12.Total regulatory capital will consist of the sum of the following items:

1. i.Tier 1 capital, composed of
   1. a.Common Equity Tier 1 (“CET1”)
   2. b.Additional Tier 1 (“AT1”)
2. ii.Tier 2 capital.

These regulatory capital components are net of regulatory adjustments.

13.Article (2.2) of Capital Adequacy Regulation requires banks to apply the following minimum requirement, at all times:

1. i.CET1 capital must be at least 7.0% of risk-weighted assets (RWA).
2. ii.Tier 1 capital must be at least 8.5% of RWA.
3. iii.Total capital, calculated as sum of Tier 1 capital and Tier 2 capital, must be at least 10.5% of RWA.

14.Article (5.1) of Capital Adequacy Regulation requires banks to maintain a capital conservation buffer (CCB) of 2.5% of total risk weighted assets, in the form of CET1 capital.

15.Article (6) of Capital Adequacy Regulation requires banks to implement a countercyclical buffer (CCyB). Banks must meet the CCyB requirements by using CET1 capital exclusively. Banks will be subject to a countercyclical buffer that varies between zero and 2.5% of total risk weighted assets. The buffer that will apply to each bank will reflect the geographic composition of its portfolio of credit exposures. The CCyB buffer extends the capital conservation buffer (CCB).

16.Domestic Systemically Important Banks (D-SIBs) are required to comply with article (7) of the Capital Adequacy Regulation. The additional requirements for identified D-SIBs will be communicated individually by the Central Bank to each relevant bank. Banks must meet the D-SIB buffer requirements by using CET1 capital. The D-SIB buffer extends the capital conservation buffer (CCB).

17.Based on the outcome of the Supervisory Review and Evaluation Process (SREP) 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 (SCG). Banks notified must apply the individual SCG requirement, as set by the Central Bank. The Individual SCG increases the minimum capital requirement.

18.The aggregation of all the capital buffers (CCB, CCyB and D-SIB) form an effective capital conservation buffer. Any breach of the capital conservation buffers will lead to the following additional supervisory requirements and constraints on distributions:

1. i.The relevant bank must immediately inform the Central Bank of the breach.
2. ii.The relevant bank shall submit an approved plan to restore its regulatory capital to meet the buffer level requirement.
3. iii.The relevant bank will be subjected to more intense supervision.
4. iv.Capital conservation restrictions will immediately become effective in the form of restriction of dividends as prescribed by the Central Bank.

19.As per Article 3.1 of the Capital Adequacy Regulation, CET1 capital consists of the sum of the following elements:

1. i.Common shares issued by a bank which are eligible for inclusion in CET1 (or the equivalent for non-joint stock companies);
2. ii.Share premium resulting from the issue of instruments included in CET1;
3. iii.Retained earnings;
4. iv.Legal reserves;
5. v.Statutory reserves;
6. vi.Accumulated other comprehensive income and other disclosed reserves;
7. vii.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;
8. viii.Regulatory adjustments applied in the calculation of CET1.

20.Retained earnings and other comprehensive income include audited/reviewed interim profit or loss. Expected dividend payments are excluded from CET1.

Common shares issued by the bank

21.For an instrument to be included in CET1 capital, it must meet all of the following criteria stated below. In cases where banks issue non-voting common shares, they must be identical to voting common shares of the issuing bank in all respects except the absence of voting rights for inclusion in CET1.

1. i.Represents the most subordinated claim in liquidation of the bank.
2. ii.The investor is entitled to a claim on the residual assets that is proportional to its share of issued capital, after all senior claims have been paid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim).
3. iii.The principal is perpetual and never repaid outside of liquidation (setting aside discretionary repurchases or other means of effectively reducing capital in a discretionary manner that is allowable under relevant law and subject to the prior approval of the Central Bank).
4. iv.The bank does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled, nor do the statutory or contractual terms provide any feature that might give rise to such an expectation.
5. v.Distributions are paid out of distributable items, including retained earnings. The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items).
6. vi.There are no circumstances under which the distributions are obligatory. Non-payment is, therefore, not an event of default.
7. vii.Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital.
8. viii.The issued capital takes the first and proportionately greatest share of any losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the others.
9. ix.The paid-in amount is recognized as equity capital (i.e. not recognized as a liability) for determining balance sheet insolvency.
10. x.The paid-in amount is classified as equity under the relevant accounting standards.
11. xi.It is directly issued and paid-in and the bank cannot directly or indirectly have funded the purchase of the instrument.
12. xii.The paid-in amount is neither secured nor covered by a guarantee of the issuer or related entity or subject to any other arrangement that legally or economically enhances the seniority of the claim.
13. xiii.It is either only issued with the approval of the owners of the issuing bank, given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorized by the owners.
14. xiv.It is clearly and separately disclosed on the bank’s balance sheet.

