ICAAP REPORT RECOMMENDED STRUCTURE

Transcription

1 ANNEX 2A ICAAP REPORT RECOMMENDED STRUCTURE Intrductin The purpse f the Internal Capital Adequacy Assessment Prcess (ICAAP) is t infrm the Bard f Directrs f the nging assessment f the bank s risks, hw the bank intends t mitigate thse risks and hw much current and future capital is necessary having cnsidered ther mitigating factrs. It is the respnsibility f the credit institutin t define and develp its ICAAP. The ICAAP is cdified in Article 73 f the CRD and implemented lcally thrugh Article 17C f the Banking Act (the Act). Within a credit institutin s internal gvernance framewrk, the ICAAP is a prcess t ensure that the Bard f Directrs (bth supervisry and management functins): adequately identifies, measures, aggregates and mnitrs the credit institutin s risks; ensures that the credit institutin hlds adequate internal capital in relatin t the credit institutin s risk prfile; and uses sund risk management systems and develps them further. The nus is n the credit institutin t demnstrate that its ICAAP is cmprehensive and adequate t the nature f risks psed by its business activities and its perating envirnment. The framewrk under which a credit institutin shuld develp its ICAAP is designed t be risk-based and emphasises the imprtance f capital planning, but als the imprtance f management and ther qualitative aspects f risk management. When assessing their capital needs, all credit institutins shuld be able t take int accunt the impact f ecnmic cycles and sensitivity t ther external risks and factrs. Fr larger and/r mre cmplex credit institutins, this may mean develping an apprpriately detailed and rigrus stress and scenari testing framewrk. Varius methdlgies may be utilised by credit institutins fr assessing their risk expsure and setting capital against it. At the same time, the intrductin f the ICAAP is nt meant t suggest that existing methds, which have met the needs f credit institutins ver the years, may necessarily need t be replaced. Hwever, all credit institutins shuld have adequate prcesses in place. The ICAAP shuld be embedded in the credit institutin s business and rganisatinal prcesses, and nt simply regarded as an add-n that permits the Bard f Directrs (bth supervisry and management functins) t indicate that supervisry expectatins have been met. (i)

2 The authrity recgnises that there may be a fair degree f variatin in the length and frmat f ICAAP submissins since banks business and risk prfiles differ and the ICAAP dcument shuld be prprtinal t the size, nature and cmplexity f a bank s business. Hwever, while the suggested frmat by the authrity may be cnsidered t be cnvenient fr sme banks as n a general basis, it cvers mst f the matters which typically wuld be the subject f review thrugh the Supervisry Review and Evaluatin Prcess (SREP) which wuld be carried ut by the authrity. Once an ICAAP has been drawn up, the authrity stresses that in line with the prvisins f Article 17C f the Act, it shuld be subject t regular internal review and such assessment f the ICAAP is t be cnducted at least annually. Where apprpriate, technical infrmatin n risk measurement methdlgies, capital mdels and all ther wrks carried ut t validate the apprach (e.g. Bard papers and minutes, internal r external reviews), culd be cntained in appendices. 1. EXECUTIVE SUMMARY The purpse f the Executive Summary is t present an verview f the ICAAP appraches and methdlgy, as well as f results and cnclusins. The verview wuld typically include: the purpse f the reprt (fr the purpses f this dcument, reprt and ICAAP are used interchangeably and shall be cnstrued t have the same meaning) and entity r entities cvered therein; the main findings f the ICAAP analysis: hw much and what cmpsitin f internal capital the bank cnsiders it shuld hld as cmpared with its Pillar I calculatin; and the adequacy f the bank s risk management prcesses; a summary f the financial psitin f the business, including the strategic psitin f the bank, its balance sheet strength, and future prfitability; a brief descriptin f the capital planning and dividend plicy f the bank. In this respect, the reprt shuld include frecasts f the capital needs and f the regulatry Own Funds which must be in line with the bank s business plan. Mrever, it is expected that the pssible surces f additinal funds wuld be set ut, especially in the cases f cntingent future adverse events; a descriptin f the cntingency plans including strategies t address the cntingent encumbrance resulting frm stress events, which means plausible albeit unlikely shcks, including dwngrades in the credit institutin s credit rating (if any), devaluatin f pledged assets and increases in margin requirements; (ii)

