Copyright © 9 Apr 2023 BDO Stoy Hayward LLP. All rights reserved.

ICAAP – what you really need to knowFiona Raistrick, Senior Manager, Financial Services Regulatory Practice

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

Background to Basel II

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)

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

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

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

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

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

ICAAP documentation

http://www.fsa.gov.uk/Pages/About/What/International/basel/info/pil2/index.shtml

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

FSA Supervisory Review Evaluation Process (SREP)

Any questions?

Fiona Raistrick – Senior Manager, Regulatory Practice

Email: fiona.raistrick@bdo.co.uk Tel: 020 7893 2529

Peter Chidgey – Head of Financial Services Email: peter.chidgey@bdo.co.uk Tel: 020 7893 2110

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