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  1. 1. Copyright © Apr 24, 2014 BDO Stoy Hayward LLP. All rights reserved. ICAAP – what you really need to know Fiona Raistrick, Senior Manager, Financial Services Regulatory Practice
  2. 2. Agenda • • Background to Basel II • • Outline of Pillar 1 requirement • • Purpose of ICAAP/Pillar 2 • • Structure of ICAAP • • Risk considerations required • • ICAAP document • • Ongoing ICAAP procedures • • FSA Supervisory review (SREP) • • Q&A
  3. 3. Background to Basel II
  4. 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. 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. 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. 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. 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. 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
  10. 10. ICAAP documentation
  11. 11. ernational/basel/info/pil2/index.shtml
  12. 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
  13. 13. FSA Supervisory Review Evaluation Process (SREP)
  14. 14. Any questions? Fiona Raistrick – Senior Manager, Regulatory Practice Email: Tel: 020 7893 2529 Peter Chidgey – Head of Financial Services Email: Tel: 020 7893 2110
  15. 15. BDO Stoy Hayward LLP operates across the UK with some 3,000 partners and staff. BDO Stoy Hayward LLP is a UK limited liability partnership and the UK Member Firm of BDO International. BDO International is a world-wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The Belfast office is operated by a separate Partnership. BDO Stoy Hayward LLP and BDO Stoy Hayward - Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business. Copyright © March 2007 BDO Stoy Hayward LLP. All rights reserved. ‘Global Firm of the Year’ 2006 ‘Employer of the Year’ 2007