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  • CA-2 CA-2 Regulatory Capital

    • CA-2.1 CA-2.1 Regulatory Capital

      • Tier 1 (T1)

        • 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 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.

          January 2015

      • Common Equity Tier 1 (CET1)

        • CA-2.1.2

          CET1 capital consists of the sum of:

          (a) Issued and fully paid common shares that meet the criteria for classification as common shares for regulatory purposes (see CA-2.1.3);
          (b) Disclosed reserves including:
          (i) General reserves;
          (ii) Legal / statutory reserves;
          (iii) Share premium;
          (iv) Fair value reserves arising from fair valuing financial instruments; and
          (v) Retained earnings or losses (including net profit and loss for the reporting period, whether reviewed or audited);
          (c) Common shares issued by consolidated banking subsidiaries of the Islamic bank licensee and held by third parties (i.e. minority interest) that meet the criteria for inclusion in CET1. See Section CA-2.3 for the relevant criteria; and
          (d) Regulatory adjustments (including unrealised losses) applied in the calculation of CET1 (see Section CA-2.4).
          Amended: April 2015
          January 2015

        • CA-2.1.2A

          For unrealised fair value reserves relating to financial instruments to be included in CET1 Capital, Islamic 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 .

          January 2015

        • CA-2.1.3

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

          (a) It is directly issued to shareholders and fully paid in;
          (b) It is non-cumulative;
          (c) It is able to absorb losses within the Islamic bank licensee on a going-concern basis;
          (d) It is neither secured nor covered by a guarantee of the issuer or a related entity or any other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors;
          (e) It represents the most subordinated claim in liquidation of the Islamic bank licensee (i.e. it is junior to depositors, general creditors, and subordinated capital instruments of the bank);
          (f) It is entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (i.e. it has an unlimited and variable claim, not a fixed or capped claim);
          (g) Its principal is perpetual and never repaid outside of liquidation;
          (h) The Islamic bank licensee does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation;
          (i) Distributions are paid out of distributable items (retained earnings included). The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items);
          (j) There are no circumstances under which the distributions are obligatory. Non-payment is therefore not an event of default;
          (k) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions;
          (l) It is the issued capital that takes the first and proportionately greatest share of any losses as they occur;
          (m) The paid in amount is recognised as equity capital (i.e. it is not recognised as a liability) for determining balance sheet insolvency;
          (n) The paid in amount is classified as equity under AAOIFI standards and disclosed separately in the financial statements;
          (o) The Islamic bank licensee cannot directly or indirectly have funded the purchase of the instrument (i.e. treasury shares and shares purchased or funded by the Islamic bank licensee for employee share purchase schemes must be deducted from CET1, and are subject to the 10% limit under the Commercial Companies' Law. Any of the Islamic bank licensee's own shares used as collateral for the advance of funds to its customers must be deducted from CET1 and are also subject to the above 10% limit); and
          (p) It is only issued with the approval of the shareholders of the issuing Islamic bank licensee;
          January 2015

      • Additional Tier 1 (AT1) Capital

        • CA-2.1.4

          AT1 capital consists of the sum of:

          (a) Instruments issued by the Islamic bank licensee that meet the criteria for inclusion in AT1 outlined in Paragraph CA-2.1.6;
          (b) Stock surplus (share premium) resulting from the issue of instruments included in AT1;
          (c) Instruments issued by consolidated banking subsidiaries of the Islamic bank licensee and held by third parties that meet the criteria for inclusion in AT1 and are not included in CET1. See Section CA-2.3 for the relevant criteria; and
          (d) Regulatory adjustments applied in the calculation of AT1 (see Section CA-2.4).
          January 2015

        • CA-2.1.5

          [This Paragraph has been left blank.]

