CA-A.1.1

The purpose of this module is to set out the Central Bank of Bahrain (CBB)'s capital adequacy Rules and provide guidance on the risk measurements for the calculation of capital requirements by Bahraini conventional bank licensees. 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.1.2

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.1.3

This Module also sets out the minimum leverage requirements which relevant banks (referred to in Section CA-B.1) must meet as a condition of their licensing.

CA-A.1.4

The requirements specified in this Module vary according to the inherent risk profile of a licensee, and the volume and type of business undertaken. As one of the principal objectives of the CBB (as outlined in Article 3 of the CBB Law 2006) is the protection of depositors, it is essential to ensure that the capital recognised in regulatory capital measures is readily available for those depositors and to ensure that conventional bank licensees hold sufficient capital to provide some protection against unexpected losses in the normal course of business, and otherwise allow conventional banks to effect an orderly wind-down of their operations. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses. The CBB therefore may impose more stringent capital requirements than those stated in this Module on certain banks taking into account the riskiness of the activities conducted by the concerned bank (see Paragraph CA-A.1.5A).

CA-A.1.5

The CBB requires that conventional bank licensees maintain adequate capital, in accordance with the requirements of this Module, against their risks. In particular, all Bahraini conventional bank licensees are required to maintain capital adequacy ratios or CARs (both on a solo and a consolidated basis where applicable) above the minimum levels set out in Chapters CA-B and CA-2. Failure to remain above these ratios will result in enforcement and other measures as outlined in Section CA-1.2 and Module EN. The detailed methodology for calculating the CARs is set out in the instructions for the form PIR.

CA-A.1.5A

All Bahraini conventional bank licensees must maintain their own target capital ratios above the supervisory CARs mentioned in Section CA-B.2 (on a solo and on a consolidated basis). Each concerned licensee must observe individual target ratios as agreed with the CBB on a case-by-case basis subject to a methodology to be disclosed in due course.

CA-A.1.6

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

CA-A.1.7

This Module contains the CBB's Directive (as amended from time to time) relating to the capital adequacy of conventional bank licensees, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable in its entirety to all Bahraini conventional bank licensees.

CA-A.1.8

For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

CA-A.2.2

The contents retained from the previous Module (Capital Adequacy — Conventional Banks) are effective from the dates depicted above.

CA-B.1.4

Generally, wherever possible, the assets and liabilities of banking subsidiaries must be consolidated on a line-by-line basis using the risk-weighting and other rules and guidance in this Module. In some cases, foreign banking subsidiaries are subject to slightly differing rules by their host regulator. In such cases it may be more convenient to add in the risk-weighted assets of the subsidiary as calculated by host rules rather than by adding in the assets of the subsidiary and subjecting them to CBB requirements and risk weights. This process of using host risk-weights instead of CBB risk-weights is termed 'aggregation'. Also host rules may treat some capital items differently to CBB rules. For example, T2 instruments may have different rules in host countries. There may therefore need to be a 'haircut' to such capital instruments, if the amount allowed by the host regulator is different to the amount of the investment by the parent bank.

CA-B.1.5

For the reasons outlined in Paragraphs CA-B.1.2A to CA-B.1.4, banks must agree the proposed regulatory consolidation or aggregation approach for banking subsidiaries with the CBB and their external auditor.

CA-B.1.6

If a banking subsidiary is to be consolidated by way of aggregation, the capital and risk weighted assets (RWAs) of the non-resident entity must be shown separately. The parent bank is required to aggregate the subsidiary's eligible capital and RWAs (based on the risk weighting of assets reported by the subsidiary to its host central bank) with its own eligible capital and RWAs respectively.

CA-B.1.7

Appropriate adjustments must be made to eliminate intra-group exposures.

CA-B.1.8

If a conventional bank operates an Islamic window, the assets of such Islamic window will be risk weighted in accordance with CBB's guidelines for conventional banks.

CA-B.1.9

If a bank in Bahrain is a subsidiary of a non-resident parent bank, the capital adequacy of such bank is determined on a standalone basis.

CA-B.1.10

Majority-owned or controlled financial entity subsidiaries must be adequately capitalised to reduce the possibility of future potential losses to the parent bank. The parent bank must monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall must also be deducted from the parent bank's solo and consolidated capital for regulatory capital purposes.

CA-1.1.2

Consolidated Total Capital consists of the sum of the following elements:

CA-1.1.3

Consolidated Total RWAs are determined by:

CA-1.1.4

For the measurement of their credit risks, conventional bank licensees measure the risks in the standardised approach, applying the measurement framework described in Chapter CA-3 and subject to the credit mitigation techniques outlined in Chapter CA-4 of this Module.

CA-1.1.5

The securitisation framework is set out in Chapter CA-6. Conventional bank licensees must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both.

CA-1.1.6

For the measurement of their operational risks, conventional bank licensees have a choice, subject to notification to the CBB, between two broad methodologies:

CA-1.1.6A

For the purpose of Sub-paragraph CA-1.1.6 (b), a licensee must provide appropriate justification and seek CBB’s prior approval, if it wishes to revert from the standardised approach to the basic indicator approach.

CA-1.1.7

For the measurement of their market risk, conventional bank licensees have a choice, subject to the written approval of the CBB, between two broad methodologies:

CA-1.1.8

In light of Paragraphs CA-1.1.3 to CA-1.1.7, each conventional bank licensee's overall capital requirement consists of:

CA-1.1.9

All transactions, including forward sales and purchases, must be included in the calculation of capital requirements as from the date on which they were entered into. Although regular reporting takes place quarterly, conventional bank licensees must manage their risks in such a way that the capital and leverage requirements are being met on a continuous basis, i.e. at the close of each business day. Conventional bank licensees must not "window-dress" by showing significantly lower credit or market risk positions on reporting dates. Conventional bank licensees must maintain strict risk management systems to ensure that intra-day exposures are not excessive. If a conventional bank licensee fails to meet the capital requirements of this Module, the bank must take immediate measures to rectify the situation as detailed in Section CA-1.2.

CA-1.1.10

A conventional bank licensee's solo capital adequacy ratio is calculated by dividing its Solo Total Capital by its Solo RWAs as described in Paragraph CA-1.1.11 and CA-1.1.12 without consolidating the assets and liabilities of subsidiaries referred to Paragraph CA-B.1.2A into the balance sheet of the parent bank.

CA-1.1.11

Solo Total Capital consists of the sum of the following elements:

CA-1.1.12

Solo Total RWAs are determined by:

CA-1.1.13

For the purpose of this Module the solo CAR may be shown diagrammatically as below.

CA-2.1.1

The predominant form of T1 capital must be common shares and retained earnings (hereafter referred to as CET1). Deductions from capital and prudential filters are applied at the level of CET1 (see CA-2.1 to CA-2.4 for a more detailed explanation). The remainder of the T1 capital base must be comprised of instruments that are subordinated, have fully discretionary non-cumulative dividends or coupons and have neither a maturity date nor an incentive to redeem.

CA-2.1.2

CET1 capital consists of the sum of the following items (a) to (d) below:

CA-2.1.2A

For unrealised fair value reserves relating to financial instruments to be included in CET1 Capital, conventional bank licensees and their auditor must only recognise such gains or losses that are prudently valued and independently verifiable (e.g. by reference to market prices). The CBB will closely review the components and extent of unrealised gains and losses and will exclude any that do not have reference to independent valuations (i.e. those made by bank management alone will not be included) or which are not deemed to be made on a prudent basis. As such, the prudent valuations, and the independent verification thereof, are mandatory. Unrealised gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's own credit risk must be derecognised in the calculation of CET1.

CA-2.1.3

For a common share to be included in CET1, it must meet the following criteria:

CA-2.1.4

AT1 capital consists of the sum of the items (a ) to (d):

CA-2.1.5

[This paragraph has been left blank.]

CA-2.1.6

For an instrument to be included in AT1, it must meet or exceed all the criteria below:

CA-2.1.7

[This paragraph has been left blank.]

CA-2.1.7A

The issuance of any new shares as a result of a trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.

CA-2.1.7B

Where an issuing bank or SPV is part of a banking group and the issuer wishes the instrument to be included in the capital base of the group (in addition to its solo capital where applicable), the terms and conditions must specify an additional trigger event.

CA-2.1.7C

Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing bank or the parent bank of the group (including any successor in resolution).

CA-2.1.7D

For the purposes of Subparagraph CA-2.1.6(o), the following provisions apply to AT1 instruments accounted for as liabilities:

CA-2.1.7E

Where the provisions governing AT1 instruments require them to be converted into CET1 instruments upon the occurrence of a trigger event, those provisions must specify either of the following:

CA-2.1.7F

Where the provisions governing AT1 instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down must reduce all the following:

CA-2.1.7G

Write down or conversion of an AT1 instrument must, under the applicable accounting framework, generate items that qualify as CET1 items.

CA-2.1.7H

The amount of AT1 instruments recognised in AT1 items is limited to the minimum amount of CET1 items that would be generated if the principal amount of the AT1 instruments were fully written down or converted into CET1 instruments.

