Definition
The ICAAP (internal capital adequacy assessment process) is the framework through which an institution identifies its risks, quantifies them and checks that its capital covers them today and over its planning horizon. It is the capital counterpart of the ILAAP for liquidity.
Method
The ICAAP combines two perspectives:
- the normative perspective, projecting regulatory capital ratios (CET1, Tier 1, total capital, leverage) over at least three years under a baseline and adverse scenarios;
- the economic perspective, comparing available internal capital with all material risks, including Pillar 2 risks such as IRRBB and CSRBB.
The framework includes stress tests and reverse stress tests, a risk appetite framework, a capital plan and documentation of assumptions and methods.
Regulatory requirement
The ICAAP is required by Article 73 of the CRD. The supervisor assesses it in the SREP, in particular to set the Pillar 2 requirement. The revised EBA SREP guidelines (EBA/GL/2026/06), applicable from 1 January 2027, specify how the reliability of internal assessments is reviewed; that reliability remains a matter for the supervisor's judgement.
Practical challenges
- Consistency between the ICAAP, financial planning and stress testing, often produced by different teams and tools.
- Projecting ratios under several scenarios, with assumptions traceable down to the calculation.
- Explaining every figure to the supervisor: where it comes from, which assumptions it carries, how it reacts to a shock.
In RIALTO
This concept is covered by the Solvency Insight Core module. The use case 'Stress simulation' shows it in practice.