Economic Capital Allocation Workshop

2 days
Prague, NH Hotel Prague
  • Risk Management and Economic Capital
  • Economic Capital Assessment and Planning in Banks
  • Allocating Capital across Business Units
  • Risk-Adjusted Loan Pricing and Performance Measurement
  • Pillar II, ICAAP & SREP
  • Scenario Analysis and Stress Testing
  • Practical Cases in Economic Capital Assessment and Allocation
The purpose of this workshop is to give you a good understanding of methods for measuring and controlling aggregate risks in financial institutions and to discuss how these methodologies can be integrated into an economic capital allocation process that meets the requirements of the CRD ICAAP.

We start with a brief review of recent trends within financial risk management. We trace the progression of risk-management techniques, from "duration management" via ALM to Enterprise-wide Risk Management. We look at the two prevailing approaches to measuring and managing risks: the "silo" approach, and the ERM, or fully integrated, approach to risk management. We explain how risks are measured at the individual and at the aggregate levels using "Value-at-Risk" and other measures and how these measures translate into regulatory (Basel) and economic capital charges.

Our main focus at this workshop will be on the use of "economic capital" as the foundation for risk management in modern financial institutions. We define the concept of "economic capital", and we explain in depth a number of approaches to calculating the amount of capital required to maintain a certain solvency level.

Further, we explore how, through the process of internal capital allocation, an institution can control risk-taking on an ex-ante basis and how this "capital-at-risk" is used as the basis for risk-adjusted performance evaluation. We explain how to manage risks in order to ensure that firm-wide exposure is consistent with shareholders' risk preferences, how to define limits for individual risk units, and how management can evaluate performance on a risk-return basis (RAROC).

We also explain and discuss the capital assessment and capital planning requirements under ICAAP (pillar II of the Capital Requirement Directive). We give an overview of the principles and requirements of ICAAP and explain their interactions with the Supervisory Review Process (SREP). We explain thoroughly how banks perform risk analysis, scenario analysis, stress testing etc. To comply with these requirements.

Finally, participants will have the opportunity to work "hands-on" with practical case studies in economic capital assessment and allocation in a financial institution.

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Risk Management and Economic Capital

  • The Evolution of Risk Management – from Duration to ERM
  • After the Crisis - The Changed Assumptions about Risk Management
    • How strengthened regulatory requirements will affect economic capital planning
  • The Need for more Efficient Capital Assessment and Allocation
  • Approaches to Measuring and Managing Risks
    • The “Silo” Approach to Measuring and Managing Risks
    • Enterprise-wide Risk Management
  • The Foundations of Economic Capital
  • Economic Capital as a “Common Currency” for Risk

Economic Capital in Banks

  • Why Increased Focus on ”Economic Capital”?
  • Integration and Mutation of Risks
  • Active Risk Management
  • Board Reporting
  • Strategic Decision Making and Shareholder Value Creation

12.00 - 13.00 Lunch

13.00 - 16.30 Economic Capital Assessment and Allocation

  • Using Mathematical Modelling for Assessing Economic Capital at the Institution Level
    • Risk factors and diversification
    • Quantifying EC of integrated risks
    • Treatment of specific risks (e.g.: business or strategic risk)
  • Allocating Capital Across Business Units
    • Making risk-return profiles comparable across business lines
    • Estimating how much risk each business unit contributes to the institutions’ total risk
    • Determining major sources of concentration and diversification
    • Deciding who gets the diversification benefits
    • Deriving appropriate limits for all risks and business lines
  • Risk Pricing, Loan Pricing and Limit-Setting Based Upon Economic Capital
  • Measuring and Evaluating Risk-Adjusted Performance
  • Small Exercises

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 ICAAP – the Internal Capital Allocation Process under Basel II

  • Introduction to ICAAP
    • Pillar II, ICAAP and SREP
  • The Four Principles of Pillar II
  • ICAAP Requirements
    • Assessments of the amounts, types and distribution of financial resources, capital resources and internal capital
    • Identification of the major sources of risk
    • Stress and scenario tests
    • Ensure that the processes, strategies and systems used in its ICAAP, are both comprehensive and proportionate to the nature, scale and complexity of that firm’s activities
    • Documentation of the Institution’s ICAAP
  • A Closer look at the ICAAP Requirements
    • Capital adequacy
    • Risks analysis
    • Capital planning
    • Scenario analysis and stress testing
    • Liquidity Planning
    • Aggregation and diversification

12.00 - 13.00 Lunch

13.00 - 16.30 Workshops: Practical Cases in Economic Capital Assessment and Allocation

  • Workshop 1:
    • Identifying and Assessing an Institution’ s Risk According the ICAAP Requirements
    • Setting Strategic Risk and Earnings Targets within an ERM Framework
  • Workshop 2:
    • Building and implementing a quantitative economic capital model
    • Measuring risks on an integrated basis
    • Calculating the overall capital requirement in the institution
    • Integrating regulatory and economic capital models into an overall framework
  • Workshop 3:
    • Internal Capital Allocation and Performance Measurement

Summary, Evaluation and Termination of the Workshop

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