Basel2-Guidlines

8/9/2019 Basel2-Guidlines

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ank Guidelines

Capital Adequacy Standards

Standardised Approach

CENTRAL BANK OF THE UNITED ARAB EMIRATES

November, 2009


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1. Introduction

TheCentralBankoftheUnitedArabEmirates(CBUAE)ispleasedtoissueguidelinesfor

implementationoftheBaselIICapitalAccord,effectivefromthedateofthiscircular.Thisfollows

onfrompreviousdirectionoutliningexpectationsincludingNotice3735/2006BaselII

ImplementationintheUAEdated27August,2006andNotice4004/2009CapitalAdequacy.

ThiscircularwillfocusonspecificissuesofrelevancefortheUAEbankingcommunity,withthe

completeBaselIIguidelinesincludingthefollowingdocuments:

InternationalConvergenceofCapitalMeasurementandCapitalStandards,June2006,

BankforInternationalSettlements

EnhancementstotheBaselIIFramework,July2009,BankforInternationalSettlements

(collectivelyreferredtoastheAccord).

NotethatalthoughtheBankforInternationalSettlements(BIS)standardsonBaselIIisgenerally

applicablespecificguidelinesasgivenbytheCBUAEaretoprevail.NationalDiscretions,where

applicable,areoutlinedinAppendix6.

TheStandardisedApproachforCreditRiskistoapplyeffectiveimmediately,andCBUAEexpects

internationallyactiveUAEbanksandlargerinstitutionsasnotifiedonacasebycasebasis to

migratetotheFoundationInternalRatingBased(FIRB)induecourse.

BankscanselectanyoftheMarketRiskandOperationalRiskapproaches,withtheadvanced

optionsrequiringexplicitapprovalbytheCBUAE.

InlinewithPillar2requirementsoftheAccord,CBUAEexpectseachbanktodevelopand

documentitsownInternalCapitalAdequacyAssessmentProcess(ICAAP)thatiscommensurateto

thebanksactivitiesandriskprofile.TheICAAPwillbeakeycomponentofoursupervisoryreview

andyourattentionisdrawntotheJuly2009EnhancementstotheBaselIIFrameworkpaperand

theaddeddetailaroundPillar2expectations. TheCBUAE,asrecommendedbytheBIS,willexpect

bankstoaddressthisaddeddetailimmediately.


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2. Capital

Ratio

Theminimumcapitaladequacyratiowillbesetat11%,risingto12%asat30June2010as

specifiedinNotice4004/2009.

CapitalAdequacyRatio(CAR)ismeasuredasaratioofcapitalagainsttheriskweightedasset

valuesforCredit,MarketandOperationalrisk,wherecapitalincludesTier1andTier2capital.Tier

2capitalwillonlybeconsideredtoamaximumof67%ofTier1capital.

QuarterlyPrudentialReportingbybanksoftheircapitalcalculationsundertheStandardised

Approachareexpectedtoapplyfromthequarterending30September2009.PrudentialReturn

TemplatesareincludedinAppendix7.

3. Pillar

1

Calculation

of

Credit

Risk

TheseguidelinespertaintotheStandardisedApproachofBaselIIonly.InternalRatingsBased

guidelineswillbeissuedinduecoursefollowingdiscussionwithbanks,onacasebycasebasis,for

whomthisisexpectedtobepertinent.

OneofthelargestdifferencesbetweenexistingguidelinesandtheStandardisedBaselIIapproach

istheabilitytoapply,onanassetclassbasis,riskweightingsdeterminedfromratingsprovidedby

ExternalCredit

Assessment

Institutions

(ECAI)

approved

by

CBUAE.

A

list

of

approved

ECAIs

is

includedinAppendix1alongwithapplicableratingtoriskweightmappings.

ExportCreditAgencyprovidedcountryscoresmaynotbeusedforriskweightingpurposes.

3.1.CentralBanks&Sovereigns

ClaimsonCentralBanksandSovereignsintheGCCmayhavea0%riskweightingapplied.Other

CentralBanksandSovereignsexposurestoberiskweightedinlinewithparagraphs53to56ofthe

Accord.

3.2.PublicSectorEntities(PSE)

ClaimsonaPSEintheGCC,intheirlocalcurrency,mayberiskweightedat0%iftreatedasaPSE

bythelocalregulator.ForeigncurrencyclaimsonaGCCPSEaretobeweightedatonegradeless

favourable,being20%.

AllotherPSEriskweightings(i.e.nonGCC)toberiskweightedatonegradelessfavourablethan

theirsovereigns.


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3.3.MultilateralDevelopmentBanks(MDB)

ProvisionsoftheAccordasperparagraph59aretoapply.

AlistofMDBswhereariskweightingof0%maybeappliedisincludedinAppendix8.

3.4.Banks

CBUAEwilladoptriskweightingsspecifiedinOption2asperparagraph63oftheAccord,as

follows:

Creditassessment

ofBanks

AAAto

AA

A+to

A

BBB+to

BBB

BB+to

B

Below

B

Unrated

RiskWeight 20% 50% 50% 100% 150% 50%

RiskWeightShort

Termclaims

20% 20% 20% 50% 150% 20%

Concessionsfor

short

term

claims

should

be

considered

in

light

of

CBUAE

guidance

on

ECAI

classificationsasperAppendix1.

3.5.SecuritiesFirms

Wheretheseentitiesareregulatedasbanks,theymaybetreatedaspertheaboveprocessfor

banks.Iftheyarenotregulatedasbanks,Corporatetreatmentasbelowistoapply.

3.6.Corporates

RiskweightingsforCorporatesratedbyapprovedECAIsmaybeappliedasperparagraph66ofthe

Accord,asfollows:

Creditassessment

ofBanks

AAAto

AA

A+to

A

BBB+to

BB

Below

BB

Unrated

RiskWeight 20% 50% 100% 150% 100%

UnRatedcorporateexposuresmustberiskweightedat100%.CBUAEmay,atitssolediscretion,

requireahigherriskweightingforsomecorporatesasadvisedtobanksdirectlywhere

appropriate.

3.7.RegulatoryRetailPortfolios

A75%riskweightingmayapplyforexposuresclassifiedasRetail.Forthisclassificationtoapply

theCBUAEwillneedtobesatisfiedthateachofthefourBaselIIcriteriaaremet:

OrientationcriterionExposuretoapersonorpersons,orsmallbusiness.


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ProductcriterionEligibleproductsincludedarecreditcards,revolvingcredit,personal

lendingandsmallbusinessproducts.Mortgageproductsarealsoexcludedastheseare

treatedseparately.

GranularitycriterionNoexposuretoanyonecounterpartyisabletoexceed0.20%ofthe

totalretailportfoliobeingevaluated.

Valuecriterion

Maximum

aggregated

exposure

to

one

counterparty

may

exceed

the

valueofAED2,000,000.

3.8.ClaimsSecuredbyResidentialProperty

A35%riskweightingmayapplytoexposuressecuredbyresidentialpropertywhere:

LoantoValue(LTV)ratioislessthan85%;and

TheexposuredoesnotexceedAED10million.

IftheaboveLTVandExposurecapcriteriacannotbedefinitivelyestablished,thentheapplicable

Risk

Weighting

for

the

counterparty

type

is

to

apply.

3.9.PastDueLoans

Theunsecuredportionofanyloan(otherthanaqualifyingresidentialmortgageloan)thatispast

dueformorethan90days,netofspecificprovisions(includingpartialwriteoffs),willberisk

weightedasfollows:

150%riskweightwhenspecificprovisionsarelessthan20%oftheoutstandingamountof

theloan;

100%riskweightwhenspecificprovisionsare20%andaboveoftheoutstandingamount

of

the

loan;

3.10. HighRisk&OtherAssets

Refertoparagraphs79through81oftheAccordfortreatmentoftheseexposures.,aswellasthe

July2009EnhancementspaperfromtheCommittee.

3.11. OffBalanceSheetCreditRisk

UnderBaselII,offbalancesheetitemsunderthestandardisedapproach(Para82to87ofBaselII)

will

be

converted

into

credit

exposure

equivalents

through

the

use

of

credit

conversion

factors

in

a

similarmannertoBaselI.

CreditConversionFactorof100%

Alldirectcreditsubstitutes,includinggeneralguaranteesofindebtednessandall

guaranteetypeinstruments,suchasstandbylettersofcreditandacceptances,backing

thefinancialobligationsofotherparties


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Creditderivativessuchascreditdefaultswapswherebankprovidescreditprotection

(othermorecomplexderivativeswillbeassessedonacasebycasebasisandshouldbe

broughttotheattentionofHeadofBankingSupervisionattheCBUAE)

Saleandrepurchaseagreementsandassetsaleswithrecourse,wherethecreditrisk

remainswiththebank

Forwardasset

purchases,

forward

deposits

and

commitments

for

the

unpaid

portion

of

partlypaidsharesandsecuritieswhichrepresentcommitmentswithcertaindrawdowns


Transactionrelatedcontingentitemse.g.performancebonds,bidbondswarrantiesand

standbylettersofcreditrelatedtoparticulartransactions

Underwritingcommitmentsundernoteissuanceandrevolvingunderwritingfacilities

(afterdeductionforownholdingsofnotesunderwritten)

OthercommitmentsNotunconditionallycancellablewithanoriginalmaturityexceeding

oneyear


Othercommitmentsnotunconditionallycancellablewithanoriginalmaturityofoneyear

orless

Shorttermselfliquidatingtraderelatedcontingentitemse.g.documentarycredits

collateralisedbyunderlyingshipments.


Anycommitmentthatisunconditionallycancellable

Thebook

amounts

of

commitments

should

be

entered

in

the

Form

CR3

by

type

and

CR2

by

counterparty(Appendix7).

Foreignexchangeandinterestraterelateditems

The treatment of foreign exchange and interest raterelated contracts needs special attention

becausebanksarenotexposedtocreditriskforthefullfacevalueofthesecontracts,butonlyto

theextentofpotentialcostofreplacingthecashflow(oncontractsshowingpositivevalue)ifthe

counterpartydefaults.

Theinstruments

that

are

captured

in

the

risk

weighting

framework

include

the

following:

Foreignexchangecontracts

(a)Forwardforeignexchangecontracts(swapsandoutrights)

(b)Crosscurrencyinterestrateswaps

(c)Foreigncurrencyfutures


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(d)Foreigncurrencyoptionspurchased

Interestraterelatedcontracts

(a)Singlecurrencyinterestrateswaps

(b)Basisswaps

(c)Forward

rate

agreements

(d)Interestratefutures

(e)Interestrateoptionspurchased

Forcalculating the foreignexchangeand interestraterelatedrisk,banksshouldusethecurrent

exposuremethod.Under thismethod, banks should calculate the current replacement costof

foreign exchange and interest raterelated contractsby marking tomarket all contractswith

positivevalue.Afactor(theaddon") isthenaddedtothereplacementcosttoreflectpotential

creditexposureovertheremaininglifeofthecontracts.Thetotalpotentialcreditexposuremust

thenbeanalysedaccordingtothetypesofcounterpartyinordertoreflectthedifferentrisks.

