UAE central bank issues new rules related to Basel III

abu dhabi — The Central Bank of the UAE has issued new regulations to ensure that capital adequacy of all banks operating in the UAE is in line with revised rules outlined by the Basel Committee on Banking Supervision in Basel III, a global regulatory framework for more resilient banks and banking systems.

The capital adequacy regulations, which became effective on February 1, are supported by accompanying standards, which elaborate on the supervisory expectations of the central bank with respect to capital adequacy requirements, said Khalifa Mohammed Al Kindi, chairman of the board of the Central Bank of the UAE.

“In introducing these Capital Adequacy Regulations, the Central Bank intends to ensure that banks’ capital adequacy is in line with revised rules outlined by the Basel Committee on Banking Supervision in Basel III. To this end, banks are required to manage their capital in a prudent manner. It is important that banks’ risk exposures are backed by a strong capital base of high quality in order to contribute to the stability of the financial system of the UAE,” the apex bank said in a circular sent to lenders.

These regulations and the accompanying standards are issued pursuant to the powers vested in the central bank under the Central Bank Law, Al Kindi added.

The central bank said that it seeks to promote the effective and efficient development and functioning of the banking system.

“These regulations and the accompanying standards apply to all banks. Banks must ensure that these regulations and standards are adhered to on the following two levels: the solo level capital adequacy ratio requirements, which measure the capital adequacy of an individual bank based on its standalone capital strength; and the group level capital adequacy ratio requirements, which measure the capital adequacy of a bank based on its capital strength and risk profile after regulatory consolidation of assets and liabilities of its subsidiaries.”

Article 2 of the regulations explains quantitative requirements and states that the total regulatory capital comprises the sum of two tiers, where Tier 1 capital is composed of a common equity Tier 1 (CET1) and an additional Tier 1 (AT1).

According to the regulations, and based on the outcome of the Supervisory Review and Evaluation Process conducted by the central bank, a bank may be subject to an additional capital add-on, also referred to as individual supervisory capital guidance requirement. The concerned banks must comply with the individual SCG requirement set by the central bank.

Article 3, which explains capital components states that CET1 capital comprises the sum of the following items: common shares issued by a bank which are eligible for inclusion in CET1; share premium resulting from the issue of instruments included in CET1; retained earnings; legal reserves; statutory reserves; accumulated other comprehensive income and other disclosed reserves; common shares issued by consolidated subsidiaries of a bank and held by third parties, also referred to as minority interest, which are eligible for inclusion in CET1; regulatory adjustments applied in the calculation of CET1. — Wam