22.Articles 3.2 of the Capital Adequacy Regulation, AT1 capital consists of the sum of the following elements:

1. i.Instruments issued by a bank which are eligible for inclusion in AT1 and are not included in CET1 (e.g. perpetual equity instruments, not included in CET1);
2. ii.Stock surplus, or share premium, resulting from the issue of instruments included in AT1;
3. iii.Instruments issued by consolidated subsidiaries of the bank and held by third parties which are eligible for inclusion in AT1 and are not included in CET1;
4. iv.Regulatory adjustments applied in the calculation of AT1.

23.The treatment of instruments issued out of consolidated subsidiaries of the bank and the regulatory deductions applied in the calculation of AT1 capital are addressed in the Tier Capital Instruments Standard.

Instruments issued by the bank that meet the Additional Tier 1 criteria

24.The following is the minimum set of criteria for an instrument issued by the bank to meet or exceed in order for it to be included in Additional Tier 1 capital:

1. i.Issued and paid-in
2. ii.Subordinated to depositors, general creditors and subordinated debt of the bank
3. iii.Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors
4. iv.Is perpetual, i.e. there is no maturity date and there are no step-ups or other incentives to redeem
5. v.May be callable at the initiative of the issuer only after a minimum of five years:
   1. a.To exercise a call option a bank must receive prior Central Bank approval; and
   2. b.A bank must not do anything which creates an expectation that the call will be exercised; and
   3. c.Banks must not exercise a call unless:
      1. 1)They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or
      2. 2)The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.
6. vi.Any repayment of principal (e.g. through repurchase or redemption) must be with prior Central Bank’s approval and banks should not assume or create market expectations that Central Bank’s approval will be given.
7. vii.Dividend/coupon discretion:
   1. a.the Central Bank and the bank must have full discretion at all times to cancel distributions/payments
   2. b.cancellation of discretionary payments must not be an event of default
   3. c.banks must have full access to cancelled payments to meet obligations as they fall due
   4. d.Cancellation of distributions/payments must not impose restrictions on the bank except in relation to distributions to common stockholders.
8. viii.Dividends/coupons must be paid out of distributable items
9. ix.The instrument cannot have a credit-sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organization’s credit standing.
10. x.The instrument cannot contribute to liabilities exceeding assets in the required balance sheet test to determine insolvency.
11. xi.Instruments classified as liabilities for accounting purposes must have principal loss absorption through a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The loss absorption trigger must be set at a level of 7.625% of CET1. The write-down will have the following effects:
    1. 1.Reduce the claim of the instrument in liquidation;
    2. 2.Reduce the amount re-paid when a call is exercised; and
    3. 3.Partially or fully reduce coupon/dividend payments on the instrument.
12. xii.Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument or otherwise come into possession of the instrument, such as through receipt of collateral or a reverse repurchase agreement, nor can the bank directly or indirectly have funded the purchase of the instrument.
13. xiii.The instrument cannot have any features that hinder recapitalization, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame.
14. xiv.[Applicable for Islamic banks only] If the instrument is not issued out of an operating entity or the holding company in the consolidated group (e.g. a special purpose vehicle – “SPV”), proceeds must be immediately available without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in AT1 capital (Refer to the Capital Instruments Standards).
15. xv.In addition to the criteria outlined above, the instrument must meet criteria for minimum requirements to ensure loss absorbency at the point of non-viability. Please refer to the Capital Instruments Standards.

Share premium resulting from the issue of instruments included in Additional Tier 1 capital;

25.Share premium that is not eligible for inclusion in CET1, will only be permitted to be included in AT1 capital if the shares giving rise to the stock surplus are permitted to be included in AT1 capital.

26.Articles 3.3 of the Capital Adequacy Regulation, Tier 2 capital consists of the sum of the following elements:

1. i.Banks using the standardized approach for credit risk: general provisions or general loan loss reserves, up to maximum of 1.25% of credit RWA;
2. ii.Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital, and are not included in Tier 1 capital;
3. iii.Share premium resulting from the issue of instruments included in Tier 2 capital;
4. iv.Instruments which are eligible for inclusion of Tier 2 (refer to paragraph 27)
5. v.Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Tier 2 capital, and are not included in Tier 1 capital;
6. vi.Regulatory adjustments applied in the calculation of Tier 2.

