ICAAP in Russia

Friedrich Bleijenberg

Bank Uralsib

2

The agenda

ICAAP in Europe – a short history

The lessons from Europe and the

time for Russia

Capital for ICAAP – the choices

Famous last words

3

Europe, Basel implementation and the 2008 crisis

UK: Principle

based ICAAP

Germany: Rule

based MARISK

European regulators focused differently

on ICAAP….

But the 2008 crisis still happened…

4

Basel II

2007 2008

Liquidity Crisis

2010

Basel III

3624-U

2001

Too little too late

483-P

20152012

Pillar 1

IRBAMAMA

Pillar 2

ICAAPSREP

Pillar 2

ICAAPSREP

Pillar 1

IRB

96-T

192-T

5

• Governance – make sure you have a

proper governance framework to

manage risks, capital, business and

models

• Documentation – key is to document

processes policies and procedures

properly within the ICAAP framework

• Economic Capital – alignment of ICAAP

and ECAP is key, only by being able to

show that the quantitative methods you

use are also really used in business

decision taking can you convince a

regulator that your methodology makes

sense

• Data – modelling is important, but if the

data is not correct your models won’t

work

• Stress testing – Don’t overdo it…. Keep

close to reality and to your business

A good time for lessons learned

6

Universal governance structure

Supervisory Board

Compensation

Committee

Risk Committee

Audit Committee

Senior

Management

ALCOEnterprise Risk

CommitteeCredit Committee

Compliance

Committee

Governance is key

Basel defines 13 principles around governance

Key items:

• Delegation of authority

• Independence of risk management

• Role of the supervisory board

• 3 lines of defence

7

Methodology is key

Documentation of ICAAP – be aware of the piles

Strategies

Policies

Methodologies

8

Basel and ICAAP capital

Pillar 1: Quantitative

approaches to capital

Credit IRB (F/A):

Models

Operational AMA:

Models

Market MA: Models

Pillar 2: Assessment

approaches

Use of Pillar 1 models

‘Own’ approaches to

assessment

Economic Capital

IRRBB

Liquidity

Other Risks

Stress testing

9

Regulators want clear capital to cover risks

Regulatory capital based on Pillar 1 calculations and Pillar 2 additions

But models need to have a proper use-test

3624-U about Capital:

•Current capital needs and planned capital

•Limit system

•Capital adequacy assessment

•Stress testing for all significant risks

•The risk management methodologies chosen should be either

following CBR rules or be part of ‘international best practices’

10

But what does the boardroom want….

Economic Capital!

I need to understand my

capital needs to run my

business optimally!

11

How to merge the views

Economic Capital:

- Use test by business use

- Based on quantitative methods

- Focus on Credit and Market risk

- Lifecycle expected loss

Regulatory Capital:

- Use test needs proof

- Based on quantitative methods

for Pillar 1 risks

- Annual expected loss

- SREP as control mechanism

Using your Economic Capital models under Pillar 2 is a good option,

but they have to be broadly Basel compliant

12

CH

AL

LE

NG

ES

Low Medium High

Minimum capital

BA

SE

CA

PIT

AL

One aim is to reduce the “supervisory multiplier” by demonstrating to the regulator that the process for

assessing overall capital adequacy is robust and credible by fulfilling all SREP requirements

• Review of Pillar 1 numbers and methodologies

• Meeting operational risk criteria for TSA/ASA

Credit risk

Operational risk

Market risk

Credit risk controls

Operational risk

controls

Market risk controls

Pill

ar 2

• Modelling of capital plan with/without management actions

• Alignment of risk and finance data, systems and processes

• Diversification• Methodology robustness of non Pillar

1 risks• Treatment of non-quantifiable risks• Choice of stress tests (mild versus

severe) and testing consistency

Pillar 2 risk Pillar 2 controls

Capital planning & stress testing

• Sufficient capital to support/fund strategy

• Quality and use of capital

• Assessing ICAAP quality

• Adoption (testing, use) and challenge (internal audit, external review)

• Peer group analysis

• Disclosure mechanisms

• SREP Measurement versus 3050-PSu

per

viso

ry m

ult

iplie

r

Methodology for

managing capitalICAAP Organization

Level of Capital to be held

How does my capital look

It is crucial that firms are fully confident with their ICAAP and that it is

embedded throughout the business, from board level adoption to operational

implementation!

ICAAP resultsRisk Management &

Capital

Pill

ar 1

SREP score 2-3

SREP Score 3-4

SREP Score >4

13

But ICAAP is more than just capital

The regulator doesn’t know all. We need to teach our regulators about ourselves.

Regulators and auditors change often, so every time we might be tested and

audited by a different leader or team. The key is that as a bank you tell a

consistent story. The ICAAP process, and with that key documents like Risk

strategy and ICAAP document are there to help you to tell this story. Tools around

document management, a proper governance process around review and

approval will further establish the level of maturity around ICAAP. But the key is,

not to act purely on what is written in Basel and CBR documents. The key is to act

in the boardroom, to challenge what is presented and to want to understand what

risks are there in the bank and to comprehend the consequences of strategic

decision.