• Prudential Requirements

    • PCD PCD Prudential Consolidation and Deduction Requirements

      • PCD-A PCD-A Introduction

        • PCD-A.1 PCD-A.1 Purpose

          • PCD-A.1.1

            This Module sets out the regulatory rules for prudential consolidation and pro-rata consolidation for banks where they own controlling or significant minority stakes in regulated financial entities (including qualifying holdings). It also sets out the framework for the prudential deductions from capital for (a) investments in regulated financial entities (below the significance threshold determined for consolidation and pro-rata consolidation), (b) significant investments in insurance entities (c) significant investments in commercial entities and (d) exposures to counterparties exceeding the large exposure limits as set out by CBB.

            Amended: January 2011
            Apr 08

          • PCD-A.1.2

            Consolidation and pro-rata consolidation, wherever referred to in this Module, denotes consolidation and pro-rata consolidation rules only for the purposes of computing regulatory minimum capital requirements and as such these do not impact on accounting consolidations and pro-rata consolidation of banks and banking groups, for which there are separate applicable standards and best practices.

          • PCD-A.1.3

            For prudential purposes, CBB will supervise banks and banking groups on a consolidated basis, in accordance with consolidation and deduction rules outlined in this Module.

            Apr 08

          • PCD-A.1.4

            The rules for prudential consolidation and pro-rata consolidation are set out in PCD-1.

            Apr 08

          • PCD-A.1.5

            The rules for prudential deductions from capital are set out in PCD-2. The prudential framework is also applicable to banks on a standalone basis.

            Apr 08

          • PCD-A.1.6

            This Module complements Modules CA and CM, which respectively set minimum capital requirements and large exposure requirements for licensed Islamic banks in Bahrain.

            Amended: January 2011
            Apr 08

          • Legal Basis

            • PCD-A.1.7

              This Module contains the CBB's Directive (as amended from time to time) on prudential consolidation and deduction requirements for Islamic bank licensees, and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain of Bahrain and Financial Institutions Law 2006 (CBB Law). The directive in this Module is applicable to all Islamic bank licensees.

              Adopted: January 2011

            • PCD-A.1.8

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

              Adopted: January 2011

        • PCD-A.2 PCD-A.2 Definitions

          • PCD-A.2.1

            A banking group is a parent bank and all its subsidiaries.

            Apr 08

          • PCD-A.2.2

            A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another bank (known as the parent bank).

            Apr 08

          • PCD-A.2.3

            A parent bank is a bank which has one or more subsidiaries.

            Apr 08

          • PCD-A.2.4

            Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

            Apr 08

          • PCD-A.2.5

            Control is presumed to exist when the parent bank owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, the bank can clearly demonstrate that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is power:

            (a) Over more than half of the voting rights by virtue of an agreement (whether revocable or not) with other investors;
            (b) To govern the financial and operating policies of the entity under a statute or an agreement;
            (c) To appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or
            (d) To cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.
            October 2010

          • PCD-A.2.6

            A bank may own share warrants, share call options, equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the bank voting power or reduce another party's voting power over the financial and operating policies of another entity (potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether the bank has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.

            Apr 08

          • PCD-A.2.7

            In assessing whether potential voting rights contribute to control, the bank examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or convert.

            Apr 08

          • PCD-A.2.8

            A parent bank loses control when it loses the power to govern the financial and operating policies of an investee so as to obtain benefit from its activities. The loss of control can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when a subsidiary becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of a contractual agreement.

            Apr 08

          • PCD-A.2.9

            Significant investments include investments in:

            (a) Licensed banking, securities or other financial entities from 20% to 50% of the investee's capital;
            (b) Insurance entities of 20% or more of the investee's capital; and
            (c) Commercial entities of 15% or more of the bank's capital.

            1 Securities entities include category one and category two investment firms incorporated in Bahrain and equivalent entities incorporated outside Bahrain.

            October 2010

          • PCD-A.2.10

            For the sake of clarity, investment management entities must be treated as financial entities (for further information, see paragraph PCD-1.1.2).