CA-2.1.7I

The aggregate amount of AT1 instruments that is required to be written down or converted upon the occurrence of a trigger event must be no less than the lower of the following:

CA-2.1.7J

When a trigger event occurs conventional bank licensees must do the following:

CA-2.1.7K

A conventional bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of a trigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible AT1 instruments into shares if a trigger event occurs.

CA-2.1.7L

All necessary authorisations must be obtained at the date of issuance of such convertible AT1 instruments. The conventional bank licensee must maintain at all times the necessary prior authorisation from the CBB to issue the CET1 instruments into which such AT1 instruments would convert upon occurrence of a trigger event.

CA-2.1.7M

A conventional bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of a trigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.

CA-2.1.7N

The following must apply where, in the case of an AT1 instrument, the conditions laid down in Paragraph CA-2.1.6 cease to be met:

CA-2.1.8

T2 capital consists of the sum of the following items:

CA-2.1.9

The treatment of instruments issued out of consolidated subsidiaries of the conventional bank licensee and the regulatory adjustments applied in the calculation of T2 are addressed in Section CA-2.3.

CA-2.1.10

For an instrument to be included in T2(see CA-2.1.8(a)), it must meet all the criteria below:

CA-2.1.11

[This paragraph has been left blank.]

CA-2.1.11A

The issuance of any new shares as a result of a trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.

CA-2.1.11B

Where an issuing bank or SPV is part of a banking group and the issuer wishes the instrument to be included in the capital base of the group (in addition to its solo capital where applicable), the terms and conditions must specify an additional trigger event.

CA-2.1.11C

Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing bank or the parent bank of the group (including any successor in resolution).

CA-2.1.11D

For the purposes of Subparagraph CA-2.1.10(j), the following provisions apply to T2 instruments accounted for as liabilities:

CA-2.1.11E

Where the provisions governing T2 instruments require them to be converted into CET1 instruments upon the occurrence of a trigger event, those provisions must specify either of the following:

CA-2.1.11F

Where the provisions governing T2 instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down must reduce all the following:

CA-2.1.11G

Write down or conversion of a T2 instrument must, under the applicable accounting framework, generate items that qualify as CET1 items.

CA-2.1.11H

The amount of T2 instruments recognised in T2 items is limited to the minimum amount of CET1 items that would be generated if the principal amount of the T2 instruments were fully written down or converted into CET1 instruments.

CA-2.1.11I

The aggregate amount of T2 instruments that is required to be written down or converted upon the occurrence of a trigger event must be no less than the lower of the following:

CA-2.1.11J

When a trigger event occurs conventional bank licensees must do the following:

CA-2.1.11K

A conventional bank licensee issuing T2 instruments that convert to CET1 on the occurrence of a trigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible T2 instruments into shares if a trigger event occurs.

CA-2.1.11L

All necessary authorisations must be obtained at the date of issuance of such convertible T2 instruments. The conventional bank licensee must maintain at all times the necessary prior authorisation from the CBB to issue the CET1 instruments into which such T2 instruments would convert upon occurrence of a trigger event.

CA-2.1.11M

A conventional bank licensee issuing T2 instruments that convert to CET1 on the occurrence of a trigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.

CA-2.1.11N

The following must apply where, in the case of a T2 instrument, the conditions laid down in CA-2.1.10 cease to be met:

CA-2.2.1

CAR components and CARs outlined in Paragraph CA-B.2.1 must meet or exceed the following minimum ratios relative to total risk-weighted assets:

CA-2.2.1A

CAR components and CARs outlined in Paragraph CA-B.2.1 must meet or exceed the following minimum ratios on a solo basis relative to total risk-weighted assets:

CA-2.2.2

CET1 must be the predominant form of capital. Accordingly, the contribution of AT1 instruments towards the Minimum T1 Capital Ratios mentioned in Paragraphs CA-2.2.1 and CA-2.2.1A is limited to 1.5%.

CA-2.2.3

The limits on AT1 instruments and T2 instruments are based on the amount of CET1 after deductions pursuant to CA-2.4 (see Appendices CA-22 and CA-23 for examples of the threshold deduction effects and the caps).

CA-2.2.4

The contribution of T2 capital towards the Minimum Total Capital Ratios and Minimum Total Capital plus Capital Conservation Buffer Ratios mentioned in Paragraphs CA-2.2.1 (consolidated) and CA-2.2.1A (solo) is limited to 2.0%.

CA-2.2.5

To explain the limits outlined in Paragraph CA-2.2.4 on the contributions of AT1 and T2 Capital to T1 and Total Capital, a simple example is given below where a conventional bank licensee has BD650mn of Core Equity Tier One Capital and BD200mn of AT1 and BD300mn of T2 Capital and BD10,000mn of total risk-weighted assets:

This means that if the conventional bank licensee only has BD650mn of CET1, it cannot comply with the additional Capital Conservation Buffer Requirement of 2.5% nor can it use excess AT1 or T2 Capital to meet this requirement. Although it would appear that the conventional bank licensee has BD1,150mn of total capital, only BD1,000 can be used to meet the minimum ratios. This example serves to underline the importance of CET1. Unless a conventional bank licensee can meet the CET1 minimum CARs of 6.5% and 9.0% mentioned above, it may not be able to meet any of the other minimum capital adequacy ratios outlined in Paragraph CA-2.2.1.

CA-2.3.1

In order for minority interest arising from the issue of common shares by a fully consolidated subsidiary of the conventional bank licensee to be recognised in CET1 for the consolidated CAR calculation, it must meet the following conditions:

¹ For the purposes of this paragraph, any institution that is subject to the same minimum prudential standards and level of supervision as a bank may be considered to be a bank.

² Minority interest in a subsidiary that is a bank is strictly excluded from the parent bank's common equity if the parent bank or affiliate has entered into any arrangements to fund directly or indirectly minority investment in the subsidiary whether through an SPV or through another vehicle or arrangement. The treatment outlined above, thus, is strictly available where all minority investments in the bank subsidiary solely represent genuine third party common equity contributions to the subsidiary.

CA-2.3.2

The amount of minority interest meeting the criteria above that will be recognised in consolidated CET1 will be calculated as follows:

CA-2.3.2A

Appendix CA-1 outlines an example of the effect of an allocation of minority interest between the parent bank and minority shareholders in the fully consolidated subsidiary.

CA-2.3.3

AT1 capital instruments issued by a fully consolidated banking subsidiary of the conventional bank licensee to third party investors (including amounts under Paragraph CA-2.3.2) may receive recognition in T1 capital only if the instruments would, if issued by the conventional bank licensee, meet all of the criteria for classification as T1. The amount of this AT1 that will be recognised in consolidated AT1 will exclude amounts recognised in consolidated CET1 under Paragraph CA-2.3.2 and will be calculated as follows:

CA-2.3.4

T2 instruments issued by a fully consolidated banking subsidiary of the conventional bank licensee to third party investors (including amounts under Paragraphs CA-2.3.2 and CA-2.3.3) may receive recognition in consolidated Total Capital only if the instruments would, if issued by the conventional bank licensee, meet all of the criteria for classification as T2. The amount of this T2 that will be recognised in the parent bank's T2 will exclude amounts recognised in CET1 under Paragraph CA-2.3.2 and amounts recognised in AT1 under Paragraph CA-2.3.3 and will be calculated as follows:

CA-2.3.5

Where capital has been issued to third parties out of a special purpose vehicle (SPV), none of this capital can be included in consolidated CET1. However, such capital can be included in consolidated AT1 or T2 and treated as if the conventional bank licensee itself had issued the capital directly to the third parties only if it meets all the relevant entry criteria and the only asset of the SPV is its investment in the capital of the conventional bank licensee in a form that meets or exceeds all the relevant entry criteria³ (as required by CA-2.1.6(r) for AT1 and CA-2.1.10(i) for T2). In cases where the capital has been issued to third parties through an SPV via a fully consolidated subsidiary of the conventional bank licensee, such capital may, subject to the requirements of this paragraph, be treated as if the subsidiary itself had issued it directly to the third parties and may be included in the conventional bank licensee's consolidated AT1 or T2 in accordance with the treatment outlined in Paragraphs CA-2.3.3 and CA-2.3.4.

³ Assets that relate to the operation of the SPV may be excluded from this assessment if they are de minimis.

CA-2.4.2

Goodwill must be deducted in the calculation of CET1, including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation. The full amount is to be deducted net of any associated deferred tax liability which would be extinguished if the goodwill becomes impaired or derecognised under IFRS. The amount to be deducted in respect of mortgage servicing rights is set out in Paragraph CA-2.4.23A. Intangible assets other than goodwill and mortgage service rights are subject to transitional arrangements and are phased out as regulatory adjustments as outlined in Subparagraph CA-B.2.1(d).

CA-2.4.3

Conventional bank licensees must use the IFRS definition of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.

