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IRAP ICAAP Outreach Final PDF

This document provides an overview of the DFSA's Internal Risk Assessment Process (IRAP) and Internal Capital Adequacy Assessment Process (ICAAP). It explains that IRAP is a comprehensive internal risk assessment that applies to all domestic firms, while ICAAP is for assessing internal capital requirements and applies to certain categories of firms. It outlines the DFSA's expectations for both processes and how they will use them for supervisory review and evaluation. The document also discusses how the DFSA may determine an Individual Capital Requirement for firms based on their ICAAP and supervisory review.

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Alex Curtois
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266 views26 pages

IRAP ICAAP Outreach Final PDF

This document provides an overview of the DFSA's Internal Risk Assessment Process (IRAP) and Internal Capital Adequacy Assessment Process (ICAAP). It explains that IRAP is a comprehensive internal risk assessment that applies to all domestic firms, while ICAAP is for assessing internal capital requirements and applies to certain categories of firms. It outlines the DFSA's expectations for both processes and how they will use them for supervisory review and evaluation. The document also discusses how the DFSA may determine an Individual Capital Requirement for firms based on their ICAAP and supervisory review.

Uploaded by

Alex Curtois
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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DFSA Outreach Session

Supervisory Review and Evaluation Processes


IRAP and ICAAP
19 March 2014
Agenda

• Introduction and objectives

• Overview of IRAP

• Overview of ICAAP

• SREP and ICR

• Questions
Introduction

• Promote internal risk assessments to assess risks faced


from Firm activities

• Internal Risk Assessment Process (‘IRAP’) applies to all


domestic Authorised Firms other than Category 4 Firms

• Internal Capital Adequacy Assessment Process (‘ICAAP’)


applies only to domestic Category 1, 2, 3A and 5 Firms
Core Objective

• Financial services is all about managing risk

• Safe and sustainable growth and success in financial services


is possible only with effective risk management

• Hence, the need for high level of effectiveness in risk


management

• To enhance the risk management


standards for all DFSA Firms

• Help Firms achieve very high levels of


effectiveness in risk management
At the same time..

• Achieve compliance with global regulatory standards

• Proportionate implementation of Pillar 2 of Basel II

• Enhance supervisory effectiveness

• Assist Firms in effectively complying with existing core


regulatory obligations (GEN Rule 5.3.1)

• Effective implementation with the IRAP and ICAAP obligations


will go a long way towards demonstrating effective
compliance with rules on risk management and capital
adequacy
DFSA’s approach

• Use Pillar 2 of Basel II – to enhance risk management


standards among authorised Firms

• Promote effective implementation of Enterprise Risk


Management (ERM) processes

• Innovative approach to implement pillar 2 in a proportionate


manner to non-deposit takers

• Improve risk sensitivity in supervisory efforts

• Optimise supervisory resource allocation on the basis of


quality IRAP outcomes
Internal Risk Assessment Process

Internal Risk Assessment Process


(IRAP)
Internal Risk Assessment Process

IRAP is applicable to all domestic Firms other than Category 4.


It is a comprehensive internal risk assessment.

IRAP

DFSA Board
SREP approvals
Internal Risk Assessment Process

IRAP Methodology
Risks identified

Strategic Risk
Planning management
strategies

IRAP
Board and
Senior Assessment of
financial position
Management
approvals

Stress testing
and scenario
analysis
IRAP – Description

• Comprehensive effort to assess all risks faced by the Firm

• A process and not a report

• Outcome is important but the journey is even more important

• Process and approach will be of utmost interest to the DFSA

• First phase of an ICAAP for Firms facing that requirement


IRAP – DFSA’s expectations

• Apply materiality and proportionality appropriately

• Consistency with risk appetite, corporate strategy, capital planning


and policies

• Robust governance – reviews at operational and at Board level

• Board engagement, ownership and challenge

• Effective involvement of all key stakeholders in the organisation

• Enhance risk management system - processes, controls,


procedures and responsibilities

• Include all the group entities – for a Financial Group


Benefits of IRAP

• Opportunity to enhance your ERM framework

• Integrate risk management with normal business processes –


pricing, new products, market entry etc.