3 cmmentary n the mst material risks and the mitigatin techniques implemented, why the level f risk is acceptable r, if it is nt, what mitigating actins are planned; cmmentary n any ther majr issues where further analysis and decisins are required; and details n wh has carried ut the assessment, hw it has been challenged, and wh has apprved it. 2. BACKGROUND Credit institutins shuld, within this sectin, include all relevant infrmatin that wuld assist twards the best pssible understanding f the bank s structure and current financial cnditin. The infrmatin that shuld be depicted is the fllwing: a) grup structure; b) rganisatinal structure, management team etc ; c) varius financial data fr the last five years e.g. perating prfit, prfit after tax, sharehlders funds, ttal assets, lans and depsits, regulatry capital etc. Cmmentary n the significant changes in the bank s financial cnditin during these years; d) significant develpments that have taken place during the past five years e.g. acquisitins, changes in the share capital etc; e) the main sharehlders f the bank (that is sharehlders wning mre than 5% f the share capital); f) a cmparisn f the internal capital which is maintained against the risks that are assumed with the minimum regulatry capital ver the last years; and g) cnclusins that may be drawn frm the analysis f the histrical data which may have implicatins fr the bank s future. 3. SUMMARY OF CURRENT AND PROJECTED FINANCIAL AND CAPITAL POSITIONS Credit institutins shuld, within this sectin, analyse, amng ther things, the fllwing: a) the current financial psitin f the bank r banking grup (if relevant), including any expected changes t the current business prfile (e.g. acquisitins, expansin abrad etc.); (iii)

4 b) the ecnmic envirnment within which the bank perates, as well as any pssible expected changes; c) the business plan f the bank. It is expected that adequate infrmatin regarding all its business activities will be included; d) the prjected financial psitins f the bank, which shuld be in line with its business plans; and e) the capital planning and the surces f funds that the bank can access. It is expected that the bank will perfrm the necessary cmparisns between the capital available and the capital required t fulfil its business plans. The means f cvering the ptential capital shrtfalls shuld als be mentined. It is t be nted that the capital prjectins may prvide the baseline against which adverse scenaris might be cmpared. 4. CAPITAL ADEQUACY Credit institutins may, within this sectin, cmmence with a descriptin f the bank s risk appetite as defined by its Bard f Directrs and used in the ICAAP. It is vital fr the authrity t understand whether what is being presented in this sectin f the ICAAP represents the bank s view f the amunt f capital required t meet minimum regulatry needs r whether what is being presented is the amunt f capital that a bank believes it needs t meet business bjectives. Fr instance, whether the capital required is based n a particular desired credit rating (if relevant) r includes buffers fr strategic purpses r t minimise the chance f breaching regulatry requirements. Where ecnmic capital mdels are used this wuld include the cnfidence level, time hrizn, and descriptin f the event t which the cnfidence level relates. Where scenari analyses r ther means are used, then sme ther descriptin f hw the severity f scenari has been chsen wuld be included. The sectin wuld then include a detailed review f the bank s internal capital adequacy. The infrmatin prvided wuld include: Timing The effective date f the internal capital adequacy calculatins tgether with cnsideratin f any events between this date and the date f submissin which wuld materially impact the level f estimated capital tgether with their effects; Details f, and ratinale fr, the time perid ver which capital has been assessed; and An identificatin f the majr risks faced in each f the fllwing categries. (iv)

