THE EFFECTIVENESS OF THE INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) IN ENHANCING BANKING STABILITY

Abstract

This study addresses the effectiveness of the Internal Capital Adequacy Assessment Process (ICAAP) and its role in enhancing banking stability in a sample of Iraqi banks listed on the Iraq Stock Exchange. During the study period, the Iraqi banking sector operated under financial and economic conditions characterized by varying levels of risk, regulatory challenges, and ongoing efforts to align banking practices with Basel requirements. These conditions highlighted the importance of internal capital assessment as a mechanism for strengthening banks’ ability to absorb risks and maintain financial stability.

The study seeks to examine ICAAP as a supervisory and managerial tool that reflects the adequacy of banks’ capital in relation to their actual risk exposure, and to clarify its role in explaining variations in banking stability. The study relied on annual financial data for the sample banks covering the period 2012–2024. ICAAP effectiveness was measured using a composite index based on four financial indicators, while banking stability was measured using the Z-Score indicator.

The study reached a set of results showing variation among the sample banks in both ICAAP effectiveness and banking stability. The findings also indicated a partially positive relationship between ICAAP effectiveness and banking stability, suggesting that banks with relatively stronger ICAAP performance tended in some cases to achieve better stability levels, although this relationship was not fully consistent across all banks. The study concluded with a number of conclusions and recommendations relevant to improving capital management and strengthening banking stability in Iraqi banks under Basel requirements.