Internal Capital Adequacy Assessment Process (ICAAP)
The supervised entity always itself bears primary responsibility for the assessment of capital needs in relation to the entire risk profile, capitalisation and the strategy for maintenance of capital levels. The capital assessment process is based on the supervised entity's own informed understanding of the capital it needs to hold against all material risks and planned risk exposure as well as the appropriateness of internal control and risk management processes given the nature, scope and diversity of operations.
The supervised entity's risk-bearing capacity is the product of the combined effect of several factors, including the quantity and quality of the capital held, allocation and availability of capital and the profitability of the business. The risk-bearing capacity also includes qualitative factors, such as internal governance, internal control and risk management as well as internal capital adequacy assessment.
The aim of the FIN-FSA standard on the Internal Capital Adequacy Assessment Process (4.2) is to ensure that
- supervised entities put in place a consistent approach, process and methods for proactive capital planning, capital adequacy assessment and maintenance of capital adequacy
- supervised entities set long-term quantitative and qualitative capital targets
- supervised entities adjust the quantity and quality of capital to meet their own risk levels
- in addition to measurable risks, supervised entities also identify unmeasurable risks and manage these qualitative risks
- supervised entities are able to undertake reliable risk-based capital allocation in relation to all material risks
- supervised entities combine the ICAAP with strategic planning and operational management
- an independent regular evaluation ordered by the management is undertaken of the ICAAP.
Supervised entities provide the FIN-FSA with information on the ICAAP and on the practical implementation and outcome of the process. There is no one single correct model for this mapping but the material to be filed with the FIN-FSA should provide a good picture of how for instance the quantity and quality of the capital held is sufficient to cover the material risks faced by the supervised entity, how internal capital targets are set and what kind of proactive capital planning the supervised entity engages in. Attention is also given to the connection of the ICAAP to business planning and other internal governance and control by management as well as on-going quality control and regular independent evaluation of the ICAAP.
Links to additional information:
4 Capital adequacy and risk management
- Standard 4.2 Internal Capital Adequacy Assessment Process
- Standard 4.1 Establishment and maintenance of internal control and risk management
- Standard 4.4a Management of credit risk
- Standard 4.4b Management of operational risk
Available only in Finnish:
- Standard 4.3c Capital requirement for credit risk under the standardised approach
- Standard 4.3d Capital requirement for credit risk under the Internal Ratings Based Approach Standard 4.3e Credit risk mitigation techniques under the standardised approach to credit risk Standard 4.3f Credit risk mitigation techniques under the Internal Ratings Based Approach Standard 4.3g Capital requirement for market risk
- Standard 4.3h Capital requirement for securitisation
- Standard 4.3i Capital requirement for operational risk
- Standard 4.3j Conditions for recognition of credit assessments by external credit assessment institutions (ECAIs) in the calculation of capital requirements
- Standard 4.3k Capital requirement for counterparty risk
- Standard 4.5 Supervisory Disclosure of capital adequacy information
20 May 2009