No'addon'isrequiredintheparticularcaseofsinglecurrencyfloatinginterestrateswaps.

Since exchange rate contracts involve an exchange of principal onmaturity as well as being

generally more volatile, higher conversion factors are set for those instruments that feature

exchangeraterisk.Exchangeratecontractswithanoriginalmaturityof14calendardaysor less

areexcludedfromriskweightrequirements.

Instruments traded on exchanges may be excluded where they are subject to daily margin

requirements. Oncethecreditequivalentamountshavebeencalculatedbythismethod,theycan

thenbeweighted according to theusual riskweights assigned to theunderlyingnatureof the

counterparty,asforonbalancesheetitems.

Theexposure toeach typeof counterpartyhas tobe riskweightedas0%,20%,50%or100%

respectivelytoarriveatthetotalweightedexposure.

Themethodofcalculatingtheriskweightedexposureregardingforeignexchangeandinterest

raterelatedcontractsisreflectedintheattachedreturnformCR2a.

3.12. CreditRiskMitigation

OnlythefollowingCreditRiskMitigationtechniqueswillbeconsideredaseffectivecreditrisk

reductionforPillar1calculationpurposes:

NettingApplicableonlywithlegallyenforceablenettingagreementsinplace.Anability

tosystematicallycalculatenetexposuremustbedemonstrated.

CollateralEithertheSimpleorComprehensiveapproachesmaybeapplied,withbanks

lookingtoapplytheComprehensiveapproachrequiringexplicitapprovalfromCBUAE.


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Guarantees&CreditDerivativesThesetoolscanbeusedtomitigatecreditriskprovided

theyaredirect,explicit,irrevocableandunconditional.CBUAEmustbesatisfiedthatthe

bankhassuitableriskmanagementtoolsinplacetoadoptuseofthesetools.

Fulldetailsareasperparagraphs109to210oftheAccord.


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4. Pillar

1

Market

Risk

Banksarerequiredtoallocatecapitalinrespectofmarketriskunderthegeneralguidelinesand

frameworksetoutunderBaselIISectionVI,MarketRisk,whichdefinesthisriskastheriskof

lossesinonandoffbalancesheetpositionsarisingfrommovementsinmarketprices.

ThissectiondealswiththeStandardisedApproachofmeasurementasmostbankswillnotbeina

positiontobasetheircalculationsonamodelsapproachwhichmaybeacceptedonacasebycase

basis.

Themarketriskssubjecttoacapitalchargeareasfollows:

InterestRateRisk,

ForeignexchangeRisk,

EquityExposureRisk,

CommodityRisk,and

OptionsRisk

Thescopeofthechargesisrestrictedtotradingbookonlyforinterestrateriskandequity

positionswhilsttheremainingwillapplytothebanksentirepositions.

Atradingbookconsistsofpositionsinfinancialinstrumentsandcommoditiesheldeitherwith

tradingintentorinordertohedgeotherelementsofthetradingbook. Tobeeligiblefortrading

bookcapitaltreatment,financialinstrumentsmusteitherbefreeofanyrestrictivecovenantson

theirtrading

ability

or

able

to

be

hedged

completely.

In

addition,

positions

should

be

frequently

andaccuratelyvalued,andtheportfolioshouldbeactivelymanaged. Thisdefinitionmayequate

totheapplicationofIAS39toMarktomarketpositions.

Banksmusthaveclearlydefinedpoliciesandproceduresfordeterminingwhichexposuresto

include/excludefromthetradingbookforpurposesofcalculatingregulatorycapitalasdetailedin

Paragraphs687and688ofBaselII. Compliancewiththesepoliciesmustbefullydocumentedand

subjecttoperiodicalaudit.

4.1.InterestRateRisk

Banksmust

calculate

two

separate

charges

for

determining

the

minimum

capital

requirement.

Instrumentsinthetradingbook,suchasdebtsecuritiesoffixedorfloatingrateandnon

convertiblepreferencesharesandotherconvertibledebtthattradeslikedebtsecurities,will

attractacalculationforspecificriskofeachsecurityandgeneralriskintheportfolio(where

longandshortpositionsindifferentsecuritiesorinstrumentscanbeoffset). Generalriskmaybe

calculatedusingeithertheMaturitymethodutilisingamaturityladderorDurationmethod,


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whichisconsideredmoreaccurateandisbasedoncalculatingpricesensitivityofeachposition

separately. DetailsofcalculationmethodologycanbefoundinParagraphs709to718(iv)ofBasel

II.

4.2.ForeignExposureRisk

Banksmust

calculate

acapital

charge

for

foreign

exchange

risk

by

computing

the

net

open

positions(greaterofsumofthenetshortpositionsorsumofthenetlongpositions)forcurrencies

andgold. Thecapitalchargewouldbeappliedtothehigherofthenetlongpositionsorthenet

shortpositions(includinggold). DetailsofcalculationmethodologycanbefoundinParagraphs

718(xxx)to718(xLii)ofBaselII. BankswillbepermittedtotreatUS$openpositionsequaltoAED

positionsaslongastheAEDremainspeggedtotheUS$,thesametreatment ispermittedforGCC

currenciessimilarlypeggedtotheUS$.

Banksthathavelittleornoforeigncurrencybusinessmaybeexemptfromcapitalrequirements

underthissectionprovidedthefollowingismet:

Thegreaterofthesumofthegrosslongpositionsandsumofgrossshortpositionsin

foreigncurrenciesmustnotexceed100%ofthecapitalbasedescribedabove.

Overallnetopenposition(asexplainedabove)doesnotexceed2%ofthecapitalbase.

4.3.EquityRisk

Banksmustcalculateacapitalchargeforequityriskbycomputingthespecificriskchargeand

generalriskchargeasperthetableinAppendix7labelledMR6. Capitalchargesforspecificrisk

maybereducedby50%foraliquidandwelldiversifiedportfolio.Detailsofcalculation

methodologycanbefoundinParagraphs718(xix)to718(xxix)ofBaselII.

4.4.CommoditiesRisk

Banksmustcalculateacapitalchargeforcommodityriskinrespectofphysicalholdingswhichcan

be,orare,traded,includingpreciousmetalsbutexcludinggold(coveredunderforeignexchange

risk). ForbanksthatonlyconductalimitedamountofcommoditiesbusinesstheMaturityLadder

ApproachortheSimplifiedApproachwouldbeexpected. Majortraderswouldbeexpectedto

followamodelsapproachandareoutsidethescopeofthispaperandthereforeshouldapproach

CBUAEforspecificguidance.

Underthematurityladderapproach,banksshouldcalculatethenetpositionineachcommodityin

its

unit

of

measurement

and

then

convert

to

AED

at

prevailing

spot

rate.

Using

a

maturity

ladder

asinMR7(Appendix7)foreachcommodity,theseshouldthenbeaggregatedontoMR7the

consolidatedtable. Alowerriskchargewillapplytomatchedlongandshortpositionswithineach

maturitybandormatchedpositionsbetweenbands,acapitalchargeof15%willapplytoresidual

unmatchedpositions.DetailsofcalculationmethodologycanbefoundinParagraphs718(xLiii)to

718(Li)ofBaselII.


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UndertheSimplifiedApproach,thecapitalchargewillbe15%ofthenetposition,longorshort,in

eachcommodity. Inordertoaccountforanybasisriskandadditionalcapitalchargeof3%ofthe

banksgrosspositions,longplusshortineachcommodity.Detailsofcalculationmethodologycan

befoundinParagraphs718(Liv)and718(Lv)ofBaselII.

4.5.Options

Risk

BanksmustcalculateacapitalchargeforoptionsriskbasedontheSimplifiedApproachapplicable

onlytobanksthatsolelyusepurchasedoptions(donotwriteoptions)whichisoutlinebelow:

Position Treatment

LongCashandLongPut

Or

ShortCashandLongCall

Thecapitalchargewillbethemarketvalue

oftheunderlyingsecuritymultipliedbythe

sumofspecificandgeneralmarketrisk

chargesfortheunderlyinglesstheamount

theoption

is

in

the

money

(if

any)

or

zero

Longcall

Or

Longput

Thecapitalchargewillbethelesserof:

a) Themarketvalueoftheunderlying

securitymultipliedbythesumofspecific

andgeneralmarketriskchargesforthe

underlying

b) Themarketvalueoftheoption

Banksnot

falling

into

the

above

category

should

approach

CBUAE

for

specific

guidance

and

agreementtouseintermediateapproachesassetoutinParagraphs718(Lix)to718(Lxix)orthe

comprehensiveriskmanagementmodeldetailedinparagraphs718(Lxx)to718(xcix)ofBaselII.


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5. Pillar

1

Operational

Risk

Operational

risk

is

defined

as

the

risk

of

loss

resulting

from

inadequate

or

failed

internal

processes,peopleandsystems,orfromexternalevents. Thisdefinitionincludeslegalriskbut

excludesstrategicandreputationalrisk.

BaselIIframeworkoutlinesthreemethodsforcalculatingtheriskchargeforoperationalrisk:

1. BasicIndicatorApproach

2. StandardisedApproach/AlternativeStandardisedApproach(ASA)

3. AdvancedMeasurementApproach

CBUAEpermitsbankstouseanyoftheaboveapproachesprovidedtheymeetthecriterialaid

down

under

Basel

II

and

subject

to

approval

for

the

Advanced

Measurement

Approach

(AMA)

for

whichbankswouldneedtodemonstratetoCBUAEtheappropriatenessofthechosenapproach.

ThisdocumentfocusesonallapproachesexcludingAMA.

InadditiontocomplyingwiththecriteriainParagraph663ofBaselII,Banksareencouragedto

refertoandcomplywiththerecommendationsoftheBaselCommitteeintheirpaperSound

PracticesfortheManagementandSupervisionofOperationalRisk,February2003.

Banksshoulduseanyoneoftheapproachesin(1)or(2)abovetoreporttheoperationalrisk

capitalchargeinthereturnsincludedinAppendix7headedOR1.

Onceabank

has

been

allowed

to

use

the

ASA

it

would

not

be

allowed

to

revert

to

the

StandardisedApproachwithoutthepermissionofCBUAE.

DetailsonthesethreeapproachesareasperUAEBaselIIGuidelinesforBanksStandardised

Approach,July2009.


