Estimating the ICAAP (Internal Capital Adequacy Assessment Process) capital charge for Strategic Risk has been possibly the most under covered topic since ICAAP submissions became a regulatory requirement under Pillar II disclosures. The only other topic also required for ICAAP submissions to receive similar disservice is capital integration across multiple risk categories (market, credit, op, liquidity, interest rate mismatch, strategic and other residual risks)….
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ICAAP – Strategic Risk – Estimating ICAAP Capital reserve for Strategic Risk
ICAAP Strategic Risk Capital Charge Estimation
The ICAAP (Internal Capital Adequacy), Stress Testing and Credit Risk Road Map
The ICAAP (Internal Capital Adequacy Assessment) Roadmap post reviews the core topics in a crash course format for Internal Capital Adequacy Assessment. The hope is that armed with the relevant context, historical background and tools we would be able to do a better job of informing our boards of expected as well as unexpected capital shortfalls.
We start off with Interest Rate Simulations, followed by a laundry list of topics…
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In this post we will be covering some of the ways in which liquidity risk may be stress tested under the Internal Capital Adequacy and Assessment Process (ICAAP). These involve simple sensitivity analysis techniques, such as applying liquidity and interest rate shocks to the assets and liabilities of the bank.
Simple Sensitivity Analysis Liquidity shocksThe stress test for liquidity risk evaluates the resilience of the banks towards the fall in liquid…
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In this post we will be covering some of the ways in which market risk can be stress tested under the Internal Capital Adequacy and Assessment Process (ICAAP). These involve simple sensitivity analysis techniques, such as applying interest rate and equity shocks, as well as Worst-Case MTM Stress Tests.
Simple Sensitivity Analysis Interest Rate ShocksMTM positions are assessed for fixed income portfolio by assuming various shifts in the yield curve. The…
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As part of the stress testing procedures of the bank’s Internal Capital Adequacy and Assessment Process (ICAAP) we will be looking at how shocks are applied to various elements of the original profitability analysis to determine their impacts on the profitability of the bank’s loan portfolio.
Profitability Analysis Stress TestThe profitability will be stress tested by applying shocks to various elements of the profitability analysis as described earlier. The impact…
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In this post we discuss one way of stress testing a rating grades transition matrix. The stressed transition matrix will then be used in the other credit risk quantification calculations. The revised results will be compared to the original credit risk quantification calculations to determine the impact of the stress test.
How to stress the transition matrixThe transition matrix stress test is based on a sector wide or industry wide…
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In this post we will go through the step-by-step methodology of carrying out a profitability analysis of the bank’s loan portfolio. This in itself is a kind of a stress test for credit risk under the Internal Capital Adequacy and Assessment Process (ICAAP) as it also computes a worst case profitability scenario.
How to carry out a Profitability AnalysisProfitability analysis consolidates the impact of rating transitions, worst case scenarios, cost…
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In this post we will consider how to derive expected classification rates for “current” customers of a loan portfolio. This is used to calculate the expected “current” customers who will be classified within the next period, which will in turn be used in the quantification process of credit risk under the Internal Capital Adequacy and Assessment Process (ICAAP).
How to determine expected classification rateExpected classification is calculated using the following…
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One way of stress testing credit risk under the Internal Capital Adequacy and Assessment Process (ICAAP) is to stress test the rating grades transition matrix. In the post below we will first look at how a rating grades transition matrix is constructed.
Transition matrix stress testWe will first consider some preliminary calculations before we discuss the transition matrix stress tests.
How to construct a transition matrixA transition matrix is a numerical…
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One way of stress testing credit risk under the Internal Capital Adequacy and Assessment Process (ICAAP) is to consider percentage falls in the Forced Sale Value (FSV) of mortgaged collateral which is discussed below.
Fall in FSV of mortgaged collateral:In this case the impact of a 10%, 20% and 40% decline in the Forced Sale Value would be analyzed. The tax-adjusted impact of the additional required provision will be calibrated…
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