London Business Breakfast on the ICAAP

Frederic Gielen, Director,avantage Capita spoke first and confirmed that feedback from the regulatory bodies on completed ICAAPs had pointed to a number of areas where there is still a lot of work to do and more importantly reasons why regulators could well ask institutions to hold additional capital. The key regulatory trends noted by Frederic where that Capital Planning and Stress Testing had not been given sufficient attention by senior management and the link between the two was a key concern. The work completed for Stress Testing also raised an additional concern in so much as many organisations did not document what they would do in the event that stressed event occurred, this point above all else was the key weakness in many of the reviewed ICAAPs.

Martin Clark, Director, avantage Capita spoke next and proceeded to highlight some of the key weaknesses avantage Capita had identified in the 20+ ICAAP projects they had completed over the past 18 months. Martin explained for each of the highlighted weaknesses how some institutions had successfully dealt with these areas. The areas that Martin focused on were:

• Risk Appetite;

• Embedding the ICAAP and Senior Management Understanding;
• Provide an Adequate Analysis;
• Specific Risks;
• Stress Testing; and
• Capital Planning.
  

The ‘Handy Tips’ to overcome these challenging areas of the ICAAP are addressed in the presentation attached below but there was one overarching theme that pervaded throughout Martin’s presentation. That theme was senior management level understanding and contribution was not sufficient. Martin made the point that risk management could not longer be thought of as a necessary evil or an overhead within organisations; senior management needed to embrace and understand not only the importance of risk management but how it was enacted in their organisations. If they did not, not only were they likely to be putting their organisation at risk due to current market conditions, but they would also be caught out by the regulators when their ICAAP was reviewed.

Simon Hills of the BBA spoke last and made the participants aware that the ICAAP was a key component of the Basel II architecture which would grow in importance but that it was not the end of road.  Simon confirmed that there would be two regulation initiatives coming banks way in the near future with a paper is from the Basel Committee and is on Stress Testing with a similar one coming out contemporaneously from the FSA. These papers would emphasise that stress testing must but not only be holistic, i.e. look at the entity as a whole but require banks to stress their organisations to destruction. The FSA would also be releasing a consultation paper on liquidity and banks will be required to have an ‘ILAS’ (Individual Liquidity Adequacy Standard) which would mirror the ICAAP, but for liquidity rather than capita and likely set quite severe requirements in terms of the ability of a subsidiary to generate its own liquidity so as not to put creditors at risk.

The session ended with a short question and answer session chaired by Martin Clark.

A copy of the presentation can be downloaded here. For upcoming events read more here. and if you would like to be informed of our events or other services please contact us.