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August 16, 2010
Essential Risk Components of the ICAAP-A Practical exposition
PRMIA Singapore organized a one-hour talk by MIchael Henroid of FRS Global on August 13, to provide an overview of the risk components essential to rolling out a practical ICAAP (Internal Capital Adequacy Assessment Process). The talk had an overwhelming response and was well attended by representatives from various banks and financial institutions. Consequent upon Mike’s long years of experience in risk management, more particularly his recent experience in Asia over four years, the presentation provided hands-on information about implementing sound risk practices. This was valuable given the scheduled implementation of the Internal Capital Adequacy Assessment Process (ICAAP) under Basel 2 Pillar 2, which requires local banks to strengthen their risk management framework.
After providing a brief theoretical background to ICAAP, Mike went on to situate it in the regulatory context of the SREP (Supervisory Review and Evaluation Process). Each individual bank needs to be guided by the “Principle of Proportionality” which essentially means having a sense of risk magnitudes that are unique and relevant to an entity. This will help identify indicators to assess the usual Pillar 1 risks- market, credit and operational- and also additional elements not covered under Pillar 1 such as concentration risk, legal risk and also those not fully covered under Pillar 1 such as Residual Risk and Securitization Risk. The underlying premise is to assess capital allocated against risks relevant to the entity. Stressing this capital amount for various external factors (of a forward-looking variety) is the next step in ICAAP followed by necessary qualitative assessments. Mike referred to a PRMIA Greece chapter meeting held on Oct 25, 2007 which could help make the ICAAP more forward looking.
Posted by bearhug at August 16, 2010 09:56 AM