The purpose of determining the risk-bearing capacity of the bank is to ensure it has sufficient economic capital to cover its risks. Economic capital is the amount of risk capital assigned to cover the impact of unexpected losses due to the risk-bearing activities of the bank. MEB employs a three-stage process to determine the Bank’s overall risk-bearing capacity:
- Calculation of the risk-bearing capacity potential;
- Planning allocation of capital in accordance with the capacity; and
- Monitoring of and reporting the bank’s adherence to the risk-bearing capacity.
The Bank is in the process of adopting and integrating the Internal Capital Adequacy Assessment Process (ICAAP) and Liquidity Adequacy Assessment Process (ILAAP) within the organization in a proportional manner.
Internal Capital Adequacy Assessment Process (ICAAP)
ICAAP is composed of internal processes to ensure that the Bank possesses adequate capital to cover all material risks. The process runs in parallel to the calculation of required regulatory capital and leads to the determination of required economic capital in accordance with the Bank’s risk bearing capacity. Economic capital is the capital required to cover all material risks estimated using the Bank’s internal risk models.
Liquidity Adequacy Assessment Process (ILAAP)
ILAAP is another important factor in the SREP framework and focuses on the assessment and management of liquidity risk and funding mismatch within the Bank. The ILAAP framework essentially brings various liquidity risk measures, including maturity and liquidity gaps, HQLA buffers, liquidity contingency funding plans, LCR and NSFR into a common liquidity-risk governance framework.