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6. Pillar

2

Supervisory

Review

CBUAE

considers

the

Pillar

2

requirements

of

the

Accord

to

be

particularly

relevant

for

banks

in

its

jurisdiction.Consequently,notwithstandingPillar1capitalcalculationsandimpliedcapital

requirementsdeterminedtherefrom,thesupervisoryreviewprocesswillfocusoneachbanks

InternalCapitalAdequacyAssessmentProcess(ICAAP).

TheICAAPmustbedocumentedandfullyintegratedwiththeenterprisewideriskmanagement

framework.Itshouldbeundertakenannually,havetheexplicitinvolvementandapprovalofboth

BoardandSeniorManagement,andbepresentedtotheCBUAEasakeypointofdiscussion

betweenthebankandregulator.

Asaminimum,theICCAPshouldincludeariskbased,forwardlookingviewofCredit,Marketand

Operationalrisk

capital.

Other

risks

that

may

require

capital

such

as

Liquidity,

Interest

Rate

Risk

in

theBankingBookandOthers(suchasreputational)mustbeexplicitlyanddemonstrably

considered.

Pillar2requirementsareintendedtobeproportionate,butCBUAEconsidersanICAAPcapability

asdemonstratedinAppendix3tobeaminimumstandardofcapability.Forbanksthatare

systematicallysignificant&/orengagedinriskierandmoresophisticatedassets,ahigherstandard

ofcapabilitywillbeexpectedasadvisedonacasebycasebasis.

Followingrecentmarketturmoil,itisnoteworthythattheBaselCommitteeissuedenhancements

totheAccordinJuly2009thatincludedsignificantchangestoPillar2requirements.Banksshould

beawareoftheseintheirentiretyastheCBUAEfullyendorsestheseenhancementsandexpects

themimplementedimmediately.Aspectsthatarenoteworthyforourenvironmentinclude:

FirmWideRiskOversightARiskframeworkendorsedbytheBoardandSenior

Managementthatisalignedtoorganisationalriskappetite,implementedviaeffective

policies,proceduresandsystems.Theframeworkmustincludemeasuresofcreditrisk

thatareappliedindaytodaybusinessandsupportedbysuitableMIS.Keyaspectofthis

requirementistheusetestprinciple.CBUAEwillbelookingfordemonstrableevidence

thattheriskframeworkisappliedacrosstheorganisation.

GovernanceBoardandSeniorManagementmustassumeexplicitresponsibilityforthe

riskframework.

A

Chief

Risk

Officer

(CRO)

function

must

exist,

it

must

be

independent

of

thebusinesslines,andmustreportdirectlytotheCEOandBoard.

RiskConcentrationRisk,asmeasuredonanaggregatedbasistoborrowergroups,must

beconsideredinthecontextofsetconcentrationlimitsatborrowergroup,industryand

countrylevel.Inaddition,sectoralanalysisacrosspropertyandmoneymarket

concentrationsisrequired.Wherethereareexcessesoninternallimits,asdistinctfrom

existingprudentialstandards,theseshouldbereportedandnotedataBoardlevel.


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LiquidityEachbankmustconsideritssourcesoffundinginthecontextofaliquidityrisk

tolerancestatementfromtheBoard.Liquidityriskmustbeanalysedacrossthe

organisationincludingallproductsandsubsidiaries,withtheICAAPexplicitlyallowingfor

stressedscenariosappropriatetothenatureoffunding.

StressTestingBanksmusthaveanestablishedforwardlookingstresstestingframework

forall

risk

types.

Results

should

be

reported

at

regularly

scheduled

intervals

to

the

Board

forreviewinthecontextoftheorganisationsriskappetiteandcapitallevels.The

robustnessofthestresstestingprocessmustbecommensuratewiththebanksrisk

appetiteandactivities,asadvisedonacasebycasebasis.

Pillar2Summary

TheCBUAEexpectsbanksmanagementtobecomemuchmorefocusedonthefollowingareas:

1.TounderstandwhattheirbankisdoingwithrespecttoPillar1andPillar2risks.

2. ToidentifyotherrisksunderPillar2relevanttotheirbankandtoassesstherisk

mitigantsavailabletosetagainstthoseotherrisksunderPillar2.

3. TotakestepstoplantheirinternalcapabilitytocalculatecapitalrequirementsunderPillar

2.

4. Ataminimum,pleaserefertothefollowingBISdocuments:

a. Part3ofBaselIIJune2006

b. EnhancementstotheBaselIIframeworkJuly2009

c. PrinciplesforSoundStressTestingPracticesandSupervisionMay2009

d. PrinciplesforSoundLiquidityRiskManagementandSupervisionSeptember2008

e. Sound

Practices

for

the

Management

and

Supervision

of

Operational

Risk

February2003


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7. Pillar

3

Market

Discipline

ThepurposeofPillar3marketdisciplineistocomplementtheminimumcapitalrequirements

(Pillar1)andthesupervisoryreviewprocess(Pillar2).TheCBUAEsupportsenhancedmarket

disciplineby

developing

aset

of

disclosure

requirements

which

will

allow

market

participants

to

assesskeypiecesofinformationonthescopeofapplication,capital,riskexposures,risk

assessmentprocesses,andhencethecapitaladequacyoftheinstitution.

Inprinciple,banksdisclosuresshouldbeconsistentwithhowseniormanagementandtheboard

ofdirectorsassessandmanagetherisksofthebank.

UnderPillar1,banksusespecifiedapproaches/methodologiesformeasuringthevariousrisksthey

faceandtheresultingcapitalrequirements.TheCBUAEbelievesthatprovidingdisclosuresthat

arebasedonacommonframeworkisaneffectivemeansofinformingthemarketaboutabanks

exposuretothoserisksandprovidesaconsistentandunderstandabledisclosureframeworkthat

enhancescomparability.

7.1.Interactionwithaccountingdisclosures

TheCBUAErecognisestheneedforaPillar3disclosureframeworkthatdoesnotconflictwith

requirementsunderaccountingstandards,whicharebroaderinscope. Wherebanksface

difficulties,CBUAEwillconsidereachissueonacasebycasebasis.

Banksareencouragedtoprovideallrelatedinformationinonelocationtothedegreefeasible. In

addition,if

information

is

not

provided

with

the

accounting

disclosure,

institutions

should

indicate

wheretheadditionalinformationcanbefound.

7.2.Materiality

Abankshoulddecidewhichdisclosuresarerelevantforitbasedonthematerialityconcept.

Informationwouldberegardedasmaterialifitsomissionormisstatementcouldchangeor

influencetheassessmentordecisionofauserrelyingonthatinformationforthepurposeof

makingeconomicdecisions. ThisdefinitionisconsistentwithInternationalAccountingStandards

andwithmanynationalaccountingframeworks.

The

CBUAE

recognises

the

need

for

a

qualitative

judgement

of

whether,

in

light

of

the

particular

circumstances,auseroffinancialinformationwouldconsidertheitemtobematerial(usertest).

TheCBUAEisnotsettingspecificthresholdsfordisclosureasthesecanbeopentomanipulation

andaredifficulttodetermine,anditbelievesthattheusertestisausefulbenchmarkfor

achievingsufficientdisclosure.


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7.3.Proprietaryandconfidentialinformation

Proprietaryinformationencompassesinformation(forexampleonproductsorsystems),thatif

sharedwithcompetitorswouldrenderabanksinvestmentintheseproducts/systemsless

valuable,and

hence

would

undermine

its

competitive

position.

Informationaboutcustomersisoftenconfidential,inthatitisprovidedunderthetermsofalegal

agreementorcounterpartyrelationship.Thishasanimpactonwhatbanksshouldrevealinterms

ofinformationabouttheircustomerbase,aswellasdetailsontheirinternalarrangements,for

instancemethodologiesused,parameterestimates,dataetc.

TheCBUAEbelievesthattherequirementssetoutbelowstrikeanappropriatebalancebetween

theneedformeaningfuldisclosureandtheprotectionofproprietaryandconfidentialinformation.

Inexceptionalcases,disclosureofcertainitemsofinformationrequiredbyPillar3mayseriously

prejudicethe

position

of

the

bank

by

making

public

information

that

is

either

proprietary

or

confidentialinnature.Insuchcases,abankneednotdisclosethosespecificitems,butmust

disclosemoregeneralinformationaboutthesubjectmatteroftherequirement,togetherwiththe

factthat,andthereasonwhy,thespecificitemsofinformationhavenotbeendisclosed.

Thislimitedexemptionisnotintendedtoconflictwiththedisclosurerequirementsunderthe

accountingstandards.

7.4.Disclosurerequirements

Banksshouldhaveaformaldisclosurepolicyapprovedbytheboardofdirectorsthataddresses

thebanks

approach

for

determining

what

disclosures

it

will

make

and

the

internal

controls

over

thedisclosureprocess.Inaddition,banksshouldimplementaprocessforassessingthe

appropriatenessoftheirdisclosures,includingvalidationandtheirfrequency.

ThegeneraldisclosurerequirementsasdetailedinPara821ofBaselIIwillbeappliedatthetop

consolidatedlevelofabankinggroupbyalllicensedbanks,i.e.,attheleveloftheparentlicensed

bank.

DisclosuresrelatedtoindividualbankswithinaUAEbankinggroupwouldnotgenerallybe

required,branchesofforeignbankswouldnotbeexempted.Anexceptiontothisarisesinthe

disclosureoftotalandTierIcapitalratiosofsubsidiarybanksbythetopconsolidatedbankwhere

ananalysisofsignificantsubsidiarybankswithinthegroupisappropriateinordertorecognisethe

needforthesesubsidiariestocomplywiththerelevantcapitaladequacyframeworkandother

applicablelimitationsonthetransferoffundswithinthegroup.

BanksshouldrefertoBaselIIJune2006sectioncoveringPillar3fordetailedrequirementsunder

thispillaralongwithEnhancementstotheBaselIIframeworkJuly2009.


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DisclosurebybanksisexpectedtoincludebothGeneralDisclosuresandSpecificdisclosures

includedinfinancialstatementspublishedfortheyear2008. Therefore,theannualreportfor31

December2008wouldbeexpectedtocomplywiththeBaselIIdisclosurerequirements. Reports

mustbeaudited/reviewedinaccordancewithInternationalAuditingStandards.

ThetablesasdetailedinAppendix7oftheUAEBaselIIGuidelinesforBanksStandardised

Approach,July2009,mayserveasguidanceinconsideringformatofdisclosuresthatarefully

explainedinthePillar3sectionofBaselII.


