Banking - capital requirements: Pillar II (ICAAP and SREP)

Question 1

What is pillar II of the three Basel pillars?

Answer 1

Supervisory review

Question 2

pillar II has to do with supervisory review - there are 2 review processes what are they?

Answer 2

ICAAP - Internal capital adequacy assessment process

SREP - Supervisory review and evaluation process

Question 3

Explain ICAAP

Answer 3

An institutions strategies and processes to assess and maintain on an ongoing basis the internal capital that they consider adequate to cover risks - presented to the CA

Question 4

Explain SREP

Answer 4

CA reviews the ICAAP from the institution and can take appropriate supervisory action if they are not satisfied with the result of the process.

Question 5

Pillar II can be broken down into 5 main objectives - what are they?

Answer 5

1 - ICAAP
Banks should have process for assessing their overall capital adequacy in relation to their risk profile and strategy for maintaining their capital levels

2 - SREP
Supervisors should review and evaluate the banks internal capital adequacy assessments and strategies and the banks ability to monitor and ensure compliance with regulatory capital ratios

3 - Appropriate action
Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process

4 - Expectations for banks
Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum

5 - early stage intervention
Supervisors should seek to intervene at an early stage to prevent capital from falling bellow the minimum levels required to support the risk characteristics of a particular bank and should require rapid action if capital is not maintained or restored