CENTRAL BANK OF LIBYA

Circular 11/2024

Date: 19 May 2024
Reference: Law No. 1 of 2005, Law No. 6 of 2010, Circular dated 11 January 2023.

Internal Capital Adequacy Assessment Process (ICAAP)

1. Legal Basis and Scope
Pursuant to Article 20 of Law No. 6 of 2010, and in light of Articles 1 to 6 of Law No. 1 of 2005, the Central Bank of Libya (CBL) issues this Circular to regulate the Internal Capital Adequacy Assessment Process (ICAAP) for banks and financial institutions. This Circular applies to all licensed banking entities in Libya, ensuring alignment with international best practices and domestic regulatory requirements.

2. Definition of ICAAP
The Internal Capital Adequacy Assessment Process (ICAAP) is a comprehensive, forward-looking framework that enables banks to identify, measure, monitor, and control all material risks. It ensures that the bank maintains sufficient capital to cover its risk profile under normal and stressed conditions, in compliance with CBL supervisory expectations.

3. Objectives and Core Components
The primary objectives of the ICAAP are to:

• Ensure adequate capital planning and allocation.
• Integrate risk management with business strategy and financial performance.
• Provide a robust basis for internal decision-making and regulatory reporting.
  The ICAAP framework encompasses the following core components: risk identification, capital adequacy calculation, stress testing, governance and oversight, internal review process, and reporting mechanisms.

4. Risk Identification and Assessment
Banks must systematically identify all material risks, including but not limited to credit risk, market risk, operational risk, liquidity risk, interest rate risk in the banking book (IRRBB), and strategic/reputational risks. Each risk category must be quantified using appropriate methodologies, models, and data sources, ensuring consistency with the bank’s risk appetite statement.

5. Capital Planning and Adequacy Calculation
Capital adequacy must be calculated in accordance with CBL capital framework requirements, incorporating both regulatory minimums and internal target ratios. Banks shall determine their Total Capital, Tier 1 Capital, and Common Equity Tier 1 (CET1) ratios, applying appropriate deductions, buffers, and capital conservation requirements. Internal targets must exceed regulatory minimums to provide a cushion against unexpected losses.

6. Stress Testing and Scenario Analysis
Banks are required to conduct regular stress tests using both historical and forward-looking scenarios. These tests must assess the impact of adverse economic, financial, and idiosyncratic events on capital adequacy, profitability, and liquidity. Stress testing results must inform capital planning, risk appetite adjustments, and contingency funding plans.

7. Governance and Oversight
The Board of Directors holds ultimate responsibility for approving the ICAAP framework, risk appetite, and capital targets. Senior management is responsible for implementing the ICAAP, ensuring data integrity, model validation, and timely reporting. The Internal Audit function must independently review the ICAAP process at least annually, providing assurance on its design and operational effectiveness.

8. Internal Review Process
The internal review process must be documented, repeatable, and integrated into the bank’s strategic planning cycle. It should include regular monitoring of risk exposures, capital consumption, and performance against targets. Any material deviations or changes in the risk profile must trigger an immediate ICAAP update and management action.

9. Reporting and Disclosure
Banks must submit periodic ICAAP reports to the CBL, including capital adequacy ratios, risk profiles, stress test results, and governance assessments. Public disclosure must align with CBL transparency requirements, ensuring stakeholders receive accurate, timely, and comparable information.

10. Compliance and Supervisory Review
The CBL will conduct periodic supervisory reviews of the ICAAP to verify compliance with this Circular. Non-compliance or material weaknesses may result in supervisory measures, including capital add-ons, restrictions on distributions, or enhanced reporting requirements. Banks must address supervisory findings within prescribed timelines and demonstrate corrective actions.

11. Effective Date and Transition
This Circular takes effect from the date of issuance (19 May 2024). All licensed banks and financial institutions must fully implement the ICAAP framework within 12 months. Existing capital plans and risk management systems must be aligned with the new requirements by the transition deadline.

12. Contact and References
For inquiries, contact the CBL Capital Markets Department.
Website: www.cbl.gov.ly | SWIFT Code: CBLJLYLX | Phone: +218 21 44.4 1488 / +218 21 333 359
References: Law No. 1 of 2005, Law No. 6 of 2010, CBL Circular dated 11 January 2023.