Bank Guidelines

Capital Adequacy Standards

Standardised Approach

CENTRAL BANK OF THE UNITED ARAB EMIRATES

November, 2009

CentralBankoftheUAE

1. Introduction
TheCentralBankoftheUnitedArabEmirates(CBUAE)ispleasedtoissueguidelinesfor
implementationoftheBaselIICapitalAccord,effectivefromthedateofthiscircular.Thisfollows
onfrompreviousdirectionoutliningexpectationsincludingNotice3735/2006BaselII
ImplementationintheUAEdated27August,2006andNotice4004/2009CapitalAdequacy.
ThiscircularwillfocusonspecificissuesofrelevancefortheUAEbankingcommunity,withthe
completeBaselIIguidelinesincludingthefollowingdocuments:

InternationalConvergenceofCapitalMeasurementandCapitalStandards,June2006,
BankforInternationalSettlements
EnhancementstotheBaselIIFramework,July2009,BankforInternationalSettlements

(collectivelyreferredtoastheAccord).
NotethatalthoughtheBankforInternationalSettlements(BIS)standardsonBaselIIisgenerally
applicablespecificguidelinesasgivenbytheCBUAEaretoprevail.NationalDiscretions,where
applicable,areoutlinedinAppendix6.
TheStandardisedApproachforCreditRiskistoapplyeffectiveimmediately,andCBUAEexpects
internationallyactiveUAEbanksandlargerinstitutionsasnotifiedonacasebycasebasisto
migratetotheFoundationInternalRatingBased(FIRB)induecourse.
BankscanselectanyoftheMarketRiskandOperationalRiskapproaches,withtheadvanced
optionsrequiringexplicitapprovalbytheCBUAE.
InlinewithPillar2requirementsoftheAccord,CBUAEexpectseachbanktodevelopand
documentitsownInternalCapitalAdequacyAssessmentProcess(ICAAP)thatiscommensurateto
thebanksactivitiesandriskprofile.TheICAAPwillbeakeycomponentofoursupervisoryreview
andyourattentionisdrawntotheJuly2009EnhancementstotheBaselIIFrameworkpaperand
theaddeddetailaroundPillar2expectations.TheCBUAE,asrecommendedbytheBIS,willexpect
bankstoaddressthisaddeddetailimmediately.

70ofPage

CentralBankoftheUAE

2. CapitalRatio
Theminimumcapitaladequacyratiowillbesetat11%,risingto12%asat30June2010as
specifiedinNotice4004/2009.
CapitalAdequacyRatio(CAR)ismeasuredasaratioofcapitalagainsttheriskweightedasset
valuesforCredit,MarketandOperationalrisk,wherecapitalincludesTier1andTier2capital.Tier
2capitalwillonlybeconsideredtoamaximumof67%ofTier1capital.
QuarterlyPrudentialReportingbybanksoftheircapitalcalculationsundertheStandardised
Approachareexpectedtoapplyfromthequarterending30September2009.PrudentialReturn
TemplatesareincludedinAppendix7.

3. Pillar1CalculationofCreditRisk
TheseguidelinespertaintotheStandardisedApproachofBaselIIonly.InternalRatingsBased
guidelineswillbeissuedinduecoursefollowingdiscussionwithbanks,onacasebycasebasis,for
whomthisisexpectedtobepertinent.
OneofthelargestdifferencesbetweenexistingguidelinesandtheStandardisedBaselIIapproach
istheabilitytoapply,onanassetclassbasis,riskweightingsdeterminedfromratingsprovidedby
ExternalCreditAssessmentInstitutions(ECAI)approvedbyCBUAE.AlistofapprovedECAIsis
includedinAppendix1alongwithapplicableratingtoriskweightmappings.
ExportCreditAgencyprovidedcountryscoresmaynotbeusedforriskweightingpurposes.

3.1.CentralBanks&Sovereigns
ClaimsonCentralBanksandSovereignsintheGCCmayhavea0%riskweightingapplied.Other
CentralBanksandSovereignsexposurestoberiskweightedinlinewithparagraphs53to56ofthe
Accord.

3.2.PublicSectorEntities(PSE)
ClaimsonaPSEintheGCC,intheirlocalcurrency,mayberiskweightedat0%iftreatedasaPSE
bythelocalregulator.ForeigncurrencyclaimsonaGCCPSEaretobeweightedatonegradeless
favourable,being20%.
AllotherPSEriskweightings(i.e.nonGCC)toberiskweightedatonegradelessfavourablethan
theirsovereigns.

70ofPage

CentralBankoftheUAE

3.3.MultilateralDevelopmentBanks(MDB)
ProvisionsoftheAccordasperparagraph59aretoapply.
AlistofMDBswhereariskweightingof0%maybeappliedisincludedinAppendix8.

3.4.Banks
CBUAEwilladoptriskweightingsspecifiedinOption2asperparagraph63oftheAccord,as
follows:
Creditassessment
ofBanks

AAAto
AA

A+to
A

BBB+to
BBB

BB+to
B

Below
B

Unrated

RiskWeight

20%

50%

50%

100%

150%

50%

RiskWeightShort
Termclaims

20%

20%

20%

50%

150%

20%

ConcessionsforshorttermclaimsshouldbeconsideredinlightofCBUAEguidanceonECAI
classificationsasperAppendix1.

3.5.SecuritiesFirms
Wheretheseentitiesareregulatedasbanks,theymaybetreatedaspertheaboveprocessfor
banks.Iftheyarenotregulatedasbanks,Corporatetreatmentasbelowistoapply.

3.6.Corporates
RiskweightingsforCorporatesratedbyapprovedECAIsmaybeappliedasperparagraph66ofthe
Accord,asfollows:
Creditassessment
ofBanks
RiskWeight

AAAto
AA

A+to
A

BBB+to
BB

Below
BB

Unrated

20%

50%

100%

150%

100%

UnRatedcorporateexposuresmustberiskweightedat100%.CBUAEmay,atitssolediscretion,
requireahigherriskweightingforsomecorporatesasadvisedtobanksdirectlywhere
appropriate.

3.7.RegulatoryRetailPortfolios
A75%riskweightingmayapplyforexposuresclassifiedasRetail.Forthisclassificationtoapply
theCBUAEwillneedtobesatisfiedthateachofthefourBaselIIcriteriaaremet:

OrientationcriterionExposuretoapersonorpersons,orsmallbusiness.
70ofPage

CentralBankoftheUAE

ProductcriterionEligibleproductsincludedarecreditcards,revolvingcredit,personal
lendingandsmallbusinessproducts.Mortgageproductsarealsoexcludedastheseare
treatedseparately.
GranularitycriterionNoexposuretoanyonecounterpartyisabletoexceed0.20%ofthe
totalretailportfoliobeingevaluated.
ValuecriterionMaximumaggregatedexposuretoonecounterpartymayexceedthe
valueofAED2,000,000.

3.8.ClaimsSecuredbyResidentialProperty
A35%riskweightingmayapplytoexposuressecuredbyresidentialpropertywhere:

LoantoValue(LTV)ratioislessthan85%;and
TheexposuredoesnotexceedAED10million.

IftheaboveLTVandExposurecapcriteriacannotbedefinitivelyestablished,thentheapplicable
RiskWeightingforthecounterpartytypeistoapply.

3.9.PastDueLoans
Theunsecuredportionofanyloan(otherthanaqualifyingresidentialmortgageloan)thatispast
dueformorethan90days,netofspecificprovisions(includingpartialwriteoffs),willberisk
weightedasfollows:

150%riskweightwhenspecificprovisionsarelessthan20%oftheoutstandingamountof
theloan;
100%riskweightwhenspecificprovisionsare20%andaboveoftheoutstandingamount
oftheloan;

3.10.

HighRisk&OtherAssets

Refertoparagraphs79through81oftheAccordfortreatmentoftheseexposures.,aswellasthe
July2009EnhancementspaperfromtheCommittee.

3.11.

OffBalanceSheetCreditRisk

UnderBaselII,offbalancesheetitemsunderthestandardisedapproach(Para82to87ofBaselII)
willbeconvertedintocreditexposureequivalentsthroughtheuseofcreditconversionfactorsina
similarmannertoBaselI.
CreditConversionFactorof100%

Alldirectcreditsubstitutes,includinggeneralguaranteesofindebtednessandall
guaranteetypeinstruments,suchasstandbylettersofcreditandacceptances,backing
thefinancialobligationsofotherparties
70ofPage

CentralBankoftheUAE

Creditderivativessuchascreditdefaultswapswherebankprovidescreditprotection
(othermorecomplexderivativeswillbeassessedonacasebycasebasisandshouldbe
broughttotheattentionofHeadofBankingSupervisionattheCBUAE)
Saleandrepurchaseagreementsandassetsaleswithrecourse,wherethecreditrisk
remainswiththebank
Forwardassetpurchases,forwarddepositsandcommitmentsfortheunpaidportionof
partlypaidsharesandsecuritieswhichrepresentcommitmentswithcertaindrawdowns

CreditConversionFactorof50%

Transactionrelatedcontingentitemse.g.performancebonds,bidbondswarrantiesand
standbylettersofcreditrelatedtoparticulartransactions
Underwritingcommitmentsundernoteissuanceandrevolvingunderwritingfacilities
(afterdeductionforownholdingsofnotesunderwritten)
OthercommitmentsNotunconditionallycancellablewithanoriginalmaturityexceeding
oneyear

CreditConversionFactorof20%

Othercommitmentsnotunconditionallycancellablewithanoriginalmaturityofoneyear
orless
Shorttermselfliquidatingtraderelatedcontingentitemse.g.documentarycredits
collateralisedbyunderlyingshipments.

CreditConversionFactorof0%

Anycommitmentthatisunconditionallycancellable

ThebookamountsofcommitmentsshouldbeenteredintheFormCR3bytypeandCR2by
counterparty(Appendix7).

Foreignexchangeandinterestraterelateditems
The treatment of foreign exchange and interest raterelated contracts needs special attention
becausebanksarenotexposedtocreditriskforthefullfacevalueofthesecontracts,butonlyto
theextentofpotentialcostofreplacingthecashflow(oncontractsshowingpositivevalue)ifthe
counterpartydefaults.
Theinstrumentsthatarecapturedintheriskweightingframeworkincludethefollowing:
Foreignexchangecontracts
(a)Forwardforeignexchangecontracts(swapsandoutrights)
(b)Crosscurrencyinterestrateswaps
(c)Foreigncurrencyfutures
70ofPage

CentralBankoftheUAE
(d)Foreigncurrencyoptionspurchased
Interestraterelatedcontracts
(a)Singlecurrencyinterestrateswaps
(b)Basisswaps
(c)Forwardrateagreements
(d)Interestratefutures
(e)Interestrateoptionspurchased
Forcalculatingtheforeignexchangeandinterestraterelatedrisk,banksshouldusethe current
exposure method. Under this method, banks should calculate the current replacement cost of
foreign exchange and interest raterelated contracts by marking to market all contracts with
positivevalue.Afactor(theaddon")isthenaddedtothereplacementcosttoreflectpotential
creditexposureovertheremaininglifeofthecontracts.Thetotalpotentialcreditexposuremust
thenbeanalysedaccordingtothetypesofcounterpartyinordertoreflectthedifferentrisks.
No'addon'isrequiredintheparticularcaseofsinglecurrencyfloatinginterestrateswaps.
Since exchange rate contracts involve an exchange of principal on maturity as well as being
generally more volatile, higher conversion factors are set for those instruments that feature
exchangeraterisk.Exchangeratecontractswithanoriginalmaturityof14calendardaysorless
areexcludedfromriskweightrequirements.
Instruments traded on exchanges may be excluded where they are subject to daily margin
requirements.Oncethecreditequivalentamountshavebeencalculatedbythismethod,theycan
then be weighted according to the usual risk weights assigned to the underlying nature of the
counterparty,asforonbalancesheetitems.
The exposure to each type of counterparty has to be risk weighted as 0%, 20%, 50% or 100%
respectivelytoarriveatthetotalweightedexposure.
Themethodofcalculatingtheriskweightedexposureregardingforeignexchangeandinterest
raterelatedcontractsisreflectedintheattachedreturnformCR2a.

3.12.

CreditRiskMitigation

OnlythefollowingCreditRiskMitigationtechniqueswillbeconsideredaseffectivecreditrisk
reductionforPillar1calculationpurposes:

NettingApplicableonlywithlegallyenforceablenettingagreementsinplace.Anability
tosystematicallycalculatenetexposuremustbedemonstrated.
CollateralEithertheSimpleorComprehensiveapproachesmaybeapplied,withbanks
lookingtoapplytheComprehensiveapproachrequiringexplicitapprovalfromCBUAE.

70ofPage

CentralBankoftheUAE

Guarantees&CreditDerivativesThesetoolscanbeusedtomitigatecreditriskprovided
theyaredirect,explicit,irrevocableandunconditional.CBUAEmustbesatisfiedthatthe
bankhassuitableriskmanagementtoolsinplacetoadoptuseofthesetools.

Fulldetailsareasperparagraphs109to210oftheAccord.

