MORNBFI Vol. 1 - Planters Development Bank

APP. Q-5209.12.31to ensure that risks are covered adequatelyand that capital coverage reflects the actualrisk profile of their bank. Moreover, anychanges in a bank’s strategic focus,business plan, operating environment orother factors that materially affectassumptions or methodologies used in theICAAP should initiate appropriateadjustments to the ICAAP. New risks thatoccur in the business of a bank should beidentified and incorporated into theICAAP. The ICAAP and its review processshould be subject to independent internalor external review. Results thereof shouldbe communicated to the board and seniormanagement.6. Banks should set capital targetswhich are consistent with their riskprofile, operating environment, andbusiness plans. Banks, however, may takeother considerations into account indeciding how much capital to hold, suchas external rating goals, market reputationand strategic goals. If these otherconsiderations are included in the process,banks must be able to show to the BSPhow they influenced their decisionsconcerning the amount of capital to hold.7. The ICAAP should capture the riskscovered under the Framework – creditrisk, market risk, and operational risk. Ifapplicable, banks should disclose majordifferences between the treatments ofthese risks in the calculation of minimumregulatory capital requirement under theFramework and under the ICAAP. Inaddition, the ICAAP should also considerother material risks that banks are exposedto, albeit that there is no standarddefinition of materiality. Banks are freeto use their own definition, albeit that theyshould be able to explain this in detail tothe BSP, including the methods used, andthe coverage of all material risks. Theseother material risks may include any of thefollowing:a. Risks not fully captured under theFramework, for example, creditconcentration risk, risk posed by nonperformingassets, risk posed bycontingent exposures, etc.;b. Risks not covered under theFramework. As a starting point, banksmay choose to use the other risksidentified under Circular No. 510 dated03 February 2006. Some of these risksare less likely to lend themselves toquantitative approaches, in which casesbanks are expected to employ morequalitative methods of assessment andmitigation. Banks should clearly establishfor which risks a quantitative measure iswarranted, and for which risks aqualitative measure is the correct riskassessment and mitigation tool; andc. Risk factors external to banks.These include risks which may arise fromthe regulatory, economic or businessenvironment.8. Banks should have a documentedprocess for assessing risks. This processmay operate either at the level of theindividual banks within the bankinggroup, or at the banking group level.Banks are likely to find that some risksare easier to measure than others,depending on the availability ofinformation. This implies that their ICAAPcould be a mixture of detailed calculationsand estimates. It is also important thatbanks not rely on quantitative methodsalone to assess their capital adequacy, butinclude an element of qualitativeassessment and management judgment ofinputs and outputs. Non-quantifiable risksshould be included if they are material,even if they can only be estimated. Thisrequirement might be eased if banks candemonstrate that they have an appropriatepolicy for mitigating/managing these risks.9. The ICAAP should take intoaccount banks’ strategic plans and how theyQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-52 - Page 2