Under Pillar 2 of the second Basel accord, a bank must have an Internal Capital Adequacy Assessment Process (ICAAP) in place. ICAAP consists of internal procedures and systems that ensure that the bank will possess adequate capital resources in the long term to cover all of its material risks. It involves the determination of economic capital as opposed to regulatory capital and is a process that is run in parallel to the regulatory capital requirement determination process. Economic capital is the capital required to cover all risks that are estimated using internal risk models of the bank. ICAAP should be an integral part of the bank’s processes and must be embedded within the organization. Senior management and the Board of Directors (BOD) should be supportive and fully engaged in the process.curves for interest rate derivatives.
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