27.The treatment of instruments issued out of consolidated subsidiaries of the bank and the regulatory deductions applied in the calculation of Tier 2 capital are addressed in the Tier Capital Instrument Standard.

Instruments issued by the bank that meet the Tier 2 criteria

28.The objective of Tier 2 capital is to provide loss absorption on a gone-concern basis. Based on this objective, the minimum set of criteria for an instrument to meet or exceed in order for it to be included in Tier 2 capital are set out below.

Criteria for inclusion in Tier 2 Capital

1. i.Issued and paid-in.
2. ii.Subordinated to depositors and general creditors of the bank.
3. iii.Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general bank creditors
4. iv.Maturity:
   1. a.minimum original maturity of at least five years
   2. b.recognition in regulatory capital in the remaining five years before maturity will be amortized on an annualized straight line basis (i.e. 20% incremental reduction in recognition every successive year in the last five years)
   3. c.there are no step-ups or other incentives to redeem
5. v.May be callable at the initiative of the issuer only after a minimum of five years:
   1. a.To exercise a call option a bank must receive prior Central Bank’s approval;
   2. b.A bank must not do anything that creates an expectation that the call will be exercised; and
   3. c.Banks must not exercise a call unless:
      1. 1.They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or
      2. 2.The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.
6. vi.The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation.
7. vii.The instrument cannot have a credit-sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organization’s credit standing.
8. viii.Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument or otherwise come into possession of the instrument, such as through receipt of collateral or a reverse repurchase agreement, nor can the bank directly or indirectly have funded the purchase of the instrument.
9. ix.[Applicable for Islamic banks only] If the instrument is not issued out of an operating entity or the holding company in the consolidated group (e.g. a special purpose vehicle – “SPV”), proceeds must be immediately available without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Tier 2 Capital (Refer to the Capital Instruments Standards).

29.In addition to the criteria outlined above, the instrument must meet the minimum requirements to ensure loss absorbency at the point of non-viability. Please refer to the Capital Instruments Standards.

Share premium resulting from the issue of instruments included in Tier 2 capital

30.Share premium that is not eligible for inclusion in Tier 1, will only be permitted to be included in Tier 2 capital if the shares giving rise to the stock surplus are permitted to be included in Tier 2 capital.
 

General provisions/General loan-loss reserves:

31.Provisions or loan-loss reserves held against future, presently unidentified losses are freely available to meet losses which subsequently materialize and therefore qualify for inclusion within Tier 2. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, should be excluded. Furthermore, general provisions or general reserves for loan losses will be limited to a maximum of 1.25% of credit risk weighted risk assets calculated under the standardised approach.
 

Capital component of Capital Adequacy Regulation

32.If a bank has complied with the minimum CET1 and Tier 1 capital ratios, the excess AT1 capital can be counted to meet the total capital ratio, also referred to as Capital Adequacy Ratio (CAR).
 

33.Profit-sharing investment accounts must not be classified as part of an Islamic bank’s regulatory capital as referred to in Article 2 of Capital Adequacy Regulation.

34.Investment risk reserves and a portion of the Profit Equalization Reserve (PER), if any, belong to the equity of investment account holders, and thus must not be used in the calculation of an Islamic bank’s regulatory capital. As the purpose of a PER is to smooth the profit pay-outs and not to cover losses, any portion of a PER that is part of the Islamic bank’s reserves must not be treated as regulatory capital as referred to in Article 2 of Capital Adequacy Regulations.

35. In order for an instrument issued by a bank to be included in AT1 or Tier 2 capital, it must also meet or exceed the minimum requirements defined in Capital Instruments Standards. These requirements are in addition to the criteria for AT1 and Tier 2 instruments stated above.

Common shares issued by consolidated subsidiaries (that is within the scope of regulatory consolidation)

36.Minority interest arising from the issue of common shares by a fully consolidated subsidiary of the bank may receive recognition in CET1 only if:

1. i.The instrument giving rise to the minority interest would, if issued by the bank, meet all of the criteria for classification as common shares for regulatory capital purposes; and
2. ii.The subsidiary that issued the instrument is itself a bank. (It is noted that minority interest in a subsidiary that is a bank is strictly excluded from the parent bank’s common equity if the parent bank or affiliate has entered into any arrangements to fund directly or indirectly minority investment in the subsidiary whether through an SPV or through another vehicle or arrangement. The treatment outlined here, thus, is strictly available where all minority investments in the bank subsidiary solely represent genuine third party common equity contributions to the subsidiary.)