5 Risks analysed Pillar I risks Credit Risk Market Risk Operatinal Risk Risks nt adequately Residual Risk cvered by Pillar I Securitisatin Pillar II risks Interest Rate Risk in the Banking Bk Cncentratin Risk Liquidity Risk Strategic Risk Reputatin Risk Weaknesses in the risk mitigatin techniques Underestimatin f credit risk with the adptin f the Standardised apprach Other risks Other risks Business risk (including quality f earnings) General Strategy Ecnmic and regulatry envirnment Stress testing Fr each risk type, an explanatin regarding the methdlgy applied fr its mnitring and measurement and the quantitative results f that assessment; Where relevant, a cmparisn f that assessment with the results f the Pillar 1 calculatins; A clear articulatin f the bank s risk appetite separately fr each risk categry if this varies frm the verall assessment; and Where relevant, an explanatin f any ther methds r ther specific techniques r arrangements apart frm capital used t mitigate the risks e.g. insurance, risk management r cntrl structures. Accrdingly, sme f the majr risks a bank might face and therefre need t assess as part f its ICAAP, are examined belw. It shuld be stressed that this is nt an exhaustive analysis f bank risks. Furthermre, banks might classify certain risks differently. Residual credit risk While banks use credit risk mitigatin (CRM) techniques t reduce their credit risk, these techniques give rise t ther risks that may render the verall risk reductin less effective. These additinal risks are legal risk, dcumentatin risk and liquidity risk and are f supervisry cncern. The Cmmissin will expect banks t have in place apprpriate written CRM plicies and prcedures in rder t cntrl these residual risks. Banks may be required t submit these plicies and prcedures t the authrity and must regularly review their apprpriateness, effectiveness and peratin. (v)

6 Credit cncentratin risk A risk cncentratin is any single expsure r grup f related expsures with the ptential t prduce lsses large enugh t threaten a bank s health r ability t maintain its cre peratins. Risk cncentratins are arguably the single mst imprtant cause f majr prblems in banks. Credit risk cncentratin arises in bth direct expsures t bligrs and may als ccur thrugh expsure t prtectin prviders such as guarantrs. Such cncentratins are nt addressed in the Pillar 1 capital charge fr credit risk. Banks shuld have in place effective internal plicies, systems and cntrls t identify measure, mnitr, and cntrl their credit risk cncentratins. They shuld explicitly cnsider the extent f their credit risk cncentratins in their assessment f capital adequacy under Pillar 2. These plicies shuld cver the different frms f credit risk cncentratins t which a bank may be expsed. Credit risk cncentratins include: A significant expsure t an individual cunterparty r grup f cunterparties. Banks might als establish an aggregate limit fr the management and cntrl f all f its large expsures as a grup; Credit expsures t cunterparties in the same ecnmic sectr r gegraphic regin; Credit expsures t cunterparties whse financial perfrmance is dependent n the same activity r cmmdity; and Indirect credit expsures arising frm a bank s CRM activities (e.g. expsure t a single cllateral type r t credit prtectin prvided by a single cunterparty). A bank s framewrk fr managing credit risk cncentratins shuld be clearly dcumented and shuld include a definitin f the credit risk cncentratins relevant t the bank and hw these cncentratins and their crrespnding limits are calculated. Limits shuld be defined in relatin t a bank s capital. A bank s management shuld cnduct peridic stress tests f its majr credit risk cncentratins and review the results f thse tests t identify and respnd t ptential changes in market cnditins that culd adversely impact the bank s perfrmance. A bank shuld ensure that, in respect f credit risk cncentratins, it cmplies with the Basel Cmmittee dcument Principles fr the Management f Credit Risk (September 2000) and the mre detailed guidance in the Appendix t that paper. (While the authrity has never actually issued a Banking Rule endrsing this Basel Cmmittee dcument, it expects banks t take accunt f it as part f its culture t fster the adptin f internatinal best practice guidelines by banks.) The authrity will assess the extent t which a bank cnsiders its credit risk cncentratins in its ICAAP and hw they are managed. Such assessments shuld include reviews f the results f any stress tests carried ut either lcally r at the grup level. The authrity will review the bank s assessment and cnsider what actin (vi)

