Does Regulatory Pressure affect ICAAP and Banks' Risk Management ...

High-Level Debate Does Regulatory Pressure Affect ICAAP and Banks’ Risk Management? The European Experience

Journal

Rosaria Cerrone

CASS-CAPCO INSTITUTE PAPER SERIES ON RISK RECIPIENT OF THE APEX AWARD FOR PUBLICATION EXCELLENCE

#41

06.2015

The Capco Institute Journal of Financial Transformation Recipient of the Apex Awards for Publication Excellence 2002-2015

Editor Prof. Damiano Brigo, Editor-in-Chief of the Capco Journal of Financial Transformation and Head of the Mathematical Finance Research Group, Imperial College London Peter Springett, Managing Editor Sam Price, Assistant Editor

Head of the Advisory Board Dr. Peter Leukert, Head of the Capco Institute, Head of the Editorial Board of the Capco Journal of Financial Transformation, and Head of Strategy, FIS

Advisory Editor Nick Jackson, Partner, Capco

Editorial Board Franklin Allen, Nippon Life Professor of Finance, The Wharton School, University of Pennsylvania Joe Anastasio, Partner, Capco Philippe d’Arvisenet, Group Chief Economist, BNP Paribas Rudi Bogni, former Chief Executive Officer, UBS Private Banking Bruno Bonati, Strategic Consultant, Bruno Bonati Consulting David Clark, NED on the board of financial institutions and a former senior advisor to the FSA Géry Daeninck, former CEO, Robeco Stephen C. Daffron, former Global Head of Operations, Morgan Stanley Douglas W. Diamond, Merton H. Miller Distinguished Service Professor of Finance, Graduate School of Business, University of Chicago Elroy Dimson, Professor Emeritus, London Business School Nicholas Economides, Professor of Economics, Leonard N. Stern School of Business, New York University Michael Enthoven, Former Chief Executive Officer, NIBC Bank N.V. José Luis Escrivá, Director, Independent Revenue Authority, Spain George Feiger, Former Executive Vice President and Head of Wealth Management Zions Bancorporation Gregorio de Felice, Group Chief Economist, Banca Intesa Hans Geiger, Professor of Banking, Swiss Banking Institute, University of Zurich Peter Gomber, Full Professor, Chair of e-Finance, Goethe University Frankfurt Wilfried Hauck, Chief Executive Officer, Allianz Dresdner Asset Management International GmbH Pierre Hillion, de Picciotto Chaired Professor of Alternative Investments and Shell Professor of Finance, INSEAD Thomas Kloet, Chief Executive Officer, TMX Group Inc. Mitchel Lenson, former Group Head of IT and Operations, Deutsche Bank Group Donald A. Marchand, Professor of Strategy and Information Management, IMD and Chairman and President of enterpriseIQ Colin Mayer, Peter Moores Professor of Management Studies, Saïd Business School, Oxford University Steve Perry, Chief Digital Officer, Visa Europe Derek Sach, Head of Global Restructuring, The Royal Bank of Scotland ManMohan S. Sodhi, Professor in Operations & Supply Chain Management, Cass Business School, City University London John Taysom, Founder & Joint CEO, The Reuters Greenhouse Fund Graham Vickery, Head of Information Economy Unit, OECD ®

High-Level Debate

Does Regulatory Pressure Affect ICAAP and Banks’ Risk Management? The European Experience Rosaria Cerrone – Associate Professor of Financial Markets and Institutions, University of Salerno, Dipartimento di Studi e Ricerche Aziendali (Management & Information Technology)

Abstract

capital management has moved from a matter of regulatory compliance to one of survival for banking institutions around the world. The paper presents the general approaches taken by regulators in supervising banks and financial institutions and shows, through a qualitative approach, how they are often different from each other offering the possibility of arbitrages between regulations. This is true in Europe where the evaluation of ICAAP reports by a local supervisory authority offers a number of ways for banks to reinforce their capital adequacy strategies.

The purpose of an internal capital adequacy assessment process (ICAAP) is to determine the adequate capitalization of a bank given the risks endured as well as future risks arising from growth, and new business lines. A full ICAAP is performed as often as required, but at least once a year and it cannot be viewed as an isolated process. It must be a central component of a strategy for managing risk and creating value. The supervisory review is an ongoing process and needs to evolve according to a bank’s risk profile. Effective

45

The Capco Institute Journal of Financial Transformation Does Regulatory Pressure Affect ICAAP and Banks’ Risk Management? The European Experience

INTRODUCTION

Some studies are based on these questions [Altunbas et al. (2007), Brewer et al. (2008), Cerrone and Madonna (2012)] and for this reason the paper aims to advance the understanding of how regulatory pressure through SREP affects banks and their choices concerning risk management policies and capital adequacy measures.

The financial crisis and the heavy losses in the banking and financial markets during last few years have shocked bankers and regulators. Many have asked why financial regulation, including the Basel II framework, was unable to prevent the crisis; why minimum capital requirements were inadequate for the control and management of risk; and how financial regulation must evolve in order to prevent this meltdown [Opplinger and Martin (2009)].

From annual reports, Pillar 3 reports, and supervisory guidelines of the major European banks and local supervisory authorities, it is clear that there is another difference in the implementation on ICAAP based on bank business model, risk framework and bank size (i.e., with a decisive application of the principle of proportionality), and above all on the level of adoption of economic capital (EC) models for the calculation of capital requirements. Moreover, SREP itself still can be applied in different ways which influences the choices of board and senior management when defining a bank’s risk appetite and capital management. A greater benchmarking should be granted due to a more accurate dialogue with supervisors. The dialogue with supervisors is very relevant when benchmarking the choices taken by board of directors and senior management. If this occurs, the possible regulatory arbitrages that may influence risk and capital management of the bank can be reduced, making the financial system much more stable.

Regulation is fundamental for banking activities and for the role of financial institutions. Banks need to be regulated and supervisory authorities must play a relevant role in keeping financial institutions safe and sound. As capital is a topic of never-ending relevance, capital regulation, in particular, is at the heart of prudential regulation and aims to ensure that banks hold an adequate level of capital consistent with their risk appetite and risk exposure. If, on the one hand, capital regulation and the regulatory framework have demonstrated their limits and they have not been sufficient for the present financial crisis, it is necessary to acknowledge the impact of internal mechanisms induced by Basel II Pillar 2 on banking risk management. In fact after the crisis, the internal controls on risks and on capital adequacy, as a consequence of the internal assessment process, have been reinforced in banks and financial institution. Controls have also been reinforced based on interaction with the local supervisory authority.

The purpose of this paper is to provide an overview of current developments. The current position of banks regarding ICAAP will be considered; it has now been a few years since its first adoption as a risk controlling process. As this process derives from Basel II Pillar 2, the approaches and the influence of regulation and supervision on risk management are presented. This shows that many banks’ decisions and policies focus on regulatory compliance. But while they apply these rules strictly, banks sometimes fail to seize the strategic opportunities that come through change. In conclusion, the paper presents a coordinated scheme that is comprehensive and forward-looking and which may help banks to develop longterm solutions to maintain shareholder value through the cycle while maintaining adequate standards, structures, systems, and skills to effectively manage risks and capital.

