Internal Capital Adequacy Assessment Process
ICAAP Reporting Template
Banking Surveillance Department
State Bank of Pakistan
ICAAP Reporting Template – State Bank of Pakistan
The Team
Name Designation Contact
Executive Director
Muhammad Ashraf Khan Ashraf.khan@sbp.org.pk
Banking Policy and Regulation Group
Director Lubna.farooq@sbp.org.pk
Lubna Farooq Malik
Banking Surveillance Department
Senior Joint Director Syed.jahangir@sbp.org.pk
Syed Jahangir Shah
Banking Surveillance Department Ph: 92-21-3245-3524
Deputy Director Tahir.Naeem@sbp.org.pk
Tahir Naeem
Banking Surveillance Department Ph: 92-21-3245-3596
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ICAAP Reporting Template – State Bank of Pakistan
Contents
Purpose and Overview 04
ICAAP Reporting Template:
Section 1: Executive Summary 06
Section 2: Structure and Operations 06
Section 3: Governance Structure 06
Section 4: Risk Assessment and Capital Adequacy 07
Section 5: Stress Testing 08
Section 6: Capital Planning 08
Section 7: Design, Approval, Review, and Use of ICAAP 09
Section 8: Challenges and Further Steps 09
Appendices:
Appendix 1: Summary of Internal Capital Adequacy Assessment Process 11
Appendix 2: Risk Appetite Statement 12
Appendix 3: Use of Internal Models for Capital Assessment 13
Appendix 4: Review of ICAAP 14
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ICAAP Reporting Template – State Bank of Pakistan
Purpose and Overview
State Bank of Pakistan (SBP) has already issued broad guidelines on ICAAP through BSD
Circular No. 17 of 2008. The SBP required the banks and DFIs (hereinafter referred to as banks)
to have effective and sound processes for assessing their overall capital adequacy. However, the
first ICAAP documents submitted by the banks had varied length and format which
necessitated the development of a standardized ICAAP reporting template.
Fundamentally, Pillar 2 should foster a more meaningful interaction and dialogue between SBP
and banks for prompt remedial measures to reduce risk and restore capitalization whenever
some weaknesses/ deficiencies are identified in the internal assessment processes of the banks.
The use of standardized ICAAP reporting template would not only make the Supervisory
Review and Evaluation Process (SREP) more efficient for both the bank and SBP, it would also
enhance the comparability of respective ICAAPs across different banks having similar business
and risk profiles.
The ICAAP reporting template has various sections supplemented by appendices. The
information acquired through this template essentially covers the key elements of an effective
ICAAP; however banks can further strengthen their ICAAP document with added relevant
information. SBP requires banks to review their respective ICAAPs annually, or more
frequently in the event of a material change in the banks’ risk profile. However, in case of no
material change in the banks’ risk-profile, banks’ ICAAP documents would reflect an update of
the previous year’s financial results and changes to budgets.
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ICAAP Reporting Template – State Bank of Pakistan
ICAAP Reporting Template
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ICAAP Reporting Template – State Bank of Pakistan
1- Executive Summary
This section should present a summary of the subsequent sections covered in the reporting
template and should include:
1.1 Purpose of ICAAP report and entities covered therein.
1.2 Summary of current financial position of the bank, its business strategy, balance sheet
structure, and projected profitability.
1.3 Assessment of the adequacy of bank’s risk management processes.
1.4 Commentary on the material risks, risk materiality level, their assessment, and actions
planned for their mitigation.
1.5 Composition and amount of capital required in addition to Pillar 1 requirements based on
ICAAP exercise and the final results be reflected in Appendix 1.
1.6 Summary of bank’s capital planning, dividend policy, adequacy of capital resources over its
planning horizon including periods of economic downturn.
1.7 Impact of stress scenarios on the Capital Adequacy Ratio (CAR) of the bank.
1.8 Comments on the adequacy of ICAAP exercise and its key findings, ICAAP implementation
within the bank, review and approval process of ICAAP.