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8. Capital

Thecapitalbaseservingasabasisforcalculatingeachbank'scapitaladequacyratioisdefinedas

follows:

8.1.Tier1capital

Corecapital:

Paidupsharecapital,

Publishedreserves(includingposttaxretainedearnings),

Sharepremium,

Legalreserves,

Generalreserves,

HybridTier1Instruments(requirespriorapprovalfromCentralBank)

Minorityinterestsintheequityofsubsidiarieslessthanwhollyowned

Profitsofthecurrentperiodarenotallowableinthecalculationofcorecapital,otherthanin

exceptionalcircumstancesatthediscretionoftheCentralBank. Thiswouldbedeterminedin

conjunctionwithreviewsbyabank'sexternalauditorsastotheirfairness.

ThefollowingdeductionsmustbemadefromTier1corecapital:

Goodwillandotherintangiblesatnetbookvalue,

Adjustmentsforthecumulativeeffectofforeigncurrencytranslation

Ownsharesheld atnetbookvaluetakingaccountofanyprovisionsmadeagainstthe

acquisitionvalue,

Currentyearloss/retainedlosses,

Shortfallinprovisions,

Otherdeductions:

Loanstodirectors:

o Adeductionmustbemadeforloanstodirectorswhicharenotgrantedonmarket

terms

or

which

are

not

properly

secured.

Loans'

are

not

granted

on

market

terms

whereinterestchargedforsuchloansissignificantlybelowthatofcomparable

loanstoothercustomersand/orbelowthebank'srefinancingcostsforsuchloans

orontermsmorefavourablethanforsimilarloanstoothercustomers.

OtherdeductionstobedeterminedbyCBUAE

*Anyassetsdeductedfromcapital,incomputingthenumeratoroftheratio,arenottobe

includedinweightedriskassetsincomputingthedenominatoroftheratio. Loansare


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inadequatelysecuredwheretheywouldnothavebeengrantedtoothercustomersforlackof

adequatesecurity.

8.2.Tier2Capital(supplementarycapital)

Thefollowingelementsareeligibleforinclusioninthecalculationoftier2capital:

GeneralProvisions

Underthestandardisedapproachtocreditrisk,generalprovisions,asexplainedinBaselII

paragraphs381to383,canbeincludedinTier2capitalsubjecttothelimitof1.25%ofrisk

weightedassets. Forfurtherdetails,banksmustrefertoparagraph49(vii)to49(x)ofBaselII.

Undisclosedreserves

Thesereservesmusthavethesamehighqualityandcharacteristicsasadisclosedcapitalreserve

beforetheywillbeacceptedbytheCBUAE. Theymustbeunencumberedandcompletelyfreeof

anylienorcommitment.Forfurtherdetails,banksmustrefertoparagraph49(iv)ofBaselII.

Assetrevaluationreserves/CumulativechangesinFairValue

Revaluationsurplusesarisingfromtherevaluationoffixedassetsorotherlongterminvestments

canbeincludedassupplementarycapital;providedtheyaresubjecttoasubstantialdiscountin

ordertoreflectconcernsbothaboutmarketvolatilityandnotionaltaxchargeswhichmayarise

weresuchgainstoberealised. Accordingly,theCentralBankoftheU.A.E.acceptsthatbanksmay

includeafigureuptoamaximumof45%oftheexcessofmarketvalueoverthenetbookvalueof

theseitemswithinsupplementarycapital. Unrealisedreservesarisinginrespectoftheexcessof

marketvalueoverthenetbookvalueofthebankspropertyassetsmaynotbeincluded. For

furtherdetails,banksmustrefertoparagraph49(vi)ofBaselII.

Hybrid(debt/equity)capitalinstruments

Certaincapitalinstrumentscombinecharacteristicsofbothequityanddebt,butvaryfromone

countrytoanother. Wheretheseinstrumentshaveclosesimilaritiestoequity,inparticular,

wheretheyareabletosupportlossesonanongoingbasiswithouttriggeringliquidation,they

maybeincludedinsupplementarycapital.Theymust,however,meetthefollowingrequirements:

Mustbeunsecured,subordinatedandfullypaidup,

MustnotberedeemablewithoutthepriorconsentoftheCBUAE,

Mustbeavailabletoparticipateinlosseswithoutthebankbeingobligedtocease

trading(unlike

conventional

subordinated

debt);

Althoughthesecapitalinstrumentsmaycarryanobligationtopayinterestthatcannot

permanentlybereducedorwaived(unlikedividendsonordinaryshareholders'equity),they

shouldallowserviceobligationstobedeferred(aswithcumulativepreferenceshares)wherethe

profitabilityofthebankwouldnotsupportpayments.

Subordinatedtermloans


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Subordinatedloancapitalwithaminimumoriginaltermtomaturityofmorethanfiveyearsmay

beincludedwithinsupplementarycapital.Duringthelastfiveyearstomaturity,cumulative

amortizationof20%perannumonastraightlinebasiswillbeappliedtoreflectthediminishing

valueoftheseinstrumentsasacontinuingsourceofstrength.Theamountofsuchinstruments

willbeallowableonlyuptoamaximumof50%oftier1capital.

8.3.Tier3Capital

Theprincipalformofeligiblecapitaltocovermarketrisksconsistsofshareholdersequityand

retainedearnings(Tier1capital)andsupplementarycapital(Tier2capital).But,subjecttoprior

approvalfromtheCBUAE,banksmayemployathirdtierofcapital(Tier3),consistingofshort

termsubordinateddebtasdefinedinparagraph49(xiv)ofBaselII,forthesolepurposeofmeeting

aproportionofthecapitalrequirementsformarketrisks,subjecttotheconditionsinparagraph

49(xiii)and49(xiv).

Deductionsfromtotaloftier1capitalandtier2capital

Normalaccounting

practice

prescribes

the

consolidation

of

the

assets

and

liabilities

of

all

membersofagroupwhenpreparinggroupaccounts.Whereagroupexcludessubsidiaries,

deductionfromcapitalisessentialtopreventthemultipleuseofthesamecapitalresourcesin

differentpartsofagroup.

Thefollowingdeductionsshouldbemadefromthesumoftier1andtier2capitaltotakeaccount

ofthisandinthoseinstanceswherebankshavecrossshareholdingsinotherbanks:

Banking,securitiesandotherfinancialsubsidiaries

UnderBaselII,bankingandfinancialsubsidiariesshouldbeconsolidated,andifnotconsolidated,

the

investment

should

be

deducted

from

the

capital

base.

InternationalAccountingStandardsdefinesubsidiariesascompaniesincorporatedintheirhome

countryorabroadwhichthebankcontrols(i.e.directlyorindirectlyholds50%ormoreofthe

ordinarysharecapital)orinwhichthebankhasacontrollinginfluence(forexample,viathe

compositionoftheboardofdirectors)whereitholdslessthan50%oftheordinarysharecapital.

Allbankingandfinancialsubsidiariesshouldbeconsolidated,exceptincertaincasesasdescribed

inInternationalAccountingStandardNo.27,ConsolidatedFinancialStatementsandAccountingfor

InvestmentsinSubsidiaries(issuedbytheInternationalAccountingStandardsCommittee)which

requiresorpermitsexclusionfromconsolidation,forexample,when:

Controlofthesubsidiaryistemporary;or

Controldoesnotexistinreality;or

Controlisimpairedbyrestrictionsonthetransferoffunds.

Significantminorityinvestmentsinbankingandotherfinancialentities

Investmentsinbankingandotherfinancialentitiesof20%andabove,upto50%shouldnormally

bedeductedfromthecapitalbase. Alternatively,suchinvestmentsmay,undercertainconditions,


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beconsolidatedonaproratabasis.Forexample,prorataconsolidationmaybeappropriatefor

jointventuresorwheretheCBUAEissatisfiedthattheparentislegallyordefactoexpectedto

supporttheentityonaproportionatebasisonlyandtheothersignificantshareholdershavethe

meansandthewillingnesstoproportionatelysupportit.

Investmentsinotherbanksorfinancialinstitutions

Thisrepresentscrossshareholdingsbetweentwoormorebanksorfinancialinstitutionswherein

theyholdasimilaramountofeachother'sCapital.Insuchcircumstances,theseamountsmustbe

deductedfromthetotalofthecapitalbase.

Investmentsininsuranceentities

Forinvestmentsininsuranceentities,aninvestmentinsuchanentityof10%orabovewouldlead

todeductionfromthecapitalbase. Banksmayrecognisesurpluscapitalininsurancesubsidiaries

asperthecriteriaanddisclosurerequirementsexplainedinParagraph33andfootnote10ofBasel

II.

Significantinvestmentsincommercialentities

Significantminorityandmajorityinvestmentsincommercialentitiesthatexceedmaterialitylevels

of15%ofthebankscapitalforindividualsignificantinvestmentsincommercialentities,and60%

ofthebankscapitalfortheaggregateofsuchinvestmentswillbedeductedfromthecapitalbase.

Theamountdeductedwouldbetheportionoftheinvestmentabovethematerialitylevel.

Investmentsinsignificantminorityowned/majorityownedandcontrolledcommercialentities

belowthematerialitylevelsnotedabovewillberiskweightedatnolowerthan100%forbanks

usingthestandardisedapproach.

Asatransitional

arrangement,

banks

holding

such

investments

at

1January

2008,

that

exceed

the

materialitylevelsstatedabove,willbepermittedtoreducetheexcessoftheirinvestmentsovera

periodnotextendingbeyond1January2011. Theimpactwouldbethatbankswiththese

investmentswillnotberequiredtodeducttheexcessover15%fromcapitalbutwillriskweightat

100%

OtherDeductions SecuritisedAssets

ExposurestosecuritisedassetsundertheStandardisedApproacharedetailedunderParagraph

538to605ofBaselII. SuchexposuresthatareratedB+andbelow(LongTerm),belowA3/P3

(Shortterm),orareunratedmustbedeductedfromthecapitalbase.

Deductionofinvestmentsinaccordancewithaboverequirements

Wheredeductionsofinvestmentsaremadepursuanttothispartonscopeofapplication,the

deductionswillbe50%fromTier1and50%fromTier2capital.


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APPENDICES

Appendix1:ExternalCreditAssessmentAgencies

Appendix2:SecuratisationMappings

Appendix3:ICAAPSubmissionSuggestedFormat

Appendix4:Pillar3SuggestedFormats

Appendix5:FrequentlyAskedQuestions

Appendix6:

National

Discretions

Appendix7:PrudentialReturns

Appendix8:ListofMultilateralDevelopmentBanks


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APPENDIX

1:

External

Credit

Assessment

Agencies

Therevisedframework,allowsbankstouseexternalcreditassessmentstodeterminetherisk

weightofcertaincreditprovidedtheExternalCreditAssessmentInstitutions(ECAIs)(rating

agencies)thatproducethoseassessmentshavebeenrecognisedaseligibleforthatpurposeby

therelevantnationalsupervisor. ECAIsmaybeconsideredeligibleforrecognitioniftheymeetthe

sixcriteriaof:

Objectivity;

Independence;

Internationalaccess/Transparency;

Disclosure;

Resources;and,

Credibility.