The purpose of an internal capital adequacy assessment process (ICAAP) is to determine the adequate capitalization of a bank taking into account the risks endured as well as future risks arising from growth and new business lines. It must, therefore, be a central component of a strategy for managing risk and creating value. A bank’s ICAAP is verified by the supervisory review and evaluation process (SREP) carried out by the local supervisory authority which considers the consistency of a bank’s risk profile and its capital management, not only for regulatory compliance, but above all as a way to maintain stability improvements in the international banking system.

The paper is organized as follows. The first section will present the literary review, which confirms that banks are often focused more on capital management than on the improvement of ICAAP and its relevance for dialogue with supervisory authorities. The second section will focus on the legal framework of Basel II Pillar 2 and the core principles of ICAAP, which should encourage management to examine, control, and measure not only the Pillar 1 risks, but also the global risk exposure of the bank, as emphasized by SREP. The third section will discuss the influence of regulatory pressure through SREP itself, as instrument of moral persuasion for risk management policy taken by European banks, with differences from country to

This paper tries to answer, through a qualitative approach, the following questions: ■■ ■■

■■

What is the relationship between capital and risk? What is the role of a regulatory framework in determining changes in capital management and risk exposure? Is regulatory pressure exerted by SREP strong enough to improve ICAAP and stabilize a greater number of European banks by reducing regulatory arbitrage?

46


country. In the fourth section there will be the discussion on ICAAP as a reconciliation process between internal capital management and regulatory compliance. The concluding section will summarize possible policy implications.

risk management and capital adequacy [Saunders and Allen (2010)] achieving convergence between the above-mentioned economic capital and regulatory capital. Moreover the new framework of Basel III [BCBS (2010)] has reinforced the need for banks to not only raise capital level, but to pay attention to the quality of the components, reducing the use of supplemental capital.1

THEORETICAL CONTRIBUTIONS

In this context the relevance of Basel II Pillar 2 increased and was reaffirmed in the Basel III framework. The contribution of ICAAP implementation and its effects on risk management in banks is particularly relevant for consulting firms and regulators [KPMG (2001); Deutsche Bundesbank (2013); CEBS (2006)]. In fact, they maintain that through ICAAP banks will not only achieve regulatory compliance, but also increase stability thanks to better capital requirements in relation to risk assumptions.

The literature on bank capital and especially the role of supervisory authorities is quite wide, with contributions by both academics [e.g., Gennotte and Pyle (1991); Ong (2012); Gualandri et al. (2009)] and the industry [Nijathaworn (2009)]. When it comes to ICAAP and SREP there are not as many academic contributions compared with industry positions [Opplinger and Martin (2009)]. In particular, according to Ong (2012), the financial crisis has underlined the importance of capital management, especially its meaning, usage, and adequacy. In particular, two concepts regarding capital have become more and more important: firstly, the socalled economic capital (EC) derived from a bank’s evaluation and influenced by strategies and risk appetite and secondly regulatory capital (RC) or capital requirement (CR).

Theoretical and empirical contributions [Luberti (2007); Cerrone and Madonna (2012); Montanaro and Tonveronachi (2009)] have, then, definitively demonstrated that in recent years, capital, risk, strategy, and bank’s survivability are strongly connected. In fact risk influences capital usage and risk management become interconnected to capital management, with ICAAP which is considered as a dedicated process that must unify the governance structure for risk and capital management. In fact different levels of risk assumption influence capital allocation, so that risk management policies really become capital management policies; that is why ICAAP itself is a good instrument making possible effective coordination between the risk framework and a bank’s capital structure.

“EC is the amount of risk capital, determined at a certain confidence level and time horizon, that a bank estimates it will need to remain solvent in the event of a catastrophic crisis” [Ong (2012), xx]. The other capital configuration is regulatory capital, which derives from imposed rules. “Regulatory capital reflects the amount of capital that a bank needs to comply with regulatory requirements in order to maintain its bank charter and in order to continue operating as a financial intermediary under the auspices of whichever bank regulators are responsible for its safety and soundness” [Ong (2012), xxi]. Moreover, the effectiveness of regulatory capital is also influenced by local regulation and the different timelines for the adoption of Basel rules by local supervisory authorities and for full implementation by banks.

THE LEGAL FRAMEWORK OF REGULATION AND SUPERVISION ON RISK MANAGEMENT: ICAAP AND SREP Capital is a topic of a great importance [e.g., Ong (2012), articles therein; Altunbas et al. (2007)] for regulators, central bankers, and bankers whose job is to oversee the stability of financial system. The Basel Accord and its evolution through Basel II and III is the basis of the actual structure of regulatory bank capital standards,

The issue of capital is of particular importance for banks, and here regulators have a relevant role. Gualandri et al. (2009) maintain that banks and financial institutions are firmly affected by the regulatory framework and by supervisory controls and that differences in regulations really support a kind of regulatory competition.

1 The reform of regulatory capital is among the most relevant innovations of the Basel III framework constructed on the principle of improving quantity as well as quality. According to the quality requirement the regulatory capital is made up by a (core) Tier 1 capital and (supplemental) Tier 2 capital. Core Tier 1 is made by “common equity” Tier 1 (high quality capital) and “additional” Tier 1. They were both revised upward and reinforced with the introduction of “conservation buffers” to sustain banks during hard crises or stressed periods and “countercyclical buffers” to counter the effects of procyclical business cycles.

Moreover, the supervisory role after the crisis seems to place additional emphasis on supervisors who would be granted less discretion and provided with clearer general rules [e.g., Caruana (2010)]. The financial crisis also confirmed the strong relationship between

47


even with raising warning flags due to recent crisis which have become more severe as they were influenced by the effects of the recent crisis.

According to Pillar 2, each bank has its specific approach to risk management, which derives from its commercial strategies, market policies, risk profile, and the position, structure, and influence of risk management units or resources on decision-making in the bank.

In recent years, supervisory efforts have focused on internal risk measurement and capital management [Banca d’Italia (2013)]. This emphasis on internal processes has been driven by the need to make supervisory policies more risk-focused in the light of the increasing complexity of banking activities.2

The development of financial markets and the use of increasingly complex banking products require a systematic approach to the risk selection and risk management. The essential objective of the ICAAP is thus the establishment of the bank’s risk profile, and the early identification of internal and external factors that could adversely affect its performance.

However, inadequate regulatory capital standards can entail significant economic costs. The resource allocation is much more accurately measured by comparing the Basel standard with the internal economic capital allocation process, which is at the basis of Basel II Pillar 2. In other words, financial institutions should attempt to quantify not only their credit, market, and operating risk, but other risk positions such as liquidity, systemic and compliance risk, by estimating loss probability distributions for various risk positions.

From this point of view, the bank must take two steps. In determining its risk-bearing capacity, it must first define the level of a specific risk that it is able to bear, and to secure adequate capital to cover such risk. The next step should be to analyze critically the amount of risk that is reasonable for the bank to take on with regard to the corresponding opportunities and threats.

Pillar 2 (supervisory review process) describes four principles that specify the expectations about the role and responsibilities of banks, their boards, and their supervisors when identifying and assessing all the risks they have decided to face. Banks must go beyond the so-called Pillar 1 risks and hold sufficient capital in line with their risk profile. In essence, Pillar 2 provides a strong push for strengthening both risk management and bank supervision systems [Caruana and Narain (2008)].

