Economic Capital, Fund Transfer Pricing and RAROC

Agenda Program
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Prague, NH Hotel Prague
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Key points / questions answered:

What are the benefits of an economic-based management framework vs. a regulatory one?
How to properly identify and measure the risks to which banks are exposed?
What are the seven founding guidelines of risk measurement?
How to work out an internal funds transfer pricing to support banking businesses effectively?
How to articulate risk and return measures to assess the cost price of transactions?
The purpose of this seminar is to introduce you to the management framework required to support successfully banks business decisions. Such support requires excellence in critical functions such risks measurement and aggregation, internal funds transfer and transactions pricing.

The focus for the first day of the seminar is Economic Capital, a framework to measure and aggregate risks. We start by demonstrating how the ECAP framework provides five fundamental business benefits that are ignored by the regulatory framework. Then we go through the seven ECAP guidelines that constitute the framework's foundation; we address implementation challenges and the use of ECAP for the ICAAP (pillar2). After this, we learn how to measure properly each type of risk, starting with credit risk.

After lunch, we apply the methodology to market and operating risks and discover how to consolidate these measures. We then learn how to interpret ECAP results to recognize changes in business models; and also how to articulate ECAP and regulatory measures. Finally, we address the organizational and IT issues to successfully implement ECAP frameworks.

In addition to daytime exercises, a self-assessment questionnaire is handed over and will be reviewed first thing next morning.

We start the second day with how to hunt for risks using the RICAP, the Risk Identification and Cartography Assessment Process. This process also contributes to spreading a common risk culture across the institution and enhancing risk awareness.

Then we address the first issue related to making the banking businesses profitable, Fund Transfer Pricing (FTP). We build step by step the Reference refinancing approach meant to achieve the reconciliation of two seemingly contradictory objectives: provide a stable commercial margin immune to market fluctuations AND make sure that external pricing is linked to the market rates in order to avoid adverse customer arbitrage.

Then we turn to the second issue, assessing the cost price of transactions by measuring their RAROC, Risk Adjusted Return On Capital. We analyze the different types of RAROC, from the simplest to the most sophisticated, along with their possible uses. We look at how to aggregate RAROC components, some of which come from Finance and some from Risk with different dimensionalities. Once the theoretical part is understood, we conclude the day with a live demonstration of RAROC calculations.

At the end of this two days course, each participant should have a clear understanding of the benefits and challenges of developing and using an economic capital framework for measuring risks. The take away includes understanding FTP and RAROC, critical tools for making the banking businesses profitable.

Program of the seminar: Economic Capital, Fund Transfer Pricing and RAROC

The seminar timetable follows Central European Time (CET).

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.30

Benefits, Foundations and Implementation

  • The competing management frameworks
  • The five benefits of Economic Capital (ECAP)
  • The seven founding guidelines and their challenges
  • How to implement an ECAP framework
  • ECAP and ICAAP (pillar 2)
  • Exercises and Q&A

Methodology - part 1

  • Common methodological principles for measuring ECAP
  • Risk capital and ECAP
  • Measuring Credit risk capital

12.30 - 13.30 Lunch

13.30 - 16.30

Methodology - part 2

  • Measuring Market Risk capital
  • Measuring Operating Risk capital
  • Consolidating Risk capital measures into ECAP

Results Analysis and Organization

  • Linking risk profiles and business models
  • Organization and IT for a successful ECAP framework
  • Exercises and Q&A

09.00 - 09.45 Self-assessment review

09.45 - 12.40

Risk Identification and Cartography Assessment Process

  • Frequency and severity assessment
  • The three risk identification principles
  • Risk cartography across the institution

FTP - Funds Transfer Pricing (part 1)

  • The ALM, its role and functions
  • Organizational types of internal funds transfers
  • Commercial and financial margins
  • Policies for setting the margins
  • Articulation with the global interest margin of the bank

12.40 - 13.40 Lunch

13.40 - 16.30

FTP - Funds Transfer Pricing (part 2)

  • Setting up the right commercial incentives
  • Insuring coherence between global and commercial margins
  • The benefits of reference refinancing
  • Reference refinancing implementation
  • Exercises and Q&A

RAROC, Risk Adjusted Return On Capital

  • Objective and definitions
  • RAROC possible uses
  • Components of the RAROC
  • Live demonstration

Wrap-up and Termination of the Seminar

Training catalogue in PDF
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