            Apr 08

          • PCD-A.2.11

            Minority interest is that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent bank.

            Apr 08

          • PCD-A.2.12

            Although consolidation and pro-rata consolidation rules outlined in this module are prescribed only for computing regulatory minimum capital, the procedures applied for such consolidation and pro-rata consolidation are performed in accordance with applicable accounting standards and best practices which may be subject to change from time to time.

            Apr 08

          • PCD-A.2.13

            A "qualifying holding" is defined (see Section CM-4.4 for associated terms) as any investment in the capital instruments of another entity by a locally incorporated bank which is equivalent to or more than 10% of the locally incorporated bank's capital base (as reported in the most recent PIR submitted to the CBB.

            Amended: April 2014
            Amended: January 2014
            Amended: October 2012
            Adopted: January 2011

        • PCD-A.3 PCD-A.3 Module History

          • PCD-A.3.1

            This Module was first issued in January 2008. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control. The most recent changes made to this module are detailed in the table below:

            Summary of changes

            Module Ref. Change Date Description of Changes
            PCD 1.1.1, 1.2.1, 2.1, 2.3.3 & 2.4 04/2010 Minor guidance changes
            PCD 2.1 01/2010 Clarification on risk weighting of listed and unlisted instruments
            PCD 10/2010 Various minor amendments to ensure consistency in CBB Rulebook.
            PCD-4 10/2010 New Chapter on SPV moved from Section HC-1.5
            PCD-A.1.7 and A.1.8 01/2011 Added legal basis.
            PCD-A, PCD-2, PCD-3, PCD-4 01/2011 Changes made to incorporate Basel Core principle 5.
            PCD-A.2.13 10/2012 Amended definition of 'qualifying holding' to be in line with Paragraph CM-4.4.1E and Glossary.
            PCD-A.2.13 01/2014 Corrected typo.
            PCD-A.2.13 04/2014 Corrected cross reference.
            PCD-4.1 04/2014 Amended requirements for SPVs and Shari'a compliance for Islamic banks.

      • PCD-1 PCD-1 Prudential Consolidation Framework

        • PCD-1.1 PCD-1.1 Banking, Securities and Other Financial Subsidiaries

          • PCD-1.1.1

            To the greatest extent possible, all banking and other relevant financial entities which are subsidiaries of a licensee bank will be captured through consolidation (or aggregation) for regulatory capital purposes (or deducted in line with chapter PCD-2). Thus, majority-owned or - controlled banking entities, securities entities (where such activities are subject to broadly the similar set of regulations or where securities activities are deemed banking activities) and other financial entities should generally be fully consolidated or aggregated for regulatory capital purposes. (See PCD-2.1.3 for possible exceptions to this treatment). Banks must notify the CBB of their proposed regulatory aggregation or consolidation approaches and agree them with the CBB and their external auditors.

            Apr 08

          • PCD-1.1.2

            For the purpose of this module, a financial entity is an entity which conducts banking activities or other financial activities such as finance leasing, issuing credit cards, portfolio management, investment advisory, money changers, factoring, forfaiting, custodial and safekeeping services and other similar activities that are ancillary to the business of banking, whether or not the entity is regulated. For the sake of further clarity, financial entities do not include insurance entities (for further guidance on banking activities and regulated banking services, please see "Licensing and Authorisation Requirements Module").

            Apr 08

          • PCD-1.1.3

            When recognising consolidated capital for regulatory capital purposes, the CBB will assess the appropriateness of including minority interest(s) arising from the consolidation of less than wholly owned banking, securities and other financial entities.

            Apr 08

          • PCD-1.1.4

            Such minority interests will be included subject to their ability to absorb losses. However, if the transfer of minority interest capital is legally restricted or if minority interest capital is not readily available then such capital will not be eligible for inclusion in the group's capital. In cases where minority interest capital exceeds 5% of a bank's consolidated capital for regulatory capital purposes, the bank is required to demonstrate to CBB that minority interests recognised as capital are readily available to other group companies e.g. by producing legal proof from the concerned supervisor of subsidiary that there is no restriction on transfer of funds to other group companies.