7 is necessary where the risks arising frm a bank s credit risk cncentratins are nt cnsidered t be adequately addressed in the ICAAP. Cunterparty credit risk Cunterparty credit risk r CCR is the risk that the cunterparty t a transactin culd default befre the final settlement f the transactin s cash flws. As CCR represents a frm f credit risk, in assessing it, banks are required t meet the CRR requirements regarding appraches t stress testing, residual risks assciated with CRM techniques, and credit cncentratins, as specified in the paragraphs abve. Banks must have cunterparty credit risk management plicies, prcesses and systems that are cnceptually sund and implemented with integrity relative t the sphisticatin and cmplexity f a firm s hldings f expsures that give rise t CCR. A sund cunterparty credit risk management framewrk shall include the identificatin, measurement, management, apprval and internal reprting f CCR. Banks risk management plicies must take accunt f the market, liquidity, legal and peratinal risks that can be assciated with CCR and, t the extent practicable, interrelatinships amng thse risks. Banks must nt undertake business with a cunterparty withut assessing its creditwrthiness and must take due accunt f bth settlement and pre-settlement credit risk. These risks must be managed as cmprehensively as practicable at the cunterparty level (aggregating cunterparty expsures with ther credit expsures) and at the bank-wide level. A bank s bard f directrs and senir management must be actively invlved in the CCR cntrl prcess and must regard this as an essential aspect f the business t which adequate resurces need t be devted. Reprts prepared n a firm s expsures t CCR must be reviewed by a level f management with sufficient senirity and authrity t enfrce bth reductins f psitins taken by individual credit managers r traders and reductins in the firm s verall CCR expsure. The measurement f CCR must include mnitring daily and intra-day usage f credit lines. The bank must measure current expsure grss and net f cllateral held where such measures are apprpriate and meaningful (e.g. OTC derivatives, margin lending, etc.). Banks must take accunt f large r cncentrated psitins, including cncentratins by grups f related cunterparties, by industry, by market, custmer investment strategies, etc. Banks must have a prcess in place fr ensuring cmpliance with a dcumented set f internal plicies, cntrls and prcedures cvering CCR management. Interest rate risk n the banking bk The authrity will require banks nt hlding capital cmmensurate with their level f interest rate risk t reduce their risk, t hld a specific and apprpriate amunt f capital r sme cmbinatin f the tw. Further guidance n interest rate risk in the banking bk may be fund in this Rule. Operatinal risk (vii)

8 Grss incme, used in Pillar 1 under the Basic Indicatr and Standardised Appraches fr peratinal risk, is nly a prxy fr the scale f peratinal risk expsure f a bank and can, in sme cases (e.g. fr banks with lw margins r prfitability) underestimate the need fr capital held against ptential lsses arising frm peratinal risk. Drawing n the Basel Cmmittee dcument n Principles fr the Sund Management f Operatinal Risk (June 2011), the ICAAP shuld include cnsideratin f whether the capital requirement generated by the Pillar 1 calculatin fr peratinal risk gives a realistic picture f the bank s peratinal risk expsure. Credit risk A bank may be aware f particular circumstances that it believes wuld lead the Standardised Appraches t credit risk under Pillar 1 t give rise t an underestimatin f credit risk. An example is where certain banks have adpted the practice f giving indicative credit facilities t clients n an uncmmitted basis. Such clients are ften significant crprate custmers. Cmmercially a bank may nt realistically be able t walk away frm that relatinship and the credit risk f such uncmmitted facilities needs t be recgnised. It is imprtant t estimate the realistic expsure t the ptential brrwer (nt just the cntractual expsure) and reflect that as a credit risk against which there shuld be a capital charge. As with peratinal risk, the ICAAP shuld include cnsideratin f whether the capital requirement generated by the Pillar 1 calculatin gives a realistic picture f the bank s credit risk expsure. Reputatinal Risk Reputatinal risk (t banks and t the jurisdictins frm where they perate) is ne f the mst imprtant risks in internatinal finance centres. The authrity will expect banks t have assessed the reputatinal risk cntained in their high risk accunts and relatinships and t have used a prxy (which might be the number r prprtin f high risk accunts r relatinships a bank has n its bks) t generate a capital charge fr reputatinal risk and/r prvide evidence f measures in place t mitigate that reputatinal risk. An example f such measures culd be rbust and clear custmer acceptance prcedures and implemented prcesses with n blind spts with respect t names f underlying principals (fr example the inapprpriate use f pled accunts). A rbust custmer risk-prfiling regime wuld be a prerequisite. Liquidity Risk Liquidity risk is the risk that a bank is unable t fund increases in assets and meet bligatins as they cme due. Managing this risk is nt nly crucial t the nging viability f a bank; it als transcends the individual bank since a liquidity shrtfall at a single bank can have system-wide repercussins. Fr this reasn the analysis f liquidity requires bank management nt nly t measure the liquidity psitin f the bank n an nging basis but als t examine hw funding requirements are likely t evlve under varius scenaris, including adverse cnditins. As with managing ther risks, sund liquidity risk management invlves setting a strategy fr the bank, ensuring effective bard and senir management versight, as well as perating under a sund prcess fr measuring, mnitring and cntrlling liquidity risk. (viii)

