PCD-2.4.1

Reciprocal cross holdings of banks' capital artificially designed to inflate the capital position of banks must be deducted for regulatory capital purposes. In determining such reciprocal cross-holdings, the CBB will take into account any bilateral agreement, dates and timings of such transactions and the amount of the two transactions involved. This deduction must be made from the tier in which the reciprocal cross holding exists.

PCD-2.4.2

In case of non-compliance³ with the large exposure limits (as set out in Chapter CM-4 of the Rulebook), the excess will be deducted from the capital of the bank for regulatory capital purposes. For off-balance sheet items, the excess is to be calculated after the application of credit conversion factors as detailed in chapter CA-4 of the Capital Adequacy Module for Islamic banks. These deduction requirements apply for direct exposures (i.e. funded by a bank's own funds or unrestricted investment accounts) and restricted investment accounts.

³ For the purpose of this rule, non-compliance means where a large exposure is taken without prior approval of CBB.

PCD-2.4.3

Deductions referred to in this module (except as stated otherwise, see paragraph PCD-2.4.1, PCD-2.4.4 and PCD-2.4.7) must be made 50% from Tier 1 and 50% from Tier 2 capital. If the amount deductible from Tier 2 exceeds the bank's actual Tier 2, the bank should deduct the shortfall amount from Tier 1 capital.

PCD-2.4.4

Goodwill relating to consolidated subsidiaries and entities subject to a deduction approach pursuant to this chapter must be deducted from Tier 1, and the remainder of the investments must be deducted as provided for in this sub-section.

PCD-2.4.5

The limits on Tier 2 capital will be based on the amount of Tier 1 capital after all deductions. Note that total eligible Tier 2 Capital may not exceed Tier One Capital. See Appendix PCD-2 for details of how these limits work in practice.

PCD-2.4.6

Where the deduction requirement relates to an investment which is carried at fair value and the resultant unrealised fair value gain/loss has been included in Tier 2 capital as per paragraph CA-2.1.5 (e) of the Capital Adequacy Module, the unrealised fair value gain/loss will be removed from the Tier 2 capital. The remaining amount will be deducted as per the above paragraph PCD-2.4.3. If the deduction is not for the full amount of investment, then the related unrealised fair value gain/loss will also be eliminated proportionately from Tier 2 capital. An example is provided in Appendix PCD-2.

PCD-2.4.7

Positions in the bank's own eligible regulatory capital instruments are deducted from capital. This deduction must be made from the Tier in which the investment exists.

PCD-2.4.8

This prudential deductions framework (PCD-2.4) applies to investments irrespective of their classification in banking book or trading book. Where a bank demonstrates that it is an active market maker then the CBB may, on a case by case basis, establish a dealer exception for holdings of other designated banks', securities firms', and other financial entities' capital instruments in the trading book. In order to qualify for the dealer exception, the bank must demonstrate to the CBB that it has adequate systems and controls surrounding the trading of financial institutions' eligible regulatory capital instruments.