            Amended October 2010
            Apr 08

          • PCD-1.1.5

            For instances where it is not feasible or desirable to consolidate certain securities and other financial entities for regulatory capital purposes, banks are required to provide the CBB with sufficient evidence that such holdings are acquired through underwriting of the share issue and are held on a temporary basis in the ordinary course of business; or are subject to materially different regulation; or non-consolidation for regulatory capital purposes is otherwise required by law.

            Amended October 2010
            Apr 08

          • PCD-1.1.6

            With the exception of activities carried out in the ordinary course of business (like share underwriting), in cases where consolidation for regulatory capital purposes does not occur, the parent bank is required to report capital adequacy measures for the parent and subsidiary separately (see also chapter PCD-2).

            Apr 08

        • PCD-1.2 PCD-1.2 Significant Investments in Banking, Securities and Other Financial Entities

          • PCD-1.2.1

            Significant investments (20% - 50%) in banking, securities and other financial entities, will be consolidated or aggregated on a pro-rata basis for regulatory capital purposes unless deducted in accordance with chapter PCD-2.

            Apr 08

          • PCD-1.2.2

            However, the CBB must be satisfied that the parent bank with significant minority ownership is expected to support the entity to the extent of its proportionate ownership only. The parent bank will be required to demonstrate that other significant shareholders have the means and the willingness to proportionately support the financial entity. The bank should have joint control in the investee entity along with other parties. If there is no joint control and a single party can exercise control, prorata-consolidation for regulatory capital purposes can not applied.

            Apr 08

          • PCD-1.2.3

            For instances where it is not feasible or desirable to prorata-consolidate/aggregate certain securities and other financial entities for regulatory capital purposes, banks are required to provide the CBB with sufficient evidence that such holdings are acquired through underwriting of the share issue and are held on a temporary basis in the ordinary course of business; or are subject to materially different regulation; or non-prorata-consolidation for regulatory capital purposes is otherwise required by law.

            Apr 08

          • PCD-1.2.4

            With the exception of activities carried out in ordinary course of business (like share underwriting), in cases where prorata-consolidation for regulatory capital purposes does not occur, the bank is required to report capital adequacy measures for itself and the investee entity separately.

            Apr 08

      • PCD-2 PCD-2 Prudential Deductions Framework

        • PCD-2.1 PCD-2.1 Investments in Banking, Securities and Other Financial Entities

          • PCD-2.1.1

            Equity investments in banking, securities and other financial entities below 20% of the investee's capital must be risk-weighted at a minimum risk-weight of 100% for listed entities and 150% for unlisted entities (see CM-4.9 where an investment below 20% of the investee's capital may exceed 15% of the reporting bank's capital base — "Qualifying holdings" — the excess of such individual holdings must be deducted and there is an additional aggregate limit for such holdings).

            Amended: January 2011
            Amended January 2009
            Apr 08

          • PCD-2.1.2

            Investments in instruments of a banking, securities and financial entities, other than equity, which are allowed as regulatory capital for the investee must be risk weighted at a minimum risk-weight of 100% for listed instruments or 150% for unlisted instruments unless such investments (including any other equity investment in that entity) exceed 20% of the eligible capital of investee entity, in which case the investments in other regulatory capital instruments of that investee entity must be deducted from the bank's capital for capital adequacy purposes.

            Amended January 2009
            Apr 08

          • PCD-2.1.3

            If any majority-owned banking, securities and other financial subsidiaries are not consolidated or aggregated for regulatory capital purposes as stated in paragraph PCD-1.1.5 and section PCD-3.1 respectively, all equity and other regulatory capital investments in those entities attributable to the group will be deducted, and the assets and liabilities, as well as third-party capital investments in the subsidiary will be removed from the bank's balance sheet for regulatory capital purposes.