9 Strategic/Business Risk Strategic and business risks are the impact n capital arising frm adverse business decisins, imprper implementatin f thse decisins, r a lack f respnsiveness t plitical, fiscal, regulatry, ecnmic, cultural, market r industry changes. Banks shuld cnstantly review and assess the cmpatibility f their strategic gals t the prevailing envirnment in which they have material peratins. There will be bth quantitative and qualitative dimensins t the resurces needed t carry ut business strategies but these will include effective cmmunicatin channels, efficient perating systems, reliable delivery netwrks, and gd quality management and staff. Methdlgy and Assumptins A descriptin f hw assessments fr each f the majr risks have been apprached and the main assumptins made. a) Minimum capital requirement apprach (Pillar I + apprach) Banks may chse t base their ICAAP n the results f the Pillar I calculatin with additinal risks (e.g. cncentratin risk, interest rate risk in the banking bk etc.) assessed separately and added t Pillar I. The descriptin here shuld indicate clearly which risks are cvered by which mdelling r calculatin apprach. This wuld include details f the methdlgy and prcess used t calculate risks in each f the categries identified and reasn fr chsing the methd used in each case. b) Internal mdel design (structured r advanced methdlgy) Alternatively, banks may decide t base their ICAAP n internal mdels fr all risks, including thse cvered under Pillar I (i.e. Credit, Market and Operatinal Risks). Where the bank uses an internal mdel fr the quantificatin f its risks, credit institutins wuld, within this sectin, explain fr each f thse mdels: the key assumptins and parameters within the capital mdelling wrk and backgrund infrmatin n the derivatin f any key assumptins; hw parameters have been chsen, including the histrical perid used and the calibratin prcess; the limitatins f the mdel; the sensitivity f the mdel t changes in thse key assumptins r parameters chsen; and the validatin wrk undertaken t ensure the cntinuing adequacy f the mdel. (ix)

