Capital Adequacy was the principal message of the Basel II framework. However, a static regulator driven capital adequacy measure was deemed insufficient to manage the risk profile and capital requirements of an active bank in today’s risk environment creating the need for an internal and invasive assessment of the capital profile of a bank. 

Ideally, such a measure would allocate and attribute risk capital to all significant sources of risk, stress tests the results and keep the board informed of any expected or projected capital shortfall. Under Pillar 2 of the Basel II Accord, Internal Capital Adequacy and Assessment Process (ICAAP for short) was introduced with exactly the same objectives.

Under ICAAP requirements a bank needs to have in place internal procedures and processes to ensure that it possesses adequate capital resources in the long term to cover all of its material risks. These processes and procedures together are known as the Internal Capital Adequacy and Assessment Process or ICAAP for short.

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