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ICAAP – Internal Capital Adequacy Assessment Process

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Overview Basel II and its Three Pillars Overview of Pillar II ICAAP & SREP Risk & Capital ICAAP Process Components of ICAAP Pillar II Risks BOB ICAAP & its implementation

Policy Structure Data Collection Reporting

Presentation on ICAAP

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1. Measurement and Management of Bank specific risks other than regulatory defined

2. Pillar 2 establishes a process of prudential supervision that complements and strengthens Pillar 1.

3. Pillar II includes Quanti able (interest rate risk in the non-trading fibook, concentration risk and the residual risk that remains when collateral is lower than expected), but also risks that require a more qualitative approach (such as reputational and strategic risk). (ICAAP)

4. ICAAP links together the Banks strategy, future business development, the risks related to these and the capital adequacy. Basel I did not include any of this.

Why Pillar II ?

Overview of Pillar II

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ICAAP & SREP

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SUPERVISORReview and Evaluate a Bank’s ICAAP

Take appropriate action if not satisfied

Review and Evaluate Bank’s compliance with Capital Ratio.

Ability to require Banks to hold capital more than the minimum.

Intervene at an early stage to prevent capital falling below minimum

Rapid remedial action if capital is not maintained and restored

BANKBanks should have in place a process for assessing their overall capital adequacy in relation to its risk profile and a strategy for maintaining its capital levels

Banks should operate above the minimum regulatory capital ratios

Responsibilities - Supervisors vs Bank

Risk Identification and quantification

All risks to which banks are or could be exposed to including hard to measure risks.

Stress Testing

Banks should have a stress test program to assess the effect of extreme yet plausible events.

Capital Planning

Bank is supposed to adopt a prospective approach to Capital Adequacy. It is required to assess the sufficiency of capital for the risks identified and stress tests conducted.

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ICAAP- Split into two parts

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RISK POLICY- Bank should have detailed policies for managing and monitoring various risks.

RISK APPETITE- The Risk Appetite of the Bank in terms of various risks should be clearly spelt out in the policies.

RISK STRUCTURE- The Bank should have a risk architecture to manage risks.

RISK REPORTING- It is a decision support system to identify risks and their affect on the Bank’s business.

Components of ICAAP

The Process of ICAAP of a bank can be

illustrated through the following diagram

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ICAAP Elements

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Concentration Risk

CountryRisk

Interest Rate Risk in

Banking Book

Risks not fully covered

in Pillar 1

Liquidity Risk

Reputation Risk

Settlement Risk

Business and

Strategic Risk

Gamut of Pillar 2 Risks

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BOB ICAAP & Implementation

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BANK OF BARODA (PARENT)

Domestic Operations

Domestic Subsidiaries Overseas Subsidiaries

Overseas operations

Data Collection

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The Risk Management Department prepares the ICAAP Document and compute the capital requirement against various risks by co-coordinating with heads of various departments. The following departments are associated with the supply of ICAAP data.

Planning DepartmentMarketing DepartmentMarket Risk Management CellOperational Risk Management CellCredit Risk Management CellCorporate Accounts and Taxation DepartmentHuman Resource ManagementPublic Relations and Official Language DepartmentASCROM Cell in Recovery Department

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Company Secretary DepartmentCompliance DepartmentLegal DepartmentOperations and Services DepartmentRetail Banking DepartmentWholesale Banking DepartmentMid Office CellInternational Subsidiaries and Territories

Reporting

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ICAAP is prepared on quarterly basis and submitted to the ALCO and BOARD for

review and further directions if any. The reviewed ICAAP document is submitted to the regulator.

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Thank You..!!