Nationalsupervisoryauthoritiesareresponsibleforestablishingamappingprocessi.e.assigning

eligibleECAIsassessmentstotheriskweightsavailableunderthestandardisedriskweighting

frameworkandthesecuritisationframeworkforthestandardisedapproach.

ObjectiveoftheMethodology

ECAIs should have a methodology of assigning a credit rating that is rigorous, systematic,

continuousandsubjecttovalidation.ToestablishthatanECAI fulfilsthisprimarycomponentof

eligibilitycriteria,itmustdemonstratethatitmeetsminimumstandardsgivenbelow:

1. Ithasanestablishedratingdefinition,criteriaandmethodology.

2. Themethodology,systemsandproceduresforassigningriskratingshallbeconsistentacross

theboard.

3. The ECAI should have a robust procedure of rating assignment based on published

information,market data, interviewswithmanagement and anyothermeans that provide

reasonableassuranceforassigningtheriskratings.

4. Whileassigning

risk

ratings,

the

ECAI

should

take

into

account

all

major

features

of

credit

quality and ensure that the ratings are assigned taking into account all risk factors of the

relatedentity.

5. TheECAIshoulddemonstratethattheratingmethodologiesaresubjecttoquantitativeback

testing.Forthispurpose,ECAIshouldcalculateandpublishdefaultstudies,recoverystudies

andtransitionmatrices.Forthepurpose,theECAIshouldhaveadefinitionofdefaultthat is

equivalenttointernationalstandardandisrelevanttodomesticmarkets.


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6. Theassessmentmethodology foreachmarketsegment includingrigorousbacktestingmust

havebeenestablishedforatleastoneyear.

7. All rating decisions should be made by the rating committee utilizing ECAIs established

criteriaandmethodology.

8. The ECAI should have amechanism to review its procedures andmethodologies to adapt

themto

changing

environment.

9. TheECAIshouldmaintainadequatesystem/internalrecordstosupportitsassignedratings.

Independence

TheECAIshouldbeindependent,freefromeconomicoranyexternalpressuresthatmayinfluence

itscreditassessments.TheindependenceofanECAIshallbeassessedonthebasisofthefollowing

fourparameters:

1. Ownership:Theownershipstructureshouldnotbesuchthatcouldjeopardizetheobjectivity

of

the

rating

process.

E.g.

the

owners

have

other

businesses

or

are

members

of

businesses

or

associationsthatareratedbytheECAI.

2. OrganisationalstructureandCorporateGovernance:TheECAIshoulddemonstratethattheir

organisationalstructureminimizesthescopeofexternalinfluencethatcannegativelyimpact

the rating process. The ECAI have in place high standards of Corporate Governance that

safeguardindependenceofitsriskassessmentandpromoteintegrity.

3. Financial Resources: Since the core earning of an ECAI is the Issuer fee, this commercial

pressuremaygiverisetoconflictofinterest.TheECAImustdemonstratethattheirbusinessis

financially viable and is able to sustain any commercialpressure exertedby rated entities.

Also,ECAIshouldnotbeprovidinganyotherservicetotheratedentities.

4. External

conflict

of

interest:

The

risk

assessment

process

of

ECAI

should

have

ability

to

withstand external pressure. The ECAI should demonstrate that it is free from all sorts of

externalconflictsofinterest.

InternationalAccessandTransparency

The risk assessment of the ECAI should be made available to both domestic and foreign

institutions on equivalent terms and the same fees should be charged for the rating/risk

assessments.

In order to promote transparency and enable its stakeholders to make decisions about the

appropriatenessof

its

risk

assessment

methods,

ECAI

should

disclose

enough

information

e.g.

ratingdefinition,methodsofarrivingattherating,ratingprocess,timehorizonoftheratingand

thesurveillanceandreviewprocedure.

Disclosure


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TheECAIshoulddemonstratethat itprovidesaccessto informationthataresufficienttoenable

itsstakeholderstomakedecisionabouttheappropriatenessofriskassessments.Thepurposeof

this disclosure requirement is to promote transparency and bring inmarket discipline. ECAI is

expectedtomakepublicthefollowinginformation:

Codeofconduct.

Definitionofdefault

Useoftimehorizons

Ratingdefinitions

Assessmentmethods

Actualdefaultratesexperiencedineachassessmentcategory

Transitionmatrices

Whetherratingwassolicitedorunsolicited

Thedateoflastreviewandupdate

Resources

ECAIshouldpossesssufficienthumanandtechnicalresourcestocarryouthighqualitycredit

assessment

1. Technical expertise of the people should be sufficient to carry out risk assessment and

maintaincontactwithmanagementofentitiesthatarerated.

2. With respect to technical resources, ECAI is expected to have quantitative techniques and

modelsthatcanprocessandanalyselargequantitiesofdata.

Credibility

The ECAI must demonstrate that it enjoys credibility in the market where it operates. The

credibilityisgaugedonthebasisof:

1. Theextenttowhichitmeetstheresourcesrequirements.

2. The extent towhich independent parties (investors, insurers etc..) rely on the ECAIs risk

assessment.

3. Existenceofinternalprocedurestopreventmisuseofconfidentialinformation.

RecognitionofExternalCreditAssessmentInstitutions(ECAIs)

Supervisory authorities across theGCChave agreed that thehome regulator is free to choose

fromthefollowinginternationallyrecognisedECAIs:

Standard&PoorsRatingsServices

MoodysInvestorsService

FitchRatings;and


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CapitalIntelligence

OnthebasisofinformationprovidedbytheaboveECAIs,CBUAEhasreachedtheviewthatbanks

applyingBaselIIcouldusetheratingsoftheaboveECAIs,andalsoreachedagreementonthe

mappingprocess. Additionalagenciesmaybeapprovedinduecourse.

MappingofECAIsratingstoriskweights

ThegeneralrulewithinBaselIIisthatbanksshouldusesolicitedratingsfromECAIs. TheGCC

nationalsupervisoryauthoritieshaveagreedattheirdiscretion,nottoallowbankstouse

unsolicitedratingsinthesamewayassolicitedratings.

BanksmustusethechosenECAIsandtheirratingsconsistentlyforeachtypeofclaim,forbothrisk

weightingandriskmanagementpurpose. Bankswillnotbeallowedtocherrypickthe

assessmentsprovidedbydifferentECAIs,andmustdisclosetheECAIsthattheyintendtousefor

therisk

weighting

of

their

assets

by

type

of

claim

as

per

the

mapping

process

in

Appendix

2.

Furtherguidanceisprovidedbelow.

LongtermmappingAssessmentsandRiskweights

ASSESSMENTS RISKWEIGHTS

Banks

Creditassessmentmethod

(Option2)

RiskGrade

S&P

FITCH

Moodys

CapitalIntelligence

Corpora

te

Maturity>

3months

Maturity3

monthsorless

(Domestic

currencyonly)

Sovereign

1 AAAto

AA

AAAto

AA

Aaato

Aa3

AAA 20% 20% 20% 0%

2 A+to

A

A+toA A1toA3 AAtoA 50% 50% 20% 20%

3 BBB+

toBBB

BBB+to

BBB

Baa1to

Baa3

BBB 100% 50% 20% 50%

4 BB+to

BB

BB+to

BB

Ba1to

Ba3

BB 100% 100% 50% 100%


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5 B+to

B

B+toB B1toB3 B 150% 100% 50% 100%

6 CCC+

and

below

CCC+and

below

Caa1and

below

Cand

below

150% 150% 150% 150%

7 Unrated Unrated Unrated Unrated 100% 50% 20% 100%

UAEDirhamdenominatedandfundedsovereignexposurestotheFederalandLocalEmirate

governmentsattractariskweightingof0%. Similarly,allGCCsovereignexposuresattractarisk

weightingof0%.

Forthemappingofratingstoriskweightsforexposurestobanksandsecuritiesfirms,onlytherisk

weightsassociated

with

Option

2are

shown.

The

GCC

exercised

this

Option

for

the

standardised

approach,ratherthanOption1,whichisbasedonthesovereignrating.

Shorttermmapping(appliedtoexposurestobanksandcorporateentities)

Forriskweightingpurposes,shorttermassessmentsaredeemedtobeissuespecific. Theycan

onlybeusedtoderiveriskweightsforclaimsarisingfromtheratedfacility. Theycannotbe

generalisedtoothershorttermclaims,exceptundertheconditionsasoutlinedbelow,which

relatetoshortterminterbankclaimsunderOption2ofthestandardisedapproachtocreditrisk.

Shorttermratingscannotbeusedtosupportariskweightforanunratedlongtermclaim,and

mayonlybeusedforshorttermclaimsagainstbanksandcorporateentities.

ConditionsfortheuseofshorttermratingsforshorttermbankexposuresunderOption2ofthe

standardisedapproachtocreditrisk

TheinteractionbetweenshorttermbankexposuresunderOption2ofthestandardisedapproach

tocreditriskandshorttermassessmentsofECAIsisasfollows:

Thegeneralpreferentialtreatmentforshorttermclaims,asdefinedunderparagraphs62and

64

of

Basel

II,

applies

to

all

claims

on

banks

of

up

to

three

months

original

maturity

when

thereisnospecificshorttermassessment(i.e.applythelongtermratingsandassociatedrisk

weightsasdefinedinAppendix2forshorttermclaimsmaturityof3monthsorless);

Wherethereisashorttermassessment,andsuchanassessmentmapsintoariskweightthat

is more favourable (i.e. lower) or identical to that derived from the general preferential

treatment,theshorttermassessmentshouldbeusedforthespecificclaimonly;and

Where a specific shortterm assessment for a shortterm claimon abankmaps into a less

favourable (i.e.higher) riskweight, thegeneralpreferential treatment for interbank claims


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cannotbeused. Allunratedshorttermclaimsshouldreceivethesameriskweightingasthat

impliedbythespecificshorttermassessment.

