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Copyright October 10 BDO Stoy Hayward LLP. All rights reserved.

ICAAP what you really need

to knowFiona Raistrick, Senior Manager, Financial Services Regulatory Practice

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Agenda

Background to Basel II

Outline of Pillar 1 requirement

Purpose of ICAAP/Pillar 2

Structure of ICAAP

Risk considerations required

ICAAP document

Ongoing ICAAP procedures

FSA Supervisory review (SREP)

Q&A

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Background to Basel II

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Outline of Pillar 1 requirement

Capital resources vs Capital resource requirement

Capital resource requirement:

Credit risk

Credit risk component

Counterparty risk component

Concentration risk component

Market risk

Operational risk or Fixed Overhead Requirement(FOR)

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Purpose of Pillar 2

Identify any risks not previously considered

within Pillar 1 requirements

Identify capital relating to these risks

Ensure business has sufficient capital tocover all relevant risks

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ICAAP

BIPRU 2.2

Different methods possible

Pillar I Plus - take Pillar I capital and assess additional

capital proportionate to non-pillar I risks

Building block approach Start with zero and buildown capital structure

Start with actual capital - break down into material risks

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ICAAP

Steps to betaken

1. Risk identification prepare a list of all material risks,interview relevant staff, assess likelihood of risks occurring

2. Capital assessment consider how much capital a riskwould absorb were it to materialise

3. Forward capital planning assess how firms capitalcalculated in 2) might change in line with its business plansand how it might respond to these changes perform stresstesting/sensitivity analysis

4. ICAAP outcome document ranges of capital identified andform an overall view on the amount of internal capital firm

should hold

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Structure of the ICAAP

1. ExecutiveSummary

2. Background the ICAAP Process

3. Statement of risk appetite

4. Business strategy

5. Material risks

6. Capital planning and Stress and scenario tests

7. Challenge and adoption ofthe ICAAP

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Risks to consider

Credit risk

Market risk

Operational risk

Liquidity risk

Insurance risk

Concentration risk

Residual risk

Securitisation risk

Business risk

Interest rate risk

Pension obligation risk; and

Any other risks identified

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ICAAP documentation

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http://www.fsa.gov.uk/Pages/About/What/Int

ernational/basel/info/pil2/index.shtml

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Ongoing ICAAP procedures

Regular review

Procedures to identify when a risk arises and the

impact this will have on the overall capital

adequacy

Annual review of ICAAP document

FSA019 questionnaire - annual

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FSA Supervisory Review Evaluation

Process (SREP)

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Any questions?

Fiona Raistrick Senior Manager, Regulatory Practice

Email: fiona.raistrick@bdo.co.uk Tel: 020 7893 2529

Peter Chidgey Head of Financial Services

Email: peter.chidgey@bdo.co.uk Tel: 020 7893 2110

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BDOStoy Hayward LLP operates across the UK with some3,000 partners and staff. BDOStoy Hayward LLP is a UK limited liability partnership and the UK Member Firm ofBDO International. BDO

International is a world-wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. TheBelfast office is operated by a separate Partnership.

BDO Stoy Hayward LLP and BDO Stoy Hayward - Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business.

Copyright March 2007 BDOStoy Hayward LLP. All rights reserved.

Global Firm of the Year 2006

Employer of the Year 2007