Internal Capital Adequacy Assessment Process (ICAAP) - Design, Implementation, and Steering

Through an extensive experience in SSM ECB SREP, Avantage Reply was engaged to lead and design the ICAAP framework and its key components. It was mandated to steer the overall process implementation and to provide SME support to build the key pieces of the framework.

The challenge

The client, the international corporate, investment, insurance and financial services arm of a French G-SIB, wanted to comply with the ECB’s requirement and submission process, but also to use the ICAAP as an internal strategic steering tool. Key challenges included the need for strong governance, efforts of communications with the Senior Management, and the transversal dimension of the ICAAP process, taking account of the wide range of topics and stakeholders.

Approach and solution

Our approach consisted of assessing the client’s current abilities to develop and implement an ICAAP framework. To do so, three steps were conducted, including a gap analysis on key identified blocks, a census of key findings and associated recommendations, and a multi-year roadmap. An action plan built around six key blocks to design of the ICAAP framework was validated. Finally, the implementation phase was launched, leading to dedicated work per key workstreams in a very ambitious timeline:

• Framing of a Business Model Analysis framework to link key institutions business lines to their profitability, solvency and risk profiles.
• Design and implementation of a strong ICAAP governance and control framework (comitology, roles and responsibilities, validation process…).
• Design and implementation of a risk identification and materiality assessment process (risk inventory, materiality definition and grid assessment, risk events evaluation, link to key processes).
• Subject matter support and design of risk quantification methodologies under the economic approach for Pillar 1 and Pillar 2 risks.
• Set-up of a capital management framework, comprising governance, assessment, adequacy, planning and allocation.
• Design of a linkage framework to describe and implement the key interactions between the ICAAP and other strategic processes.

Results and benefits

The ICAAP framework has been completed in due time to comply with ECB’s submission process and fully aligned to market best practices and the latest supervisory requirements. In the end, the project has been enlarged, and Avantage Reply has been solicited to pursue its work related to the improvement of institutions’ capital management policy and allocation.