In addition to the various improved approaches to calculate minimum capital requirements and the structures of public disclosures, the consolidated banking directives also set out important requirements for effectively managing the entire spectrum of risks to which banks are or could be exposed in their operations. These requirements are both a duty and a challenge for banks, as they must establish high-quality internal procedures, methodologies, and systems to ensure the long-term building of adequate funds to cover their significant risks. All banks must substantiate the adequacy and completeness of the ICAAP with their local supervisory authority.

The methodology of internal calculations may differ, and usually will, from that of minimum capital requirement calculations set out in the directive. As institutions are required to calculate the adequate capital for all relevant risks, internal capital calculations may result in a higher figure than the regulatory minimum capital. Thus an additional capital requirement may appear in Pillar 2. In a different scenario, where the supervisory authority confirms that an institution does not need to hold additional capital, the adequate capital will be the same as the regulatory one, i.e., the minimum capital requirement calculated under Pillar 1.

Only in this way can the supervisor assess the effectiveness of the results. According to the Basel Committee discipline rules, all supervisory authorities of countries operating under the Basel II framework should adopt the rules imposed by the Committee and so establish clear guidelines for the implementation of ICAAP in banks. National central banks, according to Basel Committee indications, follow specific guidelines to put into practice the supervisory review and evaluation process (SREP), through which they control the level of adoption and implementation of ICAAP.

Pillar 2 provides sufficient flexibility for banks when addressing capital requirements in alignment with the bank’s size, profile, and portfolio complexity (principle of proportionality) and has the following components: ■■

■■

Internal capital adequacy assessment process (ICAAP): guidelines for banks to address the internal capital requirements; Supervisory review and evaluation process (SREP): guidelines for supervisors to review and assess the capital adequacy in banks.

2 This approach has intensified banks’ investments in improving their management information systems and internal systems for quantifying pricing and managing risks.

48


Basic principles of ICAAP: risk inventory and approaches to internal capital adequacy

Careful planning of the internal capital requirements for current and future periods is the key for long-term stability according to bank’s risk-bearing capacity [Gropp and Heider (2010)]. The internal capital requirements, calculated for the purpose of the ICAAP, may be higher or lower than the minimum capital requirements. There are several reasons for this:

The ICAAP is based both on quantitative elements of the risk management process (i.e., on the internal capital requirements and the calculation of the internal capital estimates), and on qualitative elements designed to strengthen the bank’s internal environment.3 Each bank must maintain an appropriate relationship between these elements, or better between the internal capital requirements and the effectiveness and transparency of the risk management processes. The bank must be aware that capital itself is not an adequate substitute for a safe risk control policy. On this basis, banks must follow some specific principles for full implementation of the ICAAP. These are commonly defined by CEBS and assumed as relevant in local supervisory rules.4 These principles include: ■■

■■

■■

■■

■■

The bank’s responsibility to provide detailed argumentation to supervisors The proportionality of the process according to the nature, scope, and complexity of the business that the bank pursues, the sophistication of its risk management system, and the approaches that the bank uses to calculate minimum capital requirements The focus on risks which have a material impact on the bank’s current or future capital adequacy, by considering bank’s risk profile and the impact of the external factors of the environment in which it operates

■■

The consideration of risks and factors that are not included in the minimum capital requirement. In this case the internal capital requirement is higher than the minimum capital requirement The use of advanced risk measurement techniques, such as economic capital models. Good practice indicates that, in this case, the internal capital requirements can be lower than the minimum capital requirements. The bank must nevertheless build its capital in an amount equal to or higher than the minimum capital requirements The consideration of the effects of correlations and diversification. Even in this case the internal capital requirements can be lower than the minimum capital requirements, whereby the bank should have capital that is equal to or higher than the minimum capital requirements.

To measure its risk exposure and to calculate the internal capital requirement, each bank should differentiate among risk typologies. In fact, for Pillar 1 risks, the calculation of internal capital requirements follows the approaches for calculating minimum capital requirements or internal methodologies based on economic capital. For risks not entirely covered by minimum capital requirements, the less-sophisticated approaches to calculating minimum capital requirements cannot take into consideration all the specific factors in the bank’s exposure to a specific risk, as the assumptions on which their (regulatory) methodologies are based do not allow for this.5 Then, for the risks that are not subject to minimum capital requirements, in their assessment (if materially significant), the bank uses its own quantitative or qualitative methodologies. However, the classification reported in Table 2 is only a simplification as the definitions of the risks under review may differ (and consequently

Moreover, in the ICAAP process relevance must be assigned to the influence of the business cycle, the environmental factors that can have an adverse impact on the adequacy of the bank’s internal capital requirements, and the bank’s strategic plans and their dependence on macroeconomic factors. Banks must formulate relevant and sufficiently detailed scenarios of exceptional situations (stress tests). Table 1 summarizes the common steps used by banks to articulate ICAAP.

3 For example, the bank can make the case to the supervisor for lower internal capital requirements for an individual risk (to which it is more exposed) because of its highquality internal control environment through which it can effectively manage and mitigate the risk. 4 “Institutions should ‘own,’ develop, and manage their risk management processes; the ICAAP belongs to the institution and supervisors should not dictate how it is applied. The task of the supervisory authority is to review and evaluate the ICAAP and the soundness of the internal governance processes within which it is used” [CEBS (2006), p. 2 ]. 5 In the area of credit risk, for the purposes of the ICAAP, the bank must therefore consider the residual risk as a result of the use of credit protection to reduce exposure to credit risk and securitization exposure. For operational risk, the ICAAP establishes that the bank must consider the risks deriving from its planned business strategy and the risks deriving from the scope and complexity of its business, where these risks conform to the definition of operational risk.

• Assess all the risks to which the bank is exposed • Calculate how much capital is required to offset each risk using adapted models • Apply stress tests to assess how this capital might be affected by changing business conditions • Define how much capital (internal or economic capital) should be held • The board and the senior management must demonstrate understanding of their roles and responsibilities with full documentation and formalized approval process

Table 1 – Common ICAAP steps

49


total internal capital requirements for covering other materially significant risks to which it is or could be exposed to the internal capital requirements of Pillar 1 risks, or provides argumentation for the risks being of no materiality to it. A more advanced alternative to this approach is the parallel addition of internal capital requirements for covering other individual materially significant risks (e.g., for interest rate risk in the banking book, for concentration risk, or for profitability risk). The bank can also use a combination of the two variants.

Pillar I risks • • • •

Credit counterparty risk Operational risk Market risk Equity risks

Additional refinements to Pillar I risks • Residual risks • Securitization risk • Model risk IRC/CRM/stressed VaR

Pillar II risks • • • • • •

Credit concentration risk Country risk Interest rate risk in the banking book – overall IR risks Liquidity risk Settlement risk Other risks – (e.g., reputation/strategic risk)

The bank’s methodology for the internal capital requirements can also be based on advanced risk measurement techniques. In this case, the bank assesses the risks by means of economic capital models based on mathematical or statistical methods. The economic capital models must employ reasonable assumptions and the calculations must be based on a time series of risk data of adequate length, as well as on the same statistical confidence levels and the same time horizon for all the risks treated.

Note: Except for liquidity risk and other risks, EC quantitative models can be applied and are considered as adequate when calculating internal capital.