• Verification of the Firm’s risk appetite and alignment with its activities

• Enhance the governance of risk management – up to Board level

• Identify effective risk mitigation and management options

• Improve the engagement employees at all levels

• Optimise capital usage – in case of ICAAP

• Less time spent with regulator


Internal Capital Adequacy Assessment
Process

Internal Capital Adequacy


Assessment Process
(ICAAP)
Internal Capital Adequacy Assessment
Process

IRAP

Individual
Capital ICAAP
Requirement
ICAAP

DFSA Board
SREP approvals
ICAAP – Description

• Applies to domestic Firms in Category 1, 2, 3A or 5

• Calculation of ‘internal’ capital requirement

• Cover all risks – including those covered by PIB rules

• Process to effectively address residual risks identified by


IRAP

• Should be proportionate to the nature scale and complexity of


operations

• Forward looking and dynamic


Internal Capital Adequacy Assessment
Process

IRAP

Board and
Estimate Capital
Senior
required across
Management
all risks
approvals
ICAAP

Sensitivity
Capital planning analysis and
stress testing
ICAAP – DFSA’s expectations

• Living document - a process that is responsive to changes in


the internal and external environment

• No predefined approaches or models, but …

– Capital allocated for risks should be substantiated


– Satisfies the “use test”
– Robust governance and challenge at all levels
– Integrated with Firm’s ERM framework

• Not every risk mitigated by Capital


ICAAP – Description

Elements of ICAAP:
1. Financial and capital forecasts – various approaches

2. Stress testing - severe but plausible

3. Assessment of a capital ‘cushion’

4. Plan for addressing deficiencies


ICAAP – DFSA’s expectations

• Do not require sophisticated models

– Should be as complex as required but as simple as


possible

– Clear assumptions, parameters and testing

– Model verification and validation processes

– Strategy for identified capital deficiencies


Example of Risks

• Risks not fully captured under Pillar 1

• Interest Rate Risk in the Non-Trading Book

• Liquidity Risk (a special case)

• Business and strategic risks

• Reputation Risk

• Regulatory Risk

• External Risks – business cycle


Supervisory Review and Evaluation
Processes

Supervisory Review and


Evaluation Processes
(SREP)
SREP review areas

Suggested Format for IRAP and ICAAP Applicable Applicable


assessments for IRAP for ICAAP

1. Executive Summary
2. Background
3. Structure and Governance
4. Statement of Risk Appetite
5. Internal Risk Assessment Process
6. Capital planning (ICAAP only)
7. Liquidity Planning (ICAAP only)
8. Stress testing and scenario analysis
9. Integration, review and Approval
What we will do with IRAP / ICAAP

• Focus on process and governance

• Process assessment
– Coverage
– Involvement of internal stakeholders
– Internal challenge
– Engagement of the senior management and the Board
– Internal reviews

• Integration with the ERM system of the Firm and


with its other corporate processes
Supervisory Review and Evaluation
Processes

• Supervisory Review and Evaluation Process

– An integral part of supervisory approach


– Aim is to evaluate quality, completeness and consistency
– Ensure appropriate resources to support risks
– Facilitate assessment of Firms’ risk profile
– Case by case assessment

• Response can be through a risk mitigation programme

• Individual Capital Requirement (ICR) where required


Individual Capital Requirement (ICR)

• Applicable to Firms facing risk capital requirement

• May require additional capital over its Risk Capital


Requirement as calculated under the PIB

• The DFSA will set out in writing the methodology and rationale
behind the ICR where imposed

• ICR estimation will be driven off the outcome of the ICAAP


and SREP

• Adequate opportunities will be given to the Firm to discuss the


outcome of SREP and ICR
Thank You

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