RiskGrade S&P Fitch Moodys Capital

Intelligence

Risk

weight

1 A1+,A1 F1+,F1 P1 A1 20%

2 A2 F2 P2 A2 50%

3 A3 F3 P3 A3 100%

4 Allshortterm

ratingsbelow

A3

BelowF3 Notprime

(NP)

Allshortterm

ratingsbelow

A3

150%

BanksnominationofECAIs

ForthepurposeofapplyingECAIratingstoderiveriskweightsforexposuresundertheportfolio

ofclaimsonsovereigns,claimsonbanks,claimsonsecuritiesfirmsandclaimsoncorporate

entitiesunderthestandardisedapproach,abankshouldsatisfythefollowingfoursteps:

(a) NominateoneormoreECAI(s)(thenominatedECAI(s))whoseassignedratingswillbe

usedbythebankforderivingriskweightsforexposuresineachoftheexternalratings

basedportfolios,providedthatthenominatedECAI(s)canprovideareasonablecoverage

onthebanksexposureswithintheportfoliosintermsofthetypesofcounterpartiesand

differentgeographical

regions

covered

by

the

ECAI(s);

(b) NotifytheCBUAEofitsnominatedECAI(s)andtheapplicationoftheratingsofsuch

ECAI(s)oneachofthebanksexternalratingsbasedportfolios;

(c) UsetheratingsofthenominatedECAI(s)withineachoftheexternalratingsbased

portfoliosconsistently,andseektheconsentoftheCBUAEonanysubsequentchangesto

suchECAI(s)andtheapplicationofits/theirratings;and

(d) Treatarelevantexposureorthepersontowhomthebankhasarelevantexposureas

unratedforriskweightingpurposesifthatexposureorthatpersondoesnothavea

ratingassignedtoitbyanyECAIchosenbythebank.

Theabove

requirements

are

to

ensure

that

abank

applies

the

ratings

of

its

nominated

ECAI(s)

consistentlyandavoidanypossiblecherrypickingofratingsprovidedbydifferentECAIs.

IndeterminingitsnominatedECAI(s),abankshouldpayspecialattentiontothecriterionof

reasonablecoverage.Whereabankhassignificantexposureswithintheexternalratingsbased

portfoliostoaparticulartype/setofcounterpartiesoraparticularcountrythatisnotratedbythe

banksnominatedECAI(s)butbyotherrecognisedECAI(s)thebankshouldincludesuchECAIasa

nominatedECAItocomplywiththereasonablecoveragerequirement.


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Multipleassessments

IfthereisonlyoneassessmentbyanominatedECAIchosenbyabankforaparticularclaim,that

assessmentshouldbeusedtodeterminetheriskweightoftheclaim.

Ifthere

are

two

assessments

by

nominated

ECAIs

chosen

by

abank

that

map

into

different

risk

weights,thehigherriskweightwillbeapplied.

Iftherearethreeassessmentswithdifferentriskweights,theassessmentscorrespondingtothe

twolowestriskweightsshouldbereferredtoandthehigherofthosetworiskweightswillbe

applied.

Levelofapplicationofassessments

Externalassessmentsforoneentitywithinacorporategroupcannotbeusedtoriskweightother

entitieswithin

the

same

group.

Issueversusissuerassessment

Whereabankinvestsinaparticularissuethathasanissuespecificassessment,theriskweightof

theclaimwillbebasedonthisassessment. Whereabanksclaimisnotaninvestmentina

specific,assessed,issuethefollowingprinciplesapply:

Incircumstanceswhere theborrowerhasa specificassessment foran issueddebt,but the

banksclaimisnotaninvestmentinthisparticulardebt,ahighqualitycreditassessment(that

beingone

which

maps

into

arisk

weight

lower

than

that

which

applies

to

an

unrated

claim)

on

thatspecificdebtmayonlybeappliedtothebanksunassessedclaimifthisclaimrankspari

passuorseniortotheclaimwithanassessmentinallrespects. Ifnot,thecreditassessment

cannotbeusedandtheunassessedclaimwillreceivetheriskweightforunratedclaims;and

In circumstances where the borrower has an issuer assessment, this assessment typically

applies toseniorunsecuredclaimson that issuer. Consequently,onlyseniorclaimson that

issuerwillbenefitfromahighqualityissuerassessment. Otherunassessedclaimsofahighly

assessed issuerwillbe treated asunrated. If either the issueror a single issuehas a low

qualityassessment(mapping intoariskweightequaltoorhigherthanthatwhichappliesto

unratedclaims),anunassessedclaimonthesamecounterpartywillbeassignedthesamerisk

weightasisapplicabletothelowqualityassessment.

Whereabankintendstorelyonanissueroranissuespecificassessment,theassessmentmust

takeintoaccountandreflecttheentireamountofcreditriskexposureabankhaswithregardto

allamountsowedtoit.


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ExportCreditAgencies(ECAs)

BaselII(Para55)allowssupervisorstorecognisethecountryriskscoresassignedbyECAsin

respectoftheriskweightingofsovereignandcentralbankexposures. Thisisinadditiontobanks

beingabletouseECAIsforsuchexposures. TheGCCregulatorshaveexercisedthisNational

DiscretionandagreedthatbanksarenotpermittedtousetheconsensusriskscoresofECAs

participatingin

the

OECD

Arrangement

on

Officially

Supported

Export

Credits.


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APPENDIX2:SecuratisationMappings

Longtermrating

Risk Weights

Credit Default Swaps

RiskGrade

S&

P

FITCH

Moodys

CapitalIntelligence

Securitisation

Resecuritisation

First to

default

Second to

default

1 AAA to

AA-

AAA to

AA-

Aaa to Aa3 AAA 20% 40% 20% 20%

2 A+ to A- A+ to A- A1 to A3 AA to A 50% 100% 50% 50%

3 BBB+ to

BBB-

BBB+ to

BBB-

Baa1 to

Baa3

BBB 100%225% 100% 100%

BB+ to

BB-

BB+ to

BB-

Ba1 to Ba3 BB 350%650% 350% 350%

5 B+ and

below

Unrated

B+ and

below

Unrated

B1 and

below

Unrated

B and

below

Unrated

Deduction Aggregate

of risk

weights ofeach

obligor in

basket Up

to 1000%

Aggregate of

risk weights of

each obligor inbasket

(excluding

asset with

lowest risk

weight) Up to

1000%


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Shorttermrating

Risk weights

Credit Default Swaps

RiskGra

de

S&

PFitchs

Moodys

Capital

Intelligence

Securitisation

Resecuritisation

First to

default

Second to

default

1 A-1+, A-1 F1+,

F1

P-1 A1 20%

40% 20% 20%

2 A-2 F2 P-2 A2 50% 100% 50% 50%

3 A-3 F3 P-3 A3 100% 225% 100% 100%

4 All others

or

unrated

All

others

or

unrated

All others

or unrated

All others

or unrated

Deduction Aggregate

of risk

weights of

each

obligor in

basket Up

to 1000%

Aggregate of

risk weights of

each obligor in

basket

(excluding

asset with

lowest risk

weight) Up to

1000%

Deductionisrequiredforunratedpositionswiththeexceptionofthecircumstancesdescribedin

Paragraphs571to575BaselII

RefertoEnhancementstotheBaselIIframeworkJuly2009


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APPENDIX3:ICAAPSubmissionSuggestedFormat

BanksbusinessandriskprofilesdifferandtheICAAPshouldbeproportionatetothesize,nature

andcomplexity

of

abanks

business.

Adoptingthisformatmaybeconvenientforbanksasitcoversmostofthematterswhich

typicallywouldbereviewedbytheCBUAEundertheSREP. However,otherformatsmaybe

acceptable.

ExecutiveSummary

ThepurposeoftheExecutiveSummaryistopresentanoverviewoftheICAAPmethodologyand

results.Thisoverviewwouldtypicallyinclude:

1. Thepurposeofthereportandwhichbank(s)is(are)coveredbytheICAAP;

2. ThemainfindingsoftheICAAPeg:

howmuch andwhat compositionof internal capital thebank considers it should

holdascomparedwiththePillar1minimumcapitalrequirement(detailsexplained

withcalculationsinappendices);and

anassessmentoftheadequacyofthebanksriskmanagementprocesses;

3. Brief descriptions of the capital and dividend plan; how the bank intends tomanage

capitalgoingforwardandforwhatpurposes;

4. Commentaryonthekeybusinesses,mostmaterialrisks,whythelevelofriskisacceptable

or,ifitisnot,whatmitigatingactionsareplanned;

5. Commentaryon

major

issues

where

further

analysis

and

decisions

are

required;

and

6. Whohascarriedouttheassessment,howithasbeenchallenged,andwhohasapproved

it.

PILLAR 1

Min Regulatory Capital

AED000s

Pillar 2 Capital

Required capital as

derived from ICAAP

AED 000s

Credit Risk

Market Risk

Operational Risk

Total Pillar 1

Pillar 2- Credit Concentration Risk

Pillar 2- Int. Rate Risk in Bank. book

Pillar 2 - Other Risks

Total Pillar 2

Capital derived from Stress testing

Required Capital as per ICAAP

Current capital


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Surplus/(additional required)

Background

This

section

would

cover

the

relevant

organisational

and

historical

financial

data

for

the

bank.

e.g.groupstructureandkeydataandtrendsdrawnfromthebanksquarterlyreturns.

CapitalAdequacy

ThissectionmightstartwithadescriptionoftheriskappetiteusedintheICAAP.Where

economiccapitalmodelsareusedthiswouldincludedetailsoftheassumptionsbehindthat

model.Wherescenarioanalysesorothermeansareused,thensomeotherdescriptionofhow

theseverityofscenariohasbeenchosenwouldbeincluded.

Thesection

would

then

include

adetailed

review

of

the

capital

adequacy

of

the

bank

including:

1. Timing

TheeffectivedateoftheICAAPcalculationstogetherwithconsiderationofanyevents

betweenthisdateandthedateofsubmissionwhichwouldmateriallyimpacttheICAAP

calculationtogetherwiththeireffects;and

Detailsof,andrationalefor,thetimeperiodoverwhichcapitalhasbeenassessed.

2. Risksanalysed

Anidentificationofthemajorrisksfacedineachofthefollowingcategories:

Creditrisk,

Marketrisk,

Operationalrisk,

Liquidityrisk,

Concentrationrisk

Reputationalrisk

Regulatoryrisk

Insurancerisk

Residualrisk

Securitisationrisk

Businessrisk

Interestraterisk,and

Anyotherrisksidentified

Foreachrisk,anexplanationofhowtheriskhasbeenassessedandthequantitativeresultsof

thatassessment;

Acleararticulationofthebanksriskappetitebyriskcategory,forexample,strongappetite,

modestappetiteorconservativeappetite;and

Anexplanationofanyothermethodsapartfromcapitalusedtomitigatetheriskse.g.risk

managementorcontrolstructures.

3. Methodologyandassumptions


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Adescriptionofhowassessmentsforeachofthemajorriskshavebeenapproachedand

themainassumptionsmade. Thedescriptionwouldmakeclearwhichrisksarecovered

bywhichapproach.

Wherestresstestsorscenarioanalyseshavebeenusedtovalidate,supplement,or

probetheresults,thenthissectionwouldprovidedetails.

Capitaltransferability

Detailsofanyrestrictionsonthemanagementabilitytotransfercapitalinto,oroutofthebank

(forexample,contractual,commercial,regulatoryorstatutoryrestrictionsthatapply)

ICAAPcomparisons

Ananalysisofsignificantmovementsinavailablecapitalandcapitalrequiredsincethelatest

ICAAPand

acomparison

of

the

overall

level

and

quality

of

capital

required

under

Pillar

1as

comparedwiththeoverallcapitalrequirementidentifiedbytheICAAP.