10 Ecnmic and regulatry capital Credit institutins shuld, within this sectin, set ut its explanatins fr any differences between the internal ecnmic mdels and the regulatry mdels (if any) apprved by the authrity. The explanatins shuld refer t the parameters used, the assumptins made and hw these affect the capital measures. In additin, it is expected that a cmparisn between the calculated internal capital and the minimum required regulatry capital fr Pillar I risks is prvided. In this respect, the authrity expects the bank t cmment upn the cmpsitin and the adequacy f the capital maintained. The authrity expects that these explanatins will be prvided, n a sufficiently sund basis t shw the differences at the level f all risk categries under Pillar I, that is, credit risk, market risk and peratinal risk. It is nted that this infrmatin is expected frm banks that apply advanced methds fr the calculatin f capital requirements. Stress and scenari tests applied The authrity places special imprtance n the perfrmance f stress tests r scenari analyses which have been used by credit institutins. Cnsequently, it expects a detailed and relevant expsitin which shuld prvide the fllwing: details f all stress tests and simulatins carried ut by the bank t capture risks nt well estimated by the bank s internal capital mdel (e.g. nn-linear prducts, cncentratins, illiquidity and gapping f prices, shifts in crrelatins in a crisis perid); details f the quantitative results f stress tests and scenari analyses the bank carried ut and the cnfidence levels and key assumptins behind thse analyses, including, the distributin f utcmes btained fr the main individual risk factrs; details f the range f cmbined adverse scenaris which have been applied, the reasns fr chsing such scenaris and the resulting capital requirements; and details f any crrective measures including risk mitigatin and/r capital allcatins. Capital transferability Details f any restrictins n the management s ability t transfer capital int r ut f the business(es) cvered, fr example, cntractual, cmmercial, regulatry r statutry restrictins that apply. Statutry restrictins culd be limited t the maximum dividend that culd be declared and paid fllwing certain actins t maximise distributable reserves, thrugh fr example, crystallising unrealised gains, the ability fr capital transfer within a grup (if applicable) and the minimum regulatry restrictins and cntractual reserves that shuld be maintained. (x)

11 Assessment f qualitative factrs The authrity expects t receive infrmatin in relatin t the internal prcesses that the bank uses t mnitr and cntrl the varius risks. This infrmatin is expected t cver issues such as the bank s system f internal cntrls, its rganisatinal structure, its internal gvernance etc. 5. CAPITAL PLANNING Credit institutins wuld, within this sectin, explain hw a bank wuld be affected by an ecnmic recessin r dwnswings in the business r market relevant t its activities. The authrity places particular imprtance n a bank s ability t manage its business and capital s as t survive a recessin whilst meeting minimum regulatry standards. The analysis wuld include financial prjectins (including capital prjectins) based n the expected (basic) scenari as well as n pssible adverse scenaris cvering three t five years based n business plans and prjected capital adequacy rati calculatins. Fr that purpse, the severity f the recessin wuld typically be ne that ccurs nly nce in a 25 year perid. The time hrizn wuld be frm the present day t at least the deepest part f the recessin. Mrever, the key macrecnmic factrs n which the varius scenaris are based and the reasns fr chsing them are expected t be laid ut. Typical scenaris wuld include: hw an ecnmic dwnturn wuld affect the bank's capital resurces and future earnings; and the bank s capital requirement taking int accunt future changes in its prjected balance sheet; in bth cases abve, it wuld be expected that these prjectins shwed separately the effects f management actins t change the bank's business strategy and the implementatin f cntingency plans; prjectins f the future capital requirement wuld include the effect f changes in the credit quality f the bank's credit risk cunterparties (including pssible migratin in their ratings during a recessin) and the bank s capital and its credit risk capital requirement (nte that this scenari stress test is a requirement fr banks with an IRB permissin); and an assessment by the bank f any ther capital planning actins t enable it t cntinue t meet its regulatry capital requirements thrughut a recessin such as new capital injectins frm related cmpanies r new share issues. Credit institutins wuld, within this sectin, als explain which key macrecnmic factrs are being stressed, and hw thse have been identified as drivers f the bank's (xi)