            Apr 08

          • PCD-2.1.4

            If any significant investments in banking, securities and other financial entities are not prorata-consolidated or prorata-aggregated for regulatory capital purposes as stated in paragraph PCD-1.2.3 and section PCD-3.1 respectively, all equity and other regulatory capital investments in those entities attributable to the group will be deducted, and the assets and liabilities, as well as third-party capital investments in the investee will be removed from the bank's balance sheet for regulatory capital purposes.

            Apr 08

          • PCD-2.1.5

            CBB will ensure these entities (referred to in paragraph PCD-2.1.3 and PCD-2.1.4) otherwise meet regulatory capital requirements and monitor steps taken by the bank to correct any capital shortfall, if it exists. If not corrected within the timeframe agreed with CBB, the shortfall will also be deducted from investor bank's capital for regulatory capital purposes. In case of PCD-2.1.4, this deduction will be on proportionate basis if other parties are also willing to support on proportionate basis.

            Apr 08

        • PCD-2.2 PCD-2.2 Significant Investments in Insurance Entities

          • PCD-2.2.1

            When measuring regulatory capital for banks, the equity holdings in an insurance entity of 20% or more of the investee's capital shall be required to be deducted from bank's capital for regulatory capital purposes. Holdings less than 20% will be risk weighted under the applicable credit risk weighting rules (or subject to the qualifying holdings requirements outlined in Module CM-4.9).

            Amended: January 2011
            Apr 08

          • PCD-2.2.2

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

            Apr 08

        • PCD-2.3 PCD-2.3 Significant Investments in Commercial Entities

          • PCD-2.3.1

            Investments in commercial entities include holding of equities of commercial entities acquired through underwriting activities which have been held for more than 90 days2.


            2 Within the period of 90 days, CBB approved underwritten amounts are subject to treatment outlined in Section CM-4.5. See also Chapter CA-5 if such positions are to be included in the trading book.

            Amended: January 2011

          • PCD-2.3.2

            "Qualifying holdings" in commercial entities which exceed certain materiality levels outlined in CM-4.9 must be deducted from the bank's capital for regulatory capital purposes. If the investments exceed a materiality level of 15% of the bank's capital on an individual basis, the concerned bank is required to deduct the excess amount from its capital. If the aggregate amount of qualifying holdings exceeds a threshold of 60% of the bank's capital, then such excess amount is also to be deducted from the bank's capital. The application of the materiality levels will be undertaken in the order of deduction of amount in excess of 15% of bank's capital followed by 60% of capital. An illustrative example is provided in Appendix PCD-1.

            Amended: January 2011
            Apr 08

          • PCD-2.3.3

            Investments in commercial entities below the level of a qualifying holding will be risk-weighted under the applicable risk weighting rules (see chapter CA-5 for trading book and chapter CA-4 for banking book). The risk-weighting treatment will follow the accounting method in the concerned bank's audited financial statements. The effect of banks' existing significant qualifying holdings will be reviewed by the CBB. The CBB will then discuss any possible transitional arrangements with concerned banks.

            Amended: January 2011
            Apr 08

        • PCD-2.4 PCD-2.4 Common Deduction Principles

          • 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.

            Apr 08

          • 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.

            Amended: January 2011

          • 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.

            Apr 08

          • 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.

            Apr 08

          • 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.

            Apr 08

          • 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.

            Apr 08

          • 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.

            Apr 08

          • 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.

            Apr 08

      • PCD-3 PCD-3 Related Issues

        • PCD-3.1 PCD-3.1 Related Issues

          • PCD-3.1.1

            If a parent bank either controls or holds a significant investment (20% - 50%) in a non-resident banking, securities or other financial entity which is filing its return with the respective supervisor under the Basel II capital adequacy rules, and the investment is not deducted, the investor bank will not automatically be required to consolidate or pro-rata consolidate on a line by line basis respectively for regulatory capital purposes. Under such circumstances, the aggregation rules outlined in paragraph PCD-3.1.2 will be applicable. However, a bank may opt to consolidate or pro-rata consolidate such entities instead of aggregation or pro-rata aggregation provided that it satisfies CBB that these entities are otherwise adequately capitalised on a stand-alone basis in their respective jurisdictions. CBB will liaise with the concerned host supervisors in this regard. In addition, if a foreign branch of a Bahraini bank is filing its return with the respective supervisor under the Basel II capital adequacy rules, the aggregation rules may also be applied to such branch.