2- Structure and Operations
This section should provide information about the bank’s structure and its operations and
should include:
2.1 Bank’s structure (including group entities, if any).
2.2 Capital, its composition and ownership structure.
2.3 Primary customer focus (corporate/ retail, etc.) and summary of the products offered by the
bank.
2.4 Current financial results indicating contribution of each business line as per Basel Capital
Accord (if not available, then bank’s own categorization).
2.5 Financial data for the last five years, e.g., operating profit, profit after tax, shareholder’s
funds, total assets, loans, investments, deposits and regulatory capital, etc. Also provide the
conclusions that may be drawn from the analysis of the historical data which have
implications for the bank’s future and commentary on the significant changes in the bank’s
financial condition during these years.
2.6 Significant developments during the past five years, e.g., acquisitions, mergers, changes in
the share capital and regulatory/ accounting changes and its impact etc.
3- Governance Structure
This section should include an overview of the Board and senior management structure
identifying key individuals and committees and their contribution in improving the overall
control environment and should include:
3.1 Composition of the Board including brief on the relevant banking experience of its members
and number of independent directors, etc.
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ICAAP Reporting Template – State Bank of Pakistan
3.2 Organizational structure and senior management team along with their portfolios.
3.3 List of Board’s sub-committees and management committees. Moreover, provide summary
of main areas covered and decision taken by the Board, Board's sub-committees and main
management committees.
3.4 List of policies in the key areas approved by the Board along with date(s) of initial approval
and subsequent updates/ review(s).
3.5 Risk management framework and its review by the Board and senior management.
3.6 Independent review of internal controls, its key findings and steps taken in the light of such
findings for improving the bank’s internal controls.
3.7 Key audit findings submitted to the Board/ Board's sub committees and actions taken there
against.
4- Risk Assessment and Capital Adequacy
This section should cover the identification, measurement/ quantification, control and
mitigation of all material risks faced and capital maintained there against by the bank so as to
reflect an overall risk position. In this regard, some of the key risks are mentioned in the
Appendix 11.
4.1 A high level overview of the institution’s risk appetite2 and frequency of the review of risk
tolerance by the Board and management.
4.2 Identify material risks and for each risk type specify:
4.2.1 Definition and identification procedure of material risks.
4.2.2 Detail of risk assessment and quantification methodology for each risk type3.
4.2.3 For each risk type, specify the risk controls / limits, number of times when these
limits have been breached, remedial actions taken there against and changes in
such limits (if any) along with reasons.
4.2.4 Composition and amount of capital (under normal as well as stressed
circumstances4) allocated for each material risk identified during the ICAAP
exercise.
4.3 State the periodicity for reporting of material risks to the Board and senior management.
4.4 Provide the details of internal and external (if any) review of bank’s risk management
system to verify its relevance with the business activities.
4.5 Bank should determine an overall risk position by aggregating the material risks and capital
allocation there against. While aggregating the risk position, bank should preferably take
into account the interdependencies or correlations among various risk types.
4.6 Where relevant, provide an explanation of any other method apart from capital used to
mitigate the risks.
1
Please note that completion of Appendix 1 of this template is mandatory for reporting purposes.
2
Please see appendix 2 for components of Risk Appetite Statement.
3
If bank uses internal models for the measurement of material risks, provide additional details required under
appendix 3.
4
Take input from section 5 on stress testing to determine the amount of capital under stressed scenarios.
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ICAAP Reporting Template – State Bank of Pakistan
5- Stress Testing
This section should cover the details vis-à-vis development of an appropriate and rigorous
stress testing framework within the bank while taking into account the impact of economic
cycles and sensitivity to other external risks and should include:
5.1 General stress testing framework within the bank and its key features.
5.2 Role of the Board in the approval and review of bank’s stress testing framework including
the periodicity of any such review.
5.3 Provide a list of material risks covered under stress testing program along with reasons for
their inclusion. Also state the reasons for non-inclusion of material risks (if any) in the stress
testing program.
5.4 Provide details of scenarios, methodologies, assumptions, controls/ mitigating actions
applied results and amount of capital required for all the stress tests (both in-house as well
as regulatory stress tests). In case of similar/ overlapping internal and supervisory shocks,
ICAAP capital amount would be higher of the two.
