ICAAP: Internal Capital Adequacy Assessment Process
The impact of the financial crisis has undoubtedly exposed many flaws in the banking sector. Inadequate and low-quality internal capital, and inconsistencies in risk assessment were all prominent factors in the financial shock.
The impact of the financial crisis has undoubtedly exposed many flaws in the banking sector. Inadequate and low-quality internal capital, and inconsistencies in risk assessment were all prominent factors in the financial shock.
When the MSU was set up, the supervisory approach known as SREP was implemented for significant institutions under the direct supervision of the ECB.
The SREP process includes a review of 5 themes, including ICAAP. In addition, the ECB clarified its expectations by publishing a guide to ICAAP (and ILAAP) for major banks in the euro zone, positioning ICAAP and ILAAP at the heart of the institutions’ management system.
New versions have been published following a consultation with banks and the results of the SREP. Banks will have to implement the revised principles in these guides from 2020 onwards.
So what do banks need to prepare for in terms of risk management, particularly in the context of the ICAAP process? What are the challenges of this process?
What is the objective behind the ICAAP ?
The new CSSF circular 20/753 on ICAAP / ILAAP requires banks to publish an ICAAP report every Q1.
Circular 20/753 on ICAAP / ILAAP
The purpose of setting up ICAAP is first and foremost to improve the internal forward-looking assessment process for credit institutions, ensure risk governance and improve the feedback process. The expected result is to strengthen the resilience of these entities in times of stress.
As a result, institutions will have a more synthetic and global view of their risk profile, as well as an improved preventive plan.
To achieve this, the regulations have defined two approaches, adjusted according to the institution’s profile and based mainly on resistance tests
