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.
