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

Reasonable Results The ICAAP should produce a reasonable outcome vis-à-vis capital requirements. The process involves weighing together the importance of the risks which a bank encounters, the extent to which it exposes itself to these risks, and how it organizes itself and works in order to address them. This "bottom line" can crystallize into a minimum amount of capital after discussion with SAMA, as well as additional control systems necessary to cover the risks the bank is exposed to. While capital requirements constitute a minimum requirement, banks in their interest operate above this minimum level as a consequence of their strategic objectives. The reason for this includes higher rating and thereby lower funding costs. It also provides a freedom of action in connection with corporate acquisitions, as well as in the event of losses which may arise due to a rapid and serious downturn in the economy. Consequently, banks, as well as SAMA, expect that bank capital stays above the minimum level. Generally, if a bank's internal capital adequacy assessment process result in an assessed level of required capital which is the same, or below, the minimum as determined under the Pillar 1, this is an indication that the internal capital adequacy assessment process has not functioned in a satisfactory manner. II. Reporting Format and Contents 1. Overview of the Reporting Format and Contents The ultimate end product of the ICAAP process is the ICAAP document. This section on reporting format and contents is to provide guidance to banks to describe in a logical format the main assumptions and results of the ICAAP process. Consequently, the ICAAP document should bring into one place an assessment of the capital requirements in relation to a bank's risk profile, strategies, business plans, major risks, acquisitions, governance and internal risk management systems, etc. It also must establish the capital required for economic, regulatory and accounting purposes and help identify planned sources of capital to meet its objectives. Further, all relevant assessments and information should be covered and documented in the ICAAP. Specifically, the objectives of the ICAAP and the related entities of the bank that are included by it should be specified. The main results of the ICAAP effort may be presented in a tabular format indicating the major components of capital requirements, capital available, capital buffers and proposed funding plans. Furthermore, the adequacy of the governance and bank's internal control and risk management processes should be included. It is also important to document the strategic position of the bank, its balance sheet strength, planned growth in the major assets based on its Business plans for the next 12 to 18 months indicating the likely consumption in capital for this growth by major category. Further, the results of major stress tests on capital requirements and capital supply for additional risks deterioration in the economic environment, recessionary periods, or other economic/political downturns are important aspects to be covered. 2. Executive Summary The major purpose of the Executive Summary is to describe in a summary form the main results of the ICAAP effort which is to bring into one place objectives of the ICAAP, the assessment of the capital requirements for strategies, business plans, all risks, acquisitions, etc. Also presented and described should be the capital required for economic, regulatory and accounting purposes and identification of planned sources of capital to meet these objectives. The following information should be briefly described and where appropriate, relevant amounts are quantified and presented in a tabular format: A. 1. Capital Required ■ Pillar 1 Capital Requirements ■ Pillar 2 Capital Requirements ■ Business Plans (Summarized) ■ Growth Rate and amounts by business lines ■ Capital requirements by business lines ■ Strategic Initiatives ■ Capital Expenses ■ Stress testing ■ Other