MORNBFI Vol. 1 - Planters Development Bank

APP. Q-5209.12.31Annex BALTERNATIVE INTERNAL CAPITAL ADEQUACYASSESSMENT PROCESS METHODOLOGIESThis appendix outlines ICAAPmethodologies which banks may adoptin lieu of that based on the minimumregulatory capital requirement under theBSP Risk-Based Capital AdequacyFramework (the Framework). However,the choice of methodology should clearlybe commensurate with banks’ ability tocollect the necessary information and tocalculate the necessary inputs in a reliablemanner.Structured approach - In this case,banks will need to set the internal capitalrequirement at a starting point of zerocapital and then build on capital due to allrisks (both those captured under theFramework and those that are not) andexternal factors. This methodology couldbe seen as a simple model for calculatingeconomic capital and is not based on theminimum regulatory capital requirement.A sensitivity analysis could form thestarting point. The sensitivity analysisshould be based on an exceptional butplausible scenario. Risks which are notincluded in the sensitivity analysis shouldalso be considered in terms of thestructured approach.Allocation-of-risk-taking approach – Inthis approach, banks might start with itsactual capital and break it down to all itsmaterial risks. This step in the processrequires quantification or at least anestimation method for various risks. Theamount of capital provided for each riskcategory is determined by the current andenvisaged amount of risk in each category,a risk buffer and their risk appetite. Bankswill decide which type of risk quantification/estimation method is suitable and sufficientfor its particular use. If the allocated capitalseems insufficient, either the risk has to bereduced or capital has to be raised. Theallocated amounts of the capital willtherefore work as a limit system, whichassists and facilitates banks in balancingtheir risk-taking capacity and their risks.Formal economic capital models –These are expected to be used eventually bybanks that use advanced approaches indetermining the minimum regulatory capitalrequirement, or those that have substantialderivatives and structured productstransactions (i.e., those that have expandeddealer and/or user capabilities).(Circular No. 639 dated 15 January 2009)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-52 - Page 9