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
1. Risk identification – prepare a list of all material risks,
interview relevant staff, assess likelihood of risks occurring
2. Capital assessment – consider how much capital a risk
would absorb were it to materialise
3. 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
4. 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
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