What is ICAAP (Internal Capital Adequacy Assessment Process)
The Internal Capital Adequacy Assessment Process (ICAAP) notifies the Board of the current assessment of the bank's risks, how the bank plans to alleviate those risks, and the quantity of current and future capital is needed. It does so after having considered other mitigating factors.
Understanding ICAAP
Internal capital adequacy assessment processes are at the heart of banks' capital management. ICAAP plays a vital role in administering SSM banks. It gives input for the assessment of risks to capital as a part of the annual Supervisory Review and Evaluation Process (SREP).
Significant Institutions (SIs) present the ECB with a yearly comprehensive ICAAP package, with a wide range of quantitative and qualitative data. Ongoing review of the ICAAP allows supervisors to assess banks' ability to identify, assess, mitigate, and report their risks.
For most of the SSM's existence, approaches to ICAAP have proceeded to alter significantly between member states - partly a legacy of different national supervisors' historical methods. The ECB has been keen to harmonise ICAAPs and make them more similar. But it's only been throughout the past three years that their efforts have taken hold.
Factors To Consider
Appropriately identifies, measures, aggregates, and monitors the risks of the institution
Assures that the institution holds adequate internal capital in connection to the institution's risk profile
Makes use of sound risk management systems and improves them further.