12 earnings. The bank wuld als explain hw the macrecnmic factrs affect the key parameters f the internal mdel (and fr credit risk, the regulatry mdel) by demnstrating fr instance hw the relatinship between the tw has been established. Management Actins Credit institutins wuld, within this sectin, expand n the management actins assumed in deriving the ICAAP, in particular: the quantitative impact f management actins sensitivity testing f key management actins and revised ICAAP figures with management actins excluded; and evidence f management actins implemented in the past during similar perids f ecnmic stress. It is t be nted that where a bank has an IRB permissin, then credit institutins may, within this sectin, set ut management actins which mitigate the additinal capital suggested by the mandatry credit rating migratin stress test. Alternatively, such actins might be set ut in a separate capital management plan r therwise apprved by senir management r the Bard f Directrs as actins the bank is cmmitted t realistically take in such circumstances. 6. LIQUIDITY PLANNING Credit institutins wuld, within this sectin, summarise hw liquidity risk is managed (as distinct frm any capital set aside t cver lsses incurred in a liquidity stress). In particular, it wuld set ut the key assumptins and cnclusins frm stress testing f cash flws undertaken t manage the risk. It wuld generally be helpful fr the ICAAP t include as appendices the fllwing, where relevant: asset-liability cmmittee (ALCO) papers and samples f management infrmatin used day-t-day in Treasury departments: daily cash flw frecasts, weekly, mnthly etc; liquidity and funding plicy dcumentatin (sl and grup); internal Audit reprts relating t Treasury departments; an rganisatin chart that cvers liquidity and funding risk management delegated authrities and reprting lines within the bank; limit breach, plicy dcumentatin; securitisatin dcumentatin detailing hw the prgrammes functin; liquidity stress testing dcumentatin; (xii)

13 an explanatin f intra-grup liquidity arrangements (if any/applicable), especially if perating in several cuntries; number, scale and timeline f cmmitments whether frmal r infrmal twards: ff-balance sheet financing vehicles market cunterparties (including margin r cllateral bligatins) r twards clients; analysis f liquidity demands and surces f liquidity (ie funding risk and market liquidity risk affecting assets) by name and cnsidering strategic and tactical management f the risk; and quantified cntingency funding plans. Whilst capital is an imperfect mitigant (i.e. is nt a preventative measure) fr liquidity risk, there may well be a capital cst f a liquidity stress. Banks shuld therefre cnsider here r in the previus sectin such scenaris as a ratings dwngrade r ther event which might increase their cst f funding and therefre absrb capital reserves. Credit institutins shuld, within this sectin, als take int cnsideratin the prvisins and requirements f Banking Rule BR/05 n Liquidity and Part Six f the CRR(Articles 411 t 428). 7. LEVERAGE In accrdance with Article 521 f the CRR, as frm 1 January 2015, credit institutins shall be required t disclse infrmatin regarding their leverage rati and their management f the risk f excessive leverage in accrdance with Article 451(1) f the CRR. Credit institutins shuld, within this sectin, disclse the leverage rati, calculated in accrdance with Articles 429 and 499 f the CRR and prvide infrmatin abut the risk f excessive leverage and the prcesses used t manage such risk. Credit institutins shuld als refer t the prvisins and requirements f the Final draft Implementing Technical Standards (ITS) n Disclsure fr Leverage Rati, which were published by the EBA n 5 June These ITS will enter int frce upn their publicatin n the Official Jurnal f the Eurpean Unin. Fr the purpses f this sectin, credit institutins shuld als take int cnsideratin the prvisins and requirements f Article 430 f the CRR. (xiii)