Table 2 – Commonly classified types of risks

Supervisory role and SREP The SREP is reserved for supervisors. It defines financial institutions’ regulatory review activities and may take different forms depending on jurisdiction, and influences banks’ risk management activities.

the risk inventory) because the number of defined risk types can vary from bank to bank and the risks may be defined in a broad or narrow sense. The analysis of internal capital requirements must be completed by stress tests6 based on scenarios, such as liquidity crisis, significant losses from operational risk, and adverse situations in connection with other specific risks to which the bank is or could be exposed (e.g., interest rate risk in the banking book).

Regulators use the outcome of ICAAP reviews to establish the level of capital requirements and, to the extent necessary, of additional supervisory actions [CEBS (2006)]. If a regulator is particularly dissatisfied with an ICAAP solution or diagnoses incomplete implementation or other serious flaws, add-ons may even be imposed. However, regulators may also decide to grant reductions in capital requirements in the light of highly sophisticated ICAAP solutions.

In order to identify changes in market conditions that could adversely impact the bank’s future capital adequacy, the stress tests [Bignami and Pilati (2008)] must also take into consideration the state of the general business cycle (pro-cyclicality) with a general deterioration in the economic situation as a result of a decline in economic activity (recession) or a specific deterioration in the situation in economic sectors that the bank supports financially.

The SREP is an integral part of the bank supervision. It focuses on the review and evaluation of the ICAAP, risk exposure, and compliance with prudential standards. Within the framework of the SREP

If the methodology for calculating the internal capital requirements is closely related to the methodologies for calculating the capital requirements for credit, market, and operational risk, the bank makes the calculation using a building-block approach, in which the first step is to assess the adequacy of the calculated capital requirements. If the bank finds that individual capital requirements are too high or too low with regard to the bank’s actual exposure to credit, market, and operational risks, it must adjust them upwards or downwards as appropriate, providing argumentation for these adjustments. In the second step, the bank simply adds the

6 Small sized banks, for example, can improve their risk assessment with the help of simple stress tests, with the aim of demonstrating the adequacy of the internal capital requirements. These tests (also known as sensitivity analysis by the CEBS) are techniques that are less complicated to carry out, as they merely include an assessment of the impact of a change in a single, precisely defined risk factor on the bank’s financial position, the cause of the shock not being defined. Banks whose business is larger in scope and complexity can compensate for any limitations in the available data by conducting complex stress tests, with the aim of improving the forecasting power of their internal statistical models. Complex stress tests (also known as scenario tests by the CEBS) are techniques that are more complicated to carry out, as they include various combinations of changes in risk factors of an exceptional but plausible event defined by the bank for the purposes of stress testing.

50


The influence of regulatory pressure through SREP: a qualitative approach

an active dialogue with the bank is encouraged, which aims to identify any deficiencies in the ICAAP and act quickly to mitigate risks and ensure capital adequacy.

The most recent regulatory trends show that local regulatory authorities are applying more stringent capital requirements and observing regulated banks more closely. The authorities appear to invest greater relevance in Basel II Pillar 2, where capital requirements are not only based on Pillar 1 calculations, but are strongly influenced by the more differentiated requirements which characterize ICAAP. This gives more weight to the economic risk profile of regulated financial institutions. Moreover, there is also the challenge to firms to adopt stress testing and to embed this with the day-to-day running of the firm [Opplinger and Martin (2009)].

SREP must be consistent with sets of rules and standard guidelines, which include various criteria for assessing the adequacy of methodologies, procedures, systems, and calculations within the ICAAP, which must be taken into consideration when working with the bank [Banca d’Italia (2008), CEBS (2006), FSC (2009)]. There is also the comparison of the results of the SREP among banks that are similar in size or in scope and complexity of business. This comparison follows long-term monitoring of bank’s risk profile, which is regularly assessed according to the risk assessment system (RAS) methodology. Over time the bank’s risk profile can be compared with each set of results from the RAS methodology.

Basel II Pillar 2 is often presented as an enlargement of the power of supervisors. In reality, it enables them to be involved in the analysis of the internal process developed by banks to manage their risks. The relevance of the dialogue that takes place in this framework should yield a better understanding of the expectations of both supervisors and institutions [Thoraval (2006)].

Through the study of the results, supervisors are able to critically evaluate the proposals and the expert argumentation regarding the adequacy of the individual ICAAP, and where appropriate, are able to make decisions regarding further supervisory measures as needed.

Pillar 2 is receiving increasing attention both by regulators and by banking management. Regulators themselves are asking banks to strengthen the link among their institution’s risk profile, risk management policies, risk mitigation systems, and capital [Opplinger and Martin (2009)].

With the review and the evaluation of the ICAAP reports, supervisors aim to ensure that the bank has adequate funds to cover the risks taken up, moreover through their activity supervisors demonstrate the need for board and for senior management, to organize, develop or improve an efficient risk management system. The ICAAP report is the starting point for a dialogue between banks and supervisors. This makes it possible for supervisors to learn much about the bank’s strategy in risk assumption and management, and then about the bank’s methodologies for assessing/measuring risks, creating a risk profile and calculating the internal capital requirements [Elizalde and Repullo (2007)].

This section outlines the status of the ICAAP across the European banking industry and the behavior of supervisors [Gasos (2009); Pfetsch et al. (2011); KPMG (2011)]. It shows the views of the banks, as well as their concerns and expectations, regarding communication with supervisors. It also describes the major orientation adopted by supervisors. The overview is not intended to be comprehensive, but aims to highlight the most relevant features from these two complementary viewpoints. The ideas in this section will hopefully contribute to the opinion building process of the ICAAP.7

The dialogue is structured to cover bank’s governance, its commercial strategies, and the organizational structure, as well as the bank’s approach to the internal capital requirements for covering risks. Supervisors and banks must coordinate their positions regarding the adequacy of the bank’s ICAAP within the framework of the dialogue. The effect of this dialogue can be, for example, that if supervisors find an extraordinary exposure to a specific risk, they can direct the bank to reduce the risk, adjusting to the bank’s internal capital requirements. In this case, supervisors apply a qualitative approach aimed at improving the bank’s control environment. On the other hand, quantitative measures are applied when supervisors want the bank to secure additional own funds because of an inadequate coverage of its exposure to a specific risk, an inadequate risk management system, or an adverse impact from external factors originating in the macroeconomic environment.

From the largest banks by total assets as per their 2012 financial statement, the ones that have more public information have been selected, as the analysis is essentially based on the Pillar 3 report. The approaches of banks and regulators concerning an adequate level of capitalization vary according to bank size. Furthermore, in France approaches are mostly based on models with qualitative factors, while in Germany and Belgium the quantitative approach

7 The qualitative results reported in the section derive from available ICAAP reports and from the guidelines of supervisors.

