ICAAP

ICAAP, Internal Capital Adequacy and Assessment Process, was introduced under Pillar 2 of the Basel II Accord with the objectives of achieving an internal assessment of the capital profile of a bank. It requires a bank to have internal procedures and processes to ensure that it allocates adequate capital to all significant sources of risks in the long term. Therefore, it is beyond the determination of regulatory capital and is a process in determining the economic capital required to cover all material risks estimated by the bank.

After 2007 financial crisis, ICAAP has become one of the most important elements of risk management process. It aims at improving the financial organizations’ ability to assess, quantify and manage the forthcoming risks by the use of internal risk models. ICAAP is a report in which these internal procedures and processes are documented. It should be supported and endorsed by the Board of Directors and reported annually to supervisors.

ISEDES, is BRSA-Banking Regulation and Supervision Agency’s adjustment of ICAAP to Turkish banks. Like ICAAP, ISEDES is an annual report to assess a bank’s all the material risks and to determine the adequate capital level to cover these risks in the long term. It involves to quantify both present material risks and how these risks evolve in three years ahead under different economic and financial forecasts of the bank. Therefore, a bank needs to have forward looking risk models and stress test all the risk factors in order to determine the capital requirements for different scenarios.

Risk Software Technologies-RST, has developed ISEDES solution as a tool to help banks assess and calculate the capital requirement for all risks and derive the three capital tables mentioned in BRSA’s ISEDES guidance. Through a user-friendly interface, Riskturk ISEDES solution presents the banks with an analysis and reporting framework that uses cash flow analyses, scenario analysis and simulations which would let predict and asses their financial tables and risks effectively.

 

Specifications

RST ISEDES solution is a multi-staged process analysis:

 

  • Currrent Year Finacial Status Analysis

    • Balance Sheet Analysis

    • Income Statement Analysis

    • Equity Analysis

    • Internal Capital Adequacy Analysis

    • Deposit Concentration Risk Analysis

    • Loan / Deposit Analysis

 

  • Scenario Creation

    • Forward-looking interest rate shocks

    • Forward-looking FX rate shocks

    • Forward-looking NPL ratio shocks

    • Forward-looking inflation rate shocks

    • BRSA’s ISEDES scenarios

    • Bank’s own ISEDES scenarios

 

  • Projection Analysis

    • Budget Forecasting under chosen ISEDES scenario by appylying budget estimates.

    • Income Statement Forecasting

    • Equity Forecasting

 

  • Determination of Internal Capital Requirement

    • Creation of Internal Capital Adequacy Table

    • Creation of Capital Planning Buffer Table

    • Creation of Capital Deficiency Table