CA-2.4.4

Deferred tax assets (DTAs) that rely on future profitability of the conventional bank licensee to be realised are to be deducted in the calculation of CET1. Deferred tax assets may be netted with associated deferred tax liabilities (DTLs) only if the DTAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant taxation authority. Where these DTAs relate to temporary differences (e.g. allowance for credit losses) the amount to be deducted is set out in Paragraph CA-2.4.23. All other such assets, e.g. those relating to operating losses, such as the carry forward of unused tax losses, or unused tax credits, are to be deducted in full net of deferred tax liabilities as described above. The DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of goodwill, intangibles and defined benefit pension assets, and must be allocated on a pro rata basis between DTAs subject to the threshold deduction treatment and DTAs that are to be deducted in full.

CA-2.4.5

An over instalment of tax or, in some jurisdictions, current year tax losses carried back to prior years may give rise to a claim or receivable from the government or local tax authority. Such amounts are typically classified as current tax assets for accounting purposes. The recovery of such a claim or receivable would not rely on the future profitability of the conventional bank licensee and must be assigned the relevant sovereign risk weighting.

CA-2.4.6

The amount of the cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) must be derecognised in the calculation of CET1. This means that positive amounts must be deducted and negative amounts must be added back.

CA-2.4.7

This treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognised for prudential purposes. It removes the element that gives rise to artificial volatility in common equity, as in this case the reserve only reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of the hedged future cash flow).

CA-2.4.8

Any increase in equity capital resulting from a securitisation transaction (see Section CA-6.4) must be deducted from the calculation of CET1.

CA-2.4.9

[This paragraph has been left blank.]

CA-2.4.10

Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognised in the calculation of CET1 (i.e. CET1 cannot be increased through derecognising these liabilities). For each defined benefit pension fund that is an asset on the balance sheet, the asset must be deducted in the calculation of CET1 net of any associated deferred tax liability which would be extinguished if the asset should become impaired or derecognised under the relevant accounting standards. Assets in the fund to which the conventional bank licensee has unrestricted and unfettered access can, with supervisory approval, offset the deduction. Such offsetting assets must be given the risk weight they would receive if they were owned directly by the conventional bank licensee.

CA-2.4.11

Paragraph CA-2.4.10 only applies to conventional bank licensees which have subsidiaries which are located in jurisdictions where there are defined benefit pension schemes and addresses the concern that assets arising from pension funds may not be capable of being withdrawn and used for the protection of depositors and other creditors of a bank. The concern is that their only value stems from a reduction in future payments into the fund. The treatment allows for banks to reduce the deduction of the asset if they can address these concerns and show that the assets can be easily and promptly withdrawn from the fund.

CA-2.4.12

All of a conventional bank licensee's investments in its own common shares, whether held directly or indirectly must have already been deducted in the calculation of CET1 as required by Subparagraph CA-2.1.3(o). In addition, any own stock which the conventional bank licensee could be contractually obliged to purchase must be deducted in the calculation of CET1. The treatment described applies irrespective of the location of the exposure in the banking book or the trading book. In addition:

CA-2.4.13

The deductions under Subparagraphs CA-2.1.3(o) and Paragraph CA-2.4.12 are necessary to avoid the double counting of a conventional bank licensee's own capital. The treatment seeks to remove the double counting that arises from direct holdings, indirect holdings via index funds and potential future holdings as a result of contractual obligations to purchase own shares.

CA-2.4.14

Conventional bank licensee must deduct investments in their own AT1 in the calculation of their AT1 capital and must deduct investments in their own T2 in the calculation of their T2 capital.

CA-2.4.15

Reciprocal cross holdings of capital that are designed to artificially inflate the capital position of conventional bank licensees will be deducted in full. Conventional bank licensees must apply a "corresponding deduction approach" to such investments in the capital of other banks and financial entities. This means the deduction must be applied to the same component of capital for which the capital would qualify if it was issued by the conventional bank licensee itself. The above adjustments (CA-2.4.2 to CA-2.4.15) must now be aggregated and applied to CET1 to obtain a subtotal (CET1a). This new adjusted CET1a is used for the purpose of calculating the next adjustment.

CA-2.4.16

The regulatory adjustment described in Paragraph CA-2.4.17 applies to investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation and where the conventional bank licensee does not own more than 10% of the issued common share capital of the entity. In addition:

⁴ Indirect holdings are exposures or parts of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in value of the direct holding.

⁵ If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, the CBB may permit banks, subject to prior CBB approval, to use a conservative estimate of the amount to be deducted.

CA-2.4.17

If the total of all holdings listed in Paragraph CA-2.4.16 in aggregate exceed 10% of the conventional bank licensee's CET1a (i.e. after applying all other regulatory adjustments from Paragraph CA-2.4.2 to Paragraph CA-2.4.15) then the amount above 10% is required to be deducted, applying a corresponding deduction approach. This means the deduction must be applied to the same component of capital for which the capital would qualify if it was issued by the conventional bank licensee itself. Accordingly, the amount to be deducted from CET1a must be calculated as the total of all holdings which in aggregate exceed 10% of the conventional bank licensee's CET1a (as per above) multiplied by the common equity holdings as a percentage of the total capital holdings. This would result in a CET1a deduction which corresponds to the proportion of Total Capital holdings held in CET1a. Similarly, the amount to be deducted from AT1 must be calculated as the total of all holdings which in aggregate exceed 10% of the conventional bank licensee's CET1a (as per above) multiplied by the AT1 holdings as a percentage of the Total Capital holdings. The amount to be deducted from T2 must be calculated as the total of all holdings which in aggregate exceed 10% of the conventional bank licensee's CET1a (as per above) multiplied by the T2 holdings as a percentage of the Total Capital holdings.

CA-2.4.18

See Paragraph CA-2.4.21 for further details on what to do if, under the corresponding deduction approach, a conventional bank licensee is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction.

CA-2.4.19

Amounts below the threshold, which are not deducted, will continue to be risk weighted. Thus, instruments in the trading book will be treated as per the market risk rules and instruments in the banking book must be treated as per Chapter CA-3. For the application of risk weighting the amount of the holdings must be allocated on a pro rata basis between those below and those above the threshold. The above adjustments (CA-2.4.16 to CA-2.4.18) must now be aggregated and applied to CET1a to obtain a new subtotal (CET1b). This new adjusted CET1b is used for the purpose of calculating the next adjustment.

CA-2.4.20

The regulatory adjustment described in Paragraph CA-2.4.21 applies to investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation where the conventional bank licensee owns more than 10% of the issued common share capital of the issuing entity or where the entity is an affiliate of the conventional bank licensee. In addition:

⁶ Investments in entities that are outside the scope of regulatory consolidation refers to investments in entities that have not been consolidated at all or have not been consolidated in such a way as to result in their assets being included in the calculation of consolidated risk-weighted assets of the group.

⁷ If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, the CBB may permit banks, subject to prior CBB approval, to use a conservative estimate.

CA-2.4.21

All investments in Paragraph CA-2.4.20 that are not common shares must be fully deducted following a corresponding deduction approach. This means the deduction must be applied to the same tier of capital for which the capital would qualify if it was issued by the conventional bank licensee itself. If the conventional bank licensee is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher tier of capital (e.g. if a conventional bank licensee does not have enough AT1 capital to satisfy a particular deduction, the shortfall will be deducted from CET1c as applicable).

CA-2.4.22

Investments in Paragraph CA-2.4.20 that are common shares are subject to the threshold treatment described in paragraph CA-2.4.23. The above adjustments (CA-2.4.20 to CA-2.4.21) must be aggregated and applied to CET1b to obtain a new subtotal (CET1c). This new adjusted CET1c is used for the purpose of calculating the next adjustment.

CA-2.4.23

If the total of all common equity holdings listed in Paragraph CA-2.4.20 in aggregate exceeds 10% of the conventional bank licensee's CET1c, then the amount above 10% is required to be deducted from CET1c (see Appendices CA-22 and CA-23 for examples). After this deduction, the conventional bank licensee must deduct the amount by which each of items b) and c) in Paragraph CA-2.4.23A individually exceeds 10% of its CET1c. After these individual deductions, the aggregate of the three items below which exceeds 15% of its CET1c (calculated prior to the deduction of these items but after application of all other regulatory adjustments to CET1 applied in paragraphs CA-2.4.2 to CA-2.4.21) must be deducted from CET1c. The adjustments in this Paragraph are applied to CET1c to obtain a new subtotal (CET1d). This new adjusted CET1d is used for calculating the consolidated CAR and the applicable caps on AT1 and T2 Capital. The items included in the 15% aggregate limit are subject to full disclosure.

CA-2.4.23A

As of 1 January 2020, the calculation of the 15% limit will be subject to the following treatment: the sum of the three items below that remains recognised after the application of all regulatory adjustments must not exceed 15% of CET1d (See Appendix CA-3 for an example):

CA-2.4.24

The amount of the three above items that are not deducted in the calculation of CET1d is risk weighted at 250% (see Paragraph CA-3.2.26).

