# Internal Capital Adequacy, Stress Testing & Credit Risk – Learning Roadmap

With the relevant context, historical background and tools we are armed to do a better job of informing our boards of expected as well as unexpected capital shortfalls. This road map aims to familiarize the user with three such tools /concepts, Interest Rate Modelling, Stress Testing and Collateral Valuation.

# What topics are covered?

**Interest Rate Simulation Crash Course**

Whether its mark to market pricing of treasury investments, calculation of interest rate shocks for stress testing, configuring a probability of default model, a conditional transition matrix or valuation of collateral, you ultimately have to turn towards interest rate modeling if you are serious about ICAAP analysis. The topics covered include:

- Introduction to interest rate model processes
- One-factor Cox Ingersoll Ross interest rate model construction and calibration
- One –factor Black, Derman and Toy interest rate model construction and calibration
- Multiple factor Heath, Jarrow, Merton (HJM) interest rate model construction
- Principal Component Analysis

**ICAAP **

Capital Adequacy was the principal message of the Basel II framework. ICAAP introduced an internal and invasive assessment of the capital profile of a bank. The topics covered include:

- Overview of the history and background of ICAAP
- Core concepts
- Stress testing and specific stress tests for assessing credit, market and liquidity risks
- ICAAP process requirements
- Overview of the main sections of an ICAAP report include a sample report template
- Review some of the building blocks and risks of the internal model construction process
- A probability of default calculation methodology used in the quantification of credit risk

**Collateral Valuation in Credit Risk Management**

Stress testing, forced sale value modeling and credit risk mitigations connect collateral valuation to ICAAP Analysis and modeling. Without incorporation of a sound collateral management, tracking and valuation model, there is a reasonable chance that the ICAAP numbers are completely disconnected from reality. The estimation of collateral value is an important part of the process of quantifying Credit Risk. The topics covered in the Collateral Valuation course include:

- Definition and Types of Collateral
- Desirable characteristics of collateral and a number of performance measures for evaluating its effectiveness.
- Role of collateral in the financial intermediation process
- Impediments and restrictions due to insufficient collateral or when the laws pertaining to collateral are un-reformed or ineffective.
- Importance of collateral valuation to credit risk management
- General principals of valuing collateral
- Specific methodologies for valuing real estate (sales comparison approach, income capitalization approach and cost approach).
- Creation, perfection, enforcement and termination of Security Interest
- Elements of Collateral Management

**Related Video Courses**

- ALM and Capital Adequacy
- Understanding Stress Testing

**Related PDF Files**

- ICAAP – Overview & Core Concepts
- ICAAP Sample Report Template & Executive Summary
- Basel III – Liquidity Framework
- How to construct a Black Derman Toy Model in EXCEL
- How to utilize results of a Black Derman Toy Model
- Interest Rate Simulation Crash Course
- Collateral Valuation in Credit Risk Management

**Related EXCEL Files**

- ICAAP – Credit EXCEL Example
- Calibration of CIR Model Example
- Black Derman Toy Model Construction – EXCEL Example
- How to utilize results of a Black Derman Toy Model – EXCEL Example
- Heath Jarrow Merton – HJM 3 – Factor Interest Rate Model
- Principal Component Analysis – PCA – US Treasury Yield Rates

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