51


Bank Name

Country code

Total assets mil EUR (2012)

Deutsche Bank AG

DE

2.012.329

Crédit Agricole-Crédit Agricole Group

FR

2.008.152

BNP Paribas

FR

1.907.290

Barclays Bank Plc

GB

1.782.921

Royal Bank of Scotland Plc (The)

GB

1.535.981

Banco Santander SA

ES

1.269.628

Société Générale

FR

1.250.696

BPCE Group

FR

1.147.521

Lloyds Banking Group Plc

GB

1.105.757

UBS AG

CH

1.041.209

HSBC Bank plc

GB

975.309

UniCredit SpA

IT

926.828

ING Bank NV

NL

836.068

Credit Suisse Group AG

CH

764.250

Rabobank Nederland-Rabobank Group

NL

752.410

Intesa Sanpaolo

IT

673.472

Banco Bilbao Vizcaya Argentaria SA

ES

637.785

Commerzbank AG

DE

635.878

ABN AMRO Bank NV

NL

459.417

Caja de Ahorros y Pensiones de Barcelona-LA CAIXA

ES

359.109

Dexia

BE

357.210

KBC Bank NV

BE

224.824

Banca Monte dei Paschi di Siena SpA-Gruppo Monte dei Paschi di Siena

IT

218.882

Erste Group Bank AG

AT

213.824

UniCredit Bank Austria AG-Bank Austria

AT

207.596

Raiffeisen Banking Group

AT

205.361

Banco Popular Espanol SA

ES

157.618

Unione di Banche Italiane Scpa-UBI Banca

IT

132.434

Banco Popolare

IT

131.921

Actually, the use of internal EC models in Europe is present in almost all major banking groups, increasingly common in medium-sized banks, but unusual in small banks [Cerrone and Madonna (2012)]. Banks have made substantial progress (and investment) in the business integration of their economic capital models and ICAAP. An increasing number of banks use it in for everyday business management, where it has become a point of reference internally. For others it remains an objective. With regards to the relationship with supervisors, there is a clear distinction between different types of banks. In general, small banks have taken advantage of the supervisory guidelines (where provided) for the assessment on the types of risk included in the second pillar; they perform suitable ICAAP according to regulatory frameworks designed under the principle of proportionality [Cerrone and Madonna (2012)]. Large banks feel that they are being compelled to implement a “regulatory Pillar 2” on top of their own ICAAP. This implies that a bank with standardized approach for Pillar 1 risks will adopt regulatory parameters for Pillar 2 and simplified ICAAP documentation, and a bank with general use of internal models for Pillar 1 risks will adopt an economic capital model for Pillar 2 and full ICAAP documentation. The ICAAP is meant to supplement the Pillar 1 by means of a wider perspective, not to amend the Pillar 1 shortcomings. Pillar 1 is primarily a thorough regulatory requirement and banks have to strive to meet the regulatory provisions. Pillar 2 (ICAAP) is primarily an internal exercise shaped by the unique objectives, profile, and culture of the banks. Supervisors should strive to understand the characteristics of the banks, by gaining an appropriate understanding of the banks’ ICAAP and opening a critical dialogue on the aspects deemed to be worthy of more attention. Even if economic capital is used in the setting of risk appetite, in capital management, performance measure, and in portfolio management (besides senior management commitment and enough methodological skills), the main challenge is for banks to ensure that data is of sufficient quality at a granular level. In most entities, boards are increasingly informed about economic capital and senior management has a good understanding of these affairs, however, the bank still has the regulatory capital as a stronger reference. This is due to the fact that rating agencies, supervisors, and the market in general is geared to target capital ratios based on RWA for the Pillar 1 risks. Occasionally, Pillar 2 assessment is required, notably to complement those measures with capital for other risk types.

Source: Bankscope

Table 3 – Largest European banks by total assets (not less than €100,000)

is preferred. Spain and Switzerland consider higher capitalization to be relevant. As for available financial resources, many countries use their own regulatory components or own funds (Spain, France). In other countries, additional components are allowed. The first economic capital models were implemented around 1996, after the inception of the RAROC methodologies [Gasos (2009)]. A number of banks developed their models during the following years, leading the way in the integration of the cost of capital into the banking business management.

It is very interesting then that the internal validation of the ICAAP is increasingly implemented, notably in large banks. However, it

52


Types of approaches to the SREP and results for banking industry

appears that some supervisors have not drawn much attention to the ICAAP internal validation reports yet. Against this background, it would be better to invite supervisors to make good use of the banks’ internal validation frameworks in the ICAAP. This would help overcome any scarcity of resources and enable the supervisor to focus on relevant qualitative matters, such as the conceptual approach to the ICAAP, assumptions made, involvement of the management, and evaluation of capital adequacy.

Starting with the approach of Gasos (2009), KPMG (2011) and Deutsche Bundesbank (2013), taking information from annual reports, Pillar 3 reports, and SREP guidelines, different approaches to the SREP can be distinguished: 1. The qualitative dimension based approach: the supervisor focuses more on the bank’s internal capital model. Supervisors are more prone to accept the outputs of the model if the bank is able to demonstrate its soundness and to explain the deviation from Pillar 1 capital requirements. Spain and Italy are examples in this group. 2. The quantitative dimension based approach: the focus is on the final capital level. Supervisors examine to what extent various capital add-ons may be needed to make sure that the bank has set aside sufficient capital to cover all of the risks. The Pillar 2 add-ons may replace the former cushions of extra capital that were thought to be required in the rough Basel I approach. The UK is subject to this approach. 3. The hybrid approach: many supervisors distinguish between straightforward or sophisticated banks. When they review banks under the standardized approach, they use a scheme of add-ons. These are verified on the basis of detailed supervisory guidance. The scrutiny of sophisticated banks in turn is undertaken on the basis of their internal capital model (more qualitative approach). Italy and Spain represent this approach; 4. Ranking approach: the ICAAP review starts on the basis of the capital modeling undertaken by the bank. It is then supplemented by a rough estimate of the required capital add-ons, according to the supervisor’s expert judgment. The outcome of both exercises is that the bank obtains a place in a grid in which all national banks are ranked. France uses this approach.

In particular, in large banks, the role that the banks’ independent internal validation units play in this process should be sustained, as they can review all businesses and regions under a common framework and come up with valuable information. In the segment of small banks, we find a great number of institutions that have implemented Basel II under the standardized approaches for credit risk and market risk, and the basic or standardized approach for operational risk. Applying the principle of proportionality, largely acknowledged by supervisors, they have a rather simple ICAAP. In the case of Pillar 2 risks, small banks may measure concentration, liquidity, and interest rate risks using simplified algorithms proposed by the national regulator. In this case little coordination between regulators exists in this respect to ensure a level playing field. In the absence of an EC model, fair approaches that ensure a level playing field within the member state are based on the application of standard parameters to assess the Pillar 2 risks of banks that do not have an economic capital model or based on coefficient assigned by tranches of estimated concentration to calculate concentration risks. The other risks of Pillar 2 (e.g. reputation and strategic risks) are covered by fixed percentages of capital (independent from any economic model). Even in this case the size of the bank can influence the percentage within the limits defined by supervisory authorities.

It is evident that the different approaches induce banks to adopt different modeling methods when measuring capital. Moreover, the degree of supervisory implementation is different as well. Many supervisors have started reviewing the ICAAP, but others are yet to do this. This is an important point as highlighted by CEBS (2006, p. 2): “the dialogue between an institution and its supervisor is a key part of the supervisory review process.” There is a clear need for more dialogue and the ICAAP review is the right occasion. The ICAAP review also requires a high degree of understanding between banks and supervisors, as a lack of understanding generates uncertainty, which leads supervisors to impose unsubstantiated capital addons.