CA-2.4.25

The following items receive the following risk weights:

CA-2.4.26

For Subparagraphs CA-2.4.25 (c) and (d), amounts below the materiality thresholds and large exposure limits continue to be risk weighted in accordance with Chapter CA-3. Where the remaining holdings are made up of holdings carrying different risk weights, the application of the risk weighting must be allocated on a pro rata basis for those exposures that are not subject to the 800% risk weight. Appendix CA-21 gives an example of the way to calculate the risk weighted assets and the effect of the limits outlined in Subparagraphs CA-2.4.25 (c) and (d).

CA-2A.2.4

Where a conventional bank licensee fails to meet the required level of capital conservation buffer, it must prepare a Capital Conservation Plan (hereinafter referred to as "Plan") clearly outlining the information mentioned in this Paragraph. The conventional bank licensee must submit this Plan to the CBB within one week of becoming aware of the shortfall (see also CA-1.2.2). The conventional bank licensee must already have prepared such a Plan on a contingency basis. The Plan must include the following:

CA-2A.2.5

The CBB shall review the Plan submitted by the conventional bank licensee and shall approve it provided it considers that the Plan provides a reasonable basis for conserving or raising sufficient capital that will enable the conventional bank licensee to meet the buffer requirements within a period acceptable to the CBB. While reviewing the Plan, the CBB will also evaluate whether the conventional bank licensee has deliberately reduced its CET1 so as to operate in the buffer range (i.e. below the capital conservation buffer requirement) in order to reduce its cost of capital for competitive purposes.

CA-2A.2.6

If the Plan is not approved by the CBB, it may take one or more of the following steps, inter alia, as deemed necessary:

CA-3.2.1

Claims on governments of GCC member states (hereinafter referred to as GCC) and their central banks can be risk weighted at 0%. Claims on other sovereigns and their central banks are given a preferential risk weighting of 0% where such claims are denominated and funded in the relevant domestic currency of that sovereign/central bank (e.g. if a Bahraini bank has a claim on government of Australia and the loan is denominated and funded in Australian dollar, it will be risk weighted at 0%). Such preferential risk weight for claims on GCC/other sovereigns and their central banks will be allowed only if the relevant supervisor also allows 0% risk weighting to claims on its sovereign and central bank.

CA-3.2.2

Claims on sovereigns other than those referred to in the Paragraph CA-3.2.1 must be assigned risk weights as follows:

CA-3.2.3

Claims on the Bank for International Settlements, the International Monetary Fund and the European Central Bank receive a 0% risk weight.

CA-3.2.4

Any claims on the Bahraini PSEs listed in Appendix CA-18 are treated as claims on the government of Bahrain and are eligible for 0% risk weighting:

CA-3.2.4A

In addition to the Bahraini PSEs listed in Appendix CA-18, existing exposures to the following entities which have been removed from the list of PSEs as of 1^st March 2016, will be grandfathered and will remain eligible until the final maturity or sale of such exposure:

CA-3.2.4B

Any new claims to the entities listed under Paragraph CA-3.2.4A are subject to the normal risk weights as outlined in this Section.

CA-3.2.5

Where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns as outlined in Paragraphs CA-3.2.1 and CA-3.2.2. These PSEs must be shown on a list maintained by the concerned central bank or financial regulator. Where PSEs are not on such a list, they must be subject to the treatment outlined in Paragraph CA-3.2.6.

CA-3.2.6

Claims on all other (foreign) PSEs (i.e. not having sovereign treatment) denominated and funded in the home currency of the sovereign must be risk weighted as allowed by their home country supervisors, provided the sovereign carries rating BBB- or above. Claims on PSEs with no explicit home country weighting or to PSEs in countries of BB+ sovereign rating and below are subject to ECAI ratings as per the following table:

CA-3.2.7

Claims on commercial companies owned by governments must be risk weighted as normal commercial entities unless they are in the domestic currency and covered by a government guarantee in the domestic currency that satisfies the conditions in CA-4.2 and CA-4.5 in which case they may take the risk weight of the concerned government.

CA-3.2.8

MDBs currently eligible for a 0% risk weight are: the World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB), Arab Monetary Fund (AMF), the Council of Europe Development Bank (CEDB), the Arab Bank for Economic Development in Africa (ABEDA), Council of European Resettlement Fund (CERF) and the Kuwait Fund for Arab Economic Development (KFAED).

CA-3.2.9

The claims on MDB's, which do not qualify for the 0% risk weighting, are assigned risk weights as follows:

CA-3.2.10

Claims on banks must be risk weighted as given in the following table. No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of incorporation (see Guidance in Paragraph CA-3.2.11A for self-liquidating letters of credit).

CA-3.2.11

Short-term claims on locally incorporated banks may be assigned a risk weighting of 20% where such claims on the banks are of an original maturity of 3 months or less denominated and funded in either BD or US$. A preferential risk weight that is one category more favourable than the standard risk weighting may be assigned to claims on foreign banks licensed in Bahrain of an original maturity of 3 months or less denominated and funded in the relevant domestic currency (other than claims on banks that are rated below B-). Such preferential risk weight for short-term claims on banks licensed in other jurisdictions will be allowed only if the relevant supervisor also allows this preferential risk weighting to short-term claims on its banks.

CA-3.2.11A

Self-liquidating letters of credit issued or confirmed by an unrated bank are allowed a risk weighting of 20% without reference to the risk weight of the sovereign of incorporation. All other claims will be subject to the 'sovereign floor' of the country of incorporation of the concerned issuing or confirming bank.

CA-3.2.12

Claims with a contractual original maturity under 3 months that are expected to be rolled over (i.e. where the effective maturity is longer than 3 months) do not qualify for a preferential treatment for capital adequacy purposes.

CA-3.2.13

Claims on category one and category two investment firms which are licensed by the CBB are treated as claims on banks for risk weighting purposes but without the use of preferential risk weight for short-term claims. Claims on category three investment firms licensed by the CBB must be treated as claims on corporates for risk weighting purposes. Claims on investment firms in other jurisdictions will be treated as claims on corporates for risk weighting purposes. However, if the bank can demonstrate that the concerned investment firm is subject to an equivalent capital adequacy regime to this Module and is treated as a bank for risk weighting purposes by its home regulator, then claims on such investment firms may be treated as claims on banks.

CA-3.2.14

Risk weighting for corporates including insurance companies is as follows:

CA-3.2.15

Risk weighting for unrated (corporate) claims will not be given a preferential RW to the concerned sovereign. Credit facilities to small/medium enterprises (SMEs) may be placed in the regulatory retail portfolio in limited cases below.

CA-3.2.16

No claim on any unrated corporate, where said corporate originates from a foreign jurisdiction, may be given a risk weight lower than that assigned to a corporate within its own jurisdiction, and in no case will it be below 100%.

CA-3.2.17

Claims included in the regulatory retail portfolio must be risk weighted at 75%, except as provided in CA-3.2.23 for past due loans.

CA-3.2.18

To be included in the regulatory retail portfolio, claims must meet the following criteria:

¹² Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of debt exposures (e.g. loans or commitments) that individually satisfy the three other criteria. In addition, "to one counterpart" means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank's aggregated exposure on both businesses).

CA-3.2.19

Lending fully secured by first mortgages on residential property that is or will be occupied by the borrower, or that is leased, must carry a risk weighting of 75%.

CA-3.2.19A

The RW for residential property may be reduced to 35% subject to meeting all of the criteria below:

CA-3.2.19B

The RW for residential mortgage exposure granted under the Social Housing Schemes of the Kingdom of Bahrain may be reduced to 25% subject to meeting conditions, (a) and (b) in CA-3.2.19A. The reduced risk weight is subject to ensuring the compliance with the requirements for timely recognition of expected credit loss (ECL) as per the Credit Risk Management Module (Module CM).

CA-3.2.20

Claims secured by mortgages on commercial real estate are subject to a minimum of 100% risk weight. If the borrower is rated below BB-, the risk-weight corresponding to the rating of the borrower must be applied.

CA-3.2.21

The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for 90 days or more, net of specific provisions (including partial write-offs), must be risk-weighted as follows:

CA-3.2.22

For the purposes of defining the secured portion of a past due loan, eligible collateral and guarantees is the same as for credit risk mitigation purposes.

CA-3.2.23

Past due retail loans must be excluded from the overall regulatory retail portfolio when assessing the granularity criterion, for risk-weighting purposes.

CA-3.2.24

In the case of residential mortgage loans that qualify for lower risk weight in CA-3.2.19A, when such loans are past due for more than 90 days, they must be risk weighted at a minimum of 100% net of specific provisions.

CA-3.2.25

Holdings of securitisation tranches are weighted according to the weightings in CA-6.4.8 from 20% to 1,250%. Please refer to Chapter CA-6 for full details.

CA-3.2.26

Investments in listed equities must be risk weighted at 100% while equities other than listed must be risk weighted at 150% unless subject to the following treatments. The amount of any significant investments in commercial entities above the 15% and 60% Total Capital materiality thresholds (see CA-2.4.25) must be weighted at 800%. Significant investments in the common shares of unconsolidated financial entities and Mortgage Servicing Rights and Deferred Tax Assets arising from temporary differences must be risk weighted at 250% if they have not already been deducted from CET1 as required by Paragraphs CA-2.4.15 to CA-2.4.24.

