Managing Capital Adequacy with the Internal Capital Adequacy Assessment Process (ICAAP) - Challenges and Best Practices

In addition to providing guidelines for calculation of minimum capital requirement and defining market disclosure requirements, one of the major objectives of the Basel II Accord is to improve risk management within the banks. As a result of Basel II, banks are faced with the task of developing internal procedures and systems in order to ensure that they possess adequate capital resources in the long term taking in to consideration all material risks. These procedures and systems are collectively known as ICAAP (Internal Capital Adequacy Assessment Process). ICAAP is applicable to all banks irrespective of their size and complexity and its implementation is one of the major challenges being faced by banks.