What is the primary purpose of the ICAAP under Basel?
A core Risk & Compliance interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The Internal Capital Adequacy Assessment Process (ICAAP) is a bank's own assessment of its capital adequacy relative to its risk profile and business strategy. It goes beyond Pillar 1 minimum capital requirements by considering all material risks (e.g., credit, market, operational, concentration, interest rate in the banking book) and evaluating whether the bank holds sufficient capital to cover them under normal and stressed conditions. Regulators review this via SREP.
WHAT INTERVIEWERS LISTEN FOR
- ✓Bank's self-assessment of capital adequacy.
- ✓Covers all material risks, not just Pillar 1.
- ✓Includes stress testing.
COMMON MISTAKES
- ✗Confusing ICAAP with Pillar 1 only.
- ✗Saying it is just a regulatory submission.
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