          January 2015

        • CA-2.1.6

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

          (a) It is issued and paid-in;
          (b) It is subordinated to depositors and general creditors of the Islamic bank licensee;
          (c) It is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis Islamic bank licensee creditors;
          (d) It is perpetual, i.e. there is no maturity date and there are no step-ups or other incentives to redeem;
          (e) It may be callable at the initiative of the issuer only after a minimum of five years and an Islamic bank licensee must not do anything which creates an expectation that the call will be exercised. An Islamic bank licensee may not exercise such a call option without receiving prior written approval of the CBB and the called instrument is replaced with capital of the same or better quality; or the Islamic bank licensee demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised
          (f) In all early call situations, replacement of existing capital must be done at conditions which are sustainable for the income capacity of the Islamic bank licensee;
          (g) Any repayment of principal (e.g. through repurchase or redemption) must be with prior written approval of the CBB and Islamic bank licensees must not assume or create market expectations that supervisory approval will be given;
          (h) The Islamic bank licensee must have full discretion at all times to cancel distributions/payments. This means that 'dividend pushers' are prohibited. A dividend pusher obliges a bank to make a dividend or coupon payment on an instrument if it has made a payment on another capital instrument or share. Also features that require the Islamic bank licensee to make distributions in kind are not permitted;
          (i) Cancellation of discretionary payments must not be an event of default;
          (j) Islamic bank licensees must have full access to cancelled payments to meet obligations as they fall due;
          (k) Cancellation of distributions/payments must not impose restrictions on the Islamic bank licensees except in relation to distributions to common stockholders;
          (l) Dividends/coupons must be paid out of distributable items;
          (m) The instrument cannot have a credit sensitive dividend feature (this might serve to increase the dividend payable if a bank's credit rating falls from A to BBB, for example) which may lead to the dividend/coupon being reset periodically based in whole or in part on the Islamic bank licensee's credit standing;
          (n) The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of national insolvency law. This means that instruments accounted for as liabilities must be able to be written down in some way as described in subparagraph (o);
          (o) Instruments classified as liabilities for accounting purposes must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger event; or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger event. The write-down will reduce the claim of the instrument in liquidation and reduce the amount that will be re-paid when a call is exercised and partially or fully reduce coupon/dividend payments on the instrument;
          (p) Neither the Islamic bank licensee nor a related party over which it exercises control or significant influence can have purchased the instrument, nor can the Islamic bank licensee directly or indirectly have funded the purchase of the instrument. This also means that own holdings of AT1 instruments and AT1 instruments purchased or funded by the bank for employee share purchase schemes must be deducted from AT1. Any of the Islamic bank licensee's AT1 instruments used as collateral for the advance of funds to its customers must be deducted from AT1;
          (q) The instrument cannot have any features that hinder recapitalisation, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame; and
          (r) If the instrument is not issued out of a fully consolidated subsidiary bank or the parent Islamic bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to the parent bank in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in AT1.
          January 2015

        • CA-2.1.7

          [This paragraph has been left blank.]

          January 2015

        • 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.

          January 2015

        • 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 total capital of the group (in addition to its solo capital where applicable), the terms and conditions must specify an additional trigger event.

          January 2015

        • 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).

          January 2015

      • Write Down or Conversion of Additional Tier 1 Instruments

        • 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:

          (a) A trigger event occurs when the CET1 capital ratio of the Islamic bank licensee referred to in Subparagraph CA-B.2.1(a) falls below either of the following:
          (i) 7.0%; or
          (ii) A level higher than 7.0 %, where determined by the Islamic bank licensee and specified in the provisions governing the instrument; and
          (b) Islamic bank licensees may specify in the provisions governing the instrument one or more trigger events in addition to that referred to in Subparagraph (a).
          January 2015

        • 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:

          (a) The rate of such conversion and a limit on the permitted amount of conversion; or
          (b) A range within which the instruments will convert into CET1 instruments.
          January 2015

        • 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:

          (a) The claim of the holder of the instrument in the insolvency or liquidation of the Islamic bank licensee;
          (b) The amount required to be paid in the event of the call or redemption of the instrument; and
          (c) The distributions made on the instrument.
          January 2015

        • 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.

          January 2015

        • 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.

          January 2015

        • 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:

          (a) The amount required to restore fully the CET1 ratio of the Islamic bank licensee to 7.0 %; and
          (b) The full principal amount of the instrument.
          January 2015

        • CA-2.1.7J

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

          (a) Immediately inform the CBB;
          (b) Inform the holders of the AT1 instruments; and
          (c) Write down the principal amount of the instruments, or convert the instruments into CET1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Section.
          January 2015

        • CA-2.1.7K

          A Islamic 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.

          January 2015

        • CA-2.1.7L

          All necessary authorisations must be obtained at the date of issuance of such convertible AT1 instruments. The Islamic 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.

          January 2015

        • CA-2.1.7M

          An Islamic 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.

          January 2015

      • Consequences of the Conditions for AT1 Instruments Ceasing to Be Met

        • 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:

          (a) That instrument must immediately cease to qualify as an AT1 instrument; and
          (b) The part of the share premium accounts that relates to that instrument must immediately cease to qualify as an AT1 item.
          January 2015

      • Tier 2 Capital(T2)

        • CA-2.1.8

          T2 capital consists of the sum of the following items

          (a) Instruments issued by the Islamic bank licensee that meet the criteria for inclusion in T2 capital outlined in Paragraph CA-2.1.10;
          (b) Stock surplus (share premium) resulting from the issue of instruments included in T2 capital;
          (c) Instruments issued by consolidated banking subsidiaries of the Islamic bank licensee and held by third parties that meet the criteria for inclusion in T2 capital and are not included in T1. See Section CA-2.3 for the relevant criteria;
          (d) General provisions held against future, presently unidentified losses on financing which are freely available to meet losses which subsequently materialise and qualify for inclusion within T2. Such general provisions which are eligible for inclusion in T2 are limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets. Provisions ascribed to identified deterioration of particular financing assets or known liabilities, whether individual or grouped, must be excluded from T2 Capital;
          (e) Regulatory adjustments applied in the calculation of T2 Capital (see CA-2.4); and
          (f) Asset revaluation reserves which arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Similarly, gains may also arise from revaluation of Investment Properties (real estate). These reserves (including the net gains on investment properties) may be included in T2 capital, with the concurrence of the external auditor, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale.
          January 2015

        • CA-2.1.9

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

          January 2015

        • CA-2.1.10

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

          (a) It is issued and paid-in;
          (b) It is subordinated to depositors and general creditors of the Islamic bank licensee;
          (c) It is neither secured nor covered by a guarantee of the issuing Islamic bank licensee or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general creditors of the Islamic bank licensee;
          (d) It must have a minimum maturity of at least 5 years and it will be amortised on a straight line basis in the remaining five years before maturity and there are no step-ups or other incentives to redeem;
          (e) It may be callable at the initiative of the Islamic bank licensee only after a minimum of five years and the Islamic bank licensee must not do anything which creates an expectation that the call will be exercised. The Islamic bank licensee may not exercise such a call option without receiving written prior approval of the CBB and the called instrument must be replaced with capital of the same or better quality; or the Islamic bank licensee demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised. In all early call situations, any replacement of existing capital must be done at conditions which are sustainable for the income capacity of the Islamic bank licensee;
          (f) The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation;
          (g) The instrument cannot have a credit sensitive dividend/coupon that is reset periodically based in whole or in part on the Islamic bank licensee's credit standing;
          (h) Neither the issuing bank nor a related party over which the Islamic bank licensee exercises control or significant influence can have purchased the instrument, nor can the Islamic bank licensee directly or indirectly have funded the purchase of the instrument. This means own holdings of T2 instruments and T2 purchased or funded by the Islamic bank licensee for employee share purchase schemes must be deducted from T2. Any of the Islamic bank licensee's own T2 instruments used as collateral for the advance of funds to its customers must be deducted from T2;
          (i) If the instrument is not issued out of a fully consolidated subsidiary bank or the parent Islamic bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to the parent Islamic bank licensee in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in T2 capital; and
          (j) Subject to Shari'a compliance, an Islamic bank licensee can issue T2 capital instruments in the form of Mudarabah or Wakalah Sukuk, which would be convertible (as specified in the contract) into shares of common equity at the point of non-viability or insolvency. It is essential that the terms of conversion, notably the trigger event and the conversion ratio, are clearly specified in the Sukuk contract so as to avoid gharar. Prior to conversion, the underlying assets of such Sukuk would not be available to meet the claims of the Islamic bank licensee's current account holders or other creditors. After conversion of the Sukuk in case of the Islamic bank licensee's non-viability or insolvency, the resulting CET1 capital would rank pari passu with other CET1 shareholders.
          January 2015

        • CA-2.1.10A

          [This paragraph has been left blank.]

          January 2015

        • CA-2.1.10B

          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.

          January 2015

        • CA-2.1.10C

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

          January 2015

        • CA-2.1.10D

          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).

          January 2015

      • Write Down or Conversion of Tier 2 Instruments

        • CA-2.1.10E

          For the purposes of Subparagraph CA-2.1.10(j), the following provisions apply to T2 Sukuk instruments:

          (a) A trigger event occurs when the CET1 capital ratio of the Islamic bank licensee referred to in Subparagraph CA-B.2.1(a) falls below either of the following:
          (i) 7.0%; or
          (ii) A level higher than 7.0 %, where determined by the Islamic bank licensee and specified in the provisions governing the instrument; and
          (b) Islamic bank licensees may specify in the provisions governing the instrument one or more trigger events in addition to that referred to in Subparagraph (a).
          January 2015

        • CA-2.1.10F

          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:

          (a) The rate of such conversion and a limit on the permitted amount of conversion; or
          (b) A range within which the instruments will convert into CET1 instruments.
          January 2015

        • CA-2.1.10G

          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:

          (a) The claim of the holder of the instrument in the insolvency or liquidation of the Islamic bank licensee;
          (b) The amount required to be paid in the event of the call or redemption of the instrument; and
          (c) The distributions made on the instrument.
          January 2015

        • CA-2.1.10H

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

          January 2015

        • CA-2.1.10I

          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.

          January 2015

        • CA-2.1.10J

          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:

          (a) The amount required to restore fully the CET1 ratio of the Islamic bank licensee to 7.0 %; and
          (b) The full principal amount of the instrument.
          January 2015

        • CA-2.1.10K

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

          (a) Immediately inform the CBB;
          (b) Inform the holders of the T2 instruments; and
          (c) Write down the principal amount of the instruments, or convert the instruments into CET1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Section.
          January 2015

        • CA-2.1.10L

          An Islamic 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.

          January 2015

        • CA-2.1.10M

          All necessary authorisations must be obtained at the date of issuance of such convertible T2 instruments. The Islamic 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.

          January 2015

        • CA-2.1.10N

          An Islamic 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.

          January 2015

      • Consequences of the Conditions for T2 Instruments Ceasing to Be Met

        • CA-2.1.10O

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

          (a) That instrument must immediately cease to qualify as a T2 instrument; and
          (b) The part of the share premium accounts that relates to that instrument must immediately cease to qualify as a T2 item.
          January 2015

      • Treatment of PSIA, PER and IRR

        • CA-2.1.11

          Profit-sharing investment accounts of an Islamic bank licensee are not classified as part of the Islamic bank licensee's capital because they do not meet the above-mentioned criteria of T1 or T2 Capital. Furthermore, all the investment risk reserve (IRR) and a portion of the profit equalisation reserve (PER) belong to the equity of investment account holders, and thus are not part of the capital of the Islamic bank licensee. As the purpose of a PER is to smooth the profit payouts and not to cover losses, any portion of a PER that is part of the Islamic bank licensee's reserves should also not be treated as part of the regulatory capital of the Islamic bank licensee. The impact of PER and IRR has already been incorporated in the alpha component of the denominator of the formula for the calculation of the CAR, as outlined in Paragraph CA-1.1.12.

          January 2015

    • CA-2.2 CA-2.2 Limits and Minima on the Use of Different Forms of Capital

      • Consolidated T1 Capital and Total Capital

        • CA-2.2.1

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

          (a) CET1 must be at least 6.5% of risk-weighted assets at all times;
          (b) T1 Capital must be at least 8% of risk-weighted assets at all times;
          (c) Total Capital (T1 Capital plus T2 Capital) must be at least 10% of risk-weighted assets at all times;
          (d) In addition, Islamic bank licensees must meet the minimum Capital Conservation Buffer (CCB) requirement of 2.5% of risk-weighted assets. The CCB must be composed of CET1 and so this gives an aggregate 9% CET1 including the CCB minimum capital requirement;
          (e) A minimum 10.5% T1 Capital Adequacy Ratio including the above CCB requirement; and
          (f) A 12.5% minimum Total Capital Adequacy Ratio including the above CCB requirement.
          January 2015

      • Solo Tier 1 Capital and Total Capital

        • 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:

          (a) CET1 must be at least 4.5% of risk-weighted assets at all times;
          (b) T1 Capital must be at least 6% of risk-weighted assets at all times;
          (c) Total Capital (T1 Capital plus T2 Capital) must be at least 8% of risk-weighted assets at all times; and
          (d) The minimum Capital Conservation Buffer (CCB) requirement of 2.5% of risk-weighted assets does not apply on a solo basis.
          January 2015

        • 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%.

          January 2015

        • 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-11 and CA-12 for examples of the threshold deduction effects and the caps).

          January 2015

      • Tier 2: Supplementary Capital

        • 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%.

          January 2015

        • 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 an Islamic bank licensee on a consolidated basis has BD650mn of Core Equity Tier One Capital and BD200mn of AT1 and BD300mn of T1 Capital and BD10,000 mn of total risk-weighted assets:

          (a) 6.5% CET1 = BD650mn;
          (b) 8.0% T1 = BD800mn (i.e. only BD150mn of the AT1 may be included in the T1 minimum requirement;
          (c) 10% Total Capital = BD1,000 mn (i.e. only BD200mn of the T2 Capital may be included in the Total Capital requirement.

          This means that if the Islamic 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 Islamic bank licensee has BD1,150mn of total capital, only BD1,000mn can be used to meet the minimum ratios. This example serves to underline the importance of CET1. Unless an Islamic 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. A separate example of the effect of the T2 cap is given in Appendix CA-12.

          January 2015

    • CA-2.3 CA-2.3 Minority Interest Held by Third Parties in Consolidated Banking Subsidiaries

      • Common Shares Issued by Consolidated Banking Subsidiaries

        • CA-2.3.1

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

          (a) The instrument giving rise to the minority interest would, if issued by the Islamic bank licensee, meet all of the criteria for classification as common shares for regulatory capital purposes;
          (b) The subsidiary that issued the instrument is itself a bank1,2; and
          (c) The subsidiary meets the limits outlined in Paragraph CA-2.3.2.

          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.

          January 2015

        • 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:

          (a) Total minority interest meeting the criteria in Paragraph CA-2.3.1 minus the amount of the surplus CET1 of the subsidiary attributable to the minority shareholders;
          (b) Surplus CET1 of the subsidiary is calculated as the CET1 of the subsidiary minus the lower of:
          (i) The minimum CET1 requirement of the subsidiary plus the capital conservation buffer (CCB) (i.e. 7.0% of risk weighted assets or more as required by the concerned supervisor); and
          (ii) The portion of the consolidated minimum CET1 requirement plus the CCB (i.e. 9.0% of consolidated risk weighted assets) that relates to the subsidiary; and
          (c) The amount of the surplus CET1 that is attributable to the minority shareholders is calculated by multiplying the surplus CET1 by the percentage of CET1 that is held by minority shareholders.
          January 2015

        • CA-2.3.2A

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

          January 2015

      • AT1 Qualifying Capital Issued by Consolidated Banking Subsidiaries

        • CA-2.3.3

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

          (a) T1 of the subsidiary issued to third parties minus the amount of the surplus T1 of the subsidiary attributable to the third party investors;
          (b) Surplus T1 of the subsidiary is calculated as the T1 of the subsidiary minus the lower of: (1) the minimum T1 requirement of the subsidiary plus the CCB and (2) the portion of the consolidated minimum T1 requirement plus the CCB that relates to the subsidiary; and
          (c) The amount of the surplus T1 that is attributable to the third party investors is calculated by multiplying the surplus T1 by the percentage of T1 that is held by third party investors.
          January 2015

      • T2 Qualifying Capital Issued by Consolidated Subsidiaries

        • CA-2.3.4

          T2 capital instruments issued by a fully consolidated banking subsidiary of the Islamic 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 Islamic bank licensee, meet all of the criteria for classification as T2 capital. The amount of this T2 capital 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:

          (a) Total capital instruments of the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors;
          (b) Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary minus the lower of:
          (i) The minimum Total Capital requirement of the subsidiary plus the capital conservation buffer; and
          (ii) The portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer that relates to the subsidiary; and
          (c) The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors.
          January 2015

        • 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 Islamic 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 Islamic bank licensee in a form that meets or exceeds all the relevant entry criteria3 (as required by CA-2.1.5(r) for AT1 and CA-2.1.8(i) for T2). In cases where the capital has been issued to third parties through an SPV via a fully consolidated subsidiary of the Islamic 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 Islamic 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.

          January 2015

    • CA-2.4 CA-2.4 Regulatory Adjustments (Solo and Consolidated)

      • CA-2.4.1

        This section sets out the regulatory adjustments to be applied to Regulatory Capital. There are four stages of adjustments for CET1. In most cases these adjustments are applied in the calculation of CET1. The first set of adjustments is applied in Paragraphs CA-2.4.2 to CA-2.4.15. A subtotal for CET1 is obtained (this can be called CET1a). A second regulatory adjustment described in Paragraphs CA-2.4.16 to CA-2.4.19 is then applied to CET1a (this adjustment results in CET1b). A third regulatory adjustment described in Paragraphs CA-2.4.20 to CA-2.4.21 is then applied to CET1b (this adjustment results in CET1c). Then a final regulatory adjustment described in Paragraph CA-2.4.23 is then applied to CET1c (this adjustment results in CET1d). This is the amount of CET1 that can be used for the calculation of the CAR and determining all other applicable caps on T1 and T2. An example of the effects of the regulatory deductions is given in Appendix CA-11.

        January 2015

      • Goodwill and Other Intangibles (Except Mortgage Servicing Rights)

        • 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 Takaful 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 or AAOIFI. 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).

          Amended: April 2015
          January 2015

        • CA-2.4.3

          Islamic bank licensees must use the IFRS or AAOIFI definitions (as applicable) of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.

          January 2015

      • Deferred Tax Assets

        • CA-2.4.4

          Deferred tax assets (DTAs) that rely on future profitability of the Islamic 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.

          January 2015

        • 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 Islamic bank licensee and must be assigned the relevant sovereign risk weighting.

          January 2015

      • Cash Flow Hedge Reserve

        • 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.

          January 2015

        • 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 Shari'a compliant hedging contracts, but not the changes in fair value of the hedged future cash flow).

          January 2015

      • Gain on Sale Related to Securitisation Transactions

        • CA-2.4.8

          Any increase in equity capital resulting from a securitisation transaction (see Chapter CA-8) must be deducted from the calculation of CET1.

          January 2015

        • CA-2.4.9

          [This paragraph has been left blank.]

          January 2015

      • Defined Benefit Pension Fund Assets and Liabilities

        • 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 Islamic 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 Islamic bank licensee.

          January 2015

        • CA-2.4.11

          Paragraph CA-2.4.10 only applies to Islamic 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.

          January 2015

      • Investments in Own Shares

        • CA-2.4.12

          All of an Islamic bank licensee's investments in its own common shares, whether held directly or indirectly must be deducted in the calculation of CET1. In addition, any own stock which the Islamic 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:

          (a) Gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk (i.e. this would normally mean that the long and short positions are with the same counterparty and a valid close-out netting agreement is in place);
          (b) Islamic bank licensees must look through holdings of index securities to deduct exposures to own shares. However, gross long positions in own shares resulting from holdings of index securities may be netted against short positions in own shares resulting from short positions in the same underlying index where they are undertaken with the same counterparty. In such cases the short positions may still involve counterparty risk (which is subject to the relevant counterparty credit risk charge); and
          (c) Any shares of the Islamic bank licensee held as collateral against exposures to customers are considered to be held indirectly and are subject to deduction.
          Amended: April 2015
          January 2015

        • CA-2.4.13

          The deduction under Paragraph CA-2.4.12 is necessary to avoid the double counting of an Islamic 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.

          January 2015

        • CA-2.4.14

          Islamic bank licensees 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.

          January 2015

      • Reciprocal Cross Holdings in the Capital of Banking and Financial Entities

        • CA-2.4.15

          Reciprocal cross holdings of capital that are designed to artificially inflate the capital position of Islamic bank licensees will be deducted in full. Islamic bank licensees must apply a "corresponding deduction approach" to such investments in the capital of other banks and other 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 Islamic 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.

          January 2015

      • Investments in the Capital of Banking and Financial Entities that are Outside the Scope of Regulatory Consolidation and Where the Bank Does not Own More than 10% of the Issued Common Share Capital of the Entity

        • 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 Islamic bank licensee does not own more than 10% of the issued common share capital of the entity. In addition:

          (a) Investments include direct and indirect4 holdings of capital instruments. For example, Islamic bank licensees must look through holdings of index securities to determine their underlying holdings of capital;5
          (b) Holdings in both the banking book and trading book must be included. Capital includes common stock and all other types of capital instruments. It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year);
          (c) Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included; and
          (d) If the capital instrument of the entity in which the Islamic bank licensee has invested does not meet the criteria for CET1, AT1, or T2 (see CA-2.1.2(f)) of the concerned bank, the capital is to be considered common shares for the purposes of this regulatory adjustment. However, if the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant jurisdiction of the financial entity, it is not required to be deducted.

          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, banks must risk weight all such holdings in funds at 1,250% as per the 'fall-back approach' outlined in the Basel Committee document "Capital requirements for banks' equity investments in funds - final standard" dated December 2013.

          January 2015

        • CA-2.4.17

          If the total of all holdings listed in Paragraph CA-2.4.16 in aggregate exceed 10% of the Islamic 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 Islamic 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 Islamic 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 capital must be calculated as the total of all holdings which in aggregate exceed 10% of the Islamic bank licensee's CET1a (as per above) multiplied by the AT1 capital holdings as a percentage of the total capital holdings. The amount to be deducted from T2 capital must be calculated as the total of all holdings which in aggregate exceed 10% of the Islamic bank licensee's CET1a (as per above) multiplied by the T2 capital holdings as a percentage of the total capital holdings.

          January 2015

        • CA-2.4.18

          See Paragraph CA-2.4.21 for further details on what to do if, under the corresponding deduction approach, an Islamic 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.

          January 2015

        • 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-5. 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.

          January 2015

      • Significant Investments in the Capital of Banking and Financial Entities that are Outside the Scope of Regulatory Consolidation6

        • 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 Islamic 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 Islamic bank licensee. In addition:

          (a) Investments include direct and indirect holdings of capital instruments. For example, Islamic bank licensees must look through holdings of index securities to determine their underlying holdings of capital;7
          (b) Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of capital instruments. It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year);
          (c) Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included; and
          (d) If the capital instrument of the entity in which the Islamic bank licensee has invested does not meet the criteria for CET1, AT1, or T2 capital (see CA-2.1.2(f)) of the concerned bank, the capital is to be considered common shares for the purposes of this regulatory adjustment. However, if the investment is issued out of a regulated financial entity and not included in regulatory capital of the financial entity, it is not required to be deducted.

          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.

          January 2015

        • 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 Islamic bank licensee itself. If the Islamic 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 an Islamic bank licensee does not have enough AT1 capital to satisfy a particular deduction, the shortfall will be deducted from CET1c).

          January 2015

        • 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.

          January 2015

      • Threshold Deductions

        • 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 Islamic bank licensee's CET1c, then the amount above 10% is required to be deducted from CET1c (see Appendices CA-11 and CA-12 for examples). After this deduction, the Islamic 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. The items included in the 15% aggregate limit are subject to full disclosure.

          January 2015

        • 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):

          (a) Significant investments in the common shares of unconsolidated banks and other financial entities) as referred to in Paragraph CA-2.4.20;
          (b) Mortgage servicing rights (MSRs); and
          (c) Deferred Tax Assets (DTAs) that arise from temporary differences.
          January 2015

        • 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).

          January 2015

      • Former Deductions from Capital

        • CA-2.4.25

          The following items receive the following risk weights:

          (a) Certain securitisation and Sukuk exposures outlined in Chapter CA-8: 1,250%;
          (b) Non-payment/delivery on non-DvP and non-PvP transactions (see Appendix CA-4): 1,250%;
          (c) The amount of any significant investments in commercial entities, as defined in Paragraph CM-4.10.5, which exceed the materiality is risk weighted at 800%. The materiality thresholds for these investments are: 15% of Total Capital for individual significant investments; and 60% of Total Capital for the aggregate of such investments; and
          (d) Any exposures above the large exposures limits set by the CBB in Chapter CM-4 of the CBB Rulebook: 800%.
          Amended: October 2016
          Amended: July 2015
          Amended: April 2015
          January 2015

        • 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-10 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).

          Added: July 2015