            Amended: January 2011
            Apr 08

          • PCD-3.1.2

            The capital and risk weighted assets (RWAs) of the non-resident entity must be shown separately. The parent bank will be 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. In cases where bank does not control the entity, such aggregation will be limited to the percentage of ownership by the bank in the financial entity (see Appendix PCD-3). In cases where the bank does control the entity, the bank will be required to undertake full aggregation (see Appendix PCD-4).

            Amended October 2010
            Apr 08

          • PCD-3.1.3

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

            Apr 08

          • PCD-3.1.4

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

            Apr 08

      • PCD-4 PCD-4 Special Purpose Vehicles ('SPVs')

        • PCD-4.1 PCD-4.1 General Requirements

          • PCD-4.1.1

            SPVs are subject to the consolidation, deduction, risk weighting and qualifying holdings rules and regulations mentioned in this Module and Chapter CM-4.

            Amended: April 2014
            Amended: January 2011
            October 2010

          • PCD-4.1.2

            All Bahraini Islamic bank licensees must obtain the CBB's prior specific written approval if they intend to act as originator, sponsor or manager of a special purpose vehicle ('SPV'), or if they intend to participate in the creation of an SPV, or if they intend to acquire a holding of 20% or more of the equity capital of an SPV. All Bahraini Islamic bank licensees must seek prior specific written CBB approval if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors.

            Amended: April 2014
            October 2010

          • PCD-4.1.2A

            For purposes of Paragraph PCD-4.1.2, in order to avoid any delays and/or disruption in implementation of a Bahraini Islamic bank licensee's plans in this context, the CBB should be approached as soon as possible, even at a very preliminary stage.

            Added: April 2014

          • PCD-4.1.3

            The CBB requires any Bahraini Islamic bank licensee associated with an SPV to confirm the following points in any request for approval under Paragraph PCD-4.1.2:

            (a) The purpose of the SPV;
            (b) The nature of the relationship between the Bahraini Islamic bank licensee and the SPV (i.e. originator, sponsor, manager, investor, controller etc.);
            (c) The proposed consolidation/accounting treatment of the SPV in relation to the Bahraini Islamic bank licensee both for the PIR and the audited financial statements' purposes as agreed with its external auditor;
            (d) The availability of financial and other information relevant to the SPV and access to its business premises and records;
            (e) Whether the Bahraini Islamic bank licensee is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV; and
            (f) A copy of the Bahraini Islamic bank licensee's Shari'a Supervisory Board approval of the initial investment or financing structure involving the use of the concerned SPV(s).
            Amended: April 2014
            October 2010

          • PCD-4.1.3A

            In addition to the points noted in PCD-4.1.3, Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph PCD-4.1.2 must not allow such SPVs to obtain any conventional financing to fund themselves or any transactions that they enter into.

            Added: April 2014

          • PCD-4.1.3AA

            For purposes of Paragraph PCD-4.1.3A, in case of new acquisition or investment after the date of issuance of these rules, when conventional borrowing exists, it should be replaced by Islamic financing as soon as possible and in no case later than 12 months from the date of investment. In case of existing investments before the date of issuance of these rules, where conventional borrowing exists, it should be replaced by Islamic financing as soon as possible and in no case later than 12 months from the date of issuance of these rules. Both cases are extendable subject to SSB approval.

            Added: April 2014

          • PCD-4.1.3B

            Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph PCD-4.1.2 must not allow such SPVs to give any type of financial guarantee, warranty or indemnity to the Rab Al Maal, the Muwakil or investors in the SPV or any other counterparty, customer or stakeholder either directly or on behalf of the Bahraini Islamic bank licensee.