CA-3.2.27

Investments in funds (e.g. mutual funds, Collective Investment Undertakings etc.) must be risk weighted as follows:

CA-3.2.28

The amount of any large exposures exceeding the limits set in Chapter CM-5 must be weighted at 800%.

CA-3.2.29

All holdings of real estate by conventional bank licensees (i.e. owned directly or by way of investments in Real Estate Companies, subsidiaries or associate companies or other arrangements such as trusts, funds or REITs) must be risk-weighted at 200%. Premises occupied by the conventional bank licensee may be weighted at 100%. Investments in Real Estate Companies are subject to the materiality thresholds for commercial companies described in Section CA-2.4 and Chapter CM-5 and therefore any holdings which amount to 15% or more of Total Capital will be subject to 800% risk weight. The holdings below the 15% threshold will be weighted at 200%.

CA-3.2.30

Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities may be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection must be risk-weighted at 20%. The standard risk weight for all other assets will be 100%. Investments in regulatory capital instruments issued by banks or financial entities must be risk weighted at a minimum of 100%, unless they are deducted from regulatory capital according to the corresponding deduction approach outlined in Section CA-2.4 of this Module.

CA-3.2.31

Underwritings of capital instruments issued by other banking, financial or insurance entities are covered in Subparagraphs CA-2.4.16(c) and CA-2.4.20(c). The large exposures limits of Chapter CM-5 apply for underwritings. This means the 800% risk weights will apply for underwriting exposures in excess of the limits set in Chapter CM-5. The risk weights below apply for exposures within the limits of Module CM-5. Where a conventional bank licensee has acquired assets on its balance sheet in the banking book which it is intending to place with third parties under a formal arrangement, the following risk weightings apply for no more than 90 days. Once the 90-day period has expired, the usual risk weights apply:

CA-3.4.1

CBB will assess all External Credit Assessment Institutions (ECAI) according to the six criteria below. The CBB also refers to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies when determining ECAI eligibility. Any failings, in whole or in part, to satisfy these to the fullest extent will result in the respective ECAI's methodology and associated resultant rating not being accepted by the CBB:

CA-3.4.2

The CBB recognises Standard and Poor's, Moody's, Fitch IBCA and Capital Intelligence as eligible ECAIs. With respect to the possible recognition of other rating agencies as eligible ECAIs, CBB will update this paragraph subject to the rating agencies satisfying the eligibility requirements. (See Appendix CA-16 for mapping of eligible ECAIs).

CA-3.4.3

Conventional bank licensees must use the chosen ECAIs and their ratings consistently for each type of claim, for both risk weighting and risk management purposes. Conventional bank licensees will not be allowed to "cherry-pick" the assessments provided by different eligible ECAIs and to arbitrarily change the use of ECAIs.

CA-3.4.4

Conventional bank licensees must disclose in their annual reports the names of the ECAIs that they use for the risk weighting of their assets by type of claims, the risk weights associated with the particular rating grades as determined by CBB through the mapping process as well as the aggregated risk-weighted assets for each risk weight based on the assessments of each eligible ECAI.

CA-3.4.5

If there are two assessments by eligible ECAIs chosen by a conventional bank licensee which map into different risk weights, the higher risk weight must be applied.

CA-3.4.6

If there are three or more assessments by eligible ECAIs chosen by a conventional bank licensee which map into different risk weights, the assessments corresponding to the two lowest risk weights must be referred to and the higher of those two risk weights must be applied.

CA-3.4.7

Where a conventional bank licensee invests in a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment. Where the conventional bank licensee's claim is not an investment in a specific assessed issue, the following general principles apply:

CA-3.4.8

Whether the conventional bank licensee intends to rely on an issuer- or an issue-specific assessment, the assessment must take into account and reflect the entire amount of credit risk exposure the conventional bank licensee has with regard to all payments owed to it.¹³

¹³ For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with repayment of both principal and interest.

CA-3.4.9

In order to avoid any double counting of credit enhancement factors, no recognition of credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the issue specific rating (see Paragraph CA-4.1.5).

CA-3.4.10

Where unrated exposures are risk weighted based on the rating of an equivalent exposure to that borrower, the general rule is that foreign currency ratings must be used for exposures in foreign currency. Domestic currency ratings, if separate, must only be used to risk weight claims denominated in the domestic currency.

CA-3.4.11

However, when an exposure arises through a conventional bank licensee's participation in a loan that has been extended, or has been guaranteed against convertibility and transfer risk, by certain MDBs, its convertibility and transfer risk can be considered by CBB, on a case by case basis, to be effectively mitigated. To qualify, MDBs must have preferred creditor status recognised in the market and be included in MDB's qualifying for 0% risk rate under CA-3.2.8. In such cases, for risk weighting purposes, the borrower's domestic currency rating may be used instead of its foreign currency rating. In the case of a guarantee against convertibility and transfer risk, the local currency rating can be used only for the portion that has been guaranteed. The portion of the loan not benefiting from such a guarantee will be risk-weighted based on the foreign currency rating.

CA-3.4.12

For risk-weighting purposes, short-term assessments are deemed to be issue-specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims, except under the conditions of paragraph CA-3.4.14. In no event can a short-term rating be used to support a risk weight for an unrated long-term claim. Short-term assessments may only be used for short-term claims against banks and corporates. The table below provides a framework for conventional bank licensees' exposures to specific short-term facilities, such as a particular issuance of commercial paper:

¹⁴ The notations follow the methodology used by Standard & Poor's and by Moody's Investors Service. The A-1 rating of Standard & Poor's includes both A-1+ and A-1-.

¹⁵ This category includes all non-prime and B or C ratings.

CA-3.4.13

If a short-term rated facility attracts a 50% risk-weight, unrated short-term claims cannot attract a risk weight lower than 100%. If an issuer has a short-term facility with an assessment that warrants a risk weight of 150%, all unrated claims, whether long-term or short-term, must also receive a 150% risk weight, unless the conventional bank licensee uses recognised credit risk mitigation techniques for such claims.

CA-3.4.14

For short-term claims on conventional bank licensees, the interaction with specific short-term assessments is expected to be the following:

CA-3.4.15

When a short-term assessment is to be used, the institution making the assessment needs to meet all of the eligibility criteria for recognising ECAIs as presented in Paragraph CA-3.4.1 in terms of its short-term assessment.

CA-3.4.16

External assessments for one entity within a corporate group must not be used to risk weight other entities within the same group.

CA-3.4.17

Unsolicited ratings should be treated as unrated exposures.

CA-4.1.1

Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally banks may agree to net loans owed to them against deposits from the same counterparty. Off-balance sheet items will first be converted into on-balance sheet equivalents prior to the CRM being applied.

CA-4.1.2

The framework set out in this sub-section of "General remarks" is applicable to all banking book exposures.

CA-4.1.3

The comprehensive approach for the treatment of collateral (see Paragraphs CA-4.2.12 to CA-4.2.20 and CA-4.3.1 to CA-4.3.32) will also be applied to calculate the counterparty risk charges for OTC derivatives and repo-style transactions booked in the trading book.

CA-4.1.4

No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.

CA-4.1.5

The effects of CRM will not be double counted. Therefore, no additional recognition of CRM for regulatory capital purposes will be applicable on claims for which an issue-specific rating is used that already reflects that CRM. As stated in Paragraph CA-3.4.8, principal-only ratings will also not be allowed within the framework of CRM.

CA-4.1.6

Conventional bank licensees must employ robust procedures and processes to control residual risks (see Paragraph CA-4.1.6A), including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the conventional bank licensee's use of CRM techniques and its interaction with the conventional bank licensee's overall credit risk profile.

CA-4.1.6A

While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks.

CA-4.1.6B

Where residual risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.

CA-4.1.6C

Conventional bank licensees must ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivative and securities-financing counterparties, as measured by the timeliness and accuracy of its outgoing calls and response time to incoming calls. Conventional bank licensees must have collateral management policies in place to control, monitor and report:

CA-4.1.7

Public Disclosure Requirements (see Module PD) relating to the use of collateral must also be observed for conventional bank licensees to obtain capital relief in respect of any CRM techniques.

CA-4.1.8

In order for conventional bank licensees to obtain capital relief for any use of CRM techniques, the minimum standards for legal documentation outlined in Paragraph CA-4.1.9 must be met.

CA-4.1.9

All documentation used in collateralised transactions and for documenting on-balance sheet netting, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Conventional bank licensees must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

CA-4.2.1

A collateralised transaction is one in which:

¹⁷ In this section "counterparty" is used to denote a party to whom a bank has an on- or off-balance sheet credit exposure or a potential credit exposure. That exposure may, for example, take the form of a loan of cash or securities (where the counterparty would traditionally be called the borrower), of securities posted as collateral, of a commitment or of exposure under an OTC derivatives contract.

