Basel & ICAAP – Topic Guide

Under Pillar 2 of the second Basel accord, a bank must have an Internal Capital Adequacy Assessment Process (ICAAP) in place. ICAAP consists of internal procedures and systems that ensure that the bank will possess adequate capital resources in the long term to cover all of its material risks.

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It involves the determination of economic capital as opposed to regulatory capital and is a process that is run in parallel to the regulatory capital requirement determination process. Economic capital is the capital required to cover all risks that is estimated using internal risk models of the bank. ICAAP should be an integral part of the bank’s processes and must be embedded within the organization. Senior management and the Board of Directors (BOD) should be supportive and fully engaged in the process.

The Basel Committee has recently published the liquidity portion of the Basel III reforms to the capital and liquidity framework which aims to resolve the weaknesses and fill in the loopholes of the current Basel II framework that became apparent in the recent financial crisis. Basel III would require the banking sector to maintain and monitor two key minimum funding liquidity standards as part of the supervisory/ regulatory approach to managing liquidity risk. This would be in addition to the supervisory assessments that regulators would be required to undertake to review whether liquidity risk management frameworks set up by the banks are consistent and in line with published basic principles of liquidity risk management.


Topics covered

    1. ICAAP overview and concepts
      • Definitions and Terminology
      • Back ground including Regulation Q, Basel I amendments to the capital accord, Basel II’s minimum capital requirements, supervisor review and market discipline processes, ICAAP framework and requirements
      • Overview of ICAAP report
      • Process and risk of model building
      • Prevention and limitation of model risks
      • A methodology for calculating Probability of Default (PD)
      • Stress Tests for credit risk, market risk and liquidity risk
      • Comparison of ICAAP requirements and processes for various Central Banks
    2. ICAAP Sample report and template (including methodology, risk aggregation, credit portfolio review, internal capital adequacy, ICAAP assumptions and data sources)
    3. Basel III – Liquidity Framework
      • Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)
      • 5 metrics for monitoring liquidity risk
      • A framework for estimating liquidity risk capital for a bank
      • Liquidity Risk Management Case Study (Bear Stearns, Lehman Brothers, AIG)


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