1031201330300PM Session 1 ICAAP and SREP Justin
1031201330300PM Session 1 ICAAP and SREP Justin
1031201330300PM Session 1 ICAAP and SREP Justin
Process
Justin Teo
Assistant Director | Specialist Risk Department
Monetary Authority of Singapore
14 Aug 2013
Restriction: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to
parties not present at the presentation without the consent of the author. The Monetary Authority of Singapore accepts no liability whatsoever with respect
to the use of this document or its contents.
Three Pillars of Basel II
Disclosure
Calculation of capital
Principles-based requirements
requirements
approach
•Capital structure
•Credit risk Covers all risks
•Risk exposures
•Operational risk
•Risk assessment
•Market risk
processes
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Outline
The ICAAP
Objectives and components
The process
Concept of EC and its use in ICAAP
The SREP
Our approach and expectations
The process
2
Pillar 2 – Components
3
Objectives of ICAAP / SREP
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Internal Capital Adequacy Assessment Process
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ICAAP Process – Three Key Steps
ICAAP goes beyond capital accounting to capital management.
Identify key current and Projection and stress Develop capital plan
emerging risks testing: comprehensive with respect to risk,
Quantify risks suite of stresses and taking into account the
scenarios bank’s strategic focus
– Level of sophistication
is tailored to size and Specification of risk and biz plan
complexity of risks appetite (i.e. the amount Regular monitoring and
of risk a bank is able and reporting
Aggregation of
willing to accept) with Management actions
capitalised risks
respect to biz plan
Understand differences Communication
Main stakeholder
between internal capital
expectations
and regulatory capital
– Capital and earnings
implications
Identify potential risk Develop, select and Review the likelihood and
sensitivities and prioritise relevant risk severity of the scenarios
vulnerabilities based on scenarios for testing and Classify and align the
the bank’s risk exposures: reporting based on risks with risk appetite
– By risk types identified risk sensitivities, (i.e. the risk the bank is
– By activities vulnerabilities and cross- able and willing to take)
risk/ activity linkages and business strategy
Understand interactions
between risk types and Reverse stress test Benchmark potential
dependencies between scenarios (that will lead to losses against capital
activities. business failures) to help adequacy
uncover hidden
vulnerabilities
EC is calculated risk type by risk type, and can be aggregated into a group
loss curve. Methodologies will differ with the risk type and portfolio type.
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Economic Capital
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Economic Capital (Illustration)
EC can serve as a common
denominator to link (sometimes
divergent) interests of an
institution's main stakeholders
Illustration: Using EC to
measure business performance
on a consistent basis
From Oliver Wyman
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Regulatory Capital vs Internal Capital (include EC)
Provides a comprehensive internal view of capital adequacy given a bank’s risk profile
Additional
Pillar 2
risks
Pillar 1 Pillar 1
risks risks
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Can EC models and high CARs replace ICAAP?
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SREP – Supervisory Review and Evaluation
Process
Justin Teo
Assistant Director | Specialist Risk Department
Monetary Authority of Singapore
14 Aug 2013
Restriction: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to
parties not present at the presentation without the consent of the author. The Monetary Authority of Singapore accepts no liability whatsoever with respect
to the use of this document or its contents
Supervisory Review of ICAAP and Capital Adequacy
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Supervisory Review of ICAAP and Capital Adequacy
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SREP: Capital Planning
Tier 2
capital
Available
≥ capital Economic
Tier 1 Pillar 1 ≥
capital
capital
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SREP: Capital Planning
21
SREP: Capital Planning
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Our Process: Capital Planning
Calibration Documentation
and review
Communication
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SREP: Assessment of Capital Planning Framework
Capital planning framework
– Assess effectiveness of
• Board and senior management oversight
• Functional unit responsible for capital planning
• Coordination between different functions throughout the bank
• Communication channels, particularly to Board and senior
management
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SREP: Assessment of Capital Planning Framework
Capital planning framework
• Capital forecasting
– Assess if the capital plan is sufficiently forward looking, i.e.
• based on appropriate time horizon
• reflects current and future capital demand and supply
• based on forward-looking business and strategic plans
– Assess the robustness of the capital forecasting process
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SREP: Assessment of Capital Planning Framework
Capital planning framework
• Independent review
– Assess if there is a review of the robustness of the capital planning
framework by an independent party
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SREP: Assessment of the Capital Plan
Capital plan and Pillar 2
capital stress test Base case capital plan
Base case scenario
• Assess the robustness of the base case capital plan
Pillar 2 capital stress
tests
Robustness of capital
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SREP: Assessment of the Capital Plan
Capital plan and Pillar 2
capital stress test
Time horizon
Base case scenario
Robustness of capital
plan Management actions
• Assess if management actions have been considered and factored
following the Pillar 2 Capital Stress Test results
• Assess if the proposed management actions are appropriate and credible
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SREP: Capital Planning
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Thank you
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