Banks’ Governance and Controls over Internal Capital Adequacy Processes

David Palmer and Paul Sternhagen

Among the integral elements of an institution’s internal process for assessing its capital adequacy, also known as the capital adequacy process (CAP), are the governance and controls over that process.¹¹The expectations articulated in this chapter relate to large banking organisations. For a more comprehensive discussion of US supervisory expectations and the range of practices for capital planning at large banking organisations, see “Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice, August 2013”, available at http://www.federalreserve.gov/bankinforeg/bcreg20130819a1.pdf. Comprehensive and sound governance and controls are vital to ensure that an institution’s CAP is functioning as it should, and that decisions regarding capital adequacy are made in a rigorous manner.²²It is important to note that the capital adequacy process described in this chapter is equivalent to an internal capital adequacy assessment process (ICAAP) under Pillar 2 of Basel II. Accordingly, the expectations articulated here relating to the CAP are essentially the same as for the ICAAP. This includes the ability of the CAP, at large US banking