70ofPage

CentralBankoftheUAE

4. Pillar1MarketRisk
Banksarerequiredtoallocatecapitalinrespectofmarketriskunderthegeneralguidelinesand
frameworksetoutunderBaselIISectionVI,MarketRisk,whichdefinesthisriskastheriskof
lossesinonandoffbalancesheetpositionsarisingfrommovementsinmarketprices.
ThissectiondealswiththeStandardisedApproachofmeasurementasmostbankswillnotbeina
positiontobasetheircalculationsonamodelsapproachwhichmaybeacceptedonacasebycase
basis.
Themarketriskssubjecttoacapitalchargeareasfollows:

InterestRateRisk,
ForeignexchangeRisk,
EquityExposureRisk,
CommodityRisk,and
OptionsRisk

Thescopeofthechargesisrestrictedtotradingbookonlyforinterestrateriskandequity
positionswhilsttheremainingwillapplytothebanksentirepositions.
Atradingbookconsistsofpositionsinfinancialinstrumentsandcommoditiesheldeitherwith
tradingintentorinordertohedgeotherelementsofthetradingbook.Tobeeligiblefortrading
bookcapitaltreatment,financialinstrumentsmusteitherbefreeofanyrestrictivecovenantson
theirtradingabilityorabletobehedgedcompletely.Inaddition,positionsshouldbefrequently
andaccuratelyvalued,andtheportfolioshouldbeactivelymanaged.Thisdefinitionmayequate
totheapplicationofIAS39toMarktomarketpositions.
Banksmusthaveclearlydefinedpoliciesandproceduresfordeterminingwhichexposuresto
include/excludefromthetradingbookforpurposesofcalculatingregulatorycapitalasdetailedin
Paragraphs687and688ofBaselII.Compliancewiththesepoliciesmustbefullydocumentedand
subjecttoperiodicalaudit.

4.1.InterestRateRisk
Banksmustcalculatetwoseparatechargesfordeterminingtheminimumcapitalrequirement.
Instrumentsinthetradingbook,suchasdebtsecuritiesoffixedorfloatingrateandnon
convertiblepreferencesharesandotherconvertibledebtthattradeslikedebtsecurities,will
attractacalculationforspecificriskofeachsecurityandgeneralriskintheportfolio(where
longandshortpositionsindifferentsecuritiesorinstrumentscanbeoffset).Generalriskmaybe
calculatedusingeithertheMaturitymethodutilisingamaturityladderorDurationmethod,
70ofPage

CentralBankoftheUAE
whichisconsideredmoreaccurateandisbasedoncalculatingpricesensitivityofeachposition
separately.DetailsofcalculationmethodologycanbefoundinParagraphs709to718(iv)ofBasel
II.

4.2.ForeignExposureRisk
Banksmustcalculateacapitalchargeforforeignexchangeriskbycomputingthenetopen
positions(greaterofsumofthenetshortpositionsorsumofthenetlongpositions)forcurrencies
andgold.Thecapitalchargewouldbeappliedtothehigherofthenetlongpositionsorthenet
shortpositions(includinggold).DetailsofcalculationmethodologycanbefoundinParagraphs
718(xxx)to718(xLii)ofBaselII.BankswillbepermittedtotreatUS$openpositionsequaltoAED
positionsaslongastheAEDremainspeggedtotheUS$,thesametreatmentispermittedforGCC
currenciessimilarlypeggedtotheUS$.
Banksthathavelittleornoforeigncurrencybusinessmaybeexemptfromcapitalrequirements
underthissectionprovidedthefollowingismet:

Thegreaterofthesumofthegrosslongpositionsandsumofgrossshortpositionsin
foreigncurrenciesmustnotexceed100%ofthecapitalbasedescribedabove.
Overallnetopenposition(asexplainedabove)doesnotexceed2%ofthecapitalbase.

4.3.EquityRisk
Banksmustcalculateacapitalchargeforequityriskbycomputingthespecificriskchargeand
generalriskchargeasperthetableinAppendix7labelledMR6.Capitalchargesforspecificrisk
maybereducedby50%foraliquidandwelldiversifiedportfolio.Detailsofcalculation
methodologycanbefoundinParagraphs718(xix)to718(xxix)ofBaselII.

4.4.CommoditiesRisk
Banksmustcalculateacapitalchargeforcommodityriskinrespectofphysicalholdingswhichcan
be,orare,traded,includingpreciousmetalsbutexcludinggold(coveredunderforeignexchange
risk).ForbanksthatonlyconductalimitedamountofcommoditiesbusinesstheMaturityLadder
ApproachortheSimplifiedApproachwouldbeexpected.Majortraderswouldbeexpectedto
followamodelsapproachandareoutsidethescopeofthispaperandthereforeshouldapproach
CBUAEforspecificguidance.
Underthematurityladderapproach,banksshouldcalculatethenetpositionineachcommodityin
itsunitofmeasurementandthenconverttoAEDatprevailingspotrate.Usingamaturityladder
asinMR7(Appendix7)foreachcommodity,theseshouldthenbeaggregatedontoMR7the
consolidatedtable.Alowerriskchargewillapplytomatchedlongandshortpositionswithineach
maturitybandormatchedpositionsbetweenbands,acapitalchargeof15%willapplytoresidual
unmatchedpositions.DetailsofcalculationmethodologycanbefoundinParagraphs718(xLiii)to
718(Li)ofBaselII.

70ofPage

CentralBankoftheUAE
UndertheSimplifiedApproach,thecapitalchargewillbe15%ofthenetposition,longorshort,in
eachcommodity.Inordertoaccountforanybasisriskandadditionalcapitalchargeof3%ofthe
banksgrosspositions,longplusshortineachcommodity.Detailsofcalculationmethodologycan
befoundinParagraphs718(Liv)and718(Lv)ofBaselII.

4.5.OptionsRisk
BanksmustcalculateacapitalchargeforoptionsriskbasedontheSimplifiedApproachapplicable
onlytobanksthatsolelyusepurchasedoptions(donotwriteoptions)whichisoutlinebelow:
Position
LongCashandLongPut
Or
ShortCashandLongCall

Treatment

Thecapitalchargewillbethemarketvalue
oftheunderlyingsecuritymultipliedbythe
sumofspecificandgeneralmarketrisk
chargesfortheunderlyinglesstheamount
theoptionisinthemoney(ifany)orzero

Longcall

Thecapitalchargewillbethelesserof:

Or

a)

Themarketvalueoftheunderlying
securitymultipliedbythesumofspecific
andgeneralmarketriskchargesforthe
underlying

b)

Themarketvalueoftheoption

Longput

BanksnotfallingintotheabovecategoryshouldapproachCBUAEforspecificguidanceand
agreementtouseintermediateapproachesassetoutinParagraphs718(Lix)to718(Lxix)orthe
comprehensiveriskmanagementmodeldetailedinparagraphs718(Lxx)to718(xcix)ofBaselII.

70ofPage

CentralBankoftheUAE

5. Pillar1OperationalRisk
Operationalriskisdefinedastheriskoflossresultingfrominadequateorfailedinternal
processes,peopleandsystems,orfromexternalevents.Thisdefinitionincludeslegalriskbut
excludesstrategicandreputationalrisk.
BaselIIframeworkoutlinesthreemethodsforcalculatingtheriskchargeforoperationalrisk:
1. BasicIndicatorApproach
2. StandardisedApproach/AlternativeStandardisedApproach(ASA)
3. AdvancedMeasurementApproach
CBUAEpermitsbankstouseanyoftheaboveapproachesprovidedtheymeetthecriterialaid
downunderBaselIIandsubjecttoapprovalfortheAdvancedMeasurementApproach(AMA)for
whichbankswouldneedtodemonstratetoCBUAEtheappropriatenessofthechosenapproach.
ThisdocumentfocusesonallapproachesexcludingAMA.
InadditiontocomplyingwiththecriteriainParagraph663ofBaselII,Banksareencouragedto
refertoandcomplywiththerecommendationsoftheBaselCommitteeintheirpaperSound
PracticesfortheManagementandSupervisionofOperationalRisk,February2003.
Banksshoulduseanyoneoftheapproachesin(1)or(2)abovetoreporttheoperationalrisk
capitalchargeinthereturnsincludedinAppendix7headedOR1.
OnceabankhasbeenallowedtousetheASAitwouldnotbeallowedtoreverttothe
StandardisedApproachwithoutthepermissionofCBUAE.
DetailsonthesethreeapproachesareasperUAEBaselIIGuidelinesforBanksStandardised
Approach,July2009.

70ofPage

CentralBankoftheUAE

6. Pillar2SupervisoryReview
CBUAEconsidersthePillar2requirementsoftheAccordtobeparticularlyrelevantforbanksinits
jurisdiction.Consequently,notwithstandingPillar1capitalcalculationsandimpliedcapital
requirementsdeterminedtherefrom,thesupervisoryreviewprocesswillfocusoneachbanks
InternalCapitalAdequacyAssessmentProcess(ICAAP).
TheICAAPmustbedocumentedandfullyintegratedwiththeenterprisewideriskmanagement
framework.Itshouldbeundertakenannually,havetheexplicitinvolvementandapprovalofboth
BoardandSeniorManagement,andbepresentedtotheCBUAEasakeypointofdiscussion
betweenthebankandregulator.
Asaminimum,theICCAPshouldincludeariskbased,forwardlookingviewofCredit,Marketand
Operationalriskcapital.OtherrisksthatmayrequirecapitalsuchasLiquidity,InterestRateRiskin
theBankingBookandOthers(suchasreputational)mustbeexplicitlyanddemonstrably
considered.
Pillar2requirementsareintendedtobeproportionate,butCBUAEconsidersanICAAPcapability
asdemonstratedinAppendix3tobeaminimumstandardofcapability.Forbanksthatare
systematicallysignificant&/orengagedinriskierandmoresophisticatedassets,ahigherstandard
ofcapabilitywillbeexpectedasadvisedonacasebycasebasis.
Followingrecentmarketturmoil,itisnoteworthythattheBaselCommitteeissuedenhancements
totheAccordinJuly2009thatincludedsignificantchangestoPillar2requirements.Banksshould
beawareoftheseintheirentiretyastheCBUAEfullyendorsestheseenhancementsandexpects
themimplementedimmediately.Aspectsthatarenoteworthyforourenvironmentinclude:

FirmWideRiskOversightARiskframeworkendorsedbytheBoardandSenior
Managementthatisalignedtoorganisationalriskappetite,implementedviaeffective
policies,proceduresandsystems.Theframeworkmustincludemeasuresofcreditrisk
thatareappliedindaytodaybusinessandsupportedbysuitableMIS.Keyaspectofthis
requirementistheusetestprinciple.CBUAEwillbelookingfordemonstrableevidence
thattheriskframeworkisappliedacrosstheorganisation.
GovernanceBoardandSeniorManagementmustassumeexplicitresponsibilityforthe
riskframework.AChiefRiskOfficer(CRO)functionmustexist,itmustbeindependentof
thebusinesslines,andmustreportdirectlytotheCEOandBoard.
RiskConcentrationRisk,asmeasuredonanaggregatedbasistoborrowergroups,must
beconsideredinthecontextofsetconcentrationlimitsatborrowergroup,industryand
countrylevel.Inaddition,sectoralanalysisacrosspropertyandmoneymarket
concentrationsisrequired.Wherethereareexcessesoninternallimits,asdistinctfrom
existingprudentialstandards,theseshouldbereportedandnotedataBoardlevel.
70ofPage

CentralBankoftheUAE

LiquidityEachbankmustconsideritssourcesoffundinginthecontextofaliquidityrisk
tolerancestatementfromtheBoard.Liquidityriskmustbeanalysedacrossthe
organisationincludingallproductsandsubsidiaries,withtheICAAPexplicitlyallowingfor
stressedscenariosappropriatetothenatureoffunding.
StressTestingBanksmusthaveanestablishedforwardlookingstresstestingframework
forallrisktypes.ResultsshouldbereportedatregularlyscheduledintervalstotheBoard
forreviewinthecontextoftheorganisationsriskappetiteandcapitallevels.The
robustnessofthestresstestingprocessmustbecommensuratewiththebanksrisk
appetiteandactivities,asadvisedonacasebycasebasis.

Pillar2Summary
TheCBUAEexpectsbanksmanagementtobecomemuchmorefocusedonthefollowingareas:
1. TounderstandwhattheirbankisdoingwithrespecttoPillar1andPillar2risks.
2. ToidentifyotherrisksunderPillar2relevanttotheirbankandtoassesstherisk
mitigantsavailabletosetagainstthoseotherrisksunderPillar2.
3. TotakestepstoplantheirinternalcapabilitytocalculatecapitalrequirementsunderPillar
2.
4. Ataminimum,pleaserefertothefollowingBISdocuments:
a. Part3ofBaselIIJune2006
b. EnhancementstotheBaselIIframeworkJuly2009
c. PrinciplesforSoundStressTestingPracticesandSupervisionMay2009
d. PrinciplesforSoundLiquidityRiskManagementandSupervisionSeptember2008
e. SoundPracticesfortheManagementandSupervisionofOperationalRisk
February2003

70ofPage

CentralBankoftheUAE

7. Pillar3MarketDiscipline
ThepurposeofPillar3marketdisciplineistocomplementtheminimumcapitalrequirements
(Pillar1)andthesupervisoryreviewprocess(Pillar2).TheCBUAEsupportsenhancedmarket
disciplinebydevelopingasetofdisclosurerequirementswhichwillallowmarketparticipantsto
assesskeypiecesofinformationonthescopeofapplication,capital,riskexposures,risk
assessmentprocesses,andhencethecapitaladequacyoftheinstitution.
Inprinciple,banksdisclosuresshouldbeconsistentwithhowseniormanagementandtheboard
ofdirectorsassessandmanagetherisksofthebank.
UnderPillar1,banksusespecifiedapproaches/methodologiesformeasuringthevariousrisksthey
faceandtheresultingcapitalrequirements.TheCBUAEbelievesthatprovidingdisclosuresthat
arebasedonacommonframeworkisaneffectivemeansofinformingthemarketaboutabanks
exposuretothoserisksandprovidesaconsistentandunderstandabledisclosureframeworkthat
enhancescomparability.

