Driving Value through mastering Internal Capital Adequacy Assessment Process (ICAAP) post pandemic
COVID-19 pandemic represents the biggest test of the financial stability to the financial services sector. Pandemic constitutes unprecedented local as well as global macro- economic stress leading to slowed down economic conditions.
The depth and severity of financial shocks are often amplified by inadequate and low-quality capital in the financial services sector. On the other hand, many risks were not appropriately covered by a commensurate amount of capital, owing to weaknesses in banks’ risk identification and assessment. It is therefore of paramount importance to raise the resilience
of individual credit institutions in periods of stress by seeking improvements in their forward-looking internal capital adequacy assessment processes (ICAAPs), including comprehensive stress testing and capital planning.
To help banks to navigate these ambiguities, we have thoroughly analysed the ICAAP practices of the financial services sector in Sri Lanka combined with our own experience in ICAAP reviews and implementations.
Most banks can benefit substantially from greater connection between internal risk and capital models combined with a transparent management process. To enable this, banks could consider close involvement of leadership in formulation of the risk strategy, consider the use of dashboarding of critical metrics to enable the banks to translate risk appetite in to operational risk limits.