What is it?
The rationale of the ICAAP is to:
- inform the board of the ongoing assessment of the firm’s risks;
- detail how the firm intends to mitigate those risks;
- identify how much current and future capital is necessary;
- demonstrate the firm’s internal capital adequacy assessment
- process to the FSA;
- show all relevant information necessary for the firm’s senior management, and the FSA, to make an informed decision on the appropriate capital level and risk management approach.
Who it applies to:
In the UK, all firms categorised as BIPRU investment firms (thus excluding MiFID-exempt or CAD-exempt firms) are required to complete and regularly update an Internal Capital Adequacy Assessment Process (ICAAP).
The key points
- identify the major sources of risk posed to the firm and establish their impact and probability;
- detail how the firm intends to mitigate those risks;
- assess what amounts, types and distribution of financial resources are required;
- conduct stress tests to identify capital and liquidity requirements in different scenarios;
- inform the Board of the outcome of risk assessment, stress tests and risk mitigation;
- provide information for the relevant financial return (FSA019) to be submitted to the FSA.