7.1.Interactionwithaccountingdisclosures
TheCBUAErecognisestheneedforaPillar3disclosureframeworkthatdoesnotconflictwith
requirementsunderaccountingstandards,whicharebroaderinscope.Wherebanksface
difficulties,CBUAEwillconsidereachissueonacasebycasebasis.

Banksareencouragedtoprovideallrelatedinformationinonelocationtothedegreefeasible.In
addition,ifinformationisnotprovidedwiththeaccountingdisclosure,institutionsshouldindicate
wheretheadditionalinformationcanbefound.

7.2.Materiality
Abankshoulddecidewhichdisclosuresarerelevantforitbasedonthematerialityconcept.
Informationwouldberegardedasmaterialifitsomissionormisstatementcouldchangeor
influencetheassessmentordecisionofauserrelyingonthatinformationforthepurposeof
makingeconomicdecisions.ThisdefinitionisconsistentwithInternationalAccountingStandards
andwithmanynationalaccountingframeworks.
TheCBUAErecognisestheneedforaqualitativejudgementofwhether,inlightoftheparticular
circumstances,auseroffinancialinformationwouldconsidertheitemtobematerial(usertest).
TheCBUAEisnotsettingspecificthresholdsfordisclosureasthesecanbeopentomanipulation
andaredifficulttodetermine,anditbelievesthattheusertestisausefulbenchmarkfor
achievingsufficientdisclosure.

70ofPage

CentralBankoftheUAE

7.3.Proprietaryandconfidentialinformation
Proprietaryinformationencompassesinformation(forexampleonproductsorsystems),thatif
sharedwithcompetitorswouldrenderabanksinvestmentintheseproducts/systemsless
valuable,andhencewouldundermineitscompetitiveposition.
Informationaboutcustomersisoftenconfidential,inthatitisprovidedunderthetermsofalegal
agreementorcounterpartyrelationship.Thishasanimpactonwhatbanksshouldrevealinterms
ofinformationabouttheircustomerbase,aswellasdetailsontheirinternalarrangements,for
instancemethodologiesused,parameterestimates,dataetc.
TheCBUAEbelievesthattherequirementssetoutbelowstrikeanappropriatebalancebetween
theneedformeaningfuldisclosureandtheprotectionofproprietaryandconfidentialinformation.
Inexceptionalcases,disclosureofcertainitemsofinformationrequiredbyPillar3mayseriously
prejudicethepositionofthebankbymakingpublicinformationthatiseitherproprietaryor
confidentialinnature.Insuchcases,abankneednotdisclosethosespecificitems,butmust
disclosemoregeneralinformationaboutthesubjectmatteroftherequirement,togetherwiththe
factthat,andthereasonwhy,thespecificitemsofinformationhavenotbeendisclosed.
Thislimitedexemptionisnotintendedtoconflictwiththedisclosurerequirementsunderthe
accountingstandards.

7.4.Disclosurerequirements
Banksshouldhaveaformaldisclosurepolicyapprovedbytheboardofdirectorsthataddresses
thebanksapproachfordeterminingwhatdisclosuresitwillmakeandtheinternalcontrolsover
thedisclosureprocess.Inaddition,banksshouldimplementaprocessforassessingthe
appropriatenessoftheirdisclosures,includingvalidationandtheirfrequency.
ThegeneraldisclosurerequirementsasdetailedinPara821ofBaselIIwillbeappliedatthetop
consolidatedlevelofabankinggroupbyalllicensedbanks,i.e.,attheleveloftheparentlicensed
bank.
DisclosuresrelatedtoindividualbankswithinaUAEbankinggroupwouldnotgenerallybe
required,branchesofforeignbankswouldnotbeexempted.Anexceptiontothisarisesinthe
disclosureoftotalandTierIcapitalratiosofsubsidiarybanksbythetopconsolidatedbankwhere
ananalysisofsignificantsubsidiarybankswithinthegroupisappropriateinordertorecognisethe
needforthesesubsidiariestocomplywiththerelevantcapitaladequacyframeworkandother
applicablelimitationsonthetransferoffundswithinthegroup.
BanksshouldrefertoBaselIIJune2006sectioncoveringPillar3fordetailedrequirementsunder
thispillaralongwithEnhancementstotheBaselIIframeworkJuly2009.

70ofPage

CentralBankoftheUAE
DisclosurebybanksisexpectedtoincludebothGeneralDisclosuresandSpecificdisclosures
includedinfinancialstatementspublishedfortheyear2008.Therefore,theannualreportfor31
December2008wouldbeexpectedtocomplywiththeBaselIIdisclosurerequirements.Reports
mustbeaudited/reviewedinaccordancewithInternationalAuditingStandards.
ThetablesasdetailedinAppendix7oftheUAEBaselIIGuidelinesforBanksStandardised
Approach,July2009,mayserveasguidanceinconsideringformatofdisclosuresthatarefully
explainedinthePillar3sectionofBaselII.

70ofPage

CentralBankoftheUAE

8. Capital
Thecapitalbaseservingasabasisforcalculatingeachbank'scapitaladequacyratioisdefinedas
follows:

8.1.Tier1capital
Corecapital:

Paidupsharecapital,
Publishedreserves(includingposttaxretainedearnings),
Sharepremium,
Legalreserves,
Generalreserves,
HybridTier1Instruments(requirespriorapprovalfromCentralBank)
Minorityinterestsintheequityofsubsidiarieslessthanwhollyowned

Profitsofthecurrentperiodarenotallowableinthecalculationofcorecapital,otherthanin
exceptionalcircumstancesatthediscretionoftheCentralBank.Thiswouldbedeterminedin
conjunctionwithreviewsbyabank'sexternalauditorsastotheirfairness.
ThefollowingdeductionsmustbemadefromTier1corecapital:

Goodwillandotherintangiblesatnetbookvalue,
Adjustmentsforthecumulativeeffectofforeigncurrencytranslation
Ownsharesheldatnetbookvaluetakingaccountofanyprovisionsmadeagainstthe
acquisitionvalue,
Currentyearloss/retainedlosses,
Shortfallinprovisions,
Otherdeductions:
Loanstodirectors:
o Adeductionmustbemadeforloanstodirectorswhicharenotgrantedonmarket
termsorwhicharenotproperlysecured.Loans'arenotgrantedonmarketterms
whereinterestchargedforsuchloansissignificantlybelowthatofcomparable
loanstoothercustomersand/orbelowthebank'srefinancingcostsforsuchloans
orontermsmorefavourablethanforsimilarloanstoothercustomers.
OtherdeductionstobedeterminedbyCBUAE

*Anyassetsdeductedfromcapital,incomputingthenumeratoroftheratio,arenottobe
includedinweightedriskassetsincomputingthedenominatoroftheratio.Loansare
70ofPage

CentralBankoftheUAE
inadequatelysecuredwheretheywouldnothavebeengrantedtoothercustomersforlackof
adequatesecurity.

8.2.Tier2Capital(supplementarycapital)
Thefollowingelementsareeligibleforinclusioninthecalculationoftier2capital:
GeneralProvisions
Underthestandardisedapproachtocreditrisk,generalprovisions,asexplainedinBaselII
paragraphs381to383,canbeincludedinTier2capitalsubjecttothelimitof1.25%ofrisk
weightedassets.Forfurtherdetails,banksmustrefertoparagraph49(vii)to49(x)ofBaselII.
Undisclosedreserves
Thesereservesmusthavethesamehighqualityandcharacteristicsasadisclosedcapitalreserve
beforetheywillbeacceptedbytheCBUAE.Theymustbeunencumberedandcompletelyfreeof
anylienorcommitment.Forfurtherdetails,banksmustrefertoparagraph49(iv)ofBaselII.
Assetrevaluationreserves/CumulativechangesinFairValue
Revaluationsurplusesarisingfromtherevaluationoffixedassetsorotherlongterminvestments
canbeincludedassupplementarycapital;providedtheyaresubjecttoasubstantialdiscountin
ordertoreflectconcernsbothaboutmarketvolatilityandnotionaltaxchargeswhichmayarise
weresuchgainstoberealised.Accordingly,theCentralBankoftheU.A.E.acceptsthatbanksmay
includeafigureuptoamaximumof45%oftheexcessofmarketvalueoverthenetbookvalueof
theseitemswithinsupplementarycapital.Unrealisedreservesarisinginrespectoftheexcessof
marketvalueoverthenetbookvalueofthebankspropertyassetsmaynotbeincluded.For
furtherdetails,banksmustrefertoparagraph49(vi)ofBaselII.
Hybrid(debt/equity)capitalinstruments
Certaincapitalinstrumentscombinecharacteristicsofbothequityanddebt,butvaryfromone
countrytoanother.Wheretheseinstrumentshaveclosesimilaritiestoequity,inparticular,
wheretheyareabletosupportlossesonanongoingbasiswithouttriggeringliquidation,they
maybeincludedinsupplementarycapital.Theymust,however,meetthefollowingrequirements:

Mustbeunsecured,subordinatedandfullypaidup,
MustnotberedeemablewithoutthepriorconsentoftheCBUAE,
Mustbeavailabletoparticipateinlosseswithoutthebankbeingobligedtocease
trading(unlikeconventionalsubordinateddebt);

Althoughthesecapitalinstrumentsmaycarryanobligationtopayinterestthatcannot
permanentlybereducedorwaived(unlikedividendsonordinaryshareholders'equity),they
shouldallowserviceobligationstobedeferred(aswithcumulativepreferenceshares)wherethe
profitabilityofthebankwouldnotsupportpayments.
Subordinatedtermloans
70ofPage

CentralBankoftheUAE
Subordinatedloancapitalwithaminimumoriginaltermtomaturityofmorethanfiveyearsmay
beincludedwithinsupplementarycapital.Duringthelastfiveyearstomaturity,cumulative
amortizationof20%perannumonastraightlinebasiswillbeappliedtoreflectthediminishing
valueoftheseinstrumentsasacontinuingsourceofstrength.Theamountofsuchinstruments
willbeallowableonlyuptoamaximumof50%oftier1capital.

8.3.Tier3Capital
Theprincipalformofeligiblecapitaltocovermarketrisksconsistsofshareholdersequityand
retainedearnings(Tier1capital)andsupplementarycapital(Tier2capital).But,subjecttoprior
approvalfromtheCBUAE,banksmayemployathirdtierofcapital(Tier3),consistingofshort
termsubordinateddebtasdefinedinparagraph49(xiv)ofBaselII,forthesolepurposeofmeeting
aproportionofthecapitalrequirementsformarketrisks,subjecttotheconditionsinparagraph
49(xiii)and49(xiv).
Deductionsfromtotaloftier1capitalandtier2capital
Normalaccountingpracticeprescribestheconsolidationoftheassetsandliabilitiesofall
membersofagroupwhenpreparinggroupaccounts.Whereagroupexcludessubsidiaries,
deductionfromcapitalisessentialtopreventthemultipleuseofthesamecapitalresourcesin
differentpartsofagroup.
Thefollowingdeductionsshouldbemadefromthesumoftier1andtier2capitaltotakeaccount
ofthisandinthoseinstanceswherebankshavecrossshareholdingsinotherbanks:
Banking,securitiesandotherfinancialsubsidiaries
UnderBaselII,bankingandfinancialsubsidiariesshouldbeconsolidated,andifnotconsolidated,
theinvestmentshouldbedeductedfromthecapitalbase.
InternationalAccountingStandardsdefinesubsidiariesascompaniesincorporatedintheirhome
countryorabroadwhichthebankcontrols(i.e.directlyorindirectlyholds50%ormoreofthe
ordinarysharecapital)orinwhichthebankhasacontrollinginfluence(forexample,viathe
compositionoftheboardofdirectors)whereitholdslessthan50%oftheordinarysharecapital.
Allbankingandfinancialsubsidiariesshouldbeconsolidated,exceptincertaincasesasdescribed
inInternationalAccountingStandardNo.27,ConsolidatedFinancialStatementsandAccountingfor
InvestmentsinSubsidiaries(issuedbytheInternationalAccountingStandardsCommittee)which
requiresorpermitsexclusionfromconsolidation,forexample,when:

Controlofthesubsidiaryistemporary;or
Controldoesnotexistinreality;or
Controlisimpairedbyrestrictionsonthetransferoffunds.
Significantminorityinvestmentsinbankingandotherfinancialentities

Investmentsinbankingandotherfinancialentitiesof20%andabove,upto50%shouldnormally
bedeductedfromthecapitalbase.Alternatively,suchinvestmentsmay,undercertainconditions,
70ofPage

CentralBankoftheUAE
beconsolidatedonaproratabasis.Forexample,prorataconsolidationmaybeappropriatefor
jointventuresorwheretheCBUAEissatisfiedthattheparentislegallyordefactoexpectedto
supporttheentityonaproportionatebasisonlyandtheothersignificantshareholdershavethe
meansandthewillingnesstoproportionatelysupportit.
Investmentsinotherbanksorfinancialinstitutions
Thisrepresentscrossshareholdingsbetweentwoormorebanksorfinancialinstitutionswherein
theyholdasimilaramountofeachother'sCapital.Insuchcircumstances,theseamountsmustbe
deductedfromthetotalofthecapitalbase.
Investmentsininsuranceentities
Forinvestmentsininsuranceentities,aninvestmentinsuchanentityof10%orabovewouldlead
todeductionfromthecapitalbase.Banksmayrecognisesurpluscapitalininsurancesubsidiaries
asperthecriteriaanddisclosurerequirementsexplainedinParagraph33andfootnote10ofBasel
II.
Significantinvestmentsincommercialentities
Significantminorityandmajorityinvestmentsincommercialentitiesthatexceedmaterialitylevels
of15%ofthebankscapitalforindividualsignificantinvestmentsincommercialentities,and60%
ofthebankscapitalfortheaggregateofsuchinvestmentswillbedeductedfromthecapitalbase.
Theamountdeductedwouldbetheportionoftheinvestmentabovethematerialitylevel.
Investmentsinsignificantminorityowned/majorityownedandcontrolledcommercialentities
belowthematerialitylevelsnotedabovewillberiskweightedatnolowerthan100%forbanks
usingthestandardisedapproach.
Asatransitionalarrangement,banksholdingsuchinvestmentsat1January2008,thatexceedthe
materialitylevelsstatedabove,willbepermittedtoreducetheexcessoftheirinvestmentsovera
periodnotextendingbeyond1January2011.Theimpactwouldbethatbankswiththese
investmentswillnotberequiredtodeducttheexcessover15%fromcapitalbutwillriskweightat
100%
OtherDeductionsSecuritisedAssets
ExposurestosecuritisedassetsundertheStandardisedApproacharedetailedunderParagraph
538to605ofBaselII.SuchexposuresthatareratedB+andbelow(LongTerm),belowA3/P3
(Shortterm),orareunratedmustbedeductedfromthecapitalbase.
Deductionofinvestmentsinaccordancewithaboverequirements
Wheredeductionsofinvestmentsaremadepursuanttothispartonscopeofapplication,the
deductionswillbe50%fromTier1and50%fromTier2capital.