Concentration risk is intertwined with diversification. Concentration risk should not be isolated in the assessment, as diversification itself reduces the probability of failure. Concentration is part of credit risk and market risk. In fact, some supervisors have understood and accepted internal risk aggregation methods and diversification assumptions, but there is growing reluctance to recognize the beneficial effects of diversification from the regulatory side. This is in spite of the fact that it is part of the technical criteria for review and evaluation of the ICAAP. Banks expect supervisors to keep considering the diversification effects in their reviews. In fact the level of diversification used by the bank in the structure of its banking book is relevant for the EU supervisory community since diversification is considered a basic principle for applying appropriate internal risk management.

It has been shown that the ICAAP report is submitted at national discretion (annually, twice a year, or on a quarterly basis) and the

53


reviews take place at according to different timelines. The timetables are not a problem in themselves, but can lead to burdensome updates at local levels.

the responsibility of the institution to define and develop its ICAAP. It is the bank itself that has to demonstrate, during its dialogue with supervisors, that its internal capital assessment is comprehensive and adequate to counter the nature of risks posed by the business and the operating environment.

A material divergence has been observed in the assessment of the risk profile and capital adequacy of the vast majority of cross border banks, depending on the type of supervisor (or the role it plays). On the one hand, host supervisors are inclined to consider local concentrations, ignore any kind of group diversification, set specific capital buffers to local banks, and assess the local ICAAP on an isolated basis. On the other, home supervisors tend to see the group perspective but they cannot override decisions taken at the local level. However, a level playing field across the EU, which should find equivalent criteria with disclosure requirements aligned, is a main concern for banks. This condition should avoid regulatory arbitrage, which greatly influences risk and capital management in banks.

Capital and performance need to be tightly coupled with risk management and not considered separately. It is imperative for banks to assess risk-based capital for entire types of risks and effectively manage the capital through adequate planning, allocation, and monitoring mechanisms. With a greater emphasis from regulators on embedding the risk management practices with banks’ business strategy and decision-making processes, integrated risk-capital-performance will be a key choice. Pillar 2 lays the basic foundations for enterprise-wide risk management coupling risk management with capital and performance management, allowing effective management of the risk-return trade-off. It offers enhanced governance and greater transparency in risk-related choices and provides a holistic view of the underlying risks that a bank has. In addition, Pillar 2 ICAAP helps banks comply with the regulatory requirements enabling the board and senior management to effectively promote the risk management culture across the bank. The implementation of Pillar 2 ICAAP also enhances banks’ reputation and improving investors’ confidence. Moreover, increased risk management awareness and exemplary risk management practices can play a positive role in improving the credit ratings of banks, based also on enterprise-wide risk management.

Moreover, the business organization does not always match the structure of the legal entities, so that cross-border groups have had to merge, forming unique local ICAAP subsidiaries that are managed separately. While we understand the legal entity division has to be formally considered, the Pillar 2 assessment should take into account the business organization for the sake of understanding a good risk assessment.

ICAAP process as reconciliation method between risk management policy and regulatory pressure One of the greater challenges of modern-day bank management is assessing a bank’s true economic risk profile, its alignment with board oversight duties, management actions and risk management activities, and coherent communication to key stakeholders such as owners and investors, regulators, bank personnel, or business partners [Opplinger and Martin (2009)].

Concerning banks’ human resources organization, ICAAP implementation involves several defined processes and controls spanning various units of the bank. It is a challenge for the banks to delineate roles and responsibilities and make ICAAP functional. Auditing, departmental trainings, and final regulatory submission activities have to be effectively managed as they spread across various divisions of the bank, requiring active involvement and accountability from each division.

From an economic perspective, the ICAAP greatly supports banks’ governing bodies in conducting a thorough analysis of banks’ economic risk profiles, assessing the influence of economic stress situations, and helping them to prepare for such stress situations.8 A full implementation on ICAAP might also sustain a large part of the Basel III framework concerning capital reinforcement [BCBS (2010)].

Pillar 2 guidelines are still evolving and there is a greater need for banks to align their ICAAP procedures with globally adopted best practices for economic/internal capital methodologies [Pfetsch et al. (2011)]. Implementation also brings challenges with respect to

Capital adequacy does not necessarily mean more capital, in fact the view of the CEBS (2006, p. 7) of SREP is that “[t]he supervisor must also assess whether capital is the correct means of addressing the institution’s vulnerabilities.” The current developments of financial systems have emphasized the necessity for more stringent supervision of the banks and their risk management activities. It is

8 The current financial crisis has shown how financial institutions that neglected this aspect have suffered not only in terms of their share prices, but – even more importantly – also in their daily business activities by losing future earnings through the erosion of client bases and the loss of funding and liquidity sources (effect of reputation risk).

54


the measurement of internal capital for effective risk-based capital and performance management. Data management and systems integration is the key to put this challenge into practice.

5. Embedding ICAAP into business: the final step should embed the ICAAP processes into banking business so that regular monitoring and reviewing processes are useful for effective decision making. The external reviews/audits must be subsequently incorporated in updates to Pillar 2 ICAAP. The validation of the results of the ICAAP must be regularly submitted to a bank’s various committees (risk committees, ALCO, performance committee, audit committee, etc.), board of directors, and individual regulators.

Statistical modeling presents challenges for advanced ICAAP implementation, with the adoption of EC modeling, advanced liquidity risk modeling, advanced internal rating based methodologies, simulation of qualitative risks and their impact assessment on other risks, and scenario based stress testing. It is evident that Pillar 2 implementation is not merely a regulatory compliance exercise. An appropriate framework has to be established to derive the strategic benefits listed above by embedding the best practices of risk management in business processes and decision-making activities.

CONCLUSION AND POLICY IMPLICATIONS This paper outlines the current developments in the field of Pillar 2 and ICAAP and its importance for banks’ management boards. Beyond regulatory pressure, the economic value added of a sound ICAAP framework is significant and can be attained with reasonable effort. In response to the present financial crisis, internationally, detailed guidelines on some of the major ICAAP topics such as stress testing and liquidity and funding risk are evolving in line with the Basel III framework.

The evaluation of different experiences suggests a possible stepby-step approach to set up a robust Pillar 2 framework. It is a guideline deriving from Basel II Pillar 2 principles and best practices aimed at spreading the benefits of Pillar 2 ICAAP. The above-mentioned steps are summarized as follows and their objective is to reach full coordination of ICAAP and a bank’s risk policy:

Pillar 2 and ICAAP have an additional value for financial institutions that is beyond regulatory compliance. Supervisors should be aware of banks’ increasingly sophisticated responses to the existing regulatory framework. The goals of prudential regulation should be weighted against the need to permit banks to perform their essential risk-taking activities. Thus, capital standards should be structured to reflect the business lines and the degree of risk taking chosen by the individual bank. Supervision and regulation can never be a substitute for a bank’s own internal scrutiny of its counterparties and for the bank’s market reputation.

1. Current state assessment and gap analysis: the bank must document and assess its existing risk management framework and governance, its current state of risk and capital management policies and procedures, understand the specific local regulatory guidelines on Pillar 2 – ICAAP, analyze the gap between existing and future framework, and set up an implementation roadmap for ICAAP through a well-defined project plan. 2. Definition of a holistic design of ICAAP framework with a robust governance structure and delineation of roles and responsibilities with a risk-based capital management and a risk-adjusted performance management framework. 3. Definition of key elements for ICAAP: the bank must establish a wide risk appetite in both qualitative and quantitative terms, a sound stress testing framework, prepare a projected threeto five-year risk-based capital plan, set up the guidelines and procedures for allocating the internal capital and managing the capital limits, and establish the risk adjusted performance management (RAPM) guidelines and indicators; 4. Monitoring and reporting of ICAAP processes: internal reporting and dashboard for senior management must be organized to regularly monitor economic capital, internal capital, and regulatory capital. For this reason monitoring of risk/capital limit and risk-based performance is necessary, establishing periodically reporting on the risk-based capital plan and regular reporting on RAPM. In the case of breach of capital limit regular reporting must be prepared.

