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BOOK REVIEW
Risk Capacity, 2nd
Edition: Processes, Approaches
and Implementation of Risks in the Context of SREP
and MaRisk 6.0
German Title:
Praktikerhandbuch Risikotragfähigkeit 2. Auflage: Prozesse,
Steuerungsansätze und Einbindung von Risiken im Fokus von SREP und
MaRisk 6.0
Dr. Svend Reuse, MBA (ed.)
Heidelberg 2016. 1124 p., 288 fig. and 52 tab. ISBN 978-3-95725-031-5.
With the introduction of Basel II, the three pillar approach of risk analysis was
created. In pillar 2, the so-called ICAAP (Internal Capital Adequacy Assessment
Process) occurs. Banks and similar institutions have to model their risk bearing
capacity in order to be resistant against the risks they face. The financial crisis has
shown that this is necessary and many banks fail in creating a sustainable risk
controlling.
The theoretical approaches to the risk capacity quantifications were especially
developed in Germany. Pillar 2 approaches do not have such a high quality in any
other country. The presented book of the editor Svend Reuse in its 2nd
edition deals
with this topic in the context of the SREP (Supervisory Review and Evaluation
Process) and the MaRisk (Minimum Requirements for Risk Management). It sums up
all relevant aspects of the ICAAP and structures the work of more than 30 well-known
authors.
The structure is as follows: after the introduction in chapter A, the regulatory
framework of the ICAAP, based on Basel II/III and the SREP are presented in
chapter B. It is the first book to sum up all regulatory aspects in a consistent way.
Going- and Gone Concern approaches are presented and the requirements of the
BaFin (Bundesanstalt für Finanzdienstleistungaufsicht) are summed up. Chapter C
deals with the relation between strategy and ICAAP. The derivation of an ICAAP out
of the strategy is important to get a consistent approach that fits for the bank.
Further, the capital planning process and its modelling are presented. There is a
strong dependence between the risk capacity and the capital planning, especially in
the context of the SREP. Banks get specific hints as to how to optimize their strategy
processes and capital planning. Chapter D focuses on the risk inventory process.
Only in a well-done process, all relevant risks for a bank can be recognized. Within
this chapter, model risks, correlation risks and concentration risks are described and
explained. The book offers specific implications of how to handle these risks. Chapter
E analyses the models and approaches of the ICAAP. Going Concern and Gone
Concern are discussed in a critical way. The differentiation between earnings
approaches and present value approaches offers some real new aspects that will
influence the models of risk capacity in the future. Chapter F deals with the
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quantification of all relevant risks. Market price risk, interest rate risk, credit risk,
operational risk and liquidity risk as well as their implementation into the risk
capacity process are discussed on more than 200 pages. Banks as well as researchers
find a lot of references how to handle these risks. Chapter G deals with stress
testing. Banks get important information on how to model them. Chapter H offers a
really new aspect: typical reporting of risk capacity and the main risks in a bank. It is
the first book that sums up these reporting aspects in such an interesting way with
very good figures on nearly 100 pages. The same can be stated about Chapter I. It
analyses all relevant software that can be used to analyse the risk capacity and
capital planning. Banks all over the world get concrete suggestions how to implement
this software. The internal and external audit processes are analyzed in chapter J.
They offer specific hints for auditors as to how to handle the ICAAP. Chapter K sums
up the main results and offers a critical outlook according to the methodology of risk
capacity analysis from the practical and theoretical points of view.
The book is the only one that deals with the mentioned aspects on such a high level.
More than 2.000 footnotes and over 500 cited sources make the book valuable from
the practical as well as theoretical points of view. A wide annex helps the reader and
makes the book a standard reference work for the topics ICAAP and risk capacity of a
bank. The book is recommendable without any restrictions, it is a must-have for all
risk controllers in a bank and it is the main work that can be used for further research
in this field, because it offers a lot of open academic questions. It is worth distributing
widely, even in the EBA and ECB.
Reviewed by:
Prof. Dr. Dr. habil. Eric Frère
Frère Consult
Corporate Finance-Management and HR-Consulting
FOM – Hochschule für Oekonomie & Management, www.fom.de
Dean, Professorship for Finance and Entrepreneurship
FOM isf – Institute for strategic finance, www.fom-isf.de
Director
frere@frere-consult.de