5.5 Review of the stress test results by the Board and senior management and remedial actions
taken there-against.
6- Capital Planning
This section should outline the bank’s capital needs, anticipated capital expenditures, desirable
capital level and external capital sources and must be in line with the bank’s desired strategic
objectives. Capital Planning should also take into account dividend policy and planned growth
while determining the adequate capital level. This section should include:
6.1 Projected financial statements for the next three to five years based on the approved
business plan.
6.3 Future capital requirements based on approved business plan and projections, including
capital contingency plan highlighting the sources, quality and composition of capital and/
or alternative arrangements in case of sudden internal business shocks and/ or external
economic downturn, major investments, merger, acquisitions and sources to fund new
ventures, etc. It would also include capital needs for group entities, foreign branches and
subsidiaries.
6.4 Review of capital planning process by the Board and senior management to assess its
appropriateness in the light of any change in the bank’s risk profile and other relevant
factors.
6.5 Bank’s plan for meeting the expected regulatory requirements like MCR and those
envisaged in the Basel III capital accord.
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ICAAP Reporting Template – State Bank of Pakistan
7 - Design , Approval, Review and Use of ICAAP
This section should include the following:
7.1 Role of the Board in approving the conceptual design of ICAAP with reference to its scope,
methodologies and objectives.
7.2 Role of the senior management in the implementation of ICAAP.
7.3 In case the design of ICAAP (whole or parts thereof) has been outsourced, provide the
details of outsourcing entity and associated risks.
7.4 Review of ICAAP5 by the Board and senior management, external source (if any) and
internal audit. For each review, provide separately the periodicity, detailed findings of any
such review along with follow-up actions on such findings.
7.5 How ICAAP is embedded in the decision making process, business planning and risk
management processes substantiated with appropriate examples.
7.6 List of all the relevant documents and policies used in the preparation, review, approval and
implementation of ICAAP.
7.7 Highlight the significant changes made in the current ICAAP report in comparison with the
last exercise.
8 - Challenges and further Steps
This section should summarize the extent of challenges for bringing improvements in the
overall risk management framework, control processes and other relevant areas within the
bank. Bank may also discuss the details of any anticipated future refinements envisaged in the
internal assessment process in addition to the information already furnished by the bank.
5 Please see appendix 4 for further detail on the review of ICAAP.
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ICAAP Reporting Template – State Bank of Pakistan
Appendices
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ICAAP Reporting Template – State Bank of Pakistan
Appendix 1: Summary of Internal Capital Adequacy Assessment Process (ICAAP)
As of DD/MM/YYYY
Pillar 1 Minimum Capital under
Million (PKR) Amount Methodology
Regulatory Capital ICAAP
Regulatory capital
(i) Eligible Core capital (Tier 1)
(ii) Eligible Supplementary capital (Tier 2)
Risk covered under Pillar 1
Credit risk
(i) Standardized approach
(ii) Foundation IRB approach
(iii) Advanced IRB approach
Market risk
(i) Standardized approach
(ii) Internal Model approach
Operational risk
(i) Basic indicator approach
(ii) The standardized approach
(iii) Alternative standardized approach
Pillar 1 total capital requirement (a)
Risks not fully covered under Pillar 1
Residual risk
Securitization risk
Model risk
Risks covered under Pillar 2
Concentration risk
(i) Individual/ Group
(ii) Sectoral
(iii) Other
Interest rate risk in banking book
Liquidity risk
Country risk
Reputation risk
Strategic/ Business risk
Other material risks identified during ICAAP
ICAAP/ Pillar 2 capital (b)
Additional capital under stress test (c)
Risk diversification adjustment* (d)
Overall capital requirement (a) + (b) + (c) – (d)
Current Total Capital
Surplus/ deficit capital
* Please provide a brief explanation of the risks’ diversification adjustment. Also note that SBP will generally not take into account
any inter-risks diversification benefit unless it is quantified by a rigorous model with adequate support.
* *Minimum Regulatory Capital Requirement (MCR) under pillar 1 would serve as a floor to determine the bank’s capital level in
case if pillar 2 capital based on ICAAP exercise falls below the regulatory level.