70ofPage

CentralBankoftheUAE

APPENDICES

Appendix1:ExternalCreditAssessmentAgencies
Appendix2:SecuratisationMappings
Appendix3:ICAAPSubmissionSuggestedFormat
Appendix4:Pillar3SuggestedFormats
Appendix5:FrequentlyAskedQuestions
Appendix6:NationalDiscretions
Appendix7:PrudentialReturns
Appendix8:ListofMultilateralDevelopmentBanks

70ofPage

CentralBankoftheUAE

APPENDIX1:ExternalCreditAssessmentAgencies

Therevisedframework,allowsbankstouseexternalcreditassessmentstodeterminetherisk
weightofcertaincreditprovidedtheExternalCreditAssessmentInstitutions(ECAIs)(rating
agencies)thatproducethoseassessmentshavebeenrecognisedaseligibleforthatpurposeby
therelevantnationalsupervisor.ECAIsmaybeconsideredeligibleforrecognitioniftheymeetthe
sixcriteriaof:

Objectivity;
Independence;
Internationalaccess/Transparency;
Disclosure;
Resources;and,
Credibility.

Nationalsupervisoryauthoritiesareresponsibleforestablishingamappingprocessi.e.assigning
eligibleECAIsassessmentstotheriskweightsavailableunderthestandardisedriskweighting
frameworkandthesecuritisationframeworkforthestandardisedapproach.

ObjectiveoftheMethodology
ECAIs should have a methodology of assigning a credit rating that is rigorous, systematic,
continuousandsubjecttovalidation.ToestablishthatanECAIfulfilsthisprimarycomponentof
eligibilitycriteria,itmustdemonstratethatitmeetsminimumstandardsgivenbelow:
1. Ithasanestablishedratingdefinition,criteriaandmethodology.
2. Themethodology,systemsandproceduresforassigningriskratingshallbeconsistentacross
theboard.
3. The ECAI should have a robust procedure of rating assignment based on published
information, market data, interviews with management and any other means that provide
reasonableassuranceforassigningtheriskratings.
4. While assigning risk ratings, the ECAI should take into account all major features of credit
quality and ensure that the ratings are assigned taking into account all risk factors of the
relatedentity.
5. TheECAIshoulddemonstratethattheratingmethodologiesaresubjecttoquantitativeback
testing.Forthispurpose,ECAIshould calculateandpublishdefaultstudies,recoverystudies
andtransitionmatrices.Forthepurpose,theECAIshouldhaveadefinitionofdefaultthatis
equivalenttointernationalstandardandisrelevanttodomesticmarkets.
70ofPage

CentralBankoftheUAE
6. Theassessmentmethodologyforeachmarketsegmentincludingrigorousbacktestingmust
havebeenestablishedforatleastoneyear.
7. All rating decisions should be made by the rating committee utilizing ECAIs established
criteriaandmethodology.
8. The ECAI should have a mechanism to review its procedures and methodologies to adapt
themtochangingenvironment.
9. TheECAIshouldmaintainadequatesystem/internalrecordstosupportitsassignedratings.

Independence
TheECAIshouldbeindependent,freefromeconomicoranyexternalpressuresthatmayinfluence
itscreditassessments.TheindependenceofanECAIshallbeassessedonthebasisofthefollowing
fourparameters:
1. Ownership:Theownershipstructureshouldnotbesuchthatcouldjeopardizetheobjectivity
oftheratingprocess.E.g.theownershaveotherbusinessesoraremembersofbusinessesor
associationsthatareratedbytheECAI.
2. OrganisationalstructureandCorporateGovernance:TheECAIshoulddemonstratethattheir
organisationalstructureminimizesthescopeofexternalinfluencethatcannegativelyimpact
the rating process. The ECAI have in place high standards of Corporate Governance that
safeguardindependenceofitsriskassessmentandpromoteintegrity.
3. Financial Resources: Since the core earning of an ECAI is the Issuer fee, this commercial
pressuremaygiverisetoconflictofinterest.TheECAImustdemonstratethattheirbusinessis
financially viable and is able to sustain any commercial pressure exerted by rated entities.
Also,ECAIshouldnotbeprovidinganyotherservicetotheratedentities.
4. External conflict of interest: The risk assessment process of ECAI should have ability to
withstand external pressure. The ECAI should demonstrate that it is free from all sorts of
externalconflictsofinterest.

InternationalAccessandTransparency
The risk assessment of the ECAI should be made available to both domestic and foreign
institutions on equivalent terms and the same fees should be charged for the rating/risk
assessments.
In order to promote transparency and enable its stakeholders to make decisions about the
appropriateness of its risk assessment methods, ECAI should disclose enough information e.g.
ratingdefinition,methodsofarrivingattherating,ratingprocess,timehorizonoftheratingand
thesurveillanceandreviewprocedure.

Disclosure

70ofPage

CentralBankoftheUAE
TheECAIshoulddemonstratethatitprovidesaccesstoinformationthataresufficienttoenable
itsstakeholderstomakedecisionabouttheappropriatenessofriskassessments.Thepurposeof
this disclosure requirement is to promote transparency and bring in market discipline. ECAI is
expectedtomakepublicthefollowinginformation:

Codeofconduct.
Definitionofdefault
Useoftimehorizons
Ratingdefinitions
Assessmentmethods
Actualdefaultratesexperiencedineachassessmentcategory
Transitionmatrices
Whetherratingwassolicitedorunsolicited
Thedateoflastreviewandupdate

Resources
ECAIshouldpossesssufficienthumanandtechnicalresourcestocarryouthighqualitycredit
assessment
1. Technical expertise of the people should be sufficient to carry out risk assessment and
maintaincontactwithmanagementofentitiesthatarerated.
2. With respect to technical resources, ECAI is expected to have quantitative techniques and
modelsthatcanprocessandanalyselargequantitiesofdata.

Credibility
The ECAI must demonstrate that it enjoys credibility in the market where it operates. The
credibilityisgaugedonthebasisof:
1. Theextenttowhichitmeetstheresourcesrequirements.
2. The extent to which independent parties (investors, insurers etc..) rely on the ECAIs risk
assessment.
3. Existenceofinternalprocedurestopreventmisuseofconfidentialinformation.

RecognitionofExternalCreditAssessmentInstitutions(ECAIs)
Supervisory authorities across the GCC have agreed that the home regulator is free to choose
fromthefollowinginternationallyrecognisedECAIs:

Standard&PoorsRatingsServices
MoodysInvestorsService
FitchRatings;and
70ofPage

CentralBankoftheUAE

CapitalIntelligence

OnthebasisofinformationprovidedbytheaboveECAIs,CBUAEhasreachedtheviewthatbanks
applyingBaselIIcouldusetheratingsoftheaboveECAIs,andalsoreachedagreementonthe
mappingprocess.Additionalagenciesmaybeapprovedinduecourse.

MappingofECAIsratingstoriskweights
ThegeneralrulewithinBaselIIisthatbanksshouldusesolicitedratingsfromECAIs.TheGCC
nationalsupervisoryauthoritieshaveagreedattheirdiscretion,nottoallowbankstouse
unsolicitedratingsinthesamewayassolicitedratings.
BanksmustusethechosenECAIsandtheirratingsconsistentlyforeachtypeofclaim,forbothrisk
weightingandriskmanagementpurpose.Bankswillnotbeallowedtocherrypickthe
assessmentsprovidedbydifferentECAIs,andmustdisclosetheECAIsthattheyintendtousefor
theriskweightingoftheirassetsbytypeofclaimasperthemappingprocessinAppendix2.
Furtherguidanceisprovidedbelow.
LongtermmappingAssessmentsandRiskweights
RISKWEIGHTS

ASSESSMENTS

AAAto AAAto
AA
AA
A+to
A

A+toA

Creditassessmentmethod
(Option2)
Maturity> Maturity3
3months monthsorless
(Domestic
currencyonly)

Sovereign

Corporate

CapitalIntelligence

Moodys

FITCH

S&P

RiskGrade

Banks

Aaato
Aa3

AAA

20%

20%

20%

0%

A1toA3

AAtoA

50%

50%

20%

20%

BBB+ BBB+to
toBBB BBB

Baa1to
Baa3

BBB

100% 50%

20%

50%

BB+to BB+to
BB
BB

Ba1to
Ba3

BB

100% 100%

50%

100%

70ofPage

CentralBankoftheUAE
5

B+to
B

B+toB

CCC+
and
below

CCC+and Caa1and Cand

below
below
below

Unrated Unrated

B1toB3

Unrated

Unrated

150% 100%

50%

100%

150% 150%

150%

150%

100% 50%

20%

100%

UAEDirhamdenominatedandfundedsovereignexposurestotheFederalandLocalEmirate
governmentsattractariskweightingof0%.Similarly,allGCCsovereignexposuresattractarisk
weightingof0%.
Forthemappingofratingstoriskweightsforexposurestobanksandsecuritiesfirms,onlytherisk
weightsassociatedwithOption2areshown.TheGCCexercisedthisOptionforthestandardised
approach,ratherthanOption1,whichisbasedonthesovereignrating.

Shorttermmapping(appliedtoexposurestobanksandcorporateentities)
Forriskweightingpurposes,shorttermassessmentsaredeemedtobeissuespecific.Theycan
onlybeusedtoderiveriskweightsforclaimsarisingfromtheratedfacility.Theycannotbe
generalisedtoothershorttermclaims,exceptundertheconditionsasoutlinedbelow,which
relatetoshortterminterbankclaimsunderOption2ofthestandardisedapproachtocreditrisk.
Shorttermratingscannotbeusedtosupportariskweightforanunratedlongtermclaim,and
mayonlybeusedforshorttermclaimsagainstbanksandcorporateentities.
ConditionsfortheuseofshorttermratingsforshorttermbankexposuresunderOption2ofthe
standardisedapproachtocreditrisk
TheinteractionbetweenshorttermbankexposuresunderOption2ofthestandardisedapproach
tocreditriskandshorttermassessmentsofECAIsisasfollows:

Thegeneralpreferentialtreatmentforshorttermclaims,asdefinedunderparagraphs62and
64 of Basel II, applies to all claims on banks of up to three months original maturity when
thereisnospecificshorttermassessment(i.e.applythelongtermratingsandassociatedrisk
weightsasdefinedinAppendix2forshorttermclaimsmaturityof3monthsorless);
Wherethereisashorttermassessment,andsuchanassessmentmapsintoariskweightthat
is more favourable (i.e. lower) or identical to that derived from the general preferential
treatment,theshorttermassessmentshouldbeusedforthespecificclaimonly;and
Where a specific shortterm assessment for a shortterm claim on a bank maps into a less
favourable (i.e. higher) risk weight, the general preferential treatment for interbank claims
70ofPage

CentralBankoftheUAE
cannotbeused.Allunratedshorttermclaimsshouldreceivethesameriskweightingasthat
impliedbythespecificshorttermassessment.

RiskGrade

S&P

Fitch

Moodys

Capital
Intelligence

Risk
weight

F1+,F1

P1

A1

20%

A1+,A1

A2

F2

P2

A2

50%

A3

F3

P3

A3

100%

Allshortterm
ratingsbelow
A3

BelowF3

Notprime
(NP)

Allshortterm
ratingsbelow
A3

150%

BanksnominationofECAIs
ForthepurposeofapplyingECAIratingstoderiveriskweightsforexposuresundertheportfolio
ofclaimsonsovereigns,claimsonbanks,claimsonsecuritiesfirmsandclaimsoncorporate
entitiesunderthestandardisedapproach,abankshouldsatisfythefollowingfoursteps:
(a)

NominateoneormoreECAI(s)(thenominatedECAI(s))whoseassignedratingswillbe
usedbythebankforderivingriskweightsforexposuresineachoftheexternalratings
basedportfolios,providedthatthenominatedECAI(s)canprovideareasonablecoverage
onthebanksexposureswithintheportfoliosintermsofthetypesofcounterpartiesand
differentgeographicalregionscoveredbytheECAI(s);

(b)

NotifytheCBUAEofitsnominatedECAI(s)andtheapplicationoftheratingsofsuch
ECAI(s)oneachofthebanksexternalratingsbasedportfolios;

(c)

UsetheratingsofthenominatedECAI(s)withineachoftheexternalratingsbased
portfoliosconsistently,andseektheconsentoftheCBUAEonanysubsequentchangesto
suchECAI(s)andtheapplicationofits/theirratings;and

(d)

Treatarelevantexposureorthepersontowhomthebankhasarelevantexposureas
unratedforriskweightingpurposesifthatexposureorthatpersondoesnothavea
ratingassignedtoitbyanyECAIchosenbythebank.