CA-4.2.2

Where conventional bank licensees take eligible financial collateral (e.g. cash or securities, more specifically defined in Paragraphs CA-4.3.1 and CA-4.3.2, they are allowed to reduce their credit exposure to a counterparty when calculating their capital requirements to take account of the risk mitigating effect of the collateral.

CA-4.2.3

Conventional bank licensees may opt for either the simple approach, which substitutes the risk weighting of the collateral for the risk weighting of the counterparty for the collateralised portion of the exposure (generally subject to a 20% floor), or for the comprehensive approach, which allows fuller offset of collateral against exposures, by effectively reducing the exposure amount by the value ascribed to the collateral. Conventional bank licensees may operate under either, but not both, approaches in the banking book, but only under the comprehensive approach in the trading book. Partial collateralisation is recognised in both approaches. Mismatches in the maturity of the underlying exposure and the collateral will only be allowed under the comprehensive approach.

CA-4.2.4

However, before capital relief will be granted in respect of any form of collateral, the standards set out below in Paragraphs CA-4.2.5 to CA-4.2.8 must be met under either approach.

CA-4.2.5

In addition to the general requirements for legal certainty set out in Paragraphs CA-4.1.8 and CA-4.1.9, the legal mechanism by which collateral is pledged or transferred must ensure that the conventional bank licensee has the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore conventional bank licensees must take all steps necessary to fulfil those requirements under the law applicable to the conventional bank licensee's interest in the collateral for obtaining and maintaining an enforceable security interest, e.g. by registering it with a registrar, or for exercising a right to net or set off in relation to title transfer collateral.

CA-4.2.6

In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty — or by any related group entity — would provide little protection and so would be ineligible.

CA-4.2.7

Conventional bank licensees must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly.

CA-4.2.8

Where the collateral is held by a custodian, conventional bank licensees must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.

CA-4.2.9

A capital requirement will be applied to a conventional bank licensee on either side of the collateralised transaction: for example, both repos and reverse repos will be subject to capital requirements. Likewise, both sides of a securities lending and borrowing transaction will be subject to explicit capital charges, as will the posting of securities in connection with a derivative exposure or other borrowing.

CA-4.2.10

Where a conventional bank licensee, acting as agent, arranges a repo-style transaction (i.e. repurchase/reverse repurchase and securities lending/borrowing transactions) between a customer and a third party and provides a guarantee to the customer that the third party will perform on its obligations, then the risk to the conventional bank licensee is the same as if the conventional bank licensee had entered into the transaction as a principal. In such circumstances, a conventional bank licensee will be required to calculate capital requirements as if it were itself the principal.

CA-4.2.11

In the simple approach the risk weighting of the collateral instrument collateralising or partially collateralising the exposure is substituted for the risk weighting of the counterparty. Details of this framework are provided in Paragraphs CA-4.3.26 to CA-4.3.29.

CA-4.2.12

In the comprehensive approach, when taking collateral, conventional bank licensees must calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Using haircuts and add-ons, conventional bank licensees are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either¹⁸, occasioned by market movements. This will produce volatility adjusted amounts for both exposure and collateral. Unless either side of the transaction is cash, the volatility adjusted amount for the exposure will be higher than the exposure due to the add-on and for the collateral it will be lower due to the haircut.

¹⁸ Exposure amounts may vary where, for example, securities are being lent.

CA-4.2.13

Additionally where the exposure and collateral are held in different currencies an additional downwards adjustment must be made to the volatility adjusted collateral amount to take account of possible future fluctuations in exchange rates.

CA-4.2.14

Where the volatility-adjusted exposure amount is greater than the volatility-adjusted collateral amount (including any further adjustment for foreign exchange risk), conventional bank licensees must calculate their risk-weighted assets as the difference between the two multiplied by the risk weight of the counterparty. The framework for performing these calculations is set out in Paragraphs CA-4.3.3 to CA-4.3.6.

CA-4.2.15

Conventional bank licensees must use standard haircuts given in Paragraph CA-4.3.7 unless allowed to use models under Paragraph CA-4.3.22.

CA-4.2.16

The size of the individual haircuts and add-ons will depend on the type of instrument, type of transaction and the frequency of marking-to-market and remargining. For example, repo-style transactions subject to daily marking-to-market and to daily re-margining will receive a haircut based on a 5-business day holding period and secured lending transactions with daily mark-to-market and no re-margining clauses will receive a haircut based on a 20-business day holding period. These haircut numbers will be scaled up using the square root of time formula depending on the frequency of re-margining or marking-to-market.

CA-4.2.17

For certain types of repo-style transactions (broadly speaking government bond repos as defined in Paragraphs CA-4.3.14 and CA-4.3.15), the CBB may allow conventional bank licensees using standard haircuts not to apply these haircuts in calculating the exposure amount after risk mitigation.

CA-4.2.18

The effect of master netting agreements covering repo-style transactions can be recognised for the calculation of capital requirements subject to the conditions in Paragraph CA-4.3.17.

CA-4.2.19

As an alternative to standard haircuts conventional bank licensees may, subject to approval from CBB, use VaR models for calculating potential price volatility for repo-style transactions and other similar SFTs, as set out in Paragraphs CA-4.3.22 to CA-4.3.25. Alternatively, subject to approval from the CBB's, they may also calculate, for these transactions, an expected positive exposure, as set forth in Appendix CA-2.

CA-4.2.20

Where conventional bank licensees have legally enforceable netting arrangements for loans and deposits they may calculate capital requirements on the basis of net credit exposures subject to the conditions in Paragraph CA-4.4.1.

CA-4.2.21

Where guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, and the CBB is satisfied that conventional bank licensees fulfil certain minimum operational conditions relating to risk management processes the CBB may allow conventional bank licensees to take account of such credit protection in calculating capital requirements.

CA-4.2.22

A range of guarantors and protection providers are recognised, as shown in Paragraph CA-4.5.7. A substitution approach will be applied. Thus only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty will lead to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty.

CA-4.2.23

Detailed operational requirements are given in Paragraphs CA-4.5.1 to CA-4.5.5.

CA-4.2.24

Where the residual maturity of the CRM is less than that of the underlying credit exposure a maturity mismatch occurs. Where there is a maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not recognised for capital purposes. In other cases where there is a maturity mismatch, partial recognition is given to the CRM for regulatory capital purposes as detailed below in Paragraphs CA-4.6.1 to CA-4.6.4. Under the simple approach for collateral maturity mismatches will not be allowed.

CA-4.2.25

Treatments for pools of credit risk mitigants and first- and second-to-default credit derivatives are given in Paragraphs CA-4.7.1 to CA-4.7.5.

CA-4.3.1

The following collateral instruments are eligible for recognition in the simple approach:

¹⁹ Cash funded credit linked notes issued by the bank against exposures in the banking book which fulfil the criteria for credit derivatives will be treated as cash collateralised transactions.

²⁰ When cash on deposit, certificates of deposit or comparable instruments issued by the lending bank are held as collateral at a third-party bank in a non-custodial arrangement, if they are openly pledged/assigned to the lending bank and if the pledge /assignment is unconditional and irrevocable, the exposure amount covered by the collateral (after any necessary haircuts for currency risk) will receive the risk weight of the third-party bank.

²¹ However, the use or potential use by a UCITS/mutual fund of derivative instruments solely to hedge investments listed in this paragraph and paragraph CA-4.3.2 shall not prevent units in that UCITS /mutual fund from being eligible financial collateral.

CA-4.3.2

The following collateral instruments are eligible for recognition in the comprehensive approach:

Calculation of Capital Requirement

Standard Haircuts and Add-Ons

Adjustment for Different Holding Periods and Non Daily Mark-to-market or Re-Margining

Conditions for Zero H

Treatment of Repo-Style Transactions Covered under Master Netting Agreements

Use of Models

Minimum Conditions

CA-4.3.27

Transactions which fulfil the criteria outlined in Paragraph CA-4.3.14 and are with a core market participant, as defined in Paragraph CA-4.3.15, receive a risk weight of 0%. If the counterparty to the transactions is not a core market participant the transaction should receive a risk weight of 10%.

CA-4.3.28

OTC derivative transactions subject to daily mark-to-market, collateralised by cash and where there is no currency mismatch receive a 0% risk weight. Such transactions collateralised by sovereign or PSE securities qualifying for a 0% risk weight in the standardised approach will receive a 10% risk weight.

CA-4.3.29

The 20% floor for the risk weight on a collateralised transaction will not be applied and a 0% risk weight can be applied where the exposure and the collateral are denominated in the same currency, and either:

CA-4.3.30

Under the Current Exposure Method, the calculation of the counterparty credit risk charge for an individual contract is as follows:

Counterparty charge = [(RC + add-on) – C_A] x r x 8%

Where:

RC = The replacement cost,
Add-on = The amount for potential future exposure calculated according to paragraph 45 of Appendix CA-2.
C_A = The volatility adjusted collateral amount under the comprehensive approach prescribed in Paragraphs CA-4.3.3 to CA-4.3.16, or zero if no eligible collateral is applied to the transaction, and
r = The risk weight of the counterparty.

