The internal capital adequacy assessment process : implications on major banks in Malta

Abstract

Purpose: The Internal Capital Adequacy Assessment Process (ICAAP)'s introduction in the local banking sector sought to equip banks with tools to better analyse risks taken. This study will ascertain and analyse the major implications faced by the major banks in Malta due to the introduction of the ICAAP, as well as ascertain whether these banks follow ICAAP practices as in other European countries. Design: Semi-structured interviews were carried out with the seven major banks in Malta, selected on the basis of customer deposits. Findings: Various methods are adopted in the calculation and analysis of risks taken by the major banks in Malta. Some are similar to those adopted by foreign banks. Only two banks give priority of importance to the risks considered, while most banks prefer minimum target capital requirements in general for all risks rather than specifically for each risk. Total Own Funds is the main type of capital maintained by the major banks in Malta. Only one bank official stated that ICAAP had implications on the operations and strategy of the bank. Risk management practices also changed slightly, but mostly with the introduction of Basel II rather than with ICAAP per se. The relationship with the local regulator also experienced a minor change. Conclusions: ICAAP's introduction in the local banking sector had no major implications on the major banks in Malta. Also, methods similar to those used by foreign banks are adopted by the major banks in Malta, although these vary in size and proportion. Value: This study is fundamental as no similar study had been conducted in Malta, and thus such an analysis sheds light on capital management and risk management practices.