            Added: April 2014

          • PCD-4.1.3C

            The Shari'a Supervisory Board of the Bahraini Islamic bank licensee must monitor on an ongoing basis the Shari'a compliance of the SPVs and must oversee the conduct of the annual Shari'a compliance review of transactions, assets, liabilities and other commitments and relationships entered into by all SPVs with which the Bahraini Islamic bank licensee is involved (by way of the relationships described in Paragraph PCD-4.1.2). The Shari'a compliance function of the Bahraini Islamic bank licensee must perform such reviews.

            Added: April 2014

          • PCD-4.1.3D

            Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph PCD-4.1.2 must not transfer non-performing or impaired assets from their own balance sheets to such SPVs or vice versa.

            Added: April 2014

          • PCD-4.1.4

            Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the CBB on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the CBB within 3 months of the year end of the concerned SPV.

            October 2010

          • PCD-4.1.5

            Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior written approval of the CBB for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the CBB of any material events in relation to the SPV. If necessary, the CBB may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.

            Amended: April 2014
            October 2010

      • Appendix PCD-1 Investments in Commercial Entities

        Bank "x" with eligible capital of 1,000,000 before deductions has made investment in seven commercial entities listed below:

        Investee Amount %age of bank's capital
        a 100,000 10%
        b 120,000 12%
        c 150,000 15%
        d 160,000 16%
        e 170,000 17%
        f 200,000 20%
        g 250,000 25%
        Total 1,150,000 115%

        The amount to be deducted from capital in respect of these investments will be based on the following calculation:

        15% threshold (Individual basis)

        Sr # Amount 15% of Bank's capital Excess over 15% of Bank's capital
        d 160,000 150,000 10,000
        e 170,000 150,000 20,000
        f 200,000 150,000 50,000
        g 250,000 150,000 100,000
        Total     180,000

        Capital deduction on account of 15% threshold on individual basis is 180,000 (A).

        60% Threshold (Aggregate basis)

        Aggregate of investments after 15% deduction:

        c 150,000
        d 150,000
        e 150,000
        f 150,000
        g 150,000
        Total 750,000 (B)

        60% of Bank's capital = 600,000
        Aggregate (B) = 750,000
        Deduction = 150,000

        So the capital deduction based on the 60% threshold on aggregate basis is 150,000 (C).

        Total deduction based on investments in commercial entities is 330,000 (A+C).

        Net eligible capital after deductions is 670,000 (1,000,000 - 330,000).

        Remaining amount of investments 820,000 (1,150,000-330,000) will be risk weighted under the applicable risk weighting rules.

      • Appendix PCD-2 Comprehensive Example of Deductions

        Bank "x" with capital base of 10,000,000 before deductions (consisting of 5,000,000 Tier 1 and 5,000,000 Tier 2) has made four investments listed below along with the amount required to be deducted from the capital for capital adequacy purposes:

        Investment Amount Deduction requirement
        (For rules refer to chapter PCD-2)
        Bank "a" 1,000,000 1,000,000
        Insurance entity "b" 3,000,000 3,000,000 4
        Commercial entity "c" 2,000,000 500,000 5
        Entity "d" 500,000 400,000 6
        Total 6,500,000 4,900,000

        Determination of eligible Tier 1 and Tier 2 capital:

        These deductions include Goodwill of 100,000 & reciprocal cross holdings of 400,000 in Tier 1.