37.The amount of capital meeting the above criteria that will be recognized in consolidated CET1 is calculated as follows

Total minority interest meeting the two criteria above minus the amount of the surplus CET1 of the subsidiary attributable to the minority shareholders.

1. i.Surplus CET1 of the subsidiary is calculated as the CET1 (after the application of regulatory deductions) of the subsidiary minus the lower of:
   1. a.the minimum CET1 requirement of the subsidiary plus the capital conservation buffer (i.e. 9.5% of risk weighted assets) and
   2. b.the portion of the parent’s consolidated minimum CET1 requirement plus the capital conservation buffer (i.e. 9.5% of consolidated risk weighted assets) that relates to the subsidiary.
2. ii.The amount of the surplus CET1 that is attributable to the minority shareholders is calculated by multiplying the surplus CET1 by the percentage of CET1 that is held by minority shareholders.

Tier 1 qualifying capital issued by consolidated subsidiaries (that is within the scope of regulatory consolidation)

38.Tier 1 capital instruments issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraph 37) may receive recognition in Tier 1 capital only if the instruments would, if issued by the bank meet all of the criteria for classification as Tier 1 capital.
 

39.The amount of this capital that will be recognized in Tier 1 will be calculated as follows:

Total Tier 1 of the subsidiary issued to third parties minus the amount of the surplus Tier 1 of the subsidiary attributable to the third party investors.

1. i.Surplus Tier 1 of the subsidiary is calculated as the Tier 1 of the subsidiary (after the application of regulatory deductions) minus the lower of:
   1. a.the minimum Tier 1 requirement of the subsidiary plus the capital conservation buffer (i.e. 11% of risk weighted assets) and
   2. b.the portion of the parent’s consolidated minimum Tier 1 requirement plus the capital conservation buffer (i.e. 11% of consolidated risk weighted assets) that relates to the subsidiary.
2. ii.The amount of the surplus Tier 1 that is attributable to the third party investors is calculated by multiplying the surplus Tier 1 by the percentage of Tier 1 that is held by third party investors.

The amount of this Tier 1 capital that will be recognized in Additional Tier 1 will exclude amounts recognized in CET1 under paragraph 37.

Tier 1 and Tier 2 qualifying capital issued by consolidated subsidiaries (that is within the scope of regulatory consolidation)

40.Total capital instruments (i.e. Tier 1 and Tier 2 capital instruments) issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraph 37 and 39) may receive recognition in Total Capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 or Tier 2 capital
 

41.The amount of this capital that will be recognized in consolidated Total Capital will be calculated as follows:

Total capital instruments of the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors.

1. i.Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary (after the application of regulatory deductions) minus the lower of:
   1. a.the minimum Total Capital requirement of the subsidiary plus the capital conservation buffer (i.e. 13% of risk weighted assets) and
   2. b.the portion of the parent’s consolidated minimum Total Capital requirement plus the capital conservation buffer (i.e.13% of consolidated risk weighted assets) that relates to the subsidiary.
2. ii.The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors.

The amount of this Total Capital that will be recognized in Tier 2 will exclude amounts recognized in CET1 under paragraph 37 and amounts recognized in AT1 under paragraph 39 above.

42.An illustrative example for calculation of minority interest and other capital issued out of consolidated subsidiaries that is held by the third parties is furnished as Appendix 4 in Guidance for Capital Adequacy of Banks in the UAE.

Other Instructions relating to the calculation of the amount of minority interest

43.All calculations must be undertaken in respect of the subsidiary on a sub-consolidated basis (i.e. the subsidiary must consolidate all of its subsidiaries that are also included in the wider consolidated group). However, the bank may elect to give no recognition (in consolidated capital of the group) to the capital issued by the subsidiary to third parties.

44.Where capital has been issued to third parties out of an SPV, none of this capital can be included in CET1. However, such capital can be included in consolidated AT1 or Tier 2 capital and treated as if the bank itself had issued the capital directly to the third-parties only if:

1. i.it meets all the relevant entry criteria; and
2. ii.the only asset of the SPV is its investment in the capital of the bank in a form that meets or exceeds all the relevant entry criteria (as required by criterion xiv for Additional Tier 1 and criterion ix for Tier 2 capital)

In cases where the capital has been issued to third parties through an SPV via a fully consolidated subsidiary of the bank, such capital may, subject to the requirements of this paragraph, be treated as if the subsidiary itself had issued it directly to the third parties and may be included in the bank’s consolidated AT1 or Tier 2 in accordance with the treatment outlined in paragraphs 39 and 41.