ICAAP: enhanced supervisory assessment for stronger capital management in banks

14 May 2025

The ECB is committed to reducing unnecessary complexity while maintaining the resilience of European banks. Following an external review of supervisory processes in 2023, ECB Banking Supervision launched a number of projects to make supervision more efficient, effective and risk-based. The Supervision Newsletter is covering projects that will help to streamline supervision without compromising its quality – see below for one example. 

Authors: Marlon Maass and Laura Cassari

Banks need sufficient levels of capital to ensure the safety and soundness of their operations and of the financial system. The first line of defence in this regard is the internal capital adequacy assessment process (ICAAP). The ICAAP is a process established under the Capital Requirements Directive (CRD)^[1], which provides banks with the foundations to identify and manage their material risks and to ensure they have sufficient capital resources to cover these risks. Maintaining adequate levels of capital at all times is at the core of ensuring banks’ viability. Joint Supervisory Teams (JSTs) therefore thoroughly assess the soundness of ICAAPs as an important part of the annual Supervisory Review and Evaluation Process (SREP).

The European Central Bank (ECB) has taken significant steps towards enhancing its approach to assessing banks’ ICAAPs in 2025 and beyond, in full alignment with the overall objective of its ongoing SREP reform to make supervision more efficient and effective. The ICAAP assessment forms an integral part of the SREP assessment and is therefore even more effective in shaping supervisory judgement. For example, data quality assessed in the context of ICAAPs contributes to ground supervisory evaluations when conducting the SREP on banks’ internal governance and risk management. As banks use these data to make decisions on risk management or capital allocation, which is relevant across all risk categories, supervisors must gain an overall understanding of how banks set up, manage and control the quality of data.

The ICAAP assessment has also become appreciably more flexible. JSTs now employ a multi-year assessment strategy, which allows them to conduct an in-depth review of all relevant ICAAP areas over several years, in line with the ECB’s risk tolerance framework. However, an exception is made for capital plans. Baseline and adverse scenarios are assessed annually to reflect the crucial role capital planning plays in banks’ ability to navigate long-term economic developments and manage the multiple sources of future stress events, including geopolitical risks.

Another new element of the ICAAP assessment is that JSTs now receive updated or new internal ICAAP documentation throughout the year whenever it becomes applicable. Banks can thus focus their submission on updated ICAAP documents and avoid re-submitting comprehensive and sizeable packages of ICAAP documents every year. This allows JSTs to assess banks’ ICAAPs throughout the year and it supports them in identifying and addressing any issues early on.

With regard to content, the ICAAP assessment covers all the relevant aspects outlined in the ECB Guide to the internal capital adequacy assessment process (ICAAP) published in 2018.

The four ICAAP assessment modules comprise:

• ICAAP integration: ICAAP-related governance and controls, and their use in decision-making processes (e.g. defining strategies, making decisions on distributions)
• Capital management: capital planning, stress testing and management of capital adequacy from an economic perspective
• Risk controls: management and quantification of risks to capital
• Data quality and IT infrastructure

In essence, all these changes give JSTs greater flexibility for conducting their ICAAP assessments throughout the year. They allow them to focus on the areas that are most relevant for their banks and incorporate the ICAAP assessments fully into the SREP. Following the external review of supervisory processes in 2023, the ICAAP will no longer be used as a starting point for calibrating the Pillar 2 requirements on the basis of individual risks. However, the assessment of the ICAAP’s soundness can have a material impact on setting the level of capital requirements which are defined through the SREP. The ECB remains committed to its objective of strengthening its first line of defence for sound capital adequacy – strong ICAAPs in the banks it supervises.