What is Icaap risk?

Introduction. The purpose of the Internal Capital Adequacy Assessment Process (ICAAP) is to inform the Board of the ongoing assessment of the bank’s risks, how the bank intends to mitigate those risks and how much current and future capital is necessary having considered other mitigating factors.

What type of risk is concentration risk?

Concentration risk is a banking term describing the level of risk in a bank’s portfolio arising from concentration to a single counterparty, sector or country. The risk arises from the observation that more concentrated portfolios are less diverse and therefore the returns on the underlying assets are more correlated.

What is concentration risk in banking?

Concentration risk is the potential for a loss in value of an investment portfolio or a financial institution when an individual or group of exposures move together in an unfavorable direction. Concentration risk is usually calculated by comparing the liquidity of assets to their risk exposure.

What is loan concentration risk?

Loan concentration risk refers to the extra risk borne by having too many loans concentrated with one firm, industry, or economic sector. To the extent that a portfolio of loans represents loans made to a diverse cross section of the economy, concentration risk is minimized.

How does ICAAP capital adequacy assessment work?

The essence of our analysis is based on identifying primary drivers of capital requirements for a risk area and then estimating the amount of capital required over the next 12 – 36 months. A more detailed review follows. Our internal capital adequacy assessment for credit risk includes four primary pieces.

How is concentration risk considered in capital adequacy assessment?

With respect to capital, institutions should take concentration risk into account in their assessment of capital adequacy under ICAAP, and be prepared to demonstrate that its internal capital assessment is comprehensive and adequate to the nature of concentration risk.

What is value at risk ( VaR ) in ICAAP?

While Value at Risk (VaR) gives a probable threshold beyond which losses are less likely to occur, the fourth layers estimates the capital requirements if this threshold is breached. We call this critical condition capital.

Why is ICAAP important in a risk management program?

A thorough and comprehensive ICAAP is a vital component of a strong risk management program. The ICAAP should produce a level of capital adequate to support the nature and level of an institution’s risk.