TheaboverequirementsaretoensurethatabankappliestheratingsofitsnominatedECAI(s)
consistentlyandavoidanypossiblecherrypickingofratingsprovidedbydifferentECAIs.
IndeterminingitsnominatedECAI(s),abankshouldpayspecialattentiontothecriterionof
reasonablecoverage.Whereabankhassignificantexposureswithintheexternalratingsbased
portfoliostoaparticulartype/setofcounterpartiesoraparticularcountrythatisnotratedbythe
banksnominatedECAI(s)butbyotherrecognisedECAI(s)thebankshouldincludesuchECAIasa
nominatedECAItocomplywiththereasonablecoveragerequirement.
70ofPage

CentralBankoftheUAE

Multipleassessments
IfthereisonlyoneassessmentbyanominatedECAIchosenbyabankforaparticularclaim,that
assessmentshouldbeusedtodeterminetheriskweightoftheclaim.
IftherearetwoassessmentsbynominatedECAIschosenbyabankthatmapintodifferentrisk
weights,thehigherriskweightwillbeapplied.
Iftherearethreeassessmentswithdifferentriskweights,theassessmentscorrespondingtothe
twolowestriskweightsshouldbereferredtoandthehigherofthosetworiskweightswillbe
applied.

Levelofapplicationofassessments
Externalassessmentsforoneentitywithinacorporategroupcannotbeusedtoriskweightother
entitieswithinthesamegroup.

Issueversusissuerassessment
Whereabankinvestsinaparticularissuethathasanissuespecificassessment,theriskweightof
theclaimwillbebasedonthisassessment.Whereabanksclaimisnotaninvestmentina
specific,assessed,issuethefollowingprinciplesapply:

In circumstances where the borrower has a specific assessment for an issued debt, but the
banksclaimisnotaninvestmentinthisparticulardebt,ahighqualitycreditassessment(that
beingonewhichmapsintoariskweightlowerthanthatwhichappliestoanunratedclaim)on
thatspecificdebtmayonlybeappliedtothebanksunassessedclaimifthisclaimrankspari
passuorseniortotheclaimwithanassessmentinallrespects.Ifnot,thecreditassessment
cannotbeusedandtheunassessedclaimwillreceivetheriskweightforunratedclaims;and
In circumstances where the borrower has an issuer assessment, this assessment typically
applies to senior unsecured claims on that issuer. Consequently, only senior claims on that
issuerwillbenefitfromahighqualityissuerassessment.Otherunassessedclaimsofahighly
assessed issuer will be treated as unrated. If either the issuer or a single issue has a low
qualityassessment(mappingintoariskweightequaltoorhigherthanthatwhichappliesto
unratedclaims),anunassessedclaimonthesamecounterpartywillbeassignedthesamerisk
weightasisapplicabletothelowqualityassessment.

Whereabankintendstorelyonanissueroranissuespecificassessment,theassessmentmust
takeintoaccountandreflecttheentireamountofcreditriskexposureabankhaswithregardto
allamountsowedtoit.

70ofPage

CentralBankoftheUAE
ExportCreditAgencies(ECAs)
BaselII(Para55)allowssupervisorstorecognisethecountryriskscoresassignedbyECAsin
respectoftheriskweightingofsovereignandcentralbankexposures.Thisisinadditiontobanks
beingabletouseECAIsforsuchexposures.TheGCCregulatorshaveexercisedthisNational
DiscretionandagreedthatbanksarenotpermittedtousetheconsensusriskscoresofECAs
participatingintheOECDArrangementonOfficiallySupportedExportCredits.

70ofPage

CentralBankoftheUAE

APPENDIX2:SecuratisationMappings

Securitisation

Resecuritisation

Risk Weights

Capital Intelligence

Moodys

FITCH

S&P

Risk Grade

Longtermrating

Credit Default Swaps

First to
default

Second to
default

AAA to
AA-

AAA to
AA-

Aaa to Aa3

AAA

20% 40% 20%

20%

A+ to A-

A+ to A-

A1 to A3

AA to A

50% 100% 50%

50%

BBB+ to
BBB-

BBB+ to
BBB-

Baa1 to
Baa3

BBB

100% 225% 100%

100%

BB+ to
BB-

BB+ to
BB-

Ba1 to Ba3

BB

350% 650% 350%

350%

B+ and
below

B+ and
below

B1 and
below

B and
below

Unrated

Unrated

Unrated

Unrated

Deduction Aggregate
of risk
weights of
each
obligor in
basket Up
to 1000%

70ofPage

Aggregate of
risk weights of
each obligor in
basket
(excluding
asset with
lowest risk
weight) Up to
1000%

CentralBankoftheUAE

Shorttermrating

Resecuritisation

Securitisation

Capital
Intelligence

Moodys

Fitchs

Risk weights

S&P

Risk Grade

Credit Default Swaps

First to
default

Second to
default

A-1+, A-1

F1+,
F1

P-1

A1

20% 40%

20%

20%

A-2

F2

P-2

A2

50%

100%

50%

50%

A-3

F3

P-3

A3

100% 225%

100%

100%

All others
or
unrated

All
others
or
unrated

All others
or unrated

Aggregate
of risk
weights of
each
obligor in
basket Up
to 1000%

Aggregate of
risk weights of
each obligor in
basket
(excluding
asset with
lowest risk
weight) Up to
1000%

All others Deduction

or unrated

Deductionisrequiredforunratedpositionswiththeexceptionofthecircumstancesdescribedin
Paragraphs571to575BaselII
RefertoEnhancementstotheBaselIIframeworkJuly2009

70ofPage

CentralBankoftheUAE

APPENDIX3:ICAAPSubmissionSuggestedFormat
BanksbusinessandriskprofilesdifferandtheICAAPshouldbeproportionatetothesize,nature
andcomplexityofabanksbusiness.
Adoptingthisformatmaybeconvenientforbanksasitcoversmostofthematterswhich
typicallywouldbereviewedbytheCBUAEundertheSREP.However,otherformatsmaybe
acceptable.

ExecutiveSummary
ThepurposeoftheExecutiveSummaryistopresentanoverviewoftheICAAPmethodologyand
results.Thisoverviewwouldtypicallyinclude:
1.
Thepurposeofthereportandwhichbank(s)is(are)coveredbytheICAAP;
2.
ThemainfindingsoftheICAAPeg:
how much and what composition of internal capital the bank considers it should
holdascomparedwiththePillar1minimumcapitalrequirement(detailsexplained
withcalculationsinappendices);and
anassessmentoftheadequacyofthebanksriskmanagementprocesses;
3.
4.
5.
6.

Brief descriptions of the capital and dividend plan; how the bank intends to manage
capitalgoingforwardandforwhatpurposes;
Commentaryonthekeybusinesses,mostmaterialrisks,whythelevelofriskisacceptable
or,ifitisnot,whatmitigatingactionsareplanned;
Commentaryonmajorissueswherefurtheranalysisanddecisionsarerequired;and
Whohascarriedouttheassessment,howithasbeenchallenged,andwhohasapproved
it.

PILLAR 1

Pillar 2 Capital

Min Regulatory Capital

Required capital as
derived from ICAAP

AED000s

AED 000s
Credit Risk
Market Risk
Operational Risk
Total Pillar 1
Pillar 2- Credit Concentration Risk
Pillar 2- Int. Rate Risk in Bank. book
Pillar 2 - Other Risks
Total Pillar 2
Capital derived from Stress testing
Required Capital as per ICAAP
Current capital
70ofPage

CentralBankoftheUAE
Surplus/(additional required)

Background
Thissectionwouldcovertherelevantorganisationalandhistoricalfinancialdataforthebank.
e.g.groupstructureandkeydataandtrendsdrawnfromthebanksquarterlyreturns.

CapitalAdequacy
ThissectionmightstartwithadescriptionoftheriskappetiteusedintheICAAP.Where
economiccapitalmodelsareusedthiswouldincludedetailsoftheassumptionsbehindthat
model.Wherescenarioanalysesorothermeansareused,thensomeotherdescriptionofhow
theseverityofscenariohasbeenchosenwouldbeincluded.
Thesectionwouldthenincludeadetailedreviewofthecapitaladequacyofthebankincluding:
1.

2.

Timing
TheeffectivedateoftheICAAPcalculationstogetherwithconsiderationofanyevents
betweenthisdateandthedateofsubmissionwhichwouldmateriallyimpacttheICAAP
calculationtogetherwiththeireffects;and
Detailsof,andrationalefor,thetimeperiodoverwhichcapitalhasbeenassessed.
Risksanalysed

Anidentificationofthemajorrisksfacedineachofthefollowingcategories:

Creditrisk,
Marketrisk,
Operationalrisk,
Liquidityrisk,
Concentrationrisk
Reputationalrisk
Regulatoryrisk
Insurancerisk
Residualrisk
Securitisationrisk
Businessrisk
Interestraterisk,and
Anyotherrisksidentified

Foreachrisk,anexplanationofhowtheriskhasbeenassessedandthequantitativeresultsof
thatassessment;
Acleararticulationofthebanksriskappetitebyriskcategory,forexample,strongappetite,
modestappetiteorconservativeappetite;and
Anexplanationofanyothermethodsapartfromcapitalusedtomitigatetheriskse.g.risk
managementorcontrolstructures.
3.

Methodologyandassumptions
70ofPage

CentralBankoftheUAE
Adescriptionofhowassessmentsforeachofthemajorriskshavebeenapproachedand
themainassumptionsmade.Thedescriptionwouldmakeclearwhichrisksarecovered
bywhichapproach.
Wherestresstestsorscenarioanalyseshavebeenusedtovalidate,supplement,or
probetheresults,thenthissectionwouldprovidedetails.

Capitaltransferability
Detailsofanyrestrictionsonthemanagementabilitytotransfercapitalinto,oroutofthebank
(forexample,contractual,commercial,regulatoryorstatutoryrestrictionsthatapply)

ICAAPcomparisons
Ananalysisofsignificantmovementsinavailablecapitalandcapitalrequiredsincethelatest
ICAAPandacomparisonoftheoveralllevelandqualityofcapitalrequiredunderPillar1as
comparedwiththeoverallcapitalrequirementidentifiedbytheICAAP.

KeySensitivitiesandFutureScenarios
Thissectionwoulddetailthesensitivitytestsundertakentokeyassumptionsandfactorsthat
haveasignificantimpactonthebroaderfinancialconditionofthebank.Materialchangesinthe
financialriskstowhichthebusinessisexposedwouldbeexplainedandquantifiedasfaras
possibleinthissection.Theanalysiswouldincludefinancialprojectionsforwardfor,threeor
fiveyears,basedonbusinessplansandcapitaladequacycalculations.Thesewouldtakeaccount
ofexpectedcapitalrequirementsovereconomicandbusinesscycles.
Typicalscenariosmayinclude:

Howaneconomicdownturnwouldaffectthebank'scapitalresources,capitalrequirements
anditsfutureearningstakingintoaccountthebank'sbusinessplan;

Howwouldasignificantcorrectioninlocalequityand/orrealestatemarketsimpactthe
bankscapitalrequirements

Howchangesinthecreditqualityofthebank'screditriskcounterpartiesaffectthebanks
capitalanditscreditriskcapitalrequirement(notethatthisscenariostresstestisa
requirementforIRB);

Anassessmentbythebankofhowitwouldcontinuetomeetitsregulatorycapital
requirementsthroughoutarecession;

Projectionsofcashinflowsandoutflowsunderstressedconditions.

Aggregation
Thissectionwoulddescribehowtheresultsofthevariousseparateriskassessmentsare
broughttogetherandanoverallviewtakenoncapitaladequacy.Thisrequiressomesortof
methodologytobeusedtoquantifythecapitalrequiredtosupportindividualriskssothatthey
canbeaggregatedintoatotalfigure.
Asregardstheoverallassessment,thiswoulddescribehowthebankhasarrivedatitsoverall
assessmentofthecapitalitneedstakingintoaccountsuchmattersas:
70ofPage

CentralBankoftheUAE

Theinherentuncertaintyinanymodelingapproach;

Weaknessesinthebanksriskmanagementprocedures,systemsorcontrols;

Thedifferencesbetweenregulatorycapitalandinternalcapital;and

Thedifferingpurposesthatcapitalserves:shareholderreturns,ratingobjectivesforthe
bankasawhole,avoidanceofregulatoryintervention(e.g.onlargeexposurenotifications),
customerperception,protectionagainstuncertainevents,workingcapital,capitalheldfor
strategicacquisitionsetc.

ChallengesandAdoptionoftheICAAP
ThissectionwoulddescribetheextentofchallengeandtestingoftheICAAP.Itwouldinclude
thetestingandcontrolprocessesappliedtotheICAAPcalculations,andtheseniormanagement
orboardreviewandsignoffprocedures.
Acopyshouldbeattachedofanyrelevantreporttoseniormanagementortheboardandtheir
response.
Detailsoftherelianceplacedonanyexternalsuppliers/advisers/consultantswouldalsobe
detailedheree.g.forgeneratingeconomicscenariosorforassistanceinpreparationofthe
ICAAP.Inaddition,acopyofanyreportobtainedfromanexternalreviewerorinternalaudit
wouldalsobeincluded.

UseoftheICAAPwithintheBank
Thiswoulddemonstratetheextenttowhichcapitalmanagementisembeddedwithinthebank
includingtheextentanduseofcapitalmodellingorscenarioanalysisandstresstestingwithin
thebank'scapitalmanagementpolicy,e.g.insettingpricingandcharges.Thiswouldalso
includeastatementoftheactualoperatingphilosophyoncapitalmanagementandhowthis
linkstotheICAAPsubmitted.ForinstancedifferencesinriskappetiteusedintheICAAPas
comparedtothatusedforbusinessdecisionsshouldbediscussed.

