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Capital and liquidity adequacy · Reviewed 11 September 2026

Using ICAAP and ILAAP to manage a bank

The ICAAP assesses whether an institution has sufficient capital to cover its material risks. The ILAAP addresses adequate liquidity and sustainable funding. Supervisors assess both internal processes through the SREP. For management, their value lies in clear decisions about growth, limits, funding and actions when the institution comes under pressure.

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Which requirements apply to your institution?

For risk management, treasury, financial planning and management bodies of credit institutions in Germany.

For institutions under German national supervision, Section 25a KWG, the MaRisk and the joint BaFin/Bundesbank guidance establish the relevant framework. The national risk-bearing capacity guide of 24 May 2018 remains the main reference for the normative and economic perspectives. MaRisk BTR 3 is particularly relevant to liquidity risk. Application also depends on the legal entity and group perimeter.

Significant institutions under direct ECB supervision follow the relevant European requirements and ECB expectations. The ICAAP Guide was revised in July 2026; the ILAAP Guide remains the November 2018 version. Under AT 2.1 of the MaRisk published on 30 June 2026, significant institutions are outside that circular's scope. A national checklist therefore cannot be transferred unchanged to every bank in Europe.

Overview

How ICAAP and ILAAP differ

Capital and liquidity answer different questions. A bank can have sufficient own funds on its balance sheet yet be unable to meet a payment when it falls due. Conversely, immediately available cash cannot permanently remedy a capital shortfall. The two processes need consistent business assumptions while measuring their respective risks separately.

QuestionICAAPILAAP
Management objectiveLoss absorption and adequate capitalPayment capacity and sustainable funding
Internal assessmentAvailable internal capital, material risks and capital planningLiquidity buffers, cash flows and survival horizon
Regulatory connectionArticle 73 CRD; capital ratios and SREP requirementsArticle 86 CRD; including LCR and NSFR
Example of stressCredit defaults, valuation losses and lower earningsDeposit outflows, margin calls and funding disruption
Management responseLimits, capital measures and business planningFunding plan, mobilisation of collateral and contingency funding
Overview

Connecting the normative and economic perspectives

The normative perspective projects regulatory capital and the relevant requirements over the planning horizon. It connects the balance sheet, profit and loss account, own funds and risk-weighted exposures. Under the national guide, capital planning generally covers at least three years and is updated at least annually. Baseline and adverse scenarios should reveal when a requirement or internal management target becomes vulnerable.

The economic perspective examines the substance of the institution independently of when risks appear in its accounts. Economically measured risks are compared with internal capital calculated on a consistent basis. Valuation assumptions, risk horizons and aggregation methods need to work together. A loss already deducted from available capital must not be counted a second time without a clear methodological reason.

Reconciliation connects the two perspectives. An interest rate increase can immediately reduce a portfolio's economic value while its earnings effects unfold over several years. A useful bridge therefore identifies the part already reflected in capital, the future income affected and any additional risk measurement still needed. This makes differences understandable to the people approving business and risk decisions.

Overview

A simplified capital-planning example

A fictional institution starts with EUR 150 million of Common Equity Tier 1 capital and EUR 1,000 million of risk-weighted assets. Its CET1 ratio is 15%. In an adverse scenario, earnings losses reduce capital by EUR 20 million while RWA rise to EUR 1,100 million. With no other changes, CET1 falls to EUR 130 million and the ratio to 11.82%. An internal management target of 12% would be missed by approximately EUR 2 million.

The 12% target is an assumption in this example, not a universal supervisory requirement. The institution must separately record its actual minimum requirements, P2R, capital buffers and P2G. Under the economic perspective, the affected exposures would be assessed using the institution's relevant valuation and risk methods. The EUR 20 million accounting loss is not automatically the economic risk amount.

Original illustrative calculation; capital and RWA amounts in EUR million.
MeasureStarting positionAdverse scenario
CET1150130
RWA1,0001,100
CET1 ratio15.00%11.82%
Capital needed for internal 12% target120132
Distance to internal target30−2
Overview

What the ECB clarified in July 2026

The revised ICAAP Guide distinguishes a management buffer chosen internally from a supervisory requirement. Calibration is the institution's responsibility and may take account of investor expectations or uncertainty in projections. The management buffer is also distinct from the amount of capital currently available above minimum requirements.

The accompanying clarification does not impose a general requirement to rebuild every ICAAP and ILAAP document each year solely for submission to the ECB. Institutions need maintained internal documentation and the information requested for the relevant submission. P2G remains a separate supervisory expectation. Falling below it needs prompt attention and may require a revised capital plan.

Overview

Understanding the role of SREP and stress tests

The SREP examines the business model, governance, capital risks, and liquidity and funding risks. Supervisors use the ICAAP and ILAAP alongside other information. Their assessment can result in quantitative requirements and qualitative measures. An internal risk estimate therefore does not automatically become an identical supervisory capital add-on.

For directly supervised banks, the ECB uses a revised P2R methodology in the 2026 SREP cycle. Requirements determined under it take effect on 1 January 2027. It assigns add-ons to individual risk drivers and examines overlaps with Pillar 1. This should be distinguished from national procedures for less significant institutions. The individual supervisory decision determines the requirements that actually apply.

Overview

Building a process that supports decisions

A useful working set starts with an agreed risk inventory. It identifies the entities, data sources, methods, owners and reasons for materiality decisions. Capital planning and liquidity planning need the same approved business projections, even where their time intervals and stress assumptions differ.

Each material management action should have an activation trigger, decision authority, implementation lead time and expected effect. A planned portfolio sale needs realistic stressed prices and assumptions about potential buyers. A funding measure must not rely on the same limited collateral being used simultaneously by several entities. Version records and approvals make these dependencies reviewable.

T-NEX can help your institution structure the business processes, data reconciliations and recurring reports. Start with a concrete bottleneck, such as bringing approved planning versions together or following up management actions. The institution remains responsible for its risk methodologies and parameters. Agreed acceptance criteria should demonstrate that the resulting information is usable by the teams and committees making decisions.

FAQ

Frequently asked questions

Does an adequate CET1 ratio replace the ICAAP?

No. A ratio shows part of the position at a particular date. The ICAAP also addresses material risks, future developments, stress scenarios and the actions through which the institution manages its capital adequacy.

Do LCR and NSFR complete the ILAAP?

No. They are important regulatory reference points. The institution also needs to assess its own funding structure, concentrations, collateral and cash flows under stress.

Can a bank choose either the normative or the economic perspective?

The perspectives complement each other. A purely accounting-based projection may reveal economic risks too late, while a present-value assessment does not answer every question about future regulatory capital compliance.

Must every German bank directly apply the ECB ICAAP Guide?

The ECB Guide addresses significant institutions under direct supervision. German LSIs use the applicable national framework, particularly the joint BaFin/Bundesbank risk-bearing capacity guide and the MaRisk.

Sources & further reading

  1. Section 25a KWG: proper business organisationgesetze-im-internet.de
  2. BaFin/Bundesbank: national ICAAP guidancebundesbank.de
  3. ECB: ICAAP Guide, July 2026bankingsupervision.europa.eu
  4. ECB: ILAAP Guide, November 2018bankingsupervision.europa.eu
  5. ECB: submission clarification, July 2026bankingsupervision.europa.eu
  6. ECB: P2R methodology for the 2026 SREP cyclebankingsupervision.europa.eu
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