CA-4.3.31

When effective bilateral netting contracts are in place, RC is the net replacement cost and the add-on is A_Net as calculated according to paragraph 50 (i) to 50 (vi) of Appendix CA-2. The haircut for currency risk (H_fx) must be applied when there is a mismatch between the collateral currency and the settlement currency. Even in the case where there are more than two currencies involved in the exposure, collateral and settlement currency, a single haircut assuming a 10-business day holding period scaled up as necessary depending on the frequency of mark-to-market must be applied.

CA-4.3.32

As an alternative to the Current Exposure Method for the calculation of the counterparty credit risk charge, conventional bank licensees may also use the Standardised Method.

Operational Requirements Common to Guarantees and Credit Derivatives

Additional Operational Requirements for Guarantees

Additional Operational Requirements for Credit Derivatives

CA-4.5.7

Credit protection given by the following entities will be recognised:

³³ This includes the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community, as well as those MDBs referred to in CA-3.2.8.

³⁴ This includes other MDBs.

CA-4.5.7A

Credit default guarantee provided by Tamkeen is recognised as an eligible credit risk mitigant.

CA-4.5.8

The protected portion is assigned the risk weight of the protection provider. The uncovered portion of the exposure is assigned the risk weight of the underlying counterparty.

CA-4.5.9

Materiality thresholds on payments below which no payment is made in the event of loss are equivalent to retained first loss positions and must be deducted in full from the Total Capital of the conventional bank licensee purchasing the credit protection.

CA-4.5.10

Where the amount guaranteed, or against which credit protection is held, is less than the amount of the exposure, and the secured and unsecured portions are of equal seniority, i.e. the conventional bank licensee and the guarantor share losses on a pro-rata basis capital relief will be afforded on a proportional basis: i.e. the protected portion of the exposure will receive the treatment applicable to eligible guarantees/credit derivatives, with the remainder treated as unsecured.

CA-4.5.11

Where the conventional bank licensee transfers a portion of the risk of an exposure in one or more tranches to a protection seller or sellers and retains some level of risk of the loan and the risk transferred and the risk retained are of different seniority, conventional bank licensees may obtain credit protection for either the senior tranches (e.g. second loss portion) or the junior tranche (e.g. first loss portion). In this case the rules as set out in Chapter CA-6 (Credit risk — securitisation framework) will apply.

CA-4.5.12

Where the credit protection is denominated in a currency different from that in which the exposure is denominated — i.e. there is a currency mismatch — the amount of the exposure deemed to be protected will be reduced by the application of a haircut H_FX, i.e.

G_A = G x (1 – H_FX)

Where:

G = Nominal amount of the credit protection
H_FX = Haircut appropriate for currency mismatch between the credit protection and underlying obligation.

The appropriate haircut based on a 10-business day holding period (assuming daily marking-to-market) will be applied. If a conventional bank licensee uses the standard haircuts it will be 8%. The haircuts must be scaled up using the square root of time formula, depending on the frequency of revaluation of the credit protection as described in Paragraph CA-4.3.12.

CA-4.5.13

Portions of claims guaranteed by the entities detailed in Paragraph CA-3.2.1, where the guarantee is denominated in the domestic currency (and US$ in case of a guarantee provided by the Government of Bahrain and CBB) may get a 0% risk-weighting. A claim may be covered by a guarantee that is indirectly counter-guaranteed by such entities. Such a claim may be treated as covered by a sovereign guarantee provided that:

CA-4.6.2

The maturity of the underlying exposure and the maturity of the hedge should both be defined conservatively. The effective maturity of the underlying should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period. For the hedge, embedded options which may reduce the term of the hedge should be taken into account so that the shortest possible effective maturity is used. Where a call is at the discretion of the protection seller, the maturity will always be at the first call date. If the call is at the discretion of the protection buying bank but the terms of the arrangement at origination of the hedge contain a positive incentive for the bank to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the effective maturity. For example, where there is a step-up in cost in conjunction with a call feature or where the effective cost of cover increases over time even if credit quality remains the same or increases, the effective maturity will be the remaining time to the first call.

CA-4.6.3

As outlined in Paragraph CA-4.2.24, hedges with maturity mismatches are only recognised when their original maturities are greater than or equal to one year. As a result, the maturity of hedges for exposures with original maturities of less than one year must be matched to be recognised. In all cases, hedges with maturity mismatches will not be recognised when they have a residual maturity of three months or less.

CA-4.6.4

When there is a maturity mismatch with recognised credit risk mitigants (collateral, on-balance sheet netting, guarantees and credit derivatives) the following adjustment will be applied.

Pa = P x (t – 0.25) / (T – 0.25)
Where:

Pa = Value of the credit protection adjusted for maturity mismatch.
P = Credit protection (e.g. collateral amount, guarantee amount) adjusted for any haircuts.
T = Min (T, residual maturity of the credit protection arrangement) expressed in years.
T = Min (5, residual maturity of the exposure) expressed in years.

CA-4.7.1

In the case where a conventional bank licensee has multiple CRM techniques covering a single exposure (e.g. a bank has both collateral and guarantee partially covering an exposure), the conventional bank licensee is required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.

CA-4.7.2

There are cases where a conventional bank licensee obtains credit protection for a basket of reference names and where the first default among the reference names triggers the credit protection and the credit event also terminates the contract. In this case, the conventional bank licensee may recognise regulatory capital relief for the asset within the basket with the lowest risk-weighted amount, but only if the notional amount is less than or equal to the notional amount of the credit derivative.

CA-4.7.3

With regard to the conventional bank licensee providing credit protection through such an instrument, if the product has an external credit assessment from an eligible credit assessment institution, the risk weight in Paragraph CA-6.4.8 applied to securitisation tranches will be applied. If the product is not rated by an eligible external credit assessment institution, the risk weights of the assets included in the basket will be aggregated up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted asset amount.

CA-4.7.4

In the case where the second default among the assets within the basket triggers the credit protection, the conventional bank licensee obtaining credit protection through such a product will only be able to recognise any capital relief if first-default-protection has also be obtained or when one of the assets within the basket has already defaulted.

CA-4.7.5

For conventional bank licensees providing credit protection through such a product, the capital treatment is the same as in Paragraph CA-4.7.3 above with one exception. The exception is that, in aggregating the risk weights, the asset with the lowest risk weighted amount can be excluded from the calculation.

CA-6.2.1

For risk-based capital purposes, a conventional bank licensee is considered to be an originator with regard to a certain securitisation if it meets either of the following conditions:

CA-6.2.2

An asset-backed commercial paper (ABCP) programme predominately issues commercial paper with an original maturity of one year or less that is backed by assets or other exposures held in a bankruptcy-remote, Special Purpose Securitisation Vehicle (SPSV).

CA-6.2.3

A clean-up call is an option that permits the securitisation exposures (e.g. asset-backed securities) to be called before all of the underlying exposures or securitisation exposures have been repaid. In the case of traditional securitisations, this is generally accomplished by repurchasing the remaining securitisation exposures once the pool balance or outstanding securities have fallen below some specified level. In the case of a synthetic transaction, the clean-up call may take the form of a clause that extinguishes the credit protection.

CA-6.2.4

A credit enhancement is a contractual arrangement in which the conventional bank licensee retains or assumes a securitisation exposure and, in substance, provides some degree of added protection to other parties to the transaction.

CA-6.2.5

A credit-enhancing interest-only strip (I/O) is an on-balance sheet asset that (i) represents a valuation of cash flows related to future margin income, and (ii) is subordinated.

CA-6.2.6

Early amortisation provisions are mechanisms that, once triggered, allow investors to be paid out prior to the originally stated maturity of the securities issued. For risk-based capital purposes, an early amortisation provision will be considered either controlled or non-controlled. A controlled early amortisation provision must meet all of the following conditions:

CA-6.2.7

An early amortisation provision that does not satisfy the conditions for a controlled early amortisation provision must be treated as a non-controlled early amortisation provision.

CA-6.2.8

Excess spread is generally defined as gross finance charge collections and other income received by the trust or SPSV (specified in Paragraph CA-6.2.10) minus certificate interest, servicing fees, charge-offs, and other senior trust or SPSV expenses.

CA-6.2.9

Implicit support arises when a conventional bank licensee provides support to a securitisation in excess of its predetermined contractual obligation.

CA-6.2.10

An SPSV is a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPSV, and the structure of which is intended to isolate the SPSV from the credit risk of an originator or seller of exposures. SPSVs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.

CA-6.3.2

An originating bank may exclude securitised exposures from the calculation of risk weighted assets under Paragraph CA-6.4.1, only if all of the following conditions have been met. Conventional bank licensees meeting these conditions must still hold regulatory capital against any securitisation exposures they retain:

³⁵ The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it: (i) is able to repurchase from the transferee the previously transferred exposures in order to realise their benefits; or (ii) is obligated to retain the risk of the transferred exposures. The transferor's retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures.

