Getting the most out of your firm-wide Risk Management

Recent events have highlighted the importance of a Risk Management framework which is able to deal with risk types beyond those included within Basel II Pillar 1. In the light of the Pillar 2 requirements, financial institutions and investment firms are now obliged to strengthen their firmwide Risk Management, in order to foster the development of a robust risk and capital management process.

The Internal Capital Adequacy Assessment Process (ICAAP) is a system of forward-looking strategies and processes that shall reflect all the risks to which an institution is or could be exposed in order to ensure internal capital adequacy on an ongoing basis. All financial institutions and investment firms incorporated under Luxembourg Law have to comply with the CSSF Circular 07/301 on ICAAP.

The challenges

• The ICAAP process represents a big opportunity to introduce substantial changes in the definition of risk appetite and strategy by taking advantage of the new regulatory requirements.
• Leverage on Pillar 2 and on the ICAAP must be used to strengthen and to promote the full integration of risk and capital management within strategic planning and business operations.
• Sound identification and quantification of all material risks, allow the determination of an economic capital measurement consistent with the real institutions risk profile and offering protection to the institution’s own funds.
• A correct attribution of roles and responsibilities to different process owners fosters the consciousness that the ICAAP process involves the whole structure.

PricewaterhouseCoopers’ ICAAP Health Check for Banks and Investment Firms

PricewaterhouseCoopers has developed a tailored ICAAP Health Check for Banks and Investment Firms targeting 10 key areas:

1. In depth analysis of your first ICAAP report set up as of 1^st quarter of 2009.
2. Challenge of your definition of roles and responsibilities of a.o. Board of Directors, Authorised Management, as well as Audit, Compliance, Internal Control and Risk Management functions.
3. Challenge of your definition of a risk strategy, appetite and tolerance.
4. Optimisation of your internal risk based capital management process, enabling you to link your own funds to the firm’s global risk profile.
5. Reassessment of all material risks, through measurement, management and mitigation, to which your institution is or might be exposed to (exhaustiveness principle).
6. Control of documentation and evidences to verify if all the instruments (policies, procedures, reporting) ensure strong communication across the structure.
7. Optimisation of stress test scenarios to assess the impact of extreme events that have to be taken into account to determine an adequate measure of Internal Capital (notably for the CSSF Circular 08/338 on interest rates & 09/403 on liquidity). PwC has developed a tailored Liquidity Health Check to specifically address this often neglected risk and the compliance with the related new BCL & CSSF regulations.
8. Compliance with CSSF special provisions regarding some specific risk types, such as concentration risk, interest rate risk arising form non-trading activities or risks linked to wealth management activities.
9. Analysis of the robustness of risk and capital governance framework.
10. Follow up of the project implementation, support to Top and Senior Management in the respect of the provisions of Board of Directors.

Our approach

Our approach is based on four distinctive steps:

Why PricewaterhouseCoopers Luxembourg?

PricewaterhouseCoopers Luxembourg (www.pwc.com/lu) has about 1,800 professionals from 49 different countries. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.