*** Banks are encouraged to use/ develop their internal methodologies for the quantification of various risks under Pillar 2 and
capital allocation accordingly. However, as an interim arrangement, bank may allocate capital on judgmental basis to individual
risks till the development of appropriate methodologies for the quantification.
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ICAAP Reporting Template – State Bank of Pakistan
Appendix 2
Risk Appetite Statement
Risk appetite is defined as the total impact of risk; a bank is willing to accept in pursuit of its
strategic objectives. The definition of a suitable risk appetite is a basic operational pre-requisite
for a bank to set consistent risk limits. The amount of risk, a bank is willing to accept will vary
from one bank to another depending upon the circumstances unique to each one of them.
Factors such as the external environment, business, systems, people and policies will all
influence a bank’s risk appetite.
Apart from this, within the bank, risk appetite may also vary across different business units and
risk types. For example, a bank’s risk appetite for market risk may be quite different from that
of credit risk. Financial institutions use different ways to measure risk appetite, ranging from
simple qualitative measures to developing complex quantitative models. Nevertheless,
whichever approach is followed, risk appetite, if properly articulated, should provide a
cornerstone for the bank’s risk management framework.
To ensure effective monitoring and governance, the risk appetite statement will incorporate a
balanced mix of both quantitative and qualitative measure. However, a well defined risk
appetite statement, approved by the board, should have the following characteristics6.
o It should be reflective of strategy, including institutional objectives, business plans and
stakeholders’ behavior covering all key aspects of business.
o It should be reflective of acknowledgement of willingness and capacity to take on risks.
o It should consider the skills, resources and technology required to manage and monitor
risk exposure in the context of risk appetite.
o It should include tolerance for loss or negative events that can be reasonably quantified.
o It should be periodically reviewed and reconsidered with reference to evolving industry
and market conditions.
o It should quantify the desired level of risk the bank is willing to take typically expressed
as risk limits, however for ICAAP purposes, these risk limits should be quantified in
terms of capital (solvency perspective).
6
We expect that the level of sophistication will come over time, however; banks are encouraged to take into consideration the
aspects mentioned in this appendix for their Risk Appetite Statement.
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ICAAP Reporting Template – State Bank of Pakistan
Appendix 3
Use of Internal Models for Capital Assessment
Review of ICAAP
When the bank uses internal models for capital assessment, it should explain for each of those
models:
o A description of how assessments for each of the major risks have been approached as
well as the key assumptions and parameters within the capital modeling work and
background information on the derivation of any key assumptions.
o Criteria for selection of parameters including the historical period used and the
calibration process.
o Limitations of the model.
o Sensitivity of the model to changes in the key assumptions/ chosen parameters.
o Validation work undertaken to ensure the continuing adequacy of the model.
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ICAAP Reporting Template – State Bank of Pakistan
Appendix 4
Review of ICAAP
Review of ICAAP
Banks should institutionalize a robust system for the continuous monitoring and reporting of
risk exposures and assessment of change in capital needs due to any deviation from its risk
profile and business plans. Banks should conduct reviews of risk management and capital
management processes relating to ICAAP to ensure their integrity, objectivity and consistent
application. Though the principles governing ICAAP7 are not new to capital management but
the transparency and rigor expected out of this process is quite recent. Review of banks’ ICAAP
would include the following:
o Comprehensiveness and appropriateness of ICAAP in the context of bank’s operating
environment, nature of business and soundness of internal controls.
o Identification of all key and material risks.
o Appropriateness of measurement methodology employed to support ICAAP exercise
and accuracy and completeness of data input.
o Reasonableness of ICAAP input and assumptions used.
o Reasonableness and appropriateness of stress testing analysis and its assumptions.
o Integration of ICAAP results and risk management, e.g., limit setting and monitoring.
o Reasonableness of capital planning and capital targets.
o Adequacy of MIS, level of computerization and networking to support the
implementation of ICAAP. If not, what are the plans and targets/ deadlines set for
achieving it.
7
Refer to general principles for an effective ICAAP by Committee of European Banking Supervisors (CEBS)
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