ICAAP AND CAPITAL ADEQUACY REPORTING
The “Internal Capital Adequacy Assessment Process” (ICAAP) is an overall valuation of the risks a financial institution faces, how they intend to mitigate those risks and how much current and future capital is needed having considered other mitigating factors.
In Cyprus the ICAAP is a requirement of every CIF and is evaluated by CySEC using their Supervisory Review and Evaluation Process (SREP). The onus is therefore on the institution to demonstrate that its ICAAP is comprehensive and adequate to the nature of risks posed by the firm’s specific business activities and operating environment.
The implementation of an ICAAP is not rooted exclusively in supervisory considerations; rather it should be in the interest of all stakeholders to ensure a viable risk position with emphasis on the importance of capital management. In particular, it is important to detect developments which may endanger the financial institution as early as possible in order to enable suitable countermeasures, for larger or more complex institutions, this may mean developing an appropriately detailed and rigorous stress and scenario testing framework.
In addition to the ICAAP, the Capital Requirements Directive (CRD IV) brings in a new EU-wide supervisory framework for Common Reporting (CoRep). Financial Institutions are therefore subject to ongoing capital adequacy requirements, such as monitoring and assessing their capital adequacy on a continuing basis as well as preparing and submitting their Capital Adequacy Reports.
WHAT CAN FAI DO?
- Identify and assess all material risks of the firm, and implement controls to mitigate such risks
- Identify the amount and quality of internal capital in relation to risk profile, strategies and business plan, and create a proposal for capital allocation
- Preparation and design of ICAAP, including implementation and documentation, in line with nature, scale and complexity of the Firm’s activities
- ICAAP follow-up through Supervisory Review and Evaluation Process of CySEC
- Advise in relation to CRD IV
- Preparation of CRD IV CoRep Forms (i.e., Capital Adequacy Reports);
- Preparation of Pillar III Disclosures
- Provision of ICAAP, CRV IV and other regulatory requirements training to relevant employees and Senior Management