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Internal Capital Adequacy Assessment Process (‘ICAAP’)CSSF Circular 07/301Contact Details: Frederic Gielen, Directorfrederic.email@example.com +44 20 77 09 40 15TABLE OF CONTENTS• Regulatory background • ICAAP overview• Capital adequacy - Risk identification and assessment- Capital planning• Governance• Recent regulatory development and lessons learned• Possible topics of interest for the second meeting of the working group 2Regulatory Background3REGULATORY BACKGROUND | Basel II and CRD in Luxembourg• 2004: The Basel Committee on Banking Supervision issued the “International Convergence of Capital Measurement and Capital Standards”, or Basel II. • 2006: Basel II is transposed into the acquis communautaire through the “Capital Requirements Directive” (or “CRD”). The supervisory process of Pil ar II is further discussed in guidelines issued by the Committee of European Banking Supervisors (or “CEBS”).• 2006/2007: The CRD is adopted in Luxembourg through CSSF Circulars 06/273 (credit institutions) and 07/301 (complementary information on Pil ar II).44REGULATORY BACKGROUND | Basel II / CRD in LuxembourgBasel II / CRDPillar 1Pillar 2Pillar 3Minimum capital Supervisory review process Market discipline requirements (06/273)(07/301)(06/273)Credit riskOperational Market riskriskBasicAdvanced Standardised Foundation Advanced Indicator StandardisedMeasurement ApproachIRBIRBApproachApproachApproaches5REGULATORY BACKGROUND | Pillar II Overview• The Internal Capital Adequacy Assessment Process (or “ICAAP”): banks must ensure they identify and assess al risks they are or maybe exposed to (i.e., not only Pil ar I risks), maintain sufficient capital to face these risks and to develop and better use risk management techniques in monitoring and managing these risks.• The Supervisory Review and Evaluation Process (or “SREP”): supervisors are responsible for evaluating how banks are assessing their capital adequacy needs relative to their risks. Supervisors should take supervisory action if they are not satisfied with the results of this process. • Pillar II should foster a dialogue between banks and the CSSF such that when deficiencies are identified, prompt and decisive action can be taken to reduce risk and/or restore capital . 6ICAAP Overview7ICAAP OVERVIEW | ICAAP DefinitionDefinition of the “The ICAAP is a system of sound, effective ICAAP and complete strategies and processes that allow institutions to assess and maintain, on an ongoing basis, the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of risks to which they are or might be exposed.”** Source: Part XVIII of CSSF Circulars 06/2738ICAAP OVERVIEW | ICAAP in CSSF Circulation 07/301 (II)• In July 2007, the CSSF released Circular 07/301 that describes its expectations in terms of Pil ar II, in particular the ICAAP. While no formal format or structure is provided (ICAAP being internal, its format is bank-specific), Circular 07/301 sets out general guidelines and principles.• There are three high-level principles: CompletenessAny existing and potential risk should be identified and taken into account when assessing the adequacy of the internal capital. SpecificityThe ICAAP is bank-specific.ProportionalityThe ICAAP should be proportional to the bank’s complexity and size.9ICAAP OVERVIEW | ICAAP in CSSF Circulation 07/301 !! !! %&$!# "10