ICAAP methodology study

  • 5 June 2019

In collaboration with 33 of our member banks, we've conducted an industry-wide study of operational risk component of ICAAP. We looked at common industry practices and jurisdictional differences in the methodologies used by firms to meet their ICAAP requirements.

Free summary report

We've written a short summary of the study which you can download for free. This summary report will help you understand how other financial institutions around the world manage their ICAAP submissions.

About the study

The study's main focus was the range of methodologies used for the operational risk component of the ICAAP.

As regulatory guidance often leaves room for interpretation, this project helped participants understand common practices in the industry, and jurisdictional differences. Thirty-three firms from around the world took part in this study, completing a survey on one of their ICAAPs, typically for the jurisdiction in which they are headquartered.

ICAAP methodology executive summary

Here are some of the key findings from the study. You can read more about the findings in the study summary.

Strong reliance on scenarios as Pillar II moves beyond regulatory compliance

Many banks are moving beyond seeing Pillar II as just an exercise for regulatory compliance. They are starting to use economic capital as a tool for improved risk management and as an internal metric that could replace regulatory capital for key decision-making when the SMA is implemented. As well as using loss distribution approaches and scenarios to quantify economic capital, study respondents used business, environment and internal control factors (BEICFs) to make internal risk assessments more forward-looking.

Scenario selection get senior management attention

The importance of ICAAP is reflected by the fact that both senior management and business functions are typically involved in the scenario selection process. More than 75 per cent of banks get senior management involved in this process, while two thirds of banks get both groups involved.

If you're looking for support with your scenario practice, why not take a look at ORX Scenarios? This service gives you access to an extensive scenario library, scenario practice benchmark studies and lets you become part of a global scenario practitioner network. Find out more about how you can benefit from ORX Scenarios.

Stress testing is a key element of ICAAP, but the approach depends on bank size

Most participants stress operational risk within ICAAP. The methods used appear to depend on bank size more than jurisdiction. Larger banks prefer stressed macroeconomic scenarios, localised idiosyncratic events, or a combination of the two. Medium-sized banks mostly use stressed macroeconomic scenarios, while smaller banks prefer localised idiosyncratic events, typically in combination with at least one of the other approaches.

ORX members find out more

One of the many benefits of ORX membership is free participation in all our research projects. ORX members who took part in the ICAAP study can access the full report on our members website. The full report provides further insight into stress testing and reverse stress testing approaches, governance and validation practices, the integration of results into business as usual activities, and key industry challenges. 

Download the summary report

Get your free copy of the ICAAP summary report to read more about the study.

Download the report