ICAAP process (Internal Capital Adequacy Assessment Process) :
The objectives of Internal Capital Adequacy Assessment Process (ICAAP) process are as follows:
(i) Create a transparent and consensual general framework for assessment and for internal risk management of all material risks, thus, securing the organisation’s objective in the long run.
(ii) Enable bank to understand capital requirement under different scenarios.
(iii) Build and support linkage between risk and capital.
(iv) Strengthen bank’s position on capital management.
(v) Support the bank’s long-term goal to move away from regulatory capital model to a regime of internal models that addresses both regulatory and economic capital.
(vi) Move eventually to a system of ‘on-line’ calculation of Capital, both under Pillar 1 and Pillar 2.
The components of ICAAP process are appropriate identification and measurement of various risks, appropriate level of internal capital in relation to bank’s risk profile and enhanced level of Risk Management System. Further, capital adequacy under ICAAP needs to be seen from two angles – regulatory capital under Pillar 1, which explicitly covers minimum capital for Credit, Market and Operational Risk; and capital cushion to cover other risks dealt in Pillar 2.