70ofPage

APPENDIX4:PILLAR3SUGGESTEDFORMATS
TABLE (1)
INFORMATION ON SUBSIDIARIES AND SIGNIFICANT INVESTMENTS AS ON ______________
Basis of Consolidation1 :
Country of
Incorporation

% Ownership

Description
2

Accounting
Treatment 3

Surplus
Capital4

Capital
Deficiencies5

Total Interests6

Subsidiaries:
Significant
Investments:
Restrictionsontransferofregulatorycapitalwithinthegroup:
1. Includeanoutlineofdifferencesinthebasisofconsolidationofsubsidiariesforaccountingandregulatorypurposes.
2. Abriefdescriptionoftheentitieswithinthegroupsuchassecurities,insurance,otherfinancialsubsidiaries,commercialsubsidiaries,significantminority
equityinvestmentsininsurance,financialandcommercialentities.
3. Reporttheaccountingtreatmentas:
thatarefullyconsolidated;
thatareprorataconsolidated;
thataregivenadeductiontreatment;
thosefromwhichsurpluscapitalisrecognized,and
thatareneitherconsolidatednordeducted(e.g.wheretheinvestmentisriskweighted)
4. Theaggregateamountofsurpluscapitalofinsurancesubsidiaries(whetherdeductedorsubjectedtoanalternativemethod)includedinthecapitalofthe
consolidatedgroup.Surpluscapitalinunconsolidatedregulatedsubsidiariesisthedifferencebetweentheamountofinvestmentinthoseentitiesandtheir
regulatorycapitalrequirements.
5. Theaggregateamountofcapitaldeficienciesinallsubsidiariesnotincludedintheconsolidationi.e.theyarededucted.
6. Theaggregateamounts(e.g.currentbookvalue)ofthelicensedbank'stotalinterestsininsuranceentities,whichareriskweightedratherthandeducted
fromcapitalorsubjectedtoanalternategroupwidemethod,aswellas,ifdifferent,theproportionofvotingpowerintheseentities.Inaddition,indicate
thequantitativeimpactonregulatorycapitalofusingthis(it'srequiredtomethod)versususingthedeductionoralternategroupwidemethod

CONSOLIDATED CAPITAL STRUCTURE AS ON __________________________________ _

Summary terms and conditions of main features of all capital
instruments

TABLE (2)
(AED OOO's)
Amount

Tier 1 Capital
1. Paid up share capital/common stock
2. Reserves
a. Statutory reserve
b. Special reserve
c. General reserve 2
3. Minority interests in the equity of
subsidiaries
4. Innovative capital instruments 1
5. Other capital instruments
6. Surplus capital from insurance companies
Sub-total
Less: Deductions for regulatory calculation
4
2
ff
Less: Deductions from Tier 1 capital
Tier 1 Capital - Subtotal
Tier 2 capital
Less: Other deductions from capitals
Tier 3 capital
Total eligible capital after deductions
1.

2.

IncludeminorityinterestsinequityaccountsofconsolidatedsubsidiariesthattakeformofSPVsandmoderatestepupsininstrumentsissuedthrough
SPVs,aswellasdirectlyissuedTierIinstruments,subjecttostringentconditions(refertoBaselCommittee'spressrelease,Instrumentseligiblefor
inclusioninTierIcapital27October1988)andlimitedtoamaximumof15%ofTierIcapital.
Includingundisclosedreserves,revaluationreserves,generalprovisions/generalloanlossreservesHybriddebtcapitalinstrumentsandsubordinated
debt.

TABLE (3a and 3b)

CAPITAL ADEQUACY AS ON

_______________________________________________

a) Qualitative Disclosures
Include here a description of the approach taken by the bank to assess the adequacy of its capital to support current and future activities. For each
separate risk area (e.g. credit, market, operational, banking book interest rate risk, equity) banks must describe their risk management objectives
and policies as per Para 824 of Basel II.
b) Quantitative

Disclosures

Capital Requirements
1. Credit Risk
a. Standardised Approach
b. Foundation IRB
c. Advanced IRB
2. Market Risk
a. Standardised Approach
or

b. Models Approach
3. Operational Risk
a. Basic Indicator Approach

or

b. Standardised Approach/ASA

or

c. Advanced Measurement Approach

Total Capital requirements
Capital Ratio
a. Total for Top consolidated Group
b. Tier 1 ratio only for top consolidated Group
c. Total for each significant bank subsidiary

Capital Charge (AED 000s)

Capital Ratio (%)

TABLE 4(a)

Qualitative Disclosures
Definition of past due and impaired (for accounting purposes)

Description of approaches followed for specific and general allowances and statistical methods
Specific
General

Discussion of Banks credit risk management policy

Partial adoption of foundation IRB/advanced IRB

Approach
Standardised Approach
Foundation IRB
Advanced IRB

Description of exposures

Plans and timing of migration to implement

fully higher approach

TABLE 4(b)
GROSS CREDIT EXPOSURES BY CURRENCY TYPE AS ON
Loans
Foreign
Currency
AED

Debt
Securities

Total
Funded

Commitments

(AED OOO's)
OTC
Derivatives

Other OffBalance Sheet

exposures

Total NonFunded

Total

TABLE 4(c)
GROSS CREDIT EXPOSURES BY GEOGRAPHY AS ON
GEOGRAPHIC
DISTRIBUTION

Loans

Debt
Securities

Total
Funded

Commitments

OTC
Derivatives

(AED OOO's)
Other OffBalance Sheet
exposures

Total NonFunded

Total

United Arab
Emirates
GCC excluding
UAE
Arab League
(excluding GCC)
Asia
Africa
North America
South America
Caribbean
Europe
Australia
Others
Total

1.
2.

Concerning independent institutions insert the figures opposite the country which licensed them.
Concerning institutions that operate as branches for their H.O. insert the figures opposite the country where the H.O. are licensed.

TABLE 4(d)
(AED OOO's )

GROSS CREDIT EXPOSURE BY INDUSTRY SEGMENT AS ON

INDUSTRY SEGMENT

Loans

Debt
Securities

Total
Funded

Commitments

OTC
Derivatives

Other OffBalance Sheet

exposures

Total NonFunded

Gross

Agriculture, Fishing & related activities1

Crude Oil, Gas, Mining & Quarrying2
Manufacturing3
Electricity& Water
Construction 4
Trade 5
Transport, Storage & Communication6
Financial Institutions 7
Services8
Government9
Retail/Consumer banking1o
All Others
Total
1.
2.
3.

4.
5.
6.
7.
8.
9.
10.

Agriculture,FishingandAlliedActivitiesincludescultivationofcrops,dairyandpoultryfarming,fishing&otheractivities(sheeprearing,etc).
CrudeOil,Gas,MiningandQuarryingincludecrudepetroleum,naturalgasandothers.
Manufacturingincludesfood,tobacco,beverages,textile,leather,footwear,clothing,furniture,fixtures,otherwoodproducts,paper,paperproducts,printingpresses,chemical,chemicalproducts,
petroleumrefining,petrochemicals,basicmetalproductsincludingaluminum,fabricatedmetalproducts,machinery,equipment,constructionmaterials(bricktiles,etc.),cement,shipbuilding,
engineeringworks,sawmills,marbletilesandothermanufacturing.
Constructionincludesconstructionofbuildings,contractorsandotherconstruction.
Tradeincludeswholesaletradeinconstructionmaterials,consumerdurables,motorvehicles,nondurablesandretailtrade.
Transportandcommunicationincludestaxies,andotherlandtransport,watertransport,airtransport,warehousing,storageandothers.
Financialinstitutionsincludeinsurancecompanies,moneyandexchangedealers,NBFCSandotherfinancialinstitutions.
Servicesincludehotelandrestaurants,professionalservices,repairwork(repairofmotorvehicles,a/cs,etc.),recreationservices(cinemas,sportsclub,etc.)andotherservices.
Governmentincludesfederalgovernmentandlocalgovernment.
Retail/consumerlendingincludespersonalloaninstallments,residentialmortgageloans,carloans,creditcards,otherretailproducts,loansforinvestmentsinsharesetc.

TABLE 4(e)
GROSS CREDIT EXPOSURES BY RESIDUAL CONTRACTUAL MATURITY AS ON ________________________
(AED OOO's)
RESIDUAL
CONTRACTUAL
MATURITY
Less than 3 months
3 months to one year
One to five years
Over five years
Grand Total

Loans

Debt
Securities

Total Funded Commitments

OTC
Derivatives

Other OffBalance
Sheet
exposures

Total Non-Funded

TABLE 4(f)
(AED OOO's)

IMPAIRED LOANS BY INDUSTRY SEGMENT AS ON

OVERDUE
INDUSTRY SEGMENT

Less than
90 days

90 days and
above

PROVISIONS

Total

Specific

General

ADJUSTMENTS

Write-offs

Writebacks

Total
Impaired
Assets

Agriculture, Fishing & related activities1

Crude Oil, Gas, Mining & Quarrying2
Manufacturing3
Electricity& Water
Construction 4
Trade5
Transport, Storage & Communication6
Financial Institutions7
Services8
Government9
Retail/consumer banking10
All Others

Grand Total
1.
2.
3.

4.
5.
6.
7.
8.
9.
10.

Agriculture,FishingandAlliedActivitiesincludescultivationofcrops,dairyandpoultryfarming,fishingotheractivities(sheeprearing,etc).
CrudeOil,Gas,MiningandQuarryingincludecrudepetroleum,naturalgasandothers.
Manufacturingincludesfood,tobacco,beverages,textile,leather,footwear,clothing,furniture,fixtures,otherwoodproducts,paper,paperproducts,printingpresses,chemical,chemicalproducts,
petroleumrefining,petrochemicals,basicmetalproductsincludingaluminium,fabricatedmetalproducts,machinery,equipment,constructionmaterials(bricktiles,etc.),cement,shipbuilding,
engineeringworks,sawmills,marbletilesandothermanufacturing.
Constructionincludesconstructionofbuildings,contractorsandotherconstruction.
Tradeincludeswholesaletradeinconstructionmaterials,consumerdurables,motorvehicles,nondurablesandretailtrade.
Transportandcommunicationincludestaxies,andotherlandtransport,watertransport,airtransport,warehousing,storageandothers.
Financialinstitutionsincludeinsurancecompanies,moneyandexchangedealers,NBFCSandotherfinancialinstitutions.
Servicesincludehotelandrestaurants,professionalservices,repairwork(repairofmotorvehicles,a/cs,etc.),recreationservices(cinemas,sportsclub,etc.)andotherservices.
Governmentincludesfederalgovernmentandlocalgovernment.
Retail/consumerlendingincludespersonalloaninstalments,residentialmortgageloans,carloans,creditcards,otherretailproducts,loansforinvestmentsinsharesetc.

TABLE 4(g)
IMPAIRED LOANS BY GEOGRAPHIC DISTRIBUTION AS ON __________________________________

OVERDUE

PROVISIONS

(AED OOO's )

ADJUSTMENTS
Total
Impaired
Assets

Geographic Region
Less than
90 days

90 days
and above

Total

Specific

United Arab Emirates

GCC (excluding UAE)
Arab League
(excluding GCC)
Asia
Africa
North America
South America
Caribbean
Europe
Australia
Others
Grand Total

Note:Jurisdictionsshouldnotbeincludedmorethanonceunderthegeographicregion

General

Writeoffs

Write-backs

TABLE 4(h)
RECONCILIATION OF CHANGES IN PROVISION FOR IMPAIRED LOANS FOR THE PERIOD TO

Description
Opening Balance of Provisions for Impaired Loans
Add:

Charge for the year

Specific provisions
General provisions

Add:

Write-off of impaired loans to income statement

Less:

Recovery of loan loss provisions

Less:

Recovery of loans previously written-off

Less:

Write-back of provisions for loans

Adjustments of loan loss provisions
Closing Balance of Provisions for Impaired Loans

AED 000s

TABLE 4(i)
(AED OOO's)

LOAN PORTFOLIO AS PER STANDARDISED APPROACH AS ON

ASSET CLASSES

See Basel II, June 2006, Para 50 to 81, and Central Bank National Discretions

CLAIMS ON SOVEREIGNS
CLAIMS ON NON-CENTRAL GOVERNMENT PUBLIC SECTOR ENTITIES (PSEs)

CLAIMS ON MULTI LATERAL DEVELOPMENT BANKS

CLAIMS ON BANKS

CLAIMS ON SECURITIES FIRMS

CLAIMS ON CORPORATES

CLAIMS INCLUDED IN THE REGULATORY RETAIL PORTFOLIO

CLAIMS SECURED BY RESIDENTIAL PROPERTY

CLAIMS SECURED BY COMMERCIAL REAL ESTATE

PAST DUE LOANS

HIGH RISK CATEGORIES

OTHER ASSETS

ON BALANCE
SHEET

OFF BALANCE
SHEET

GROSS
OUTSTANDING

NET EXPOSURE
AFTER CREDIT
CONVERSION
FACTORS (CCF)

CREDIT RISK MITIGATION (crm)

RISK WEIGHTED
ASSETS
EXPOSURE
BEFORE CRM

CRM

AFTER CRM

CLAIMS ON SECURITISED ASSETS

CREDIT DERIVATIVES (Banks Selling protection)

TOTAL CLAIMS

TABLE 5 (a & b)

a) Qualitative Disclosures

For each portfolio, name of ECAIs used, plus reasons for any changes
Types of exposure for which each agency is used

LOAN PORTFOLIO AS PER STANDARDISED APPROACH AS ON

b)

Quantitative
Di l

Asset Class

Claims on Sovereigns
Claims on Public Sector Entities
Claims on Multilateral
Development Banks
Claims on securities firms
Claims on Banks
Claims on Corporate
Regulatory & other retail exposure
Residential retail exposure
Commercial Real Estate
Other assets
Claims on Securitised Assets
Credit Derivatives (Banks selling
protection)
Grand Total

(AED OOO's)

Gross Credit Exposures

Rated

Unrated

Total

Post
CRM

Exposures Subject to Deduction

RWA Post
CRM

Rated

Unrated

Total

Post CRM

RWA Post
CRM

TABLE 7 (a, b & c)

CREDIT RISK MITIGATION: DISCLOSURES FOR STANDARDIZED APPROACH AS ON _________ _

a) Qualitative Disclosures
Policiesandprocessescoveringcreditriskmitigation,includingsummaryof:

Policiesandprocessesfor,andanindicationoftheextenttowhichthebankmakesuseof,onandoffbalancesheetnetting;
Policiesandprocessesforcollateralvaluationandmanagement;
Descriptionofthemaintypesofcollateraltakenbythebank;
Themaintypesofguarantor/creditderivativecounterpartyandtheircreditworthiness;and
Informationabout(marketorcredit)riskconcentrationswithinthemitigationtaken.

