CA-A.3 CA-A.3 Capital Adequacy Ratio
CA-A.3.1
Historically, on a consolidated basis, the CBB has set a minimum Capital Adequacy Ratio ("CAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank has been required to maintain a minimum CAR of 8.0% (i.e. unconsolidated). The arrangements outlined below will apply once banks have been subject to a Pillar 2 risk profile assessment by the CBB or an acceptable audit firm. Until such an assessment has been completed, the existing 12% and 8% minimum capital ratio requirements (as outlined in Module CA-2.5 October 2006 edition) will remain in place.
Apr 08CA-A.3.2
CAR will be calculated by applying the regulatory capital to the numerator and risk-weighted assets (RWAs) to the denominator.
Eligible Capital
{ Total Risk-weighted Assets (Creditb + Marketb Risks) Plus Operational Risks
Less
Risk-weighted Assets funded by Restricted PSIAc (Creditb + Marketb Risks)
Less
(1 - α) [Risk-weighted Assets funded by Unrestricted PSIAc (Creditb + Marketb Risks)]
Less
α [Risk-weighted Assets funded by PER and IRR of Unrestricted PSIAe (Creditb +
Marketb Risks)]}(a) Total RWA include those financed by both restricted and unrestricted Profit Sharing Investment Accounts (PSIA);(b) Credit and market risks for on- and off-balance sheet exposures;(c) Where the funds are commingled, the RWA funded by PSIA are calculated based on their pro-rata share of the relevant assets. PSIA balances include PER and Investment risk reserve (IRR) or equivalent reserves;(d) — α refers to the proportion assets funded by unrestricted PSIA which, as determined by the CBB, is 30%; and(e) The relevant proportion of risk-weighted assets funded by the PSIA's share of PER and by IRR is deducted from the denominator. The PER has the effect of reducing the displaced commercial risk and the IRR has the effect of reducing any future losses on the investment financed by the PSIA.
The above formula is applicable as the Islamic banks may smooth income to the Investment Account Holders (IAHs) as part of a mechanism to minimise withdrawal risk and is concerned with systemic risk.Amended: April 2011
April 2008CA-A.3.3
All locally incorporated banks are required to maintain a capital ratio both on a solo (and a consolidated basis where applicable) above the minimum "trigger" CAR of 8%. Failure to remain above the trigger ratio will result in Enforcement and other measures as outlined in Section CA-1.4.
Apr 08CA-A.3.4
All locally incorporated banks will be required to maintain capital ratios above individually set "target" CARs on a solo and on a consolidated basis. These target CARs will be set at an initial minimum of 8.5% and may in the case of high risk banks be set at levels above the 12.5% target ratio set prior to January 2008. Failure to remain above the target ratio will result in Enforcement and other measures as outlined in Section CA-1.4.
Apr 08Eligible Capital
CA-A.3.5
Banks are allowed two classes of capital (see section CA-2.2) to meet their capital requirements for credit risk, operational risk and market risk, as set out below:
Tier 1: Core capital — Supports the calculation of credit risk weighted assets, operational risk and market risk.
Tier 2: Supplementary capital — Supports credit risk, operational risk and market risk subject to limitations.
Apr 08Risk-weighted Assets
CA-A.3.6
Total risk-weighted assets are determined by:
(i) Multiplying the capital requirements for market risk and operational risk by 12.5; and(ii) Adding the resulting figures to the sum of risk-weighted assets for credit risk.Amended: January 2011
Apr 08CA-A.3.7
Islamic banks are not contractually obliged to make good losses arising from Islamic financing assets funded by the investment accounts, unless these losses arise from the negligence on the part of the Islamic bank as manager (Mudarib) or as agent (Wakeel). However to be prudent, the CBB requires Islamic banks to provide regulatory capital to cover minimum requirement arising from 30% of the risk weighted assets and contingencies financed by the unrestricted investment accounts. Therefore, for the purpose of calculating its Capital Adequacy Ratio (CAR), the risk-weighted assets of an Islamic bank consist of the sum of the risk-weighted assets financed by the Islamic bank's own capital and liabilities, plus 30% of the risk-weighted assets financed by the Islamic bank's unrestricted PSIAs.
Amended: January 2011
Apr 08CA-A.3.8
In measuring credit risk for the purpose of
capital adequacy , banks must apply the standardised approach through which claims of different categories of counterparties are assigned risk weights (RWs) according to broad categories of relative riskiness.Apr 08CA-A.3.9
For the measurement of their operational risks, banks have a choice, subject to the written approval of the CBB, between two broad methodologies:
(a) One alternative is to measure the risks using a basic indicator approach, applying the measurement framework described in Chapter CA-6 of this Module; and(b) The second methodology (i.e. the standardised approach) is set out in detail in Chapter CA-6 including the procedure for obtaining the CBB's approval. This methodology is subject to the fulfillment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the CBB.Amended: January 2011
Apr 08CA-A.3.10
In measuring market risk for the purpose of
capital adequacy , banks must apply the approach set out in relevant sections.Apr 08CA-A.3.11
If an Islamic bank wants to adopt an advanced approach (IRB for credit risk and/or IMA for market risk), it will need to apply to the CBB for prior approval.
Apr 08
