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  • 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; and
        Tier 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.