The HFSA's iCAAP guidance is based on the European Commission's directive, the Basel Committee's work and the guideline on Pillar 2 published by the Committee of European Banking Supervisors (CEBS).

As part of the series of actions to implement the new Capital Requirement Directives (CRD), one supervisory responsibility is to prepare guidelines that set forth the steps of the internal capital adequacy assessment procedure (to be carried out by institutions), discuss the key risks to consider and provide guidance to the practical interpretation of the directives. Another purpose of these guidelines is to explain the expected contents of materials to be submitted by institutions regarding their internal capital adequacy calculations and the principles on which the supervisory authority will assess the submitted documents and information.

The Basel ii capital adequacy framework comprises three pillars, of which Pillar 2 focuses on providing a comprehensive view of a supervised entity's capital adequacy. in fact, Pillar 2 requires that both supervised entity and supervisor assess overall capital adequacy.

Pillar 2 requires that both supervised entity and supervisor assess capital adequacy and risk-bearing ability in relation to all material risks. Also risks excluded from capital adequacy calculation under Pillar 1 must be taken into account. The Basel Committee emphasizes the importance of setting quantitative and qualitative capital targets, adequately proactive capital planning and strong senior management involvement in, and responsibility for, capital planning. Supervised entities should have a comprehensive internal Capital Adequacy Assessment Process (iCAAP), backed by senior management approval, guidance and oversight. The new regulatory framework underscores managerial responsibility for ensuring good consistency of capital planning and management systems with other corporate-level steering systems.