Top 12 actions for better risk management
Risk 4: Use ICAAP procedures to optimize capital uplift
Capital is valuable, and management of this vital resource will differentiate the winners from the losers in optimization, collateral management or seed capital decisions.
4. Use your ICAAP procedures to optimize the amount of capital uplift (ICG) needed, taking into account the “new normal” and the need for robust evidencing of reverse and normal stress testing.
Firms should carry out comparative studies on what other firms are doing as part of their ICAAP/SREP processes, bearing in mind the type and combination of style factors that might give the regulator cause for awarding RMP points or setting elevated ICG uplifts. Revisit unwinding costs and fixed overhead requirement amounts and define meaningful stress testing to destruction (“killer” scenarios).
Ensure that your firm’s reverse stress-testing scenarios draw upon at least five to seven years’ worth of quality operational data if possible. Risk governance arrangements in particular should provide adequate levels of independent challenge, ideally free from fund manager or business bias or conflicts of interest.
They should be linked to risk appetite and balance responsibilities between the business and control functions such as risk, compliance and internal audit.
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