MORNBFI Vol. 1 - Planters Development Bank

APP. Q-5209.12.31GUIDELINES ON BANKS’ INTERNAL CAPITALADEQUACY ASSESSMENT PROCESS(Appendix to Sec. 4119Q)A. Introduction1. This document sets out the broadguidelines that UBs and KBs (hereinafterreferred to as ‘banks’) should follow inthe design and use of their Internal CapitalAdequacy Assessment Process (ICAAP).A bank’s ICAAP supplements the BSP’sRisk-Based Capital Adequacy Framework(the Framework) as contained in existingregulations and, thus, must be appliedon a group-wide basis, i.e., it shouldcover all of a bank’s subsidiaries andaffiliates.2. Although the Framework prescribesthe guidelines for determining banks’minimum regulatory capital requirementsin relation to their exposure to credit risk,market risk and operational risk, a bank’sBoard of Directors and senior managementare still ultimately responsible in ensuringthat the bank maintains an appropriate leveland quality of capital commensurate not justwith the risks covered by the Framework,but also with all other material risks towhich it is exposed. Hence, a bank musthave in place an ICAAP that takes intoaccount all of these risks.B. Guiding principles1. Banks must have a process forassessing their capital adequacy relative totheir risk profile (an ICAAP).2. The ICAAP is the responsibility ofbanks. Banks are responsible for settinginternal capital targets that are consistentwith their risk profile, operatingenvironment, and strategic/business plans.The ICAAP should be tailored to a bank’scircumstances and needs, and it should usethe inputs and definitions that a banknormally uses for internal purposes.3. Banks’ ICAAP (i.e., the methodologies,assumptions and procedures) and otherpolicies supporting it (e.g., capital policy,risk management policy, etc.) should beformally documented, and they should bereviewed and approved by the board. Theresults of the ICAAP should also be regularlyreported to the board.In addition, the board and seniormanagement are responsible for integratingcapital planning and capital managementinto banks’ overall management culture andapproach. They should ensure that formalcapital planning and management policiesand procedures are communicated andimplemented group-wide and supported bysufficient authority and resources.Banks’ ICAAP document should besubmitted to the appropriate Central Pointof Contact Department (CPCD) of the BSPevery 31 January of each year. A suggestedformat of the ICAAP submission to the BSPis provided in Annex A of Appendix Q-52.4. The ICAAP should form an integralpart of banks’ risk management processesso as to enable the board and seniormanagement to assess, on an on-going basis,the risks that are inherent in their activitiesand material to their bank. This could rangefrom using the ICAAP in more generalbusiness decisions (e.g. expansion plans) andbudgets, to the more specific decisions suchas allocating capital to business units, or tohaving it play a role in the individual creditdecision process.5. The ICAAP should be reviewed bythe board and senior management at leastannually, or as often as is deemed necessaryManual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-52 - Page 1