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

Models and Stress Testing Assessments of risks may be made both by using very sophisticated methods, models and also using perhaps simpler measures, and methods. What is appropriate and relevant is determined by the banks operations in question. In case of a large bank, it might be natural to use extensive stress tests which provide quantitative measurements of the impact due to a specified disruption. Generally, larger banks have external analyses with respect to economic and business cycles and financial market trends, including the use of economic capital models and measurements. This type of approach can constitute an important element of the internal capital adequacy assessment process. However, it is limited by the fact that generally it only deals with risks that are quantifiable. It follows, therefore, it is not necessary for a bank with less complex operations to employ complicated model involving advanced analysis leading to economic capital requirements. However, for a small bank, the most important issue is to assess the effect of, for example, loosing its three largest customers, or an economic sector where the bank has considerable exposure having major problems, as well as consequence of the closure of a large customer. Should a Bank utilize models relevant and appropriate disclosure of the model such as its generic name, application or use within the risk management process, validation results, internal logic, should be provided.