Regulators and banks are exploring multiple measures to restore financial stability. Proactive and efficient risk management is the key towards fulfilling this objective. Pillar 2 will occupy a central stage, as it requires banks to develop sound risk management processes that will help identify, measure, aggregate, monitor, and control risks. In fact, the rating agencies have released guidelines where the rating methodology includes the banks’ enterprise-wide risk management sophistication. It is necessary that banks attach more importance to Pillar 2 implementation to lay a strong foundation on which layers of sophistication can be built. A continuous improvement process is the key for the banks in establishing globally adopted best practices and bringing about a paradigm shift in the enterprise-wide risk culture.

55


Moreover, Pillar 2 in the future will focus more on reputation risk, strategic risk, liquidity risk, residual risk, and hitherto less visited aspects of other risks. Banks will have to ensure ICAAP incorporates a forward-looking approach for proactive capital and performance management that is aligned with a banks’ risk profile.

between the three Pillars of Basel II. In fact according to Basel II, Pillar 1 sets out the rules of regulatory capital requirements, Pillar 2 defines the principles for the internal assessment of capital adequacy and Pillar 3 offers the scheme for risk disclosure through the content of a part of banks’ annual reports. The aim of the regulatory approach is to reach full integration of the three Pillars. The integration of the Pillars will benefit banks’ risk management strategies, which will be more consistent with the banks’ risk framework. The accuracy of these reports may be considered as a step towards three pillars’ integration. The benefits go further than simply complying with the rules by increasing overall management risk awareness.

ICAAP should always be internal and a dialogue between the bank and the supervisor should be conducted at a senior level on both sides. Regular and formal feedback from the supervisors is necessary to improve risk management. Banks should also allow for fact that supervisors sometimes need to wait for the ongoing changes in the regulatory framework as detailed features are finalized.

European banks and regulators seem to be ready to coordinate rules and controls and so align host and home regulations. This would avoid discrepancy and regulatory arbitrage, which can be translated into differently risk-based strategic decisions. Finally, banks should determine the methods and procedures which best suit their needs, as these determine the validity of the ICAAP as well as the required implementation resources. Due to the recent crisis another relevant aspect has emerged from the analysis, i.e., in the course of selecting methods banks should not only consider their current risk profile but also anticipate planned developments of individual risk types.

EC modeling and its outputs are not simple to evaluate, due to the multiplicity of models in use for each class of risks and the number of strong assumptions. Once the shortcomings or deficiencies are pointed out, evaluating the respective bias introduced by the assumptions in EC results in an even harder task for the supervisors. Nevertheless, each bank should make efforts to detect gaps in its fulfillment of requirements as early as possible so that it can take appropriate measures in a timely and economical manner. Closing these gaps quickly serves to improve the bank’s internal risk management and thus also enhances the bank’s ability to ensure its risk-bearing capacity. For this reason, the bank should develop a master plan, which covers planning and budgeting of all ICAAP tasks. This plan forms the basis for requesting internal and external capacities and may well involve planning resources over a period of several years. Once it reaches a certain scale, the master plan should be transformed into a detailed project plan. The fundamental concept behind the ICAAP should not only be communicated to the top management of the bank, but to all relevant organizational units. By applying an appropriate communication policy and setting best practices, a bank’s management can generate the internal acceptance necessary for successful implementation of the ICAAP. One major objective of the ICAAP is to foster the development of internal risk management. For this reason, expertise in this area is a critical success factor in the introduction of an ICAAP. Finally, data quality and its elaboration are especially important because they determine the reliability and accuracy of calculated results (e.g., risk indicators and capital calculation). The process of data quality assurance begins with accurate data capture and goes as far as ensuring data availability in the ICAAP. For risk management purposes, it is necessary and worthwhile to ensure timely automated evaluations due to the large data quantities involved and the complex calculation algorithms sometimes used. This paper is only the first exploration of the level of integration

56


REFERENCES

•

European Banking Authority (EBA), 2001, Guidelines on Internal Governance, 9 Financial Services Commission (FSC), 2009, Guidance Note. Basel II: Pillar 2 – The ICAAP & The SREP

•

Ahmad, R., M. Ariff, and M. J. Skylly, 2009, “Determinants of Bank Capital Ratios in a Developing Economy,” Asia-Pacific Financial Markets, 15 (3-4): 255-272

•

•

Alexandre, H. and K. Bouasis, 2009, “The Complementarity of Regulatory and Internal Governance Mechanisms in Banks,” Bankers, Markets, Investors, 98: 6-15

•

Financial Stability Board (FSB), 2013, Thematic Review on Risk Governance, Peer Review Report, 2

•

Alfon, I., I. Argimon, and P. Bascunana-Ambros, 2004, “What Determines how much Capital is Held by UK Banks and Building Societies?” FSA Occasional Paper Series 22

•

FSB Senior Supervisors Group, 2008, Observations on Risk Management Practices during Recent Market Turbulence, 3

•

Allen, F., E. Carletti, and R. Marquez, 2011, “Credit Market Competition and Capital Regulation,” Review of Financial Studies, 24 (4): 983-1018

•

FSB Senior Supervisors Group, 2009, Risk Management Lessons from the Global Banking Crisis of 2008, 10

•

Altunbas, Y., S. Carbo, E. P. M Gardener, and P. Molyneux, 2007, “Examining the Relationship Between Capital, Risk and Efficiency in European Banking,” European Financial Management, 13 (1): 49-70

•

Gasos, G., 2009, The Views of European Banking Industry. CEBS Seminar on ICAAP, Banca d’Italia, Rome, 20-22 October

•

•

Banca d’Italia, 2008, Guida Per l’Attività di Vigilanza. Parte Prima, Principi, Obiettivi, Metodologia Generale, 5: Circ. 269

Gennotte, G. and D. Pyle, 1991, “Capital Controls and Bank Risk,” Journal of Banking and Finance, 15: 805-824

•

•

Banca d’Italia, 2013, Disposizioni di Vigilanza Prudenziale per le Banche in Materia di Sistema dei Controlli Interni, Sistema Informativo e Continuità Operativa. Relazione Sull’Analisi di Impatto, 6

Gropp, R. and F. Heider, 2010, “The Determinants of Bank Capital Structure,” Review of Finance, 1 14 (4): 587-622

•

Gualandri, E., 2011, Basel III, Pillar 2: The Role of Banks’ Internal Governance and Control Function. Working Paper, Università degli studi di Modena e Reggio Emilia (UNIMORE).

