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The internal capital adequacy assessment process (ICAAP) has been and remains one of ECB Banking Supervision’s top supervisory priorities1 since they were first published in 2016. In this context, and to clarify our expectations of the significant institutions (SIs) with regard to the ICAAP, the ECB published in November 2018 the ECB Guide to the internal capital adequacy assessment process (ICAAP Guide)2.
Following the publication of these ICAAP expectations, ECB Banking Supervision’s horizontal function conducted a structured analysis of ICAAP practices based on the ICAAP packages which a representative sample of SIs submitted in 2019. This report summarises the results of this analysis, describing the range of ICAAP practices observed in a sample of 37 banks. Furthermore, the analysis underlines areas where banks’ practices appear to be further developed, as well as those where the ECB is of the opinion that additional work is warranted across banks.
The ECB undoubtedly acknowledges that many banks have made a considerable effort towards improving their ICAAPs over recent years and also that they have made clear progress. This is reflected in the report by providing examples of good ICAAP practices observed in banks included in the analysis sample. A further observation of the positive developments seen in banks was that there are some ICAAP areas which are broadly established across banks. For instance, all banks in the sample have risk identification processes, produce capital adequacy statements and conduct stress-testing and capital planning including adverse scenarios.
As mentioned, the analysis also revealed several ICAAP areas that are less developed, all of which meriting attention as weak practices in those areas could undermine the overall effectiveness of the ICAAPs. The ECB would like to draw particular attention to the importance of a more general feature of the ICAAP, namely that of the underlying concept of continuity. A good ICAAP fosters a bank’s ability to sustainably pursue its business model by allowing it to effectively prepare for, quickly respond to and successfully manage through potential crisis situations, stay economically healthy and take appropriate management decisions based on a strong set of reliable information.
The conclusions presented here were drawn before the outbreak of COVID-19. However, the current crisis situation emphasises the crucial importance of three particular areas of the ICAAP for the continuity of banks, as described below. The ECB is convinced that better ICAAP practices strengthen banks’ ability to successfully navigate through stressful times such as the current extraordinary situation and that, in broader terms, good ICAAPs are key success factors for effective risk management, sustainable financial soundness and long-term economic.