THE INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS – ICAAP (regulation, assessment of risk profile and specific risk positions)

Abstract

The internal capital adequacy assessment process - ICAAP, describes whether the bank's risk profile and capital are consistent with the requirements of regulators and the bank internal estimates. ICAAP unifies business strategy and risk management strategy by ensuring that the bank can at any time identify inherent risks, while comparing them with the internally set limits and levels of capital for its coverage, all in order to maintain profitability and solvency of the bank. The role of supervisors in the ICAAP process is to evaluate the capital adequacy and the quality of the risk management in banks starting from the specific risk profile of the bank and the principle of proportionality and to draw conclusions about the adequacy of the bank’s capital after review of its business. Implementation and use of the ICAAP is a complex process and executive officers in banks, especially the top management, should be in charge of its implementation. ICAAP implementation in Bosnia and Herzegovina (BiH) will be based on standard models of Basel 2 and the basic models of estimates of capital needed to cover other risk areas, while the largest amounts of allocated capital will be related to coverage of the credit risk and the concentration risk.