ICAAP Overview Core Concepts Toc

8/2/2019 ICAAP Overview Core Concepts Toc

1/3

InternalCapitalAdequacy

AssessmentProcess

Overview&CoreConcepts

ByJawwadAhmedFarid


2/3

I N T E R N A L C A P I T A L A D E Q U A C Y A S S E S S M E N T P R O C E S S O V E R V I E W & C O R E C O N C E P T S

Pleasedonotphotocopyordistributewithoutpermission.AllrightsreservedAlchemySoftwarePvtLimited.

http://FourQuants.com

Page3of42

CONTENTS

INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) ................................................. 5

1. GLOSSARY:DEFINITIONS AND TERMINOLOGY ..................................................................... 5

1.1 Unconditional and Conditional Transition Matrix ............................................. 5

1.2 Homogeneity ........................................................................................................ 51.2 Probability of Default (PD) .................................................................................. 5

1.3 Stressed PD ............................................................................................................ 5

1.4 Loss Given Default (LGD) .................................................................................... 5

1.5 Stressed LGD ......................................................................................................... 6

1.6 Exposure at Default (EAD) .................................................................................. 6

1.7 Stressed EAD ......................................................................................................... 6

2. BACK GROUND............................................................................................................... 6

2.1 The Great Depression and Regulation Q .......................................................... 6

2.2 Basel I & Amendments to the Capital Accord ................................................. 7

2.3 Basel II .................................................................................................................... 7a. Minimum Capital Requirements ................................................................ 8

b. Supervisory Review ..................................................................................... 8

c. Market Discipline ......................................................................................... 8

d. Thoughts going forward ............................................................................. 9

3. INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)REQUIREMENT ..................... 9

4. ICAAPREPORT .............................................................................................................. 12

4.1 Executive Summary ............................................................................................. 12

4.2 Internal Capital Adequacy ................................................................................ 12

4.3 Aggregation ......................................................................................................... 124.4 Capital Planning .................................................................................................. 13

4.5 Sample ICAAP ...................................................................................................... 13

ICAAP Document Review ................................................................................ 14

Methodology ..................................................................................................... 15

Risk Aggregation ............................................................................................... 17

5. PROCESS AND RISKS OF MODEL BUILDING ......................................................................... 19

5.1 Introduction .......................................................................................................... 19

5.2 The Model Building Process................................................................................. 19

5.3 Model Risks ............................................................................................................ 20

5.4. Prevention / Limitation of Model Risks ............................................................... 216. CALCULATION OF PROBABILITY OF DEFAULT ....................................................................... 21

7. STRESS TESTING ............................................................................................................... 22

7.1 Credit Risk .............................................................................................................. 22

Non-performing loan (NPL) stress test ............................................................. 22

Simple Sensitivity Analysis .................................................................................. 23

Transition matrix stress test ................................................................................ 25

Profitability Analysis Stress Test .......................................................................... 27

7.2 Market Risk ............................................................................................................ 28

Simple Sensitivity Analysis .................................................................................. 28Worst case MTM Stress Tests .............................................................................. 28


3/3

I N T E R N A L C A P I T A L A D E Q U A C Y A S S E S S M E N T P R O C E S S O V E R V I E W & C O R E C O N C E P T S

Pleasedonotphotocopyordistributewithoutpermission.AllrightsreservedAlchemySoftwarePvtLimited.

http://FourQuants.com

Page4of42

7.3 Liquidity Risk .......................................................................................................... 29

Simple Sensitivity Analysis .................................................................................. 29

REFERENCES .......................................................................................................................... 31

ANNEXURE:COMPARISON OF ICAAP REQUIREMENTSTHE ICAAPIMPLEMENTATION PROCESS OF

VARIOUS CENTRAL BANKS ...................................................................................................... 32

DISCLAIMER .......................................................................................................................... 42

Documents

ICAAP Overview Core Concepts Toc