6.The supervisory review process, as set forth by the Central Bank, is intended not only to ensure that banks in the UAE have adequate capital to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing risks.

7.The supervisory review process recognises the responsibility of bank management in developing an internal capital assessment process and setting minimum capital requirements that are commensurate with the bank’s risk profile and control environment. Bank management continues to bear responsibility for ensuring that the bank has adequate capital to support its risks beyond the core minimum requirements in Pillar 1.

8.The Central Bank will evaluate how well banks are assessing their capital needs relative to their risks and intervene, where appropriate. This interaction is intended to foster an active dialogue between banks, the Central Bank such that when deficiencies are identified, prompt, and decisive action can be taken to reduce risk or restore capital.

9.The Central Bank recognises the relationship that exists between the amount of capital held by the bank against its risks and the strength and effectiveness of the bank’s risk management and internal control processes. However, increased capital must not be viewed as sufficient for addressing increased risks confronting the bank. Other, complementary, means for addressing risk, such as strengthening risk management, applying internal limits, strengthening the level of provisions and reserves, and improving internal controls, must also be considered as complimentary measures. Furthermore, capital must not be regarded as a substitute for addressing fundamentally inadequate control or risk management processes. However, the Central Bank may require banks to hold more capital to compensate for deficiencies.

10.There are three main areas that will be particularly suited for its treatment under Pillar 2: risks considered under Pillar 1 that are not fully captured by the Pillar 1 framework (e.g. credit concentration risk); those factors not taken into account by the Pillar 1 framework (e.g. interest rate risk in the banking book, business and strategic risk); and factors external to the bank (e.g. business cycle effects). A further important aspect of Pillar 2 is the assessment of compliance with the minimum standards and disclosure requirements of the more advanced methods in Pillar 1. The Central Bank will ensure that these requirements are being met, both as qualifying criteria and on a continuing basis. The quality of risk management will also be considered and any shortcoming may warrant a capital add-on by the bank or by the Central Bank.