Internal Capital Adequacy Assessment
An Internal Capital Adequacy Assessment is a bank’s internal process for evaluating whether its capital is sufficient to cover its risks.
Meaning in Practice
Banks conduct this assessment to align capital levels with their specific risk profile. It includes forward-looking projections, stress testing, and governance review. Supervisors evaluate the process as part of ongoing oversight.
Why It Matters
The assessment ensures that capital buffers reflect real economic risks rather than minimum regulatory thresholds alone. It strengthens solvency and resilience under stress conditions.
Market Impact
If internal assessments reveal capital gaps, banks may reduce dividends or raise equity. Strong capital planning supports stable valuations and lower perceived risk.
Example
A bank projects potential loan losses under a severe recession scenario and determines it must increase capital reserves to remain compliant.