KeySensitivitiesandFutureScenarios

Thissectionwoulddetailthesensitivitytestsundertakentokeyassumptionsandfactorsthat

haveasignificantimpactonthebroaderfinancialconditionofthebank. Materialchangesinthe

financialriskstowhichthebusinessisexposedwouldbeexplainedandquantifiedasfaras

possibleinthissection.Theanalysiswouldincludefinancialprojectionsforwardfor,threeor

fiveyears,

based

on

business

plans

and

capital

adequacy

calculations.

These

would

take

account

ofexpectedcapitalrequirementsovereconomicandbusinesscycles.

Typicalscenariosmayinclude:

Howaneconomicdownturnwouldaffectthebank'scapitalresources,capitalrequirements

anditsfutureearningstakingintoaccountthebank'sbusinessplan;

Howwouldasignificantcorrectioninlocalequityand/orrealestatemarketsimpactthe

bankscapitalrequirements

Howchangesinthecreditqualityofthebank'screditriskcounterpartiesaffectthebanks

capitaland

its

credit

risk

capital

requirement

(note

that

this

scenario

stress

test

is

arequirementforIRB);

Anassessmentbythebankofhowitwouldcontinuetomeetitsregulatorycapital

requirementsthroughoutarecession;

Projectionsofcashinflowsandoutflowsunderstressedconditions.

Aggregation

Thissectionwoulddescribehowtheresultsofthevariousseparateriskassessmentsare

broughttogetherandanoverallviewtakenoncapitaladequacy.Thisrequiressomesortof

methodologyto

be

used

to

quantify

the

capital

required

to

support

individual

risks

so

that

they

canbeaggregatedintoatotalfigure.

Asregardstheoverallassessment,thiswoulddescribehowthebankhasarrivedatitsoverall

assessmentofthecapitalitneedstakingintoaccountsuchmattersas:


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Theinherentuncertaintyinanymodelingapproach;

Weaknessesinthebanksriskmanagementprocedures,systemsorcontrols;

Thedifferencesbetweenregulatorycapitalandinternalcapital;and

Thedifferingpurposesthatcapitalserves:shareholderreturns,ratingobjectivesforthe

bankasawhole,avoidanceofregulatoryintervention(e.g.onlargeexposurenotifications),

customerperception,protectionagainstuncertainevents,workingcapital,capitalheldfor

strategicacquisitions

etc.

ChallengesandAdoptionoftheICAAP

ThissectionwoulddescribetheextentofchallengeandtestingoftheICAAP.Itwouldinclude

thetestingandcontrolprocessesappliedtotheICAAPcalculations,andtheseniormanagement

orboardreviewandsignoffprocedures.

Acopyshouldbeattachedofanyrelevantreporttoseniormanagementortheboardandtheir

response.

Detailsoftherelianceplacedonanyexternalsuppliers/advisers/consultantswouldalsobe

detailedheree.g.forgeneratingeconomicscenariosorforassistanceinpreparationofthe

ICAAP. Inaddition,acopyofanyreportobtainedfromanexternalreviewerorinternalaudit

wouldalsobeincluded.

UseoftheICAAPwithintheBank

Thiswoulddemonstratetheextenttowhichcapitalmanagementisembeddedwithinthebank

including

the

extent

and

use

of

capital

modelling

or

scenario

analysis

and

stress

testing

within

thebank'scapitalmanagementpolicy,e.g.insettingpricingandcharges. Thiswouldalso

includeastatementoftheactualoperatingphilosophyoncapitalmanagementandhowthis

linkstotheICAAPsubmitted.ForinstancedifferencesinriskappetiteusedintheICAAPas

comparedtothatusedforbusinessdecisionsshouldbediscussed.


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APPENDIX4:PILLAR3SUGGESTEDFORMATS

INFORMATION ON SUBSIDIARIES AND SIGNIFICANT INVESTMENTS AS ON ______________

Basis of Consolidation1:

Country ofIncorporation

% OwnershipDescription

2AccountingTreatment 3

SurplusCapital4

CapDeficie

Subsidiaries:

SignificantInvestments:

Restrictionson

transfer

of

regulatory

capital

within

the

group:

1. Includeanoutlineofdifferencesinthebasisofconsolidationofsubsidiariesforaccountingandregulatorypurposes.

2. Abriefdescriptionoftheentitieswithinthegroupsuchassecurities, insurance,otherfinancialsubsidiaries,commer

equityinvestmentsininsurance,financialandcommercialentities.

3. Reporttheaccountingtreatmentas:

thatarefullyconsolidated;

thatareprorataconsolidated;

thataregivenadeductiontreatment;

thosefromwhichsurpluscapitalisrecognized,and

thatareneitherconsolidatednordeducted(e.g.wheretheinvestmentisriskweighted)

4. Theaggregate

amount

of

surplus

capital

of

insurance

subsidiaries

(whether

deducted

or

subjected

to

an

alternative

m

consolidatedgroup.Surpluscapitalinunconsolidatedregulatedsubsidiariesisthedifferencebetweentheamountofi

regulatorycapitalrequirements.

5. Theaggregateamountofcapitaldeficienciesinallsubsidiariesnotincludedintheconsolidationi.e.theyarededucted.

6. Theaggregateamounts(e.g.currentbookvalue)ofthelicensedbank'stotalinterestsininsuranceentities,whichare

fromcapitalorsubjectedtoanalternategroupwidemethod,aswellas,ifdifferent,theproportionofvotingpoweri

thequantitativeimpactonregulatorycapitalofusingthis(it'srequiredtomethod)versususingthedeductionoraltern


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CONSOLIDATED CAPITAL STRUCTURE AS ON __________________________________ _

Summary terms and conditions of main features ofinstruments

Tier 1 Capital

1. Paid up share capital/common stock

2. Reserves

a. Statutory reserve

b. Special reserve

c. General reserve 2

3. Minority interests in the equity ofsubsidiaries

4. Innovative capital instruments 1

5. Other capital instruments

6. Surplus capital from insurance companies

Sub-total

Less: Deductions for regulatory calculation

Less: Deductions from Tier 1 capital

Tier 1 Capital - Subtotal

Tier 2 capital

Less: Other deductions from capitals

Tier 3 capital

Total eligible capital after deductions1. IncludeminorityinterestsinequityaccountsofconsolidatedsubsidiariesthattakeformofSPVsandmoderatestep

SPVs,aswellasdirectlyissuedTierIinstruments,subjecttostringentconditions(refertoBaselCommittee'spressr

inclusioninTierIcapital 27October1988)andlimitedtoamaximumof15%ofTierIcapital.

2. Includingundisclosedreserves,revaluationreserves,generalprovisions/generalloanlossreservesHybriddebtcapit

debt.


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CAPITAL ADEQUACY AS ON _______________________________________________

a)Qualitative Disclosures

Include here a description of the approach taken by the bank to assess the adequacy of its capital to support cuseparate risk area (e.g. credit, market, operational, banking book interest rate risk, equity) banks must describe

and policies as per Para 824 of Basel II.b)Quantitative Disclosures Capital Charge (AED 000s)

Capital Requirements

1. Credit Risk

a. Standardised Approach

b. Foundation IRB

c. Advanced IRB

2. Market Risk

a. Standardised Approach

or b. Models Approach

3. Operational Risk

a. Basic Indicator Approach

or b. Standardised Approach/ASA

or c. Advanced Measurement Approach

Total Capital requirements

Capital Ratio

a. Total for Top consolidated Group

b. Tier 1 ratio only for top consolidated Group

c. Total for each significant bank subsidiary


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Qualitative Disclosures

Definit ion of past due and impaired (for account ing purposes)

Descrip tion of approaches followed for specif ic and general allowances and statistical methods

Specific

General

Discussion of Banks credit risk management policy

Partial adoption of foundation IRB/advanced IRB

Approach Descript ion of exposures Plans and t imfu

Standardised Approach

Foundation IRB

Advanced IRB


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GROSS CREDIT EXPOSURES BY CURRENCY TYPE AS ON

LoansDebt

SecuritiesTotal

FundedCommitments

OTCDerivatives

Other Off-Balance Sheet

exposures

Foreign

Currency

AED


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GROSS CREDIT EXPOSURES BY GEOGRAPHY AS ON

GEOGRAPHICDISTRIBUTION

LoansDebt

SecuritiesTotal

FundedCommitments

OTCDerivatives

Other Off-Balance Sheet

exposuresUnited ArabEmiratesGCC excludingUAE

Arab League(excluding GCC)

Asia

Africa

North America

South America

Caribbean

Europe

Australia

Others

Total

1. Concerning independent institutions insert the figures opposite the country which licensed them.2. Concerning institutions that operate as branches for their H.O. insert the figures opposite the country where


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GROSS CREDIT EXPOSURE BY INDUSTRY SEGMENT AS ON

INDUSTRY SEGMENT Loans Debt

SecuritiesTotal

FundedCommitments

OTCDerivatives

Agriculture, Fishing & related activities1

Crude Oil, Gas, Mining & Quarrying2

Manufacturing3

Electricity& Water

Construction 4

Trade 5

Transport, Storage & Communication6

Financial Institutions 7

Services8

Government9

Retail/Consumer banking1o

All Others

Total

1. Agriculture,FishingandAlliedActivitiesincludescultivationofcrops,dairyandpoultryfarming,fishing&otheractivities(sheeprearing,etc).

2. CrudeOil,Gas,MiningandQuarryingincludecrudepetroleum,naturalgasandothers.

3. Manufacturingincludesfood,tobacco,beverages,textile,leather,footwear,clothing,furniture,fixtures,otherwoodproducts,paper,paperproduct

petroleumrefining,petrochemicals,basicmetalproductsincludingaluminum,fabricatedmetalproducts,machinery,equipment,constructionmate

engineeringworks,sawmills,marbletilesandothermanufacturing.

4. Constructionincludes

construction

of

buildings,

contractors

and

other

construction.

5. Tradeincludeswholesaletradeinconstructionmaterials,consumerdurables,motorvehicles,nondurablesandretailtrade.

6. Transportandcommunicationincludestaxies,andotherlandtransport,watertransport,airtransport,warehousing,storageandothers.