14 8. AGGREGATION AND DIVERSIFICATION The prcesses f risk assessment and stress testing cmbined with assessments f the impact f risks and the prbability f them ccurring will enable banks t begin t assign specific quantitative measures t particular risks. These quantitative assessments shuld help the management f banks t determine the relative imprtance f the risks facing the bank. This, in turn, will assist bank management t decide whether t allcate additinal capital (and, if s, hw much capital) r t establish, enhance r maintain ther mitigants t address thse risks. Other mitigants might be specific prcedures, cntrls r insurance prgrammes. Where a bank decides t allcate additinal capital as a mitigant against particular risks, these additinal capital sums shuld be aggregated t prvide an additinal capital requirement under Pillar II. This wuld be added t the minimum capital figure derived frm Pillar I t give the bank s verall capital charge. Credit institutins wuld, within this sectin, describe hw the results f the varius separate risk assessments are brught tgether and an verall view taken n capital adequacy. At a technical level, this therefre requires sme methd t be used t cmbine risks using quantitative techniques. At the brader level, the verall ratinality f the detailed quantificatin appraches might be cmpared with the results f an analysis f capital planning (see sectin 5) and a view taken by senir management as t the verall level f capital that is apprpriate. Dealing with the technical aggregatin, this wuld describe: i) any allwance made fr diversificatin, including any assumed crrelatins within risks and between risks and hw such crrelatins have been assessed, including in stressed cnditins; ii) iii) the justificatin fr any credit fr diversificatin benefits between legal entities, and the justificatin fr the free mvement f capital between them in times f financial stress; and the impact f diversificatin benefits with management actins excluded. It might be helpful t set ut revised ICAAP figures with all crrelatins set t 1 i.e., n diversificatin; and similar figures with all crrelatins set t 0 i.e. assuming all risks are independent. As regards the verall assessment, this wuld describe hw the bank has arrived at its verall assessment f the capital it needs, taking int accunt such matters as: i) the inherent uncertainty in any mdelling apprach; ii) iii) weaknesses in the bank s risk management prcedures, systems r cntrls; the differences between regulatry capital and internal capital; and (xiv)

15 iv) the differing purpses that capital serves: sharehlder returns, rating bjectives fr the bank as a whle r certain debt instruments the bank has issued, avidance f regulatry interventin, prtectin against uncertain events, depsitr prtectin, wrking capital, capital held fr strategic acquisitins etc. 9. CHALLENGE AND ADOPTION OF THE ICAAP Credit institutins wuld, within this sectin, describe the extent f challenge and testing f the ICAAP. It wuld include the testing and cntrl prcesses applied t the ICAAP mdels r calculatins, and the senir management r Bard f Directrs review and sign-ff prcedures. It might be helpful if a cpy f any relevant reprt t senir management r the Bard f Directrs and their respnse are duly attached. Details f the reliance placed n any external suppliers wuld als be detailed here e.g. fr generating ecnmic scenaris. In additin, a cpy f any reprt btained frm an external reviewer r internal audit wuld als be included. 10. USE OF THE ICAAP WITHIN THE BANK This wuld demnstrate the extent t which capital management is embedded within the bank including the extent and use f capital mdelling r scenari analysis and stress testing within the bank's capital management plicy, e.g. in setting pricing and charges and the level and nature f future business. This wuld als include a statement f the actual perating philsphy n capital management and hw this links t the ICAAP submitted. Fr instance, differences in risk appetite used in the ICAAP as cmpared t that used fr business decisins might be discussed. Finally, it wuld be helpful if the bank culd detail any anticipated future refinements within the ICAAP (highlighting thse aspects which are wrk-in-prgress) and prvide any ther infrmatin that yu believe will help us review yur ICAAP. The authrity will assess the ICAAP t establish whether the amunt f capital identified by the ICAAP is sufficient t supprt the risks faced by the bank. The authrity will review the crprate gvernance framewrk arund the ICAAP and will pay particular attentin t Bard f Directrs and senir management versight and invlvement, as well as respnses t any issues raised by the authrity during the review. It will als cnsider the extent t which the internal capital assessment is used rutinely within the bank fr decisin making purpses. The authrity places particular imprtance n the integratin f the ICAAP within the bank s decisin making prcess. Therefre, it is expected that banks disclse the methds f utilising the results f their internal mdels, f the varius stress tests etc. (xv)

16 in the decisin making prcess e.g. during the determinatin f their pricing plicy, in the curse f evaluating investment ptins etc. 11. FUNDING PLANS Credit institutins shall be required t refer t Banking Rule BR/16 f 2014 n the Funding Plans fr Credit Institutins authrised under the Banking Act. The reprting f funding plans in the ICAAP will enable the authrity t mnitr and assess the relevant funding risk and funding risk management framewrks. (xvi)