAP REQUIREMENTS – THE ICAAP IMPLEMENTATION PROCESS OF VARIOUS CENTRAL BANKS

EXCEL Examples

No

2. Introduction

Under Pillar 2, a bank must have an Internal Capital Adequacy Assessment Process (ICAAP) in place. ICAAP consists of internal procedures and systems that ensure that the bank will possess adequate capital resources in the long term to cover all of its material risks. It involves the determination of economic capital as opposed to regulatory capital and is a process that is run in parallel to the regulatory capital requirement determination process. Economic capital is the capital required to cover all risks that is estimated using internal risk models of the bank. ICAAP should be an integral part of the bank’s processes and must be embedded within the organization. Senior management and the Board of Directors (BOD) should be supportive and fully engaged in the process.

The main purpose of ICAAP is to ensure that the bank’s overall capital is adequate in relation to the level of risk it takes or is subject to. The risk profile must be understood. There should be systems in place to quantify and monitor these risks. The extent and depth of the process should be proportional to the nature, size and complexity of the bank’s business processes.

A pre-requisite for an effective ICAAP therefore is a sound risk management framework within the bank. What this entails is that the bank should be subject to strong and effective levels of BOD and senior management oversight; an effective risk monitoring and review process, where the policies and procedures that are used to identify, assess and report all material risks are credible, and a system or process of regular and independent review of ICAAP and its review process.

3. Buy this course

To buy this or any other course, check out the finance course store..