7. Financialinstitutionsincludeinsurancecompanies,moneyandexchangedealers,NBFCSandotherfinancialinstitutions.

8. Servicesincludehotelandrestaurants,professionalservices,repairwork(repairofmotorvehicles,a/cs,etc.),recreationservices(cinemas,sportscl

9. Governmentincludesfederalgovernmentandlocalgovernment.

10. Retail/consumerlendingincludespersonalloaninstallments,residentialmortgageloans,carloans,creditcards,otherretailproducts,loansforinves


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GROSS CREDIT EXPOSURES BY RESIDUAL CONTRACTUAL MATURITY AS ON ____________________

RESIDUALCONTRACTUAL

MATURITYLoans Debt

SecuritiesTotal Funded Commitments OTC

Derivatives

Other O

BalancShee

exposur

Less than 3 months

3 months to one year

One to five years

Over five years

Grand Total


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IMPAIRED LOANS BY INDUSTRY SEGMENT AS ON

OVERDUE PROVISIONS

INDUSTRY SEGMENT Less than

90 days

90 days andabove

TotalSpecific General

W

Agriculture, Fishing & related activities1

Crude Oil, Gas, Mining & Quarrying2

Manufacturing3

Electricity& Water

Construction4

Trade5

Transport, Storage & Communication6

Financial Institutions7

Services8

Government9

Retail/consumer banking10

All Others

Grand Total

1. Agriculture,FishingandAlliedActivitiesincludescultivationofcrops,dairyandpoultryfarming,fishingotheractivities(sheeprearing,etc).

2. CrudeOil,Gas,MiningandQuarryingincludecrudepetroleum,naturalgasandothers.

3. Manufacturingincludesfood,tobacco,beverages,textile,leather,footwear,clothing,furniture,fixtures,otherwoodproducts,paper,paperpro

petroleumrefining,petrochemicals,basicmetalproductsincludingaluminium,fabricatedmetalproducts,machinery,equipment,construction

engineeringworks,

saw

mills,

marble

tiles

and

other

manufacturing.

4. Constructionincludesconstructionofbuildings,contractorsandotherconstruction.

5. Tradeincludeswholesaletradeinconstructionmaterials,consumerdurables,motorvehicles,nondurablesandretailtrade.

6. Transportandcommunicationincludestaxies,andotherlandtransport,watertransport,airtransport,warehousing,storageandothers.

7. Financialinstitutionsincludeinsurancecompanies,moneyandexchangedealers,NBFCSandotherfinancialinstitutions.

8. Servicesincludehotelandrestaurants,professionalservices,repairwork(repairofmotorvehicles,a/cs,etc.),recreationservices(cinemas,spo

9. Governmentincludesfederalgovernmentandlocalgovernment.

10. Retail/consumerlendingincludespersonalloaninstalments,residentialmortgageloans,carloans,creditcards,otherretailproducts,loansfori


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IMPAIRED LOANS BY GEOGRAPHIC DISTRIBUTION AS ON __________________________________

OVERDUE PROVISIONS ADJUS

Geographic Region

Less than90 days

90 daysand above

TotalSpecific General Write-

offs

United Arab Emirates

GCC (excluding UAE)

Arab League

(excluding GCC)

Asia

Africa

North America

South America

Caribbean

Europe

Australia

Others

Grand Total

Note:Jurisdictionsshouldnotbeincludedmorethanonceunderthegeographicregion


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TABLE 4(h)

RECONCILIATION OF CHANGES IN PROVISION FOR IMPAIRED LOANS FOR THE PERIOD TO

Description

Opening Balance of Provisions for Impaired Loans

Add: Charge for the year

Specific provisions

General provisions

Add: Write-off of impaired loans to income statement

Less: Recovery of loan loss provisions

Less: Recovery of loans previously written-off

Less: Write-back of provisions for loans

Adjustments of loan loss provisions

Closing Balance of Provis ions for Impaired Loans


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LOAN PORTFOLIO AS PER STANDARDISED APPROACH AS ON

ASSET CL ASSESON BALANCE

SHEET

OFF BALANCE

SHEETCREDIT RISK MITIGA

See Basel II, June 2006, Para 50 to 81, and Central Bank National Discr etions GROSSOUTSTANDING

NET EXPOSURE

AFTER CREDITCONVERSION

FACTORS (CCF)

EXPOSUREBEFORE CRM

CRM

CLAIMS ON SOVEREIGNS

CLAIMS ON NON-CENTRAL GOVERNMENT PUBLIC SECTOR ENTITIES (PSEs)

CLAIMS ON MULTI LATERAL DEVELOPMENT BANKS

CLAIMS ON BANKS

CLAIMS ON SECURITIES FIRMS

CLAIMS ON CORPORATES

CLAIMS INCLUDED IN THE REGULATORY RETAIL PORTFOLIO

CLAIMS SECURED BY RESIDENTIAL PROPERTY

CLAIMS SECURED BY COMMERCIAL REAL ESTATE

PAST DUE LOANS

HIGH RISK CATEGORIES

OTHER ASSETS


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CLAIMS ON SECURITISED ASSETS

CREDIT DERIVATIVES (Banks Selling protecti on)

TOTAL CLAIMS


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For each portfolio, name of ECAIs used, plus reasons for any changes

Types of exposure for which each agency is used

LOAN PORTFOLIO AS PER STANDARDISED APPROACH AS ON

b)Quantitative Gross Credit Exposures Exposures Su

Asset Class Rated Unrated

TotalPostCRM

RWA PostCRM

Rated Unrated To

Claims on Sovereigns

Claims on Public Sector Entities

Claims on MultilateralDevelopment Banks

Claims on securities firms

Claims on Banks

Claims on Corporate

Regulatory & other retail exposure

Residential retail exposure

Commercial Real Estate

Other assets

Claims on Securitised Assets

Credit Derivatives (Banks sellingprotection)

Grand Total


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CREDIT RISK MITIGATION: DISCLOSURES FOR STANDARDIZED APPROACH AS ON _____


Policiesandprocessescoveringcreditriskmitigation,includingsummaryof:

Policiesandprocessesfor,andanindicationoftheextenttowhichthebankmakesuseof,on andoffbalanceshee

Policiesandprocessesforcollateralvaluationandmanagement;

Descriptionofthemaintypesofcollateraltakenbythebank;

Themaintypesofguarantor/creditderivativecounterpartyandtheircreditworthiness;and

Informationabout(marketorcredit)riskconcentrationswithinthemitigationtaken.

b) Quantitative Disclosures Exposures

Gross Exposure prior to Credit Risk Mitigation

Less: Exposure covered by on-balance sheet netting

Less: Exposures covered by Eligible Financial Collateral

Less: Exposures covered by Guarantees

Less: Exposures covered by Credit Derivatives

Net Exposures after Credit Risk Mitigation


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TOTAL CAPITAL REQUIREMENT FOR MARKET RISK UNDER STANDARDISED APPROACH AS O(

Market Risk

Interest rate risk

Equity position risk

Foreign exchange risk

Commodity risk

Total Capital Requirement


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EQUITY POSITION IN THE BANKING BOOK AS OF ________________________________________ _

a) Qualitative Disclosures

Thegeneralqualitativedisclosurerequirement(Paragraph824ofBaselII)withrespecttoequityrisk,including:

Differentiationbetweenholdingsonwhichcapitalgainsareexpectedandthosetakenunderotherobjectivesinclud

reasons;and

Discussionofimportantpoliciescoveringthevaluationandaccountingofequityholdingsinthebankingbook. This

techniquesandvaluationmethodologiesused,includingkeyassumptionsandpracticesaffectingvaluationaswella

practices

Asat _______,thebank'stotalequity investmentportfolio inthebankingbookamountedtoAED __ %ofwhichrep

detailsoftheaccountingpoliciesandvaluationmethodology,pleaserefertoNoteXtotheconsolidated financialstateme

Policies'Detailsofcost,marketandfairvaluearereportedinNoteytotheconsolidatedfinancialstatementsundertheheadi


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b) Quantitative Disclosures

1. QUANTITATIVE DETAILS OF EQUITY POSITION:

Type Current Year

Publicly Traded Privately Held Public

Equities

Collective investment schemes

Any other investment

Total

2. REALISED, UNREALISED AND LATENT REVALUATION GAINS (LOSES) DURING THE YEAR:

Gains (Losses)

Realised gains (losses) from sales and liquidations

*Unrealised gains (losses) recognised in the balance sheet but not through profit and loss account

**Latent revaluation gains (losses) for investment recorded at cost but not recognised in balance sheet or profit aaccount

Total

3. ITEMS IN (2) ABOVE INCLUDED IN TIER 1/TIER 2 CAPITAL:

Tier Capital

Amount included in Tier I capital

Amount included in Tier II capital

Total


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TABLE 13(CON'T)

EQUITY POSITION IN THE BANKING BOOK AS OF ________ _

4. CAPITAL REQUIREMENTS BY EQUITYGROUPINGS:

Grouping

Strategic investments

Available for sale

Held for trading

Total capital requirement


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Table 14

INTERESTRATERISKINTHEBANKINGBOOK(IRRBB)ASOF

Interestrateriskarisesfromthepossibilitythatchangesininterestrateswillaffectfuture

profitability,cash

flows

or

the

fair

values

of

financial

instruments.

The

Bank

is

exposed

to

interest

rateriskasaresultofmismatchesorgapsintheamountsofassetsandliabilitiesandoffbalancesheetinstrumentsthatmatureorrepriceinagivenperiod.TheBoardofDirectorshasestablishedacceptablelevelsofinterestrateriskbysettinglimitsontheinterestrategapsforstipulatedperiods.TheBankmanagesinterestrateriskbymatchingtherepricingofassetsandliabilitiesthroughriskmanagementstrategiesandmonitorsthepositionsonadailybasistoensuretheyaremaintainedwithinestablishedlimits.AdherencetotheselimitsismonitoredbyALCO.

InterestrateriskisalsoassessedbymeasuringtheimpactofdefinedmovementsininterestyieldcurvesontheBank'snetinterestincome.Thefollowingimpactonthenetinterestincomeandregulatorycapitalfortheyearofanimmediateandpermanentmovementininterestyieldcurvesasat _

ShiftinYieldCurves NetInterestIncome RegulatoryCapital

+200basispoint

200basispoint

Theaboveinterestratesensitivitiesareillustrativeonlyandadoptsimplifiedscenarios.The

sensitivitiesdo

not

incorporate

actions

that

could

be

taken

by

management

to

mitigate

the

effect

ofinterestratemovements.


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APPENDIX5:FrequentlyAskedQuestions

CapitalBase

Q HowisaRetainedLosstreatedwhencalculatingcore/tier1capital?

A Retainedearnings are added if they arepositive,however,negative retained earningsor

retainedlossaredeductedfromcorecapital

Q Howarecumulativechangesinfairvaluetreated?

A Thesemaybeincludedastier2capitalunderAssetRevaluationReserve,butaresubjecttoa

discountof55%asperBaselIIPara49(v

Basel2-Guidlines

Documents

Transcript of Basel2-Guidlines