SAMA'S Guideline Document on the Internal Capital Adequacy Assessment Plan (ICAAP)

Bank's Role and Responsibility for the ICAAP Banks have to convince SAMA that their ICAAP process is comprehensive, rigorous and includes capital commensurate with their risk profile as well as strategic and operational planning. The banks must compose and assemble the specific ICAAP process and methodology based on the objective and requirements imposed by SAMA and on the specific strategic and operational plans set by their Board of Directors. Consequently, banks must have a clear understanding on SAMA's expectations in terms of the definitions, concepts and benchmarks in order for an effective assessment and follow-up by it. An important and obvious example is the manner in which both the risks and the capital are defined. 3.2 SAMA's Role and Responsibility in the ICAAP Process SAMA is responsible for establishing the frequency and nature of the review, while the Banks are to establish their actual implementation processes and methodology as per SAMA's guidelines. Thus, while the two processes involved are closely integrated through the Supervisory Review Process, at the same time there is an express division of responsibilities. SAMA's role has the final word in this process as it makes its risk assessment of the banks and, where reason exists, imposes additional requirements on the banks or requires enhanced risk management systems, additional stress testing, etc. One of the alternative courses of action available to SAMA is to establish a higher capital requirement than that calculated by the bank itself. The level of capital needed is based on the calculation of the capital requirement with respect to credit, market and operational risks based on the explicitly established calculation rules which are laid down within the scope of Pillar 1. However, a supplement could be required as additional capital which, in light of other types of risks (Pillar 2), which may arise within the scope of the internal capital adequacy assessment process. Consequently, this is not the only tool (to set a higher capital requirement) and it will not necessarily be the first choice, in that capital should not be a substitute for adequate risk management. On the other hand, a demand for more capital may be justified even for those banks with high, but well-managed risk exposures.