Post on 28-Jul-2015
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CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Supervisory Review
Module D: Balance Sheet Management
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Bank Financial Management: Supervisory Review
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Contents
Coverage:
1. Introduction
2. Supervisory Review Process
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
INTRODUCTION
1.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Objective of SRP
• To ensure that banks have adequate capital to support all the
risks in their business as also to encourage them to develop
and use better risk management techniques for monitoring
and managing their risks.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Aspects to be addressed
Risks that are not fully captured by the
minimum capital ratio prescribed under Pillar I
Risks that are not fully captured by the
minimum capital ratio prescribed under Pillar I
Risks that are not at all taken into account by
Pillar I
Risks that are not at all taken into account by
Pillar I
Factors External to the bank
Factors External to the bank
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Risks not fully captured in the regulatory CRAR
Interest Rate risk in the Banking Book
Interest Rate risk in the Banking Book
Credit Concentration Risk
Credit Concentration Risk
Liquidity Risk Liquidity Risk Settlement Risk Settlement Risk
Reputational Risk Reputational Risk Strategic Risk Strategic Risk Risk of under-estimation of credit risk under the Standardised Approach
Risk of under-estimation of credit risk under the Standardised Approach
“Model Risk” i.e., the risk of under estimation of credit risk under the
IRB Approach
“Model Risk” i.e., the risk of under estimation of credit risk under the
IRB Approach
Risk of weakness in the credit-risk mitigants
Risk of weakness in the credit-risk mitigants
Residual risk of securitisation etc.
Residual risk of securitisation etc.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Risks and SRP
• Considering the risks that are not fully captured banks should have
their own assessment of various risk exposures through a well
defined internal process
• Adequate cushion should be maintained for such risks
• ICAAP document should include:
– Capital Adequacy Assessment
– Projections of Capital requirement for the ensuing year
– Plans and strategies for meeting the Capital Requirement
• The ICAAP document should be approved by the board
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SUPERVISORY REVIEW PROCESS
2.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
4 Key Principles
1. Bank should have a process for assessing their overall capital adequacy in relation to
their risk profile and a strategy for maintaining their capital levels
2. Supervisors should review and evaluate the banks’ internal capital adequacy
assessments and strategies, as well as the ability to monitor and ensure their
compliance with the regulatory capital ratios. Supervisors should take appropriate
supervisory action if they are not satisfied with the result of this process.
3. Supervisors should expect banks to operate above the minimum regulatory capital
ratios and should have the ability to require the banks to hold capital in excess of the
minimum.
4. Supervisors should seek to intervene at an early stage to prevent capital from falling
below the minimum levels required to support the risk characteristics of a particular
bank and should require rapid remedial action if capital is not maintained or restored.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Bank’s Responsibilities
1. Should have in place:
1. Process for assessing the overall capital adequacy in relation to their
risk profile
2. Strategy for maintaining their capital levels
(Principle 1)
2. Should operate above the minimum regulatory capital ratios
(Principle 3)
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Supervisor’s Responsibilities
1. Should review and evaluate the bank’s ICAAP (Principle 2)
2. Should take appropriate action if not satisfied with the results of this process (Principle 2)
3. Should review and evaluate a bank’s compliance with the regulatory capital ratios (Principle 2)
4. Should have the ability to require banks to hold capital in excess of the minimum (Principle 3)
5. Should seek to intervene at an early stage to prevent capital from falling below the
minimum levels (Principle 4)
6. Should require rapid remedial action if capital is not maintained or restored (Principle 4)
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ICAAP
• Internal Capital Adequacy Assessment Process
• Comprises bank’s procedures and measures designed to
ensure the following:
a) Appropriate identification and measurement of risks
b) Appropriate level of internal capital in relation to the bank’s risk
profile
c) Application and further development of suitable risk management
systems in the bank
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SREP
• Supervisory Review and Evaluation Process
• Review and evaluation process which covers all the processes
and measures defined in the principles. These include:
– Review and evaluation of the Bank’s ICAAP
– Conducting an independent assessment of the bank’s risk profile
– Taking appropriate measures and other supervisory actions as and
where required
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Structural Aspects of ICAAP
• Every bank to have an ICAAP
• Should be board-approved
• Yearly review of the ICAAP outcomes by the board
• Should be proportional to the nature, scope, scale and the
degree of complexity in the bank’s business operations
(Simple, Moderately Complex)
• Regular independent review and validation
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ICAAP
• To be a:
– Forward Looking Process
– Risk Based Process
• To include Stress Tests and Scenario Analyses
– Quantitative and Qualitative Approaches
– Risk aggregation and Diversification Effects
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Just mark an email to super.msahluwalia@yahoo.com
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M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida