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  • 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