ICAAP – Internal Capital Adequacy Assessment Process

A question from our client (a large banking group in Central Europe):

We would reduce capital requirements to reflect the lower risk profile of our bank. Can ITCB (Bankárképző) help us do this in a prudent and considered way?

Our team's solution process:


Consultation (governance, reporting)


Developing new ICAAP models


Result: lower capital requirements, 1.1%-point better capital adequacy ratio

What you need to know about ICAAP?

The legal background and the additional processes of economic capital accounting are regulated by the Hpt. and the CRR (Capital Requirements Regulation). In addition to the definition of regulatory capital, each Bank defines economic capital and accordingly determines the required level of capital. 

The MNB provides detailed information on the requirements for the determination of economic capital and the related procedures in the form of ICAAP/ILAAP guidelines.

The capital calculation should identify all the risks relevant to the bank (plus, for example, book interest rate risk, liquidity risk, country risk and other types of risk). It is not possible to rely only on the quantification of the high priority risks under the second pillar, but it is possible to define capital from the perspective of the institution - with due caution, of course. Under the second pillar, the MNB also sets out a number of other requirements related to the economic capital calculation: a risk strategy should be established, the results of the economic capital calculation should be used in capital planning, economic capital should be stress tested, economic capital can and should be allocated along the main dimensions, and internal governance requirements should be met.

During the ICAAP methodological review, all ICAAP-relevant elements will be assessed and improved by ITCB (Bankárképző). During the development of the sub-methodologies and local internal policy implementation, we will keep in mind the critical points for the domestic regulator. The areas most frequently addressed by our clients are:

  • developing a risk strategy/supplementing the current risk strategy
  • developing the methodological background for the capital plan
  • risk mapping, risk assessment methodology (relevance assessment)
  • a methodology for calculating capital requirements covering all risks in an integrated way (e.g. advanced credit risk, operational risk, liquidity risk, etc.)
  • development of related risk limit systems
  • development of a methodology for the management and measurement of risks not or not fully addressed by legislation or by the central parent bank methodology
  • developing stress tests for second pillar risks appropriate to the domestic economic environment
  • development of a capital allocation methodology
  • regular identification and management of risky portfolios identified by the MNB
  • ICAAP "use test": proposal for the use of ICAAP results and the scope of related reporting
  • Demonstration of differences with Pillar 1 through analysis

ITCB (Bankárképző) will manage the implementation of the established methodologies, processes and procedures into internal policies, in line with the Bank's regulatory regime.

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If you are interested in a particular area, contact the head of our consulting business!

Béla Öcsi
Béla ÖcsiCEObocsi@itcb.hu

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For over 35 years, our company has been a top provider of training and consulting services in the domestic banking sector.