ICAAP tips advice

ICAAP Stress Testing

Help for firms required to undertake the Individual Capital Adequacy Assessment Process ICAAP in accordance with the requirements set out in the PRA Rulebook

Under Basel II ICAAP is a new requirement for financial institutions requiring risk assessments including

  • Pillar I minimum capital requirements;
  • the extent of total stockholder funds required to meet a firm’s strategy and maintain minimum capital requirements;
  • ensuring risks of the firm are understood by the board, and that there is sufficient and adequate management of the risks.

ICAAP elements

  1. identification and measurement of the risks;
  2. risk mitigation to lower capital requirements;
  3. stress-testing techniques;
  4. role of the directors of the business and the business management team

Pillar II: the board needs to understand and accept the business risks.   Pillar II : requires maintenance  of capital ratio especially for regulator satisfaction.

A financial institution must include internal risk drivers that the business have now or on the horizon including fraud, rogue trading, or business strategy mistakes.

Capital Plan : to include all risks including cooperation and collaboration across all business departments taking into account business growth forecasts and maintenance of a  capital ratio.

Assess the risks :

  1. Identify risks : List all material risks, interview staff in relevant departments, and assess the probability of risks occurring.
  2. Assess capital : how much do you need?
  3. Forward capital plans  :  stress test and scenario analyse business plans.

Understand all risks :

The ICAAP typically has the following structure:

  1. Background to ICAAP process
  2. Risk Appetite
  3. Business Risk Strategy
  4. Business Risk Assessment
  5. Business Capital Planning
  6. Business Risk Testing and Scenario Testing

What is on the horizon for your business ?   What is your risk profile for the future?   What is the gap between the company’s regulatory capital, its actual capital, and the capital it needs to hold for business purposes.

ICAAP should provide you with a capital buffer required from stockholders.

How do you demonstrate how ICAAP is embedded in senior management and executive decision-making.

What KRI’s and KCI’s do you have to update capital assumptions and present these to the board.   Make sure your business gets the right balance for the business not just for regulation compliance.   Senior managers should understand the positive benefits and use ICAAP to make the business more profitable with less uncertainty.

Get help to prepare and keep an ongoing review of ICAAP reports in UK

Bank of England

The Bank of England says :

“The ICAAP is that part of the Pillar 2 assessment undertaken by firms.  The ICAAP should allow firms to assess the level of capital that adequately supports all relevant current and future risks in their business.  In undertaking an ICAAP, a firm should be able to ensure that it has appropriate processes in place to ensure compliance with the CRDIV.  This requires firms to develop and use appropriate risk management techniques.”

Understanding the Internal Capacity Adequacy Assessment Process

Understand the role, functions, and requirements of the Internal Capital Adequacy Assessment Process (ICAAP).

ICAAP Finance Training Course

Under Pillar 2 of the second Basel accord, an Internal Capital Adequacy Assessment Process ICAAP is required.

ICAAP consists of internal procedures and systems that ensure that a business has 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 business risk management process and must be embedded within the organisation. 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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