SREP Prep

Basel II, the long awaited and greatly delayed new capital framework for banks – EU implementation via the Capital Requirements Directive (CRD), also applicable to investment firms, is now set for 1 January 2007 – was supposed to comprise three distinct Pillars, broadly, quantitative (Pillar 1), qualitative (Pillar 2) and market discipline through public disclosure (Pillar 3). “Pillar 2 is trying to capture all material risk not quantitatively captured in Pillar 1,” said Alan Houmann, Deputy Secretary General, CEBS (Committee of European Banking Supervisors). “But Pillar 2 has become very much of a too difficult dustbin,” Keith Pooley, Manager of the Pillar 2 Team, Risk Review Department, FSA, told delegates to City and Financial’s “The Capital Requirements Directive and Basel II: an update on FSA implementation for banks” in November. On a more positive note, the clear message from some investment firms at a Basel II conference on the previous day had been, “What’s all the fuss about?” said Pooley – ICAAP (Internal Capital Adequacy Assessment Process) means monitoring, managing and mitigating risks, it entails forward planning and governance – “we do that already, surely” firms had argued. Although ICAAP and SREP (Supervisory Review and Evaluation Process) may not represent a radical development for all firms, they do contain new aspects, said Pooley, not least in the explicit way capital is linked to risk management. A firm’s own assessment and modelling of its capital will be examined and judged by supervisors and used to inform its individual capital guidance (ICG) from the regulator.