CA-6.3.3

For synthetic securitisations, the use of CRM techniques (i.e. collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognised for risk-based capital purposes only if the conditions outlined below are satisfied:

CA-6.3.4

For synthetic securitisations, the effect of applying CRM techniques for hedging the underlying exposure are treated according to Chapter CA-4. In case there is a maturity mismatch, the capital requirement will be determined in accordance with Paragraphs CA-4.6.1 to CA-4.6.4. When the exposures in the underlying pool have different maturities, the longest maturity must be taken as the maturity of the pool. Maturity mismatches may arise in the context of synthetic securitisations when, for example, a conventional bank licensee uses credit derivatives to transfer part or all of the credit risk of a specific pool of assets to third parties. When the credit derivatives unwind, the transaction will terminate. This implies that the effective maturity of the tranches of the synthetic securitisation may differ from that of the underlying exposures. Originating banks of synthetic securitisations must treat such maturity mismatches in the following manner. A conventional bank licensee applying the standardised approach for securitisation must risk weight all retained positions that are unrated or rated below investment grade at 1,250%. For all other securitisation exposures, the conventional bank licensee must apply the maturity mismatch treatment set forth in Paragraphs CA-4.6.1 to CA-4.6.4.

CA-6.3.5

For securitisation transactions that include a clean-up call, no capital will be required due to the presence of a clean-up call if the following conditions are met:

CA-6.3.6

Securitisation transactions that include a clean-up call that does not meet all of the criteria stated in Paragraph CA-6.3.5 result in a capital requirement for the originating bank. For a traditional securitisation, the underlying exposures must be treated as if they were not securitised. Additionally, conventional bank licensees must not recognise in regulatory capital any gain-on-sale, as defined in Paragraph CA-6.4.3. For synthetic securitisations, the bank purchasing protection must hold capital against the entire amount of the securitised exposures as if they did not benefit from any credit protection. If a synthetic securitisation incorporates a call (other than a clean-up call) that effectively terminates the transaction and the purchased credit protection on a specific date, the conventional bank licensee must treat the transaction in accordance with Paragraph CA-6.3.4 and Paragraphs CA-4.6.1 to CA-4.6.4.

CA-6.3.7

If a clean-up call, when exercised, is found to serve as a credit enhancement, the exercise of the clean-up call must be considered a form of implicit support provided by the conventional bank licensee and must be treated in accordance with the supervisory guidance pertaining to securitisation transactions.

CA-6.4.1

Except as stated in Paragraph CA-6.3.2, conventional bank licensees are required to hold regulatory capital against all of their securitisation exposures and re-securitisation exposures, including those arising from the provision of credit risk mitigants to a securitisation transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the remainder of this section. Repurchased securitisation exposures must be treated as retained securitisation exposures.

(i) Deduction

(ii) Implicit Support

CA-6.4.6

The following operational criteria concerning the use of external credit assessments apply in the standardised approach of the securitisation framework:

CA-6.4.6A

A conventional bank licensee is not permitted to use any external credit assessment for risk-weighting purposes where the assessment is at least partly based on unfunded support provided by the conventional bank licensee. For example, if a conventional bank licensee buys ABCP where it provides an unfunded securitisation exposure extended to the ABCP programme (e.g. liquidity facility or credit enhancement), and that exposure plays a role in determining the credit assessment on the ABCP, the conventional bank licensee must treat the ABCP as if it were not rated. The conventional bank licensee must continue to hold capital against the other securitisation exposures it provides (e.g. against the liquidity facility and/or credit enhancement). The treatment described above is also applicable to exposures held in the trading book. A conventional bank licensee's capital requirement for such exposures held in the trading book can be no less than the amount required under the banking book treatment.

CA-6.4.6B

Conventional bank licensees are permitted to recognise overlap in their exposures, consistent with Paragraph CA-6.4.23. For example, a conventional bank licensee providing a liquidity facility supporting 100% of the ABCP issued by an ABCP programme and purchasing (for its own account) 20% of the outstanding ABCP of that programme could recognise an overlap of 20% (100% liquidity facility + 20% CP held − 100% CP issued = 20%). If a conventional bank licensee provided a liquidity facility that covered 90% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if 10% of the two exposures overlapped (90% liquidity facility + 20% CP held – 100% CP issued = 10%). If a conventional bank licensee provided a liquidity facility that covered 50% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if there were no overlap.

(i) Scope

(ii) Risk Weights

(iii) Exceptions to General Treatment of Unrated Securitisation Exposures

(iv) Credit Conversion Factors for Off-Balance Sheet Exposures

(vi) Capital Requirement for Early Amortisation Provisions

(vii) Determination of CCFs for Controlled Early Amortisation Features

(viii) Determination of CCFs for Non-Controlled Early Amortisation Features

CA-7.1.4

Conventional bank licensees applying the Basic Indicator Approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero must be excluded from both the numerator and denominator when calculating the average.³⁷ The charge may be expressed as follows:
K_BIA = [∑(GI_1.nα)]/n

where:

K_BIA = the capital charge under the Basic Indicator Approach

GI = annual gross income, where positive, over the previous three years (audited financial years)

n = number of the previous three years for which gross income is positive

α = 15%, relating the industry wide level of required capital to the industry wide level of the indicator.

³⁷ If negative gross income distorts a bank's Pillar 1 capital charge, CBB will consider appropriate supervisory action.

CA-7.1.5

Gross income is defined as net interest income plus net non-interest income.³⁸ This measure should: (i) be gross of any provisions (e.g. for unpaid interest); (ii) be gross of operating expenses, including fees paid to outsourcing service providers³⁹; (iii) exclude realised profits/losses from the sale of securities in the banking book;⁴⁰ and (iv) exclude extraordinary or irregular items as well as income derived from insurance.

³⁸ As defined under International Financial Reporting Standards as applicable in the Kingdom of Bahrain.

³⁹ In contrast to fees paid for services that are outsourced, fees received by banks that provide outsourcing services shall be included in the definition of gross income.

⁴⁰ Realised profits/losses from securities classified as "held to maturity" and "available for sale", which typically constitute items of the banking book, are also excluded from the definition of gross income.

CA-7.1.6

In case of a bank with negative gross income for the previous three years, a newly licensed bank with less than 3 years of operations, or a merger, acquisition or material restructuring, the CBB shall discuss with the concerned licensed bank an alternative method for calculating the operational risk capital charge. For example, a newly licensed bank may be required to use the projected gross income in its 3-year business plan. Another approach that the CBB may consider is to require such licensed banks to observe a higher CAR.

CA-7.1.7

Conventional bank licensees applying this approach are encouraged to comply with the principles set in Section OM-8.2 of Operational Risk Management Module.

CA-7.1.8

In the Standardised Approach, banks' activities are divided into eight business lines: corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management, and retail brokerage. The business lines are defined in detail in Appendix CA-9. The conventional bank licensee must meet the requirements detailed in Section OM-8.3 to qualify for the use of standardised approach.

CA-7.1.9

Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line. It should be noted that in the Standardised Approach, gross income is measured for each business line, not the whole institution, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line. An example of calculation of gross income is provided in Appendix CA-10.

CA-7.1.10

The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line can not off-set positive capital charges in other business lines. Where the aggregate capital charge across all business lines within a given year is negative, then the input to the numerator for that year will be zero.⁴¹ The total capital charge may be expressed as:

K_TSA = {∑ _{years 1-3} max[(GI_1-8 X β_1-8, 0]}/3

where:

K_TSA = the capital charge under the Standardised Approach

GI _1-8 = annual gross income in a given year, as defined above in the Basic Indicator Approach, for each of the eight business lines

β_1-8 = a fixed percentage, relating the level of required capital to the level of the gross income for each of the eight business lines.

The values of the betas are detailed below.

⁴¹ As under the Basic Indicator Approach, if negative gross income distorts a bank's Pillar 1 capital charge under the Standardised Approach, CBB will consider appropriate supervisory action.

CA-8.3.5

The counterparty credit risk charge for single name credit derivative transactions in the trading book must be calculated applying the following potential future exposure add-on factors:

There will be no difference depending on residual maturity.

The definition of "qualifying" is the same as for the treatment of specific risk in chapter CA-9.

** The protection seller of a credit default swap is only subject to the add-on factor where it is subject to closeout upon the insolvency of the protection buyer while the underlying is still solvent. Add-on must then be capped to the amount of unpaid premiums.

CA-8.3.6

Where the credit derivative is a first to default transaction, the add-on is determined by the lowest credit quality underlying in the basket, i.e. if there are any non-qualifying items in the basket, the non-qualifying reference obligation add-on is used. For second and subsequent to default transactions, underlying assets must continue to be allocated according to the credit quality, i.e. the second lowest credit quality determines the add-on for a second to default transaction etc.

CA-9.2.8

Unrated securities may be included in the "qualifying" category when they are (subject to CBB's approval) unrated, but deemed to be of comparable investment quality by the reporting bank, and the issuer has securities listed on a recognised stock exchange.