As a key determinant of bank solvency and therefore a critical component of financial system stability, a banking applicant’s capital assessments receive significant scrutiny from regulators as part of the application process.

Alongside the Regulatory Business Plan (RBP), The Internal Capital Adequacy Assessment Process (ICAAP) is therefore one of the most important pieces of work you will need to perform in the run up to receiving your authorisation, and thereafter on an on-going basis.

What is the ICAAP and why is it so important to our application for a banking licence?

The ICAAP is an internal, risk-based assessment of capital requirements and resources for the proposed business, and is expected to evidence that the applicant has:

A review of the ICAAP is a cornerstone of the Supervisory Review and Evaluation Process (SREP) undertaken by PRA/FCA.

What is the typical ICAAP development process?

The following graphic outlines our understanding of the ICAAP development process for applicants:

What should you watch out for in developing your ICAAP?

From our experience of ICAAPs across bank business models, the following key messages stand out:

  • Ensure that the ICAAP details how risks have been identified and assessed, including articulation of the risk taxonomy and prioritisation of individual risks given the business model;
  • Ensure the ICAAP demonstrates appropriate quality and quantity of available capital through the mobilisation period to cover the minimum requirements and buffers, ongoing costs and staffing costs until additional funds have been raised;
  • Forecast Pillar 1, 2A and 2B over a period of 5 years;
  • Differentiate Pillar 2A and Pillar 2B over a 5 years forecast period;

Here are a few questions we think the Regulators are interested in getting appropriate responses to:

While it is understandable that financial projections and underlying assumptions may be subject to significant uncertainty at the application stage, there is an expectation to get the controls and risk assessment tools right from the get go.

So, what is the most important message for you?

Applicants must note that only when the regulators are sufficiently comfortable with the quality of the RBP, ICAAP and ILAAP, do they consider firms mature enough to formally apply for the banking licence.

To make sure you do it right, think scalability, think transition and think risk management for a high growth business!

For more details reach out to the authors of this blog.