Internal Capital Planning - Risk Governance, Capital Policy and Capital Preservation

2 days
Prague, NH Hotel Prague
  • Risk Management and Economic Capital Assessment
  • Internal Control and Governance
  • Capital Policy and Risk Capture
  • Incorporating Forward-Looking Views
  • Management Framework for Preserving Capital
  • Scenario Analysis and Stress Testing
  • Allocating Capital Across Business Units
  • Risk-Adjusted Performance Measurement and Monitoring
The purpose of this seminar is to give you a good understanding of how a comprehensive capital planning process can enable bank management to determine the appropriate amount and composition of capital needed to support a bank's business strategies across a range of potential risk scenarios and outcomes.

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 define the concept of "internal capital" (or "economic capital"), and we explain in depth a number of approaches to calculating the amount of capital required to maintain a certain solvency level.

We then proceed to explain the four fundamental components of a sound capital planning process suggested by the Basel Committee.

First, we describe how to establish a formalised capital planning process and explain how this process should be administered through an effective governance structure.

Second, we discuss the role of a capital policy in codifying guidelines that senior management will rely upon in making decisions about capital deployment or preservation. We explain the importance of and methods for sufficient risk capture, and how a capital policy can be established with reference to capital- and performance-related metrics such as "economic capital" and "RAROC". We also explain and demonstrate how "internal capital" can be efficiently allocated to different business lines and how risk-adjusted performance can be monitored.

Third, we explain how forward-looking measures about potential capital needs van be effectively incorporated into a bank's capital planning process. We explain and show how stress testing and/or scenario analyses can be used to obtain a forward view on the sufficiency of a bank's capital base.

Finally, we explain and demonstrate how a formal management process can be established to consider and prioritize actions that could be taken to preserve capital. Methods include reductions in dividends, equity raises and/or balance sheet reductions.

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Trends in Risk Management and Capital Planning

  • The Evolution of Risk Management - from Duration to ERM
  • The Changing Assumptions about Risk Management
  • Capital Regulation from Basel I to Basel III and Beyond
  • The Need for more Efficient Capital Assessment and Allocation
  • Economic Capital - a "Common Currency" for Risk

Establishing a Formalized Capital Planning Process

  • Centralized vs. Decentralized Approaches to Capital Planning
  • An ERM Framework for Risk Management and Capital Planning
  • Establishing a Philosophy Regarding Risk Management
  • Establishing the Entity's Risk Culture and Risk Appetite
  • Establishing Capital Targets
  • Managing Business Lines in Relation to Capital Targets
  • Governance of the Capital Planning Process
  • Case Study

12.00 - 13.00 Lunch

13.00 - 16.30 Capital Policy and Risk Capture

  • Requirements for a Sound Capital Policy
  • Establishing Strategies to Address Capital Shortfalls
  • Capital- and Performance-Related Metrics
    • Regulatory and economic capital
    • ROE, RORAC and RAROC
  • Identifying and Quantifying Material Risks and Assessing Capital Needs
  • Establishing Clear Links between Capital and Liquidity Monitoring
  • Internal Capital Allocation and Performance Measurement
    • Making risk-return profiles comparable across business lines
    • Determining major sources of concentration and diversification
    • Deriving appropriate limits for all risks and business lines
  • Risk Pricing, Loan Pricing Measuring and Risk-Adjusted Performance
  • Case Study: Capital Policy, Risk Capture and Capital Allocation

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Using Stress Testing and Scenario Analyses in Capital Planning

  • The Need for a Forward-Looking View on Capital Sufficiency
  • Basel Principles for Sound Stress Testing Practices and Supervision
  • Types of Stress Tests
    • Single factor/sensitivity analysis
    • Reverse stress testing
    • Multi factor/scenario analysis
  • Types of Scenarios
    • Historical scenarios
    • Hypothetical scenarios
  • Stress Testing of Individual Risk Categories
  • Coherent (Integrated) Risk Stress Testing
    • Historical/hypothetical scenarios which are common for all risk types
    • Taking the correlation between risk types into account
    • Diversification effects and risk capital allocation
  • Integration in Risk Governance and Capital Planning
  • Case Study: Stress Testing and Scenario Analysis

12.00 - 13.00 Lunch

13.00 - 16.30 Capital Preservation

  • Prioritizing and Quantifying Capital Actions to Cushion against Unexpected Events
  • Capital Preservation Actions Available in Practice
    • Reduction in dividend payments
    • Raising fresh equity
    • Balance sheet reduction
    • Use of asset securitization to reduce RWA
    • Using credit derivatives and synthetic securitization to preserve capital
  • Assessing the Feasibility of Proposed Contingent Actions under Stress
  • Guiding Principles for Determining the Appropriateness of Particular Actions under Different Scenarios
  • Assessing Potential Benefits and Long-term Costs of Actions
  • Case Study: Capital Preservation

Evaluation and Termination of the Seminar

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