Internal Capital Adequacy and Assessment Process (ICAAP): Report – main elements
Earlier we had considered the importance of documentation of the ICAAP process. In this post we will look at some of the main elements of an ICAAP report, in particular the Executive Summary, the section on the Internal Capital Adequacy Assessment for each risk category, Aggregation of the capital charges and Capital Planning.
Some of the main sections of an ICAAP report are discussed below:
The executive summary gives an overview of the process that is explained in more detail in the sections that follow. This includes the:
- Scope and purpose of ICAAP
- Material risks of the bank and any risk mitigation plans in place or to be put into place in the future
- Main findings and results of the analysis with regard to how much capital is required based on internal assessment processes as compared to those under the minimum regulatory requirements
- Main finding and results with regard to how adequate the bank’s risk management and control processes are
- A brief description of the bank’s capital plan and how it will manage capital in the future
- A commentary on the significant limitations and weaknesses identified during ICAAP and where further analysis and decisions would be required
Internal Capital Adequacy
This section would include a detailed review of the capital adequacy of the bank. This includes:
- Highlighting the risk appetite of the bank
- Detailing, for each material risk, the assessment methodology and calculation approach used, the main assumptions made and parameters used and quantification of each material risk
- The internal assessment will be compared with that used for regulatory minimum capital requirement purposes. Differences in the results will be attributed to specific factors.
- Risk mitigation methods will be described if methods other than capital will be used to mitigate risk.
- Limitations to the model if internal models are used in the assessment will also be mentioned.
- The sensitivity of the model to changes in the assumptions and parameters will also be discussed.
- Stress test and scenario analysis methodologies, assumptions, derivation and quantified results will be discussed
In this section the individual estimates of capital for each material risk are used to determine the total internal capital requirement. This could entail a simple summation of all the separate capital requirements or a more sophisticated application of aggregation that accounts for inter-risk diversification.
This section would detail stress tests and scenario analysis that could encompass a wide range of scenarios such as a change in the strategic plan of the bank, economic recessions and downswings. It would quantify the risk and capital requirements and detail how the bank would plan and manage its business if these scenarios were to occur and how it would meet future minimum capital requirements and internal capital needs.
We have reviewed some of the main sections that constitute an ICAAP report. To view an extract of a sample ICAAP report you may be interested in viewing the following post:
Under ICAAP the bank will make use of internal models in order to quantify and stress test all material risks. In the next post we will look at some of the important principles of model building.