(AED OOO's)
b)

Quantitative Disclosures
Gross Exposure prior to Credit Risk Mitigation

Less:

Exposure covered by on-balance sheet netting

Less:

Exposures covered by Eligible Financial Collateral

Less:

Exposures covered by Guarantees

Less:

Exposures covered by Credit Derivatives

Net Exposures after Credit Risk Mitigation

Exposures

Risk Weighted Assets

TABLE 10

TOTAL CAPITAL REQUIREMENT FOR MARKET RISK UNDER STANDARDISED APPROACH AS ON ________ _
(AED OOO's)
Market Risk
Interest rate risk
Equity position risk
Foreign exchange risk
Commodity risk
Total Capital Requirement

Amount

TABLE 13
(AED OOO's )
EQUITY POSITION IN THE BANKING BOOK AS OF ________________________________________ _

a) Qualitative Disclosures
Thegeneralqualitativedisclosurerequirement(Paragraph824ofBaselII)withrespecttoequityrisk,including:

Differentiationbetweenholdingsonwhichcapitalgainsareexpectedandthosetakenunderotherobjectivesincludingforrelationshipandstrategic
reasons;and
Discussionofimportantpoliciescoveringthevaluationandaccountingofequityholdingsinthebankingbook.Thisincludestheaccounting
techniquesandvaluationmethodologiesused,includingkeyassumptionsandpracticesaffectingvaluationaswellassignificantchangesinthese
practices

Asat _______ ,thebank'stotalequityinvestmentportfoliointhebankingbookamountedtoAED__%ofwhichrepresentsquotedinvestments.For

detailsoftheaccounting policiesand valuationmethodology,pleaserefertoNoteX totheconsolidatedfinancialstatementsunder'SignificantAccounting
Policies'Detailsofcost,marketandfairvaluearereportedinNoteytotheconsolidatedfinancialstatementsundertheheadingof"NonTradinginvestments.

b) Quantitative Disclosures
1. QUANTITATIVE DETAILS OF EQUITY POSITION:
Type

Current Year
Publicly Traded

Privately Held

Previous Year
Publicly Traded

Privately Held

Equities
Collective investment schemes
Any other investment
Total
2. REALISED, UNREALISED AND LATENT REVALUATION GAINS (LOSES) DURING THE YEAR:
Gains (Losses)

Amount

Realised gains (losses) from sales and liquidations

*Unrealised gains (losses) recognised in the balance sheet but not through profit and loss account
**Latent revaluation gains (losses) for investment recorded at cost but not recognised in balance sheet or profit and loss
account
Total
3. ITEMS IN (2) ABOVE INCLUDED IN TIER 1/TIER 2 CAPITAL:
Tier Capital
Amount included in Tier I capital
Amount included in Tier II capital
Total

Amount

TABLE 13
(CON'T)
EQUITY POSITION IN THE BANKING BOOK AS OF ________ _
4. CAPITAL REQUIREMENTS BY EQUITY
GROUPINGS:
Grouping
Strategic investments
Available for sale
Held for trading
Total capital requirement

(AED OOO's)
Amount

Table 14
INTERESTRATERISKINTHEBANKINGBOOK(IRRBB)ASOF
Interestrateriskarisesfromthepossibilitythatchangesininterestrateswillaffectfuture
profitability,cashflowsorthefairvaluesoffinancialinstruments.TheBankisexposedtointerest
rateriskasaresultofmismatchesorgapsintheamountsofassetsandliabilitiesandoffbalance
sheetinstrumentsthatmatureorrepriceinagivenperiod.TheBoardofDirectorshasestablished
acceptablelevelsofinterestrateriskbysettinglimitsontheinterestrategapsforstipulated
periods.TheBankmanagesinterestrateriskbymatchingtherepricingofassetsandliabilities
throughriskmanagementstrategiesandmonitorsthepositionsonadailybasistoensuretheyare
maintainedwithinestablishedlimits.AdherencetotheselimitsismonitoredbyALCO.

Interestrateriskisalsoassessedbymeasuringtheimpactofdefinedmovementsininterestyield
curvesontheBank'snetinterestincome.Thefollowingimpactonthenetinterestincomeand
regulatorycapitalfortheyearofanimmediateandpermanentmovementininterestyieldcurvesas
at
_

ShiftinYieldCurves

NetInterestIncome

RegulatoryCapital

+200basispoint

200basispoint

Theaboveinterestratesensitivitiesareillustrativeonlyandadoptsimplifiedscenarios.The
sensitivitiesdonotincorporateactionsthatcouldbetakenbymanagementtomitigatetheeffect
ofinterestratemovements.

APPENDIX5:FrequentlyAskedQuestions

CapitalBase
Q

HowisaRetainedLosstreatedwhencalculatingcore/tier1capital?

Retained earnings are added if they are positive, however, negative retained earnings or
retainedlossaredeductedfromcorecapital

Howarecumulativechangesinfairvaluetreated?

Thesemaybeincludedastier2capitalunderAssetRevaluationReserve,butaresubjecttoa
discountof55%asperBaselIIPara49(vi)

How are negative reserves treated? for example negative balance arising from Foreign
CurrencyTranslationofoverseasinvestments

ThesewouldbedeductedfromTier1capitalinthesamemannerasgoodwill

ClaimsonSovereigns

WhichtypeofUAEexposureswouldbeincludedinclaimsonsovereigns?

A UAE Government exposure includes the Federal and Local government ministries,
municipalities, all government departments and the UAE Central Bank. Excludes all other
entitiesownedbythegovernmentwhichmaybeincludedunderPublicSectorEntities.

AregovernmentownedentitiesalsoincludedinGovernment?

No,pleaseseebelow.

ClaimsonNonCentralGovernmentPublicSectorEntities(PSE)
Q

WhichtypeofUAEexposureswouldbeincludedinclaimsonPublicsectorentities?

A UAE entity may be considered a PSE for the relevant asset class under the Standardised
ApproachtoCreditRiskunderBaselII,ifitmeetsthefollowingCriterion.

Entitieswheredirectgovernment(Federal/Emirate)ownershipismorethan50%
directlyorthroughaqualifyingPSEthatitselfismajorityownedbygovernment.

WouldallUAEPublicsectorentitiesqualifyfor0%riskweight?

No,entitiesthatsatisfytheabovecriteriashouldbeclassifiedaseither;
a. NoncommercialPSE(attractinga0%riskweight),or
b. CommercialPSE(riskweightedaccordingtoexternalratings,e.g.Moodys,S&P)

WhichentitieswouldbeincludedundernoncommercialPSEs?

Refertofootnote23ofBaselII.Inaddition,aUAEentitymustalsosatisfythefollowing
criteriatobeconsideredanoncommercialPSE,otherwisewouldbeofcommercialin
nature.3

EntitieswhosecompleteactivitiesarethefunctionsoftheGovernment.

Authoritiesestablishedbyadecree,solongastheydontchangetheirnature.

Notlistedonanystockexchange.

Doesnotsellservicesorproductstothepublic,exceptutilitiese.g.Electricity/water.

ProvidesinternalservicestotheparentorsistercompaniesONLY,andtheparentcompany
isitselfanoncommercialPSE.

Publicimportanceevenwhensellingservicestothepublic(e.g.electricityandwater).

ForeignstrategicpartnerfortechnicalexpertiseONLY.

Doesnotoperateinacompetitivemarket.

Doesnotoperateoverseas.

CLAIMSONBANKS
Q

Whatisthedefinitionofshorttermexposures?

Refertofootnote26ofBaselII,whereshorttermclaimsinoption2aredefinedashaving
anoriginalmaturityofthreemonthsorless.

Doweapplyriskweightsofshorttermexposuresusingshorttermrating?

No,longtermratingsmustbeusedaccordingtoparagraphs62ofBaselII.Underoption2,a
preferentialriskweightthatisonecategorymorefavourablemaybeappliedtoclaimswith
an original maturity of three months or less and denominated in the domestic currency

(such claims in a foreign currency will use the long term weights, and report under short
term).
PleaserefertoAppendix1ofthisdocument,andusethetableLongtermmapping
AssessmentsandRiskweights.

CLAIMSINCLUDEDINTHEREGULATORYRETAILPORTFOLIO
Q

DowereportallclaimsunderAED2Matthepreferentialriskweightof75%?

No,banksshouldconsiderthegranularitycriterionwhichstatesthatnoexposurereported
underthepreferentialriskweightconstitutesabove0.2%ofthetotalregulatoryretail
portfolio.Inotherwords,thethresholdtoqualifyforthe75%riskweightisthelowerofAED
2Mand0.2%ofR.R.P.

CLAIMSSECUREDBYRESIDENTIALPROPERTY
Q

WhatcanbeincludedunderClaimssecuredbyresidentialproperty?

Only residential mortgages (i.e. where the purpose of the loan is to buy the property
primarilyforownuseasadiscretionmaximumofmortgageson4individualpropertiesthat
willberentedoutbyaretailborrowermayalsobeincluded)shouldbereportedunderthis
assetclass,allotherexposuresmustbereportedunderrespectiveassetclass,inthemain
beingcommercialrealestate.

Doexposurestofinanceanentireresidentialbuildingqualify?

Notnecessarily,thecriteriaispurposeofloan,soiftheloanistobuild/buyabuildingwhich
isclearlytobeletthenthiswouldbecommercialrealestate.

Can we take benefit of the preferential risk weight for claims exceeding CBUAE criteria of
AED10million,fortheportionofthemortgagethatdoes?

Yes,the35%riskweightappliestotheportionoftheloanbelow85%LTVuptoAED10M;
thebalancereceives100%riskweight.

CLAIMSSECUREDBYCOMMERCIALREALESTATE
Q

Doweincludeallclaimsthatarecollateralisedbycommercialproperty?

No,thisassetclassisforexposuresspecificallymadeforthepurposeofbuying/constructing
commercialproperty,i.e.realestateloans(includesresidentialtowers/mixedusetowers).
Allotherexposuresmustbereportedundertherespectiveassetclass.

PASTDUELOANS
Q

Howcanwedetermineiftheprovisionisaboveorbelow20%oftheloanamount?

Theprovisioncoverageiscalculatedatacounterpartylevelasfollow:
Specificprovision

(OutstandingLoanInterestinsuspense)

OTHERASSETS
Q

DoweusetheissuerslongtermratingtomapEQUITYinvestmentstotherespectiverisk
weight?

No,forcreditriskALLBankingBookequityinvestmentsfallintothecriteriaforOther
Assetsandthereforemustbereportedat100%riskweight.
TradingBookequityinvestmentsaretobereportedat0%riskweightintheCR2formfor
completenesspurposesonly.

HowdoweriskweightourinvestmentsinaSukuk?

ThefirstmattertodetermineisiftheSukukfallsundertheSecuritisationFrameworkof
BaselIIasperSectionIVofBaselII.IftheSukukofferstheinvestorstwoormoretranches
inwhichtoinvest,thentheSecuritisationFrameworkshouldbeappliedalongwiththe
relevantriskweights.Ifonlyasingleinstrumentwiththesamereturnisofferedtoinvestors
thentheSukukwouldbetreatedinthesamemannerasbondsandincludedundertheasset
classoftheissuer.
InallcasesapplytheriskweightthatreflectstheexternalratingoftheSukuk.Wherethe
Sukukisunrated,treatasanunratedbond,exceptwheretherisksstillremainwiththe
originator(e.g.wheretheoriginatorunderwrites/guaranteestheissue)inwhichcasethe
ratingoftheoriginatorwillapply.

OffBalancesheet
Q

DocashmarginforoffbalancesheetexposuresalsoqualifyasCRM?

Yes.Cashcollateral(margins)forOffbalancesheetexposuresneedtobereported,atthe
counterpartylevel,inCRMreturns(CR4orCR4a)inthecashcollateralcolumnAFTER
convertingapplyingthesameCCF%whichhasbeenappliedtothecorrespondingoff
balancesheetexposure.Thesametreatmentwouldapplytoothercollateralseligibleunder
CR4etc.

Banksmayfinditbeneficialtoprepareaseparatetable(notforsubmissiontoCBUAE)foron
balancesheetandoffbalancesheetcollateralbeforeenteringtheconsolidatednumbers
ontoCR4etc.

IsreportingofoffbalancesheetexposureinCR2andCR3beforeapplicationofCCF%would
benetofcashmargin.

No,reportingofoffbalancesheetexposureisbeforeapplicationofCCF%andgrossofany
CRM(cashmarginsetc.)whenenteringtheExposurebeforeCCFinCR2andCR3.