        Determination of eligible capital:

          Tier 1 capital Tier 2 capital
        Capital base 5,000,000 5,000,000
        Goodwill 7 (100,000) -
        Reciprocal cross-holding 8 (400,000) -
        Other deductions (Equally from Tier 1 and Tier 2) (4,900,000 - 500,000=4,400,000/2) (2,200,000) (2,200,000)
        Resulting capital 2,300,000 2,800,000
        Eligible capital 2,300,000 2,300,000 9

        Calculation of CAR:

        CAR = Eligible capital/Risk-Weighted Assets

        = (2,300,000 + 2,300,000)/(Say) 40,000,000 = 4,600,000/40,000,000 = 11.5%


        4 This investment is 30% of the insurance "b" capital.

        5 This investment is 20% of the bank's capital. As such the amount exceeding 15% i.e. 500,000 will be deducted.

        6 This investment is 2% of entity "d"s capital. Entity "d" has also made investment in Tier 1 capital of Bank "x" amounting to 400,000. This amount (400,000), being cross-holding, is required to be deducted from regulatory capital of the bank "x".

        7 This represents goodwill arising at the time of acquisition of a consolidated subsidiary.

        8 As this cross-holding exists in Tier 1 capital (see footnote 3), this amount must be deducted from the same tier.

        9 Tier 2 can not exceed 100% of Tier 1 (after all subsequent deductions).

      • Appendix PCD-3 Pro-rata Aggregation

        Bank "x" has made an investment in a non-resident financial entity "y" (30% shareholding) which is filing its return with the respective supervisor under the Basel II capital adequacy rules. The aggregation of capital and RWAs will be carried out as follows:

        Bank:

        Eligible regulatory capital = 3,000,00010

        Risk weighted assets = 20,000,000

        CAR = 3,000,000/20,000,000

        = 15%

        Investee:

        Eligible regulatory capital = 1,000,000

        Risk weighted assets = 10,000,000

        CAR = 1,000,000/10,000,000

        = 10%

        Consolidated Capital Adequacy Ratio:

        Eligible regulatory capital = 3,300,000 [(3,000,000 + (1,000,000*30%)]

        Risk weighted assets = 23,000,000 (20,000,000 + (10,000,000*30%)]

        CAR = 3,300,000/23,000,000

        = 14.35%


        10 This capital amount is after all necessary deductions, including investment in "y".

      • Appendix PCD-4 Full Aggregation

        Bank "x" controls a non-resident financial entity "z" (80% shareholding) which is filing its return with the respective supervisor under the Basel II capital adequacy rules. The aggregation of capital and RWAs will be carried out as follows:

        Parent Bank:

        Eligible regulatory capital = 3,000,00011,

        Risk weighted assets = 20,000,000

        CAR = 3,000,000/20,000,000

        = 15%

        Non-resident subsidiary:

        Eligible regulatory capital = 1,000,000

        Risk weighted assets = 10,000,000

        CAR = 1,000,000/10,000,000

        = 10%

        Consolidated Capital Adequacy Ratio:

        Eligible regulatory capital = 4,000,000 (3,000,000+1,000,000)

        Risk weighted assets = 30,000,000 (20,000,000+10,000,000)

        CAR = 4,000,000/30,000,000

        = 13.33%


        11 This capital amount is after all necessary deductions, including investment in "z".

      • Appendix PCD-5 Calculation of the Investment Amount, based on its Fair Value that should be deducted from Capital Base

        Bank "x" with eligible capital of 1,000 before deductions has made investment in a commercial entity (cost 160) which is carried at fair value (200). The amount to be deducted is as follows:

        Regulatory capital (before deductions) = 1,000

        Equity investment at cost = 160

        Equity investment at fair value = 200

        Fair value gain = 40

        Amount to be subjected to deduction (see Appendix CA-17 of CA module) = 200 - (40*.55) = 178

        Excess investment amount above the 15% level = 178 - (1,000 X 0.15) = 28

        The deduction should be as follows:

        1. The asset side should be reduced by 50 (28 see above + 22 see Appendix CA-17 of CA Module)
        2. The Capital Base shall be reduced as follows:
        Fair value to be removed from Tier 2 (18/178*28) 2.82
        Deduction of 50% of remaining amount from Tier 1(28-2.83 = 25.17/2) 12.59
        Deduction of 50% of the remaining amount from Tier 2(28-2.83 = 25.17/2) 12.59
        Total deduction from capital base 28.00