1. Scope of Application
1.This Standard formulates capital adequacy requirements that need to be applied to all banks in UAE on a consolidated basis. The consolidated entity includes all worldwide banking subsidiaries, however it excludes insurance companies and non-financial commercial entities that are subsidiaries of the entity licensed in the UAE.
2.Banks are required to deduct, from CET1, the full amount of any capital shortfall of subsidiaries that are regulated and are subject to capital requirements on a worldwide basis. Additionally, any shortfall in the capital requirement of unconsolidated subsidiary (e.g. insurance, commercial entity) must be fully deducted from the CET1 capital (at stand-alone as well as consolidated level)
3.The amount of the capital requirement and capital shortfall for this deduction is to be based on the regulations issued by the subsidiary’s regulator (i.e. based on the host regulator’s capital adequacy requirements).
4.The Standards follow the international calibration as developed by the Basel Committee, imposing risk weights up to 1250% for assets. The UAE adopted a higher minimum capital requirement of 10.5% minimum CAR (without the capital conservation buffer). Taking into consideration the higher minimum capital requirements of 10.5% in the UAE, the risk weight shall be capped at 952% (reciprocal of 10.5%).
1.1 Investments in the Capital of Banking Subsidiaries
5.Majority-owned or controlled banking entities, securities entities (where subject to broadly similar regulation or where securities activities are deemed banking activities) and other financial entities should generally be fully consolidated. Notwithstanding the banks decision on exercising control over an entity and the subsequent consolidation of that entity, the Central Bank reserves the right to determine whether the bank exercises control over an entity and hence may require banks to consolidate/deconsolidate entities.
6.In instances where it is not feasible to consolidate certain majority-owned banking, securities or other regulated financial entities1, banks may, subject to prior Central Bank approval, opt for non-consolidation of such entities for regulatory capital purposes.
7.For group level reporting, if any majority-owned financial subsidiaries are not consolidated for capital purposes, all assets, liabilities and third-party capital investments in the subsidiaries will be removed from the bank’s balance sheet. All equity and other investments in regulatory capital instruments in those entities attributable to the bank / banking group will be deducted.
8.Banks are required to deduct from CET1 the full amount of any capital shortfalls of subsidiaries excluded from regulatory consolidation, that are regulated entities and are subject to capital requirements. The amount of the capital requirement and capital shortfall for this deduction is to be based on the regulations issued by the subsidiary’s regulator (i.e. based on the host regulator’s local capital adequacy requirements).
1 Examples of the types of activities that financial entities might be involved in include financial leasing, issuing credit cards, portfolio management, investment advisory, custodial and safekeeping services and other similar activities that are ancillary to the business of banking.
1.2 Investments in the Capital of Banking, Securities, Financial and Insurance Entities
Banking, securities, financial and insurance entities – (ownership in entity does not exceed 10%)
9.A bank’s equity interests in banking, securities, insurance and other financial entities are defined as investments in the capital of banking, securities, insurance and other financial entities if the bank owns up to 10% of the investee’s common share capital.
For detailed treatment of investments in such entities, refer to Section 3.9 - Regulatory Adjustments.
Banking, securities, financial and insurance entities – Significant investments (ownership in entity exceeds 10%)
10.Significant investments in banking, securities and other financial entities are defined as investments in the capital of banking, securities and other financial entities (that are outside the scope of regulatory consolidation) wherein the bank owns more than 10% of the investee’s common share capital. Such investments will be subject to the treatment outlined in Section 3.10 - Regulatory Adjustments.
1.3 Investments in Commercial Entities
11.Significant investments in commercial entities are subject to the treatment outlined in section 5. Subsidiaries that are commercial entities are not to be consolidated for regulatory capital purposes. In cases where a subsidiary that is a commercial entity has been consolidated for accounting purposes, the entity is to be deconsolidated for regulatory purposes (i.e. all assets, liabilities and equity will be removed from the bank’s balance sheet) and the book value of the investment will be subject to the treatment.
For detailed treatment of investments in such entities, refer to Section 5.