The Basel Committee on Banking Supervision (BCBS) released a paper titled “A Sound Capital Planning Process: Fundamental Elements” in January 2014.  This paper does not propose changes to standards or capital requirements.  Instead, it reports on a study carried out by BCBS on the capital planning process at a number of banks.

The paper has a good overview of what is good capital planning and is worth reading if you work in bank capital management.  It covers the following fundamental elements: internal control and governance, capital policy and risk capture, forward-looking view and management framework for preserving capital.

Banks must forecast future capital needs under a range of conditions as part of their  internal capital adequacy assessment process (ICAAP).  ICAAP is an part of Basel 2, Pillar 2 requirements.  The BCBS document “Enhancements to the Basel II framework” outlined measures to strengthen Pillar 2 requirements.  For Australian banks, the requirements are set out in Australian Prudential Regulation Authority’s standards and practice guides (APS 110 and CPG 110 respectively).

A number of the components of a sound capital planning process are already requirements under the current standards or guidance that Australian banks need to follow. (more…)