•

Gualandri, E., A. Landi, and V. Venturelli, 2009, “Financial Crisis and New Dimensions of Liquidity Risk: Rethinking Prudential Regulation and Supervision,” Journal of Money, Investment and Banking, 8: 25-42

•

Bain and Company, 2011, Il Processo di Definizione e Gestione del Risk Appetite nelle Banche Italiane, March

•

Baravelli, M. and L. Vigano (eds.), 2000, L’Internal Audit nelle Banche: Sistema dei Controlli Interni e Linee di Cambiamento nelle Banche Italiane, Rome: Bancaria Editrice

•

Hull, J. C., 2012, Risk Management and Financial Institutions. New York: John Wiley & Sons

•

Barrios, V. E. and J. M. Blanco, 2003, “The Effectiveness of Bank Capital Adequacy Regulation: A Theoretical and Empirical Approach,” Journal of Banking and Finance, 27(10): 1935-1958

•

Kahane, Y., 1977, “Capital Adequacy and the Regulation of Financial Intermediaries,” Journal of Banking and Finance, 1: 207-218

•

Basel Committee on Banking Supervision (BCBS), 2006a, Basel II: International Convergence of Capital Measurement and Capital Standards, A Revised Framework Comprehensive Version

•

KPMG, 2011, ICAAP in Europe, 5

•

Luberti, M., 2007, “Secondo e Terzo Pilastro dell’Accordo di Basilea: un’Opportunità di Cambiamento per il Sistema di Vigilanza in Italia,” Banca Impresa e Società, 2: 259-282

•

Basel Committee on Banking Supervision (BCBS), 2006b, Core Principles for Effective Banking Supervision

•

•

Basel Committee on Banking Supervision (BCBS), 2008, Fair Value Measurement and Modelling: An Assessment of Challenges and Lessons Learned from Market Stress, 6

Lusignani, G. and L. Zicchino, 2010, “Il Rafforzamento Patrimoniale delle Banche: Prime Indicazioni sull’Impatto delle Nuove Proposte di Basilea,” Banca Impresa e Società, 2: 237-268

•

•

Basel Committee on Banking Supervision (BCBS), 2009, Findings on the Interaction of Market and Credit Risk, Working Paper, 16

Meister, E., 2005, “Pillar 2 in Basel II – Supervisory Implications and Implementation in Germany,” BIS Review, 28

•

•

Basel Committee on Banking Supervision (BCBS), 2010, Basel III: A Global Regulatory Framework for more Resilient Banks and Banking System

Mieli S., 2011, La Gestione dei Rischi Bancari Tra Crisi Finanziaria e Sviluppi Regolamentari, Convention APB, 10

•

•

Berger, A. N., R. J. Herring and G. P. Szegö, 1995, “The Role of Capital in Financial Institutions,” Journal of Banking and Finance, 19 (3-4): 393-430

Memmel, C. and P. Rapauch, 2010, “How do Banks Adjust their Capital Ratios?”, Journal of Financial Intermediation, 19: 509-528

•

•

Brewer III, E., G. G. Kaufman, and L. D. Wall, 2008, “Bank Capital Ratios Across Countries: Why do They Vary?” Journal of Financial Services Research, 34 (2-3): 177-201

Montanaro, E. and M. Tonveronachi, 2009, “Il Secondo Pilastro di Basilea 2. Prove di Stress per le Banche o Per la Vigilanza?”, Banca Impresa e Società, 1: 73-91

•

Nijathaworn, B., 2009, “Risk Management and Pillar II Implementation,” BIS Review, 56

•

Cannata, F. and M. Quagliariello, 2010, “The Regulatory Reform Proposed by the Basel Committee,” Bancaria, 2: 14-21

•

Ong, M. (ed.), 2012, Managing and Measuring Capital, London: Risk Book, Incisive Media

•

Opplinger, B. and D. Martin, 2009, The Internal Capital Adequacy Assessment Process under Basel II. Current Developments, Challenges and Potential Solutions, Zurich: Ernst & Young

•

Carosio, G., 2010, “Verso la Revisione della Regolamentazione del Capitale,” Banca Impresa e Società, 2: 191-204

•

•

Caruana, J., 2010, “Re-establishing the Resilience of the Financial Sector: Aspects of Risk Management and Supervision,” Fifth Biennal Conference on Risk Management and Supervision, BIS, Basel, 11

Penza, P., 2011, “Basilea 3 e Gli Impatti sulle Banche: Redditività, Gestione del Capitale e Ruolo del Pillar 2,” Bancaria, 11: 24-36

•

Pfetsch, S., T. Poppensieker, S. Schneider, and D. Serova, 2011, Mastering ICAAP: Achieving Excellence in the New World of Scarce Capital, McKinsey Working Papers on Risk, 27

•

Caruana, J. and A. Narain, 2008, “Banking on More Capital,” Finance & Development, 6: 24-28

•

•

Cerrone, R., 2012, Pianificazione Strategica e Controllo dei Rischi nella Banca. Scelte di Contenimento e Processi di Pianificazione Patrimoniale, Milan: Maggioli Editore

Repullo, R., 2004, “Capital Requirements, Market Power, and Risk-Taking in Banking,” Journal of Financial Intermediation, 13 (2): 156-182

•

•

Cerrone, R. and M. M. Madonna, 2012, “Risk Management and Pillar II: Implementing ICAAP in Italian Credit Cooperative Banks,” Capco Journal of Financial Transformation, 35: 71-79

Resti, A. (ed.), 2008, Il Secondo Pilastro di Basilea e la Sfida del Capitale Economico, Roma: Bancaria Editrice

•

•

Committee of European Banking Supervisors (CEBS), 2006, Guidelines on the Application of the Supervisory Review Process under Pillar II, GL03

•

Deutsche Bundesbank, 2013, “Banks’ Internal Methods for Assessing and Maintaining Internal Capital Adequacy and their Relevance to Supervision,” Monthly Report, 3: 29-41

Bignami, M., and A. Pilati, 2008, Il Secondo Pilastro tra l’Accordo di Basilea, le direttive comunitarie e le regole prudenziali italiane, cap.2, pp. 34-58, in Resti, A. (ed.). Saunders, A. and L. Allen, 2010, Credit Risk management in and out of the Financial Crisis, New York: John Wiley & Sons

•

•

Diamond, D. W. and R. G. Rajan, 2000, “A Theory of Bank Capital,” Journal of Finance, 55 (6): 2431-2465

Sironi, A., 2010, “Le Proposte del Comitato di Basilea per la Riforma del Sistema di Adeguatezza Patrimoniale: Quali Evidenze della Ricerca Passata e Quali Implicazioni per la Ricerca Futura,” Banca Impresa e Società, 2: 211-236

•

Elizalde, A. and R. Repullo, 2007, “Economic and Regulatory Capital in Banking: What is the difference?”, International Journal of Central Banking, 3 (3): 87-117

•

Thoraval, P. Y., 2006, “The Basel II Framework: the Role and Implementation of Pillar 2,” Financial Stability Review, 9: 117-132

•

Enria, A., 2010, “Lo Stato del Sistema Bancario Italiano e le Prospettive per l’Attività Normativa,” Audizione del Capo del Servizio Normativa e Politiche di Vigilanza, Banca d’Italia, Camera dei Deputati, VI Commissione- Finanze, 11

57

AMSTERDAM BANGALORE BRATISLAVA BRUSSELS CHARLOTTE CHICAGO DÜSSELDORF FRANKFURT GENEVA HONG KONG JOHANNESBURG KUALA LUMPUR LONDON NEW YORK ORLANDO PARIS RICHMOND SAN FRANCISCO SINGAPORE TORONTO VIENNA WASHINGTON DC ZÜRICH