ICAAP IN RISK MANAGEMENT
This article covers the topic of Internal Capital Adequacy Assessment Process along with CAIIB November 2022 Exam. Afterwards towards the end of the article you can find CAIIB Risk Management 2022 Video Classes.
One of the premium flagship courses under IIBF is CAIIB. This year one exam will be held in November 2022. You cannot write a CAIIB if you are a banker who has not cleared his or her JAIIB or converted DBF, as well as who is in arrears with the institute. The major goal of the CAIIB exam is to give members of IIBF additional knowledge in areas such as risk management, Treasury management, credit management, international banking, balance sheet management, economic analysis, etc. that is important for improved decision-making.
ICAAP (Internal Capital Adequacy Assessment Process)
The Internal Capital Adequacy Assessment Process (ICAAP) informs the Board of how the bank now perceives its risks, how it intends to mitigate those risks, and how much capital is required in the present and the future. It does so after taking into account all other mitigating circumstances.
Processes for evaluating internal capital sufficiency are at the core of capital management for banks. The ICAAP is essential to the management of SSM banks. It contributes to the yearly Supervisory Review and Evaluation Process’s assessment of capital risks (SREP).
The ECB receives an annual comprehensive ICAAP package from Significant Institutions (SIs), which includes a wide range of quantitative and qualitative data. Supervisors can evaluate banks’ capacity to identify, evaluate, mitigate, and report risks through ongoing examination of the ICAAP.
For the majority of the SSM’s existence, member state approaches to ICAAP have continued to differ greatly, partially as a result of various national supervisors’ previous methodologies. The ECB has been eager to harmonise and standardise ICAAPs. But their efforts have only been successful over the past three years.
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GENERAL ICAAP RULES
Institutions must create an ICAAP that is
- Formally acknowledged and documented.
- Clearly stating the amount of capital that is required now and, in the future, to support all significant risks to which the institution is exposed over a forecasted period of three to five years.
- Subject to internal evaluation and board and management approval.
- Complete in its risk coverage. The institution’s business risks should be accurately identified and measured in the ICAAP, as well as the amount of capital required to support these risks.
- Showing how different dangers interact both under normal circumstances and under stress. The legislative, economic, and corporate environments may contain external risk elements that institutions should identify.
- Correlates risks, strategic focus, and business plan with the institution’s capital adequacy goals.
- Consists of a process that ensures the integrity of the overall management process, internal measures, impartial evaluations, and audits
THE PROPORTIONALITY PRINCIPLE
However, the size, scope, and complexity of an institution’s commercial activities should be reflected in the ICAAP documents. The proportionality principle shall
pertain to the ICAAP’s following aspects:
- The methods used to measure/assess risks and to calculate the associated internal resources.
- The kind and scope of the stress tests that were used.
- The handling of risk correlation and the calculation of internal capital in total.
- The risk control systems’ organisational structure
ELEMENTS OF CAIIB RISK MANAGEMENT’S ICAAP
These three elements should be included in an efficient ICAAP
- Oversight by the board and top management. The institution’s board and top management should:
- Check to see if the bank has enough capital to cover its risks. The minimal amount of capital needed should allow the bank to continue as a going concern and be enough to support future growth.
- Review the ICAAP policies, including any amendments approved by the Board, at least once a year or as needed in response to particular occurrences. Additionally, the policies must always be in accordance with any applicable regulatory and supervisory requirements.
- Effective Capital Planning. The following requirements should be met by a sound capital planning process:
- The approved ICAAP document should include the capital plan outlining capital targets and the deadlines for completing them. The document should also offer general information about the process of capital planning and the obligations that go along with it. Institutions should offer a declaration of intent to abide with regulatory capital requirements and a broad strategy for handling differences and unforeseen situations.
- The capital held should take into account not only the measured level of risks, but a further sum to take into consideration probable risks as noted in the ICAAP.
- The institution’s capital adequacy objectives should be stated in relation to risks, taking into account its strategic emphasis and business plan.
- Comprehensive Risk Identification and Assessment
- Comprehensive policies and processes that are regularly monitored and reviewed should be in place to identify, measure, control, and report risks that are present in an institution’s operations.
- The nature and scope of the risks that the institutions are exposed to should be accurately captured by the risk measurement systems, which should also distinguish risk exposures consistently across risk categories and levels of riskiness.
- To prove that the risk measurement procedures being employed are accurate or suitable, thorough assessments should be carried out.
- It is important to recognise and comprehend the limitations of risk quantification and measurement approaches using the proper procedures.
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