ICAAP (Internal Capital Adequacy Assessment Process)

The purpose of the Internal Capital Adequacy Assessment Process (ICAAP) is an ongoing evaluation of the risks that a bank is taking or may take. Banks assess processes for mitigating these risks, the amount of current and future capital required to cover these risks and the system for capital maintenance and related control mechanisms.

ICAAP outputs are submitted to the Czech National Bank. The ongoing development of the ICAAP framework has gradually introduced a number of additional qualitative and quantitative regulatory requirements. The ICAAP process has also been complemented by the Internal Liquidity Adequacy Assessment Process (ILAAP).

Services provided by ARM in areas related to ICAAP:

• Risk Appetite (RA)
• ICAAP methodology
• Economic Capital
• Stress testing
• ICAAP reporting
• ILAAP (Internal Liquidity Adequecy Assesment Process

Risk Appetite (RA)

ARM provides advisory and support services particularly in the following activities closely related to risk appetite:

• risk identification (workshops, consultations, creation of templates for risk identification, creation of risk catalogue and setting of processes ensuring its regular update),
• data collection about risk events (setting rules),
• proposal of methodologies for risk measurement,
• proposal of scales for the assessment of risk severity,
• assessment of materiality and significance of risks,
• assessment of current methodologies for risk measurement,
• specification of the risk appetite, selection of suitable time horizon, creation of Risk Appetite Framework and Risk Appetite Statement,
• setting of quantitative limits for individual risks:
  • regulatory and internal capital adequacy for planned development;
  • regulatory and internal capital adequacy for stress scenarios;
  • additional internal limits;
• creation of Business Continuity Plan (BCM) for a predefined set of stress scenarios,
• assessment of the compliance of the risks which is the bank exposed to with risk appetite,
• verbal description of the assessment of the overall risk profile of the bank.

ICAAP methodology

ARM can help you with:

• design/assessment of the ICAAP methodology (with emphasis on: logical correctness, completeness, sufficient level of complexity, implementation of methodologies, suitability of the selected planning period)
• assessment of control mechanisms,
• assessment of compliance of ICAAP methodologies with relevant regulations, internal policies and methodologies,
• preparation of draft ICAAP development strategies,
• update process of ICAAP methodologies.

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Economic Capital

ARM can help you with:

• Preparation of economic capital model for credit risk:
  • model structure design,
  • models for PD, LGD, CCF,
  • behavioral models (e.g. models on pre-payments).
• Preparation of economic capital models for operational risk:
  • AMA-based models – Value at Risk and LDA (with/without Extreme Value Theory)
  • calculation of capital requirements using BIA, TSA:
    • identification of business lines and categorization of operational risk event types
    • transition to the revised standardized approach (required from 2023)
• Preparation of economic capital model for IRRBB, including back-testing and validation of behavioral models;
• Proposal of economic capital models for other risks,
• Proposal of rules for the aggregation of economic capital for individual risks,
• Validation of current models for economic capital – assessment of assumptions, logical accuracy of models and their compliance with methodologies; verification of the calculation accuracy, data quality check and assessment of model documentation.

Stress testing

ARM can help you with:

• creation of the stress testing frameworks,
• proposal of particular stress scenarios:
  • planned development,
  • stress scenarios,
  • liquidity shocks,
  • operational risk scenarios,
  • regulatory scenarios;
• analysis of stress scenarios impact on the value of economic and regulatory capital,
• revision of stress testing methodologies,
• assessment of compliance of stress testing methodologies with relevant regulations and internal policies,
• assessment of the necessity of strategic plan modifications based on stress testing results and proposal of possible actions.

ICAAP reporting

• Analysis of the reports produced within the reporting framework and assessment of how they are used in decision-making
• Automatization of reporting (e.g. development of VBA scripts generating relevant reports)
• Assessment of the content of reports prepared for purposes of internal and regulatory reporting

ILAAP (Internal Liquidity Adequecy Assesment Process)

• Analysis of the current state of liquidity management
• Design/assessment of methodologies for ILAAP
• LCR and NSFR calculations
• Determination of Liquidity Buffer
• Creation of contingency plans, or revision of related documentation