MarketRisk
Q

Investmentsdesignatedasavailableforsalethatareaccountedforapplyingfairvalue
throughtheprofit&lossaccount,aretheseconsideredundertradingbook?

No.OnlythoseinvestmentsthataremarktomarketunderIFRSanddesignatedastrading
bookunderIAS39areconsistentwithdefinitionoftradingbookformarketriskunderBasel
II.

APPENDIX6:NationalDiscretions

BaselIIpara.
reference
(June2006
version)

SummaryofBaselIIIssuessubject
toNationalDiscretion

CentralBankofUAEDecisions

ScopeofApplicationandOtherIssues
24&27

28

3034

Choiceofrulebetween
consolidationanddeduction.All
relevantfinancialactivitieswillbe
consolidated,butifnot
consolidated,deductedfromthe
capital.

Thethresholdlevelforconsolidation
intheUAEisownershipofabove
50%.

Thresholdforminorityinvestments
inbankingandfinancialentitiesto
bedeemedsignificantandbeeither
deductedorconsolidatedonapro
ratabasis

Thethresholdlevelforprorata
consolidationisownershipequaltoor
above20%butlessthan50%

Treatmentofsignificantinvestments
ininsurancesubsidiaries
Thecommitteebelievesthatatthis
stageitis,inprinciple,appropriate
todeductbanksequityandother
regulatorycapitalinvestmentsin
insurancesubsidiariesandalso
significantminorityinvestmentsin
insuranceentities.

Deduction,ifownershipis50%or
below

Deductionwherethiscriteriaisnot
met

Ownershipof10%andabovein
insurancesubsidiarieswillleadto
deduction.

BaselIIpara.
reference
(June2006
version)
33

SummaryofBaselIIIssuessubject
toNationalDiscretion

Thecapitalinvestedinamajority
ownedorcontrolledinsuranceentity
mayexceedtheamountof
regulatorycapitalrequiredforsuch
anentity(surpluscapital).
Supervisorsmaypermitthe
recognitionofsuchsurpluscapitalin
calculatingabankscapitaladequacy,
underlimitedcircumstances.

CentralBankofUAEDecisions

Banksarepermittedtorecognise
surpluscapitalininsurance
subsidiariesexplainedinParagraph
33ofInternationalConvergenceof
CapitalmeasurementandCapital
StandardsJune2006issuedbythe
BaselCommitteeonBanking
Supervision(BaselII).

Banksrecognisingsurpluscapitalin
insurancesubsidiarieswillpublicly
disclosetheamountofsuchsurplus
capitalrecognizedintheircapital.
35

Significantminorityandmajority
investmentsincommercialentities
thatexceedcertainmateriality
levelswillbedeductedfrombanks
capital.

Yes,deductionwheninvestments
exceedmaterialitylevelsof15%of
thebankscapitalforindividual
significantinvestmentsincommercial
entitiesand60%ofthebankscapital
fortheaggregateofsuch
investments.
Asatransitionalarrangement,banks
holdingsuchinvestments(acquired
priorto1January2008)thatexceed
theabovematerialitylevels,willbe
exemptedfromanysuchdeduction
until1January2011andinsteadwill
applyariskweightof100%

ClaimsonSovereigns
53

Claimsoncentralbanksand
sovereignswillberiskweightedin
accordancewithexternalcredit
assessment

Yes,exceptthatforallGCC
sovereignsbanksmayapplyazero
riskweight

BaselIIpara.
reference
(June2006
version)

SummaryofBaselIIIssuessubject
toNationalDiscretion

CentralBankofUAEDecisions

54and201

Recognisethelowerriskweightsof
othersupervisoryauthoritiesfor
domesticcurrencysovereign
exposuresfundedinthatcurrency

Yes,forallGCCsovereigns

55

Allowtherecognitionofexport
creditagenciescountryriskscores
forriskweightingclaimson
sovereigns

Notpermitted

Applyalowerriskweighttoclaims
(andportionsofclaims)guaranteed
bythesovereign(orcentralbank)
whendenominatedandfundedin
domesticcurrency

Yes

201

ClaimsonNonCentralGovernmentPublicSectorEntities(PSEs)
5758

ClaimsondomesticPSEs

DomesticcurrencyclaimsonaGCC
PSEshouldbetreatedasclaimson
theirsovereignsiftheircentralbank
ormonetaryauthoritytreatsthemas
such.ExcludescommercialPSEs.
ForeigncurrencyclaimsonsuchaPSE
shouldberiskweightedonegrade
lessfavourablethanitssovereigni.e.
20%RW.
ClaimsonotherforeignPSEsshould
beriskweightedonegradeless
favourablethanitssovereign.
Claimsoncommercialcompanies
ownedbyGCCsovereignorPSEsthat
operateasacommercialorganization
shallbetreatedasclaimsona
corporateandassignedariskweight
basedontheexternalcreditrating.

ClaimsonBanks
6064

Claimsonbanksmayberisk
weightedonecategoryless
favourablethanclaimsonthe
sovereign(optionone)orbasedon

Option2

BaselIIpara.
reference
(June2006
version)

SummaryofBaselIIIssuessubject
toNationalDiscretion

CentralBankofUAEDecisions

thebanksratingissuedbya
recognisedexternalcreditrating
agency(optiontwo)

64

Allowapreferentialriskweightfor
claimsonbankswithanoriginal
maturityofthreemonthsorless
thataredenominatedandfundedin
thedomesticcurrency

Yes

ClaimsonCorporates
67

68

Increasethestandardriskweightfor
unratedclaimswhenahigherrisk
weightiswarrantedbythedefault
experienceofthejurisdiction.As
partofthesupervisoryreview
process,supervisorsmayalso
considerwhetherthecreditquality
ofcorporateclaimsheldby
individualbanksshouldwarranta
standardriskweighthigherthan
100%
Allowallcorporateclaimstoberisk
weightedat100%withoutregardto
externalratings

Yes,onacasebycasebasis

Notpermitted.
Wherebankshaveselectedan
approvedECAIasperPara9091
below,allratingsmustbeapplied
whereavailableandcannotbe
disregarded

ClaimsintheRegulatoryRetailPortfolio
69

Claimsthatqualifyundercriteriaas
laiddownunderBaselII(subjectto
discretionrePara70below)maybe
consideredasretailclaimsina
regulatoryretailportfolioandmay
beriskweightedat75%(exceptfor
pastdueloans)

A75%riskweightingwillbeallowed
forclaimsintheregulatoryretail
portfoliothatmeetthefourBaselII
criteria(orientation,product,
granularityandlowvalue)andwhere
themaximumaggregatedgross
amounttoonepartydoesnotexceed
AED2,000,000,subjecttoPara70
below.

BaselIIpara.
reference
(June2006
version)

SummaryofBaselIIIssuessubject
toNationalDiscretion

CentralBankofUAEDecisions

Allotherretailloansshouldberisk
weightedat100%
70

71

Setanumericallimitonthe
regulatoryretailportfoliosothatno
aggregateexposuretoone
counterpartexceeds0.2%ofthe
overallregulatoryretailportfolio

Yesthelimitissetat0.2%ofthe
overallretailportfolio

Nationalsupervisorybodiesmay
Increasethesuggestedriskweights
forregulatoryretailexposures

CBUAEretainsthediscretionto
increasetheriskweightswhen
circumstancesdictate

ClaimsSecuredbyResidentialProperty
7273

Applyapreferentialriskweight(i.e.
35%)forclaimssecuredby
mortgagesonresidentialproperties
(occupiedbytheborroweror
rented)subjecttoLoantoValue
(LTV)criteria

Preferentialriskweightsmaybe
appliedwherethesecurityis
perfectedand:

Whereclaims(notexceedingAED
10million),aresecuredby
residentialpropertywithloanto
valueratio(LTV)ofupto85%arisk
weightof35%willapply

Ifabankdoesnotholdinformation
regardingLTVsforindividual
exposures,oriftheLTVisabove
85%,ariskweightingof75%will
applytoexposuresthatmeetthe
criteriaforregulatoryretailclaims

LTVsshouldbeassessedon
origination,makinguseof
independentvaluationsandmarket
informationwhereappropriate,
futuresimilarvaluationsmayalsobe
permittedtodetermineLTVs.
Allotherclaims(includingclaimspast
due90days)securedonresidential
propertyshouldberiskweighted
100%includingtheexcessofthe
claimsthatexceedtheaboveceiling

ClaimsSecuredbyCommercialRealEstate

BaselIIpara.
reference
(June2006
version)
Footnote29
toparagraph
74

SummaryofBaselIIIssuessubject
toNationalDiscretion

CentralBankofUAEDecisions

Allowcertaincommercialproperty
loanstoberiskweightedat50%
(subjecttoconditions)

Notpermitted100%riskweightis
applicable

PastDueLoans
75and78

Allowtheriskweightforthe
unsecuredportionofanyloan
(includingaqualifyingresidential
mortgageloan)thatispastduefor
morethan90days,netofspecific
provisions,tobereducedfrom100%
to50%,whenspecificprovisionsare
atleast50%oftheoutstanding
amountoftheloan.

No100%riskweightmustbeapplied

Footnote30
toparagraph
75

Treatnonpastdueloansextendedto Yes
counterpartiessubjecttoa150%

riskweightthesamewayaspastdue

loans(i.e.wherespecificprovisions
aremorethan50%oftheclaim,risk
weighttheunprovidedportionof
theclaimat50%)

77

Allowa100%riskweightforpast
dueloansthatarefullysecuredby
otherformsofcollateralwhere
provisionsaregreaterthan15%of
theoutstandingamountoftheloan

Yes
Othercollateralmayinclude

QuotedShares(inUAE,
internationallyrecognised
exchange)

Motorvehicles

ResidentialRealEstate

CommercialRealEstate

OtherCategories
80

Applyariskweightof150%or
highertootherassets(e.g.venture
capitalandprivateequity
investments)

Yes,a150%riskweightwillapplyfor:
1. Venturecapitalandprivateequity
investments
2. Realestateacquiredinsettlement
ofdebtandnotliquidatedwithin
thestatutoryperiod

BaselIIpara.
reference
(June2006
version)

SummaryofBaselIIIssuessubject
toNationalDiscretion

CentralBankofUAEDecisions

CBUAEmaychoosetoassign150%or
higherriskweightsreflectinghigher
risksassociatedwithcertainassets
Footnote32
toparagraph
81

Allowgoldbullionheldinbanks
ownvaultsoronanallocatedbasis
totheextentitisbackedbybullion
liabilitiestoberiskweightedat0%

9091

AcceptableCreditRatingAgencies

Yes

Banksmaychoosefromthefollowing
initiallyapprovedagencies:
-

Moodys

S&P

FitchIBCA

CapitalIntelligence

Othersmaybeaddedtothislistatthe
discretionoftheCentralBankofThe
UAE
Banksshouldfollowtheguidancein
Para94anddisclosuresmustbeas
perPara95
92

NationalSupervisorswillissue
MappingofECAIassessmentstoRisk
Weights

YesseeAppendices2and3ofBaselII
GuidelinesforbanksStandardised
ApproachissuedbyCentralBankofthe
UAE

UseofExternalRatings
Footnote37
toparagraph
102

Allowtheoptiontouseaborrowers
domesticcurrencyratingfor
exposureinforeignexchange
transactionswhenanexposure
arisesthroughabanksparticipation
inaloanthathasbeenextended,or
hasbeenguaranteedagainst
convertibilityandtransferrisk,by
MultilateralDevelopmentBanks

Yes

BaselIIpara.
reference
(June2006
version)
108

SummaryofBaselIIIssuessubject
toNationalDiscretion

Allowabanktouseunsolicited
ratingsinthesamewayassolicited
ratings

CentralBankofUAEDecisions

Notpermitted

OperationalRisk
652(FN104)

Atnationalsupervisorydiscretion,a
supervisorcanchoosetoallowa
banktousethealternative
standardisedapproach(ASA)
providedthebankisabletosatisfyits
supervisorthatthisalternative
approachprovidesanimprovedbasis
by,forexample,avoidingdouble
countingofrisks.

YesHowever,onceabankhasbeen
allowedtousetheASAitwouldnotbe
allowedtoreverttotheStandardised
Approachwithoutthepermissionof
CBUAE.

654(FN105)

Supervisorsmayadoptamore
conservativetreatmentofgross
income.

Yesnegativenumbersshouldbe
excludedfromthecalculationsof
grossincome

663

Assomeinternationallyactivebanks
willwishtousetheStandardised
approach,itisimportantthatsuch
bankshaveadequateoperationalrisk
managementsystems.Consequently,
aninternationallyactivebankusing
theStandardisedApproachmust
meetthecriteriainparagraph663.
Forotherbanks,thesecriteriaare
recommended,withnational
discretiontoimposethemas
requirements.

(FN108)

Allbanksareexpectedtofollowthe
requirementsinPara663asthisislikely
tobringaboutanimprovementin
managementandassessmentoftheir
OperationalRisk.

Furthermore,banksareexpectedto
seekguidancefromtheBISpaper
SoundPracticesforTheManagement
andSupervisionofOperationalRisk
February2003

APPENDIX8:MultiLateralDevelopmentBanks

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

WorldBank(IERD)anditsaffiliates
AsianDevelopmentBank
EuropeanInvestmentBank
EuropeanBankforReconstructionandDevelopment
InterAmericanDevelopmentBank
IslamicDevelopmentBank
CaribbeanDevelopmentBank
OPECFundforInternationalDevelopment
ArabFundforEconomicandSocialDevelopment
ArabMonetaryFund
ArabBankforEconomicDevelopmentinAfrica(BADEA)
CouncilforEuropeDevelopmentBank