Learning Objectives:

  • Explain the link between ALM and capital management.

  • Understand ICAAP and its role in capital planning.

  • Apply stress testing and scenario analysis to capital adequacy.

6.1 The Link Between ALM and Capital Management

Capital management is a core component of ALM . The BTRM course covers “capital management” and “ICAAP principles” . Key elements include:

  • Capital Adequacy: Ensuring the bank has sufficient capital to absorb losses.

  • Capital Planning: Projecting capital needs under various scenarios.

  • Stress Testing: Assessing capital adequacy under severe stress.

6.2 ICAAP (Internal Capital Adequacy Assessment Process)

ICAAP is the bank’s own assessment of its capital needs . The BTRM course covers “ICAAP principles” . Key components include:

  • Risk Identification: Identifying all material risks.

  • Capital Projection: Forecasting capital needs under various scenarios.

  • Stress Testing: Assessing capital adequacy under stress.

6.3 Stress Testing

The Bocconi course covers “stress testing” as a core topic . Key elements include:

  • Scenario Analysis: Evaluating the impact of adverse scenarios on capital adequacy.

  • Reverse Stress Testing: Identifying scenarios that could cause bank failure.

  • Regulatory Stress Tests: Conducted by regulators to assess bank resilience.

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