ICAAP stands for Internal Capital Adequacy Assessment Process. It is a set of activities and processes that regulated financial institutions must undertake to assess and maintain, on an ongoing basis, the amounts, types, and distribution of internal capital commensurate with their risk profiles, as well as robust governance and internal control arrangements. The ICAAP is a vital component of a strong risk management program and should produce a level of capital adequate to support the nature and level of an institutions risk.

The ICAAP is part of Pillar 2 within the Basel Framework, representing a financial institutions own assessment of the capital needed to run the business. It is an internal assessment that allocates capital to significant risk sources, stress tests results, and informs the Board of Directors of expected capital shortfall. The ICAAP should be written in a format that is easily understood at a high level and should contain all the relevant quantitative and qualitative information on risk assessment, capital planning, and risk management.

The ICAAP should be tailored to the unique needs of each institution and should reflect how the institution is managed and organized in practice. The extent of formalization and sophistication of ICAAPs will differ depending on the institutions complexity, range of business activities, risk profile, and operating environment. The ICAAP should include all material interest rate risk positions of the institution and consider all relevant repricing and maturity data.

In summary, ICAAP is an internal process that regulated financial institutions must undertake to assess and maintain the amounts, types, and distribution of internal capital commensurate with their risk profiles. It is a vital component of a strong risk management program and should be tailored to the unique needs of each institution.