CA-A CA-A Introduction
CA-A.1 CA-A.1 Application
CA-A.1.1
Regulations in this module are applicable to locally incorporated banks on both a stand-alone, including foreign
branches , and consolidated group basis.CA-A.1.2
In addition to licensees mentioned in paragraph CA-A.1.1, certain of these regulations (in particular market risk requirements) are also applicable to full commercial
branches of foreign banks.CA-A.2 CA-A.2 Purpose
CA-A.2.1
The purpose of this module is to set out the Agency's
capital adequacy regulations and provide guidance on the risk measurement for the calculation of capital requirements by locally incorporated banks.CA-A.2.2
The module also sets out the minimum gearing requirements which relevant banks (referred to in section CA-A.1) must meet as a condition of their licensing.
CA-A.2.3
The Agency requires in particular that the relevant banks maintain adequate capital, in accordance with the Regulation in this module, against their risks as capital provides banks with a cushion to absorb losses without endangering customer
deposits . Due to this, the Agency also requires the relevant banks to maintain adequate liquidity and identify and control their large creditexposures that might otherwise be a source of loss to a licensee on a scale that might threaten its solvency.CA-A.2.4
This module provides support for certain other parts of the Rulebook, mainly:
(a) Licensing and Authorisation Requirements;(b) BMA Reporting Requirements;(c) Credit Risk Management;(d) Market Risk Management;(e) Operational Risk Management;(f) Liquidity Risk Management;(g) High Level Controls:(h) Relationship with Audit Firms; and(i) Penalties and Fines.CA-A.3 CA-A.3 Key requirements
CA-A.3.1
All locally incorporated banks are required to measure and apply capital charges in respect of their credit and market risk capital requirements.
The capital requirement
CA-A.3.2
Banks are allowed three classes of capital instruments (see section CA-2.2) to meet their capital requirements for credit risk and market risk, as set out below:
Tier 1: Core capital — May be used to support credit risk and market risk;Tier 2: Supplementary capital — May be used to support credit risk and market risk; andTier 3: Ancillary capital — May be used solely to support market risk.Measuring credit risks
CA-A.3.3
In measuring credit risk for the purpose of
capital adequacy , banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.Measuring market risks
CA-A.3.4
For the measurement of their market risks, banks will have a choice, subject to the written approval of the Agency, between two broad methodologies. One alternative is to measure the risks in a standardised approach, using the measurement frameworks described in chapters CA-4 to CA-8 of these regulations. The second alternative methodology (i.e. the internal models approach) is set out in detail in chapter CA-9 including the procedure for obtaining the Agency's approval. This methodology is subject to the fulfilment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the Agency.
Minimum capital ratio requirement
CA-A.3.5
On a consolidated basis, the Agency has set a minimum Risk Asset Ratio ("RAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank is required to maintain a minimum RAR of 8.0% (i.e. unconsolidated).
CA-A.3.6
For banks that are required to complete only the PIR form, the Agency has set a minimum Risk Asset Ratio ("RAR") of 12.0%.
Maintaining minimum RAR
CA-A.3.7
The Agency considers it a matter of basic prudential practice that, in order to ensure that these RARs are constantly met, banks set up internal "targets" of 12.5% (on a consolidated basis) and 8.5% (on a solo basis) to warn them of a potential fall by the bank below the Agency's required minimum RARs. Where a bank's capital ratio falls below its target ratio, the General Manager should notify the Agency immediately, however, no formal action plan will be necessary. The General Manager should explain what measures are being implemented to ensure that the bank will remain above its minimum RAR(s).
CA-A.3.8
The bank will be required to submit form PIR (and PIRC where applicable) to the Agency on a monthly basis, until the RAR(s) exceeds its target ratio(s).
Gearing requirements
CA-A.3.9
For Full Commercial Bank and Offshore Banking Unit licensees,
deposit liabilities should not exceed 20 times the respective bank's capital and reserves.CA-A.3.10
For Investment Bank licensees,
deposit liabilities should not exceed 10 times the respective bank's capital and reserves.CA-A.4 CA-A.4 Regulation history
CA-A.4.1
This module was first issued in July 2004 as part of the conventional principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control. The most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes Evolution of the Module
CA-A.4.2
Prior to the development of the Rulebook, the Agency had issued various circulars representing regulations relating to
capital adequacy requirements. These circulars have now been consolidated into this module covering thecapital adequacy regulation. These circulars and their evolution into this module are listed below:Circular Ref. Date of Issue Module Ref. Circular Subject ODG/50/98 11 Sep 1998 CA-1–CA-9 Market Risk Capital Regulations BC/07/02 26 Jun 2002 CA-1.4 Review of PIR by External Auditors OG/78/01 20 Feb 2001 CA-2.5 Monitoring of Capital Adequacy BC/01/98 10 Jan 1998 CA-2.5 Risk Asset Ratio Effective date
CA-A.4.3
The contents in this module are effective from the date depicted in the original circulars (see Paragraph CA-A.4.2) from which the requirements are compiled.
