CA-A.1.1

Rules in this Module are applicable to locally incorporated banks (hereinafter referred to as "the banks") on both a stand-alone (i.e. including their foreign branches) and on a consolidated group basis (i.e. including their subsidiaries and any other investments which are included or consolidated into the group accounts or which are required to be consolidated or aggregated for regulatory purposes by the Central Bank of Bahrain ('CBB').

CA-A.1.2

If the banks have investments in banking, securities, financial, insurance and/or commercial entities, the banks will also need to apply rules set out in the Prudential Consolidation and Deduction Requirements Module (Module PCD) for the calculation of their solo and consolidated Capital Adequacy Ratio (CAR).

CA-A.1.3

Certain of the requirements relating to gearing (See Chapter CA-15) also apply to Bahrain branches of foreign retail bank licensees.

Executive Summary

CA-A.2.1

The purpose of this module is to set out the CBB's capital adequacy Rules and provide guidance on the risk measurements for the calculation of capital requirements by locally incorporated banks. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).

CA-A.2.2

Principle 9 of the Principles of Business requires that conventional bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requires conventional bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).

CA-A.2.3

This 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.2.4

The requirements specified in this Module vary according to the Category of conventional bank licensee concerned, their inherent risk profile, and the volume and type of business undertaken. The purpose of such requirements is to ensure that conventional bank licensees hold sufficient capital to provide some protection against unexpected losses, and otherwise allow conventional banks to effect an orderly wind-down of their operations, without loss to their depositors. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses.

CA-A.2.5

The CBB requires in particular that the banks maintain adequate capital, in accordance with the requirements of this Module, against their risks.

CA-A.2.6

This module provides support for certain other parts of the Rulebook, mainly:

Legal Basis

CA-A.3.1

Historically, on a consolidated basis, the CBB has set a minimum Capital Adequacy Ratio ("CAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank has been required to maintain a minimum CAR of 8.0% (i.e. unconsolidated). The arrangements outlined below will apply once banks have been subject to a Pillar 2 risk profile assessment by the CBB or an acceptable audit firm. Until such an assessment has been completed, the existing 12% and 8% minimum capital ratio requirements (as outlined in Module CA-2.5 October 2006 edition) will remain in place.

CA-A.3.2

CAR is calculated by applying the regulatory capital to the numerator and risk-weighted assets to the denominator.

CA-A.3.3

All locally incorporated banks are required to maintain a capital ratio both on a solo (and a consolidated basis where applicable) above the minimum "trigger" CAR of 8%. Failure to remain above the trigger ratio will result in Enforcement and other measures as outlined in Section CA-1.4.

CA-A.3.4

All locally incorporated banks will be required to maintain capital ratios above individually set "target" CARs on a solo and on a consolidated basis. These target CARs will be set at an initial minimum of 8.5% and may in the case of high risk banks be set at levels above the 12.5% target ratio set prior to January 2008. Failure to remain above the target ratio will result in Enforcement and other measures as outlined in Section CA-1.4.

Eligible Capital

Risk-weighted Assets

CA-A.4.1

For banks applying the IRB approach for credit risk, there will be a capital floor following implementation of this Module. Banks must calculate the difference between: (i) the floor as defined in Paragraph CA-A.4.2 and (ii) the amount as calculated according to Paragraph CA-A.4.3. If the floor amount is larger, banks are required to add 12.5 times the difference to the risk-weighted assets.

CA-A.4.2

The capital floor is based on previous capital adequacy Rules issued by CBB dated July 2004. It is derived by applying an adjustment factor to the following amount: (i) 8% of the risk-weighted assets, (ii) plus Tier 1 and Tier 2 deductions. The adjustment factor for banks applying the foundation IRB approach for the year 2008 is 95%. The adjustment factor for the year 2009 is 90%, and for the year 2010 is 80%. The following table illustrates the application of the adjustment factors. Additional transitional arrangements including parallel calculation are set out in Paragraphs CA-5.2.45 to CA-5.2.51.

CA-A.4.3

In the years in which the floor applies, banks must also calculate (i) 8% of total risk-weighted assets as calculated under this Module, (ii) less the difference between total provisions and expected loss amount as described in Section CA-5.7, and (iii) plus other Tier 1 and Tier 2 deductions.

CA-A.4.4

These prudential floors are also applicable to banks that that do not complete the transition to IRB approach in the years specified in Paragraph CA-2.4.2 to provide time to ensure that individual bank implementations of the IRB approach are sound. However, CBB may develop appropriate bank-by-bank floors periodically.

CA-A.4.5

Banks which start to use internal models for market risk for one or more risk categories should, over a reasonable period of time, extend the models to all of their operations, subject to the exceptions mentioned in Paragraph CA-A.4.6 below, and move towards a comprehensive model (i.e., one which captures all market risk categories).

CA-A.4.6

On a transitional basis, banks will be allowed to use a combination of the standardised approach and the internal models approach to measure their market risks provided they should cover a complete risk category (e.g., interest rate risk or foreign exchange risk), i.e., a combination of the two methods will not be allowed within the same risk category¹. However, banks presently implementing or further improving their internal models will be allowed some flexibility (including within risk categories) in including all their operations on a worldwide basis. This flexibility shall be subject to the specific prior written approval of the CBB, and such approval will be given on a case-by-case basis and reviewed by the CBB from time to time.

¹ This does not, however, apply to pre-processing techniques which are used to simplify the calculation and whose results become subject to the standardised methodology.

CA-A.4.7

The CBB will closely monitor banks to ensure that there will be no "cherry-picking" between the standardised approach and the models approach for market risk within a risk category. Banks which adopt a model will not be permitted, save in exceptional circumstances, to revert to the standardised approach.

CA-A.4.8

The CBB recognises that even a bank which uses a comprehensive model for market risk may still incur risks in positions which are not captured by their internal models², for example, in remote locations, in minor currencies or in negligible business areas³. Any such risks that are not included in a model should be separately measured and reported using the standardised approach described in Chapters CA-9 to CA-13.

² Banks may also incur interest rate and equity risks outside of their trading activities. However, there are no explicit capital charges for the price risk in such positions.

³ For example, if a bank is hardly at all engaged in commodities it will not necessarily be expected to model its commodities risk.

CA-A.4.9

Transitioning banks are required to move towards a comprehensive internal model approach for market risk.

CA-A.4.10

The CBB will closely monitor the risk management practices of banks moving towards the models approach for market risk, to ensure that they are in a position to meet all standards once they apply a full-fledged model for any risk category.

CA-A.5.1

This module was first issued in July 2004 as part of the conventional principles volume. Any material changes that have subsequently been made to this module are annotated with the calendar quarter date in which the changes were made. Chapter UG-3 provides further guidance on Rulebook maintenance and version control.

CA-A.5.1A

The most recent changes are detailed in the Table below.

Summary of Changes

Evolution of Module