basel twosecondpillar(1)

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For further discussions on economic capital, and Deloitte vision on

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Economic Capital (ICAAP)readiness checklist for banks in

the scope of Basel II/CRDAre you ready for Basel II’s second pillar?

Audit.Accounting.Tax.Consulting.Corporate Finance.



Are you ready for Basel II’s second pillar?

Economic Capital (ICAAP) readiness checklist for banks in the scope of Basel II/CRD


The list of questions below, that anybody with a broad view on the organisation should be able

to answer in the time span of a few minutes, should either give you comfort that the company

is on track to reach the economic capital (ICAAP) best practice, or will give an indication on

where the major improvement areas are. The questionnaire is designed in such a way that ‘I

fully agree’ answers would indicate that you are close to best practice. Obviously, this quick

check does not intend to be a full ICAAP-Self Assessment. However, it should provide a fair

view on the major strengths and weaknesses in this area.

Our future business and investment decisions take into2.

account the risk inherent in those new ventures, the

capital to be allocated to them now and in the medium

term future and the availability of this capital. Limits on

volume or risk are set based on this available capital. A

back-up plan exists to restore capital within a reasonable

timeframe when it is impaired.

I do not agree

I disagree somewhat

I agree somewhat

fully agree

We have a risk policy document, approved by the Board of1.

Directors of the bank, that describes all major risk classes

we are exposed to, the quantative methodologies used to

measure them and a quantative indicator of the amount

of risk the bank is willing to bear in the light of our capital

base and earnings potential (identification of the risk

taking capicty, definition of the risk appetite).

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

Checklist

• Objectives

• Planning capital medium term

• Incorporation in business development decisions

• Link with product pricing

• Stakeholder communication and remuneration

Standard

Methodology

Position Data

Market Data

Implementation

Stress Test

Economic Capital

Integration Calculation

Operational Risk

Standard

Methodology

Position Data

Market Data

Implementation

Stress Test

Market Risk

Standard

Methodology

Position Data

Market Data

Implementation

Stress Test

Credit Risk

Standard

Methodology

Position Data

Market Data

Implementation

Stress Test

Other Risk




Economic Capital (ICAAP) readiness checklist for banks in the scope of Basel II/CRD

Our total required capital as of today is allocated to3.

the different business units, including the portfolio

diversification effects. Performance of the different

business units is measured relative to the capitalconsumption (RAROC, RARORAC) today. In doing so, we

go beyond mere capital adequacy, and we aim to optimize

the risk-return pair.

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

Our product pricing, whether in core banking services4.

like lending or whether in financial services like payment

processing or custody, takes into account the required

capital for this product, across the different risk classes.

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

Our risk identification, modelling and measurement5.

processes are constantly compared with emerging best

practices and adapted accordingly if needed. We have a

team dedicated to this task. The scope of their activitiesincludes risk categories that are not directly covered by

regulatory capital requirements (e.g. reputational risk,

business risk, …).

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

We have a consistent communication policy to all6.

stakeholders (shareholders, clients, rating agencies, bondholders,…) about our capital targets and capital usage.

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

We have a comprehensive stochastic methodology (à la7.

Value at Risk) tool and dataset (contract data and market

data) to accurately measure our market risk on a timely

basis. This methodology is complemented with periodicstress tests that seek to find exposures that are not

adequately captured by the stochastic model.

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

We have a comprehensive methodology, tool and dataset8.

(contract data and market data) to accurately measure

the credit quality of our counterparts, the losses we may

be exposed to in case of their default and the credit risk

mitigants in place, on a timely basis. This methodology

is complemented with periodic stress tests that seek to

find exposures that are not adequately captured by the

stochastic model.

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

We have a comprehensive process in place by which our9.operational risk exposures are identified and measured.

This is done both on a backward looking basis (e.g.

loss data collection) and on a forward looking basis

(e.g. self-assessment workshops). Combined with the

analysis of specific stress scenarios, this leads us tot the

determination of capital requirements for operational risk.

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

The capital requirements for the different risk classes10.

are aggregated as accurately as possible, given today’s

best practices. Correlations used and the diversification

benefits this gives rise to, are constantly challenged.

I do not agree

I disagree somewhat

I agree somewhat

I fully agree

basel twosecondpillar(1)

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