During the industry consultation the Central Bank received a number of questions related to the Credit Risk Standard and Guidance. To ensure consistent implementation of the Credit Risk Standard in the UAE, the main questions are addressed hereunder.

Claims on Sovereigns

Question 1: What does the 7-year transition for USD exposure to the Federal Government and Emirates Government mean for banks?
During the 7-year transition period, banks are required to have a forward looking plan on USD exposures to Federal and Emirate governments. Banks shall monitor and manage the impact of the change in risk weights of exposures in USD on the bank’s capital position. Exposures in USD as well as the banks’ capital plans will be monitored by the Central Bank.

Question 2: What is the appropriate risk weight for exposures to other GCC sovereigns?
A 0% risk weight is applied to GCC Sovereign exposures denominated and funded in the domestic currency of their country. However, exposures in non-domestic currencies (including USD) shall be risk weighted according to the rating of sovereigns.

Question 3: Does the Central Bank allow banks to apply unsolicited ratings in the same way as solicited ratings?
Bank should use ratings determined by an eligible External Credit Assessment Institution (ECAIs). Only solicited ratings are allowed to be used. The Central Bank only allows unsolicited ratings from an eligible ECAI for the UAE federal government. All other exposures shall be risk weighted using solicited ratings.

Claims on Non-Commercial Public Sector Enterprises

Question 4: Can the bank include claims on a GCC PSE denominated in their local currency under claims of Non-Commercial PSEs?
No, the preferential risk weights for Non-Commercial PSEs are only granted for UAE entities.

Question 5: Do all the seven criteria stated in the credit risk guidance have to be met or any of the criterion can be met to classify an entity as non-commercial PSE? In addition, does the bank just follow the so-called GRE list or shall the bank apply the criteria to classify entities as non-commercial PSE?
To classify entities as Non-commercial PSE, the Central Bank will consider in its approval process all seven criteria and in principle all seven criteria must be satisfied. A bank may approach the Central Bank, if the bank thinks that certain entities satisfy the criteria for a Non-commercial PSE that can be added to the GRE list. If banks have information that would lead to changes to of the GRE List, banks should inform the Central Bank accordingly.

Question 6: The guidance requires that the bank’s internal audit/ compliance departments perform regular reviews to ensure the PSE and GRE classification complies with the Central Bank's GRE list. What is the expected frequency of such a review?
The frequency of internal audit/compliance should be commensurate with the bank's size, the nature and risks of bank’s operations and the complexity of the bank.

Claims on Multilateral Development Banks (MDBs)

Question 7: Does an MDB need to satisfy all of the stated criteria or any one of the criteria to apply a 0% risk-weight?
Exposures to MDBs may receive a risk weight of 0% if they fulfill all five criteria. However, the Central Bank does not decide whether an MDB satisfies the criteria or not. The Basel Committee on Banking Supervision (BCBS) evaluates each MDB’s eligibility for inclusion in the list of 0% RW on a case-by-case basis.

Claims on Banks

Question 8: For claims on an unrated bank, can the bank apply the preferential rating as per risk weight table for short-term exposures?
A risk weight of 50% for long term exposures and 20% for short term exposures are applied to claims on unrated banks. However, no claim on an unrated bank may receive a risk weight lower than the risk weight applied to claims on its sovereign of incorporation, irrespectively of the exposure being short-term or long-term.

Claims on Corporates

Question 9: Should loans to High Net Worth Individuals (HNIs) be reported under claims in regulatory retail portfolio or claims on corporate?
No, HNI classification should be aligned with the BRF explanatory note and should be reported under claims on corporate.

Question 10: What is the treatment for SMEs and in which asset class are SME exposures reported?
Answer: Banks have to follow BRF explanatory note 6.21 for the definition of SME. Exposures classified as SME according to BRF explanatory note, are for capital adequacy reporting purposes classified as “Retail SME” and “corporate SME”. SME exposures fulfilling all of four retail criteria as stated in Section III G of the Credit Risk Standard are reported under “claims on retail”. SME that do not fulfill the retail criteria are treated under claims on corporates as per Section III F of the Credit Risk Standard.

Claims secured by Residential Property

Question 11: Does the bank have to assign 100% RW for customers with more than 4 properties?
Yes, if a customer has more than 4 properties, a bank has to report all properties of that customer as claims on commercial properties and the risk weight of the properties shall be 100%.

Question 12: Can the bank apply a preferential RW of 35% for properties under construction?
No, the preferential risk weight of 35% applies only to completed properties, as under construction, residential properties incur higher risks than buying completed properties.

Claims Secured by Commercial Real Estate

Question 13: Do loans with a collateral of a completed commercial property, irrespective of their purpose, fall under Claims secured by Commercial Real Estate?
No, this asset class is for exposures specifically for the purpose of buying/ constructing commercial property, i.e. real estate loans.

Higher-risk Categories

Question 14: What type of exposure would fall under higher risk categories? What is the appropriate RW for higher risk categories?
Almost all the exposures that receive 150% risk weight are reported under the respective asset class. The Central Bank will apply a 150% or higher risk weight, reflecting the higher risks associated with assets that require separate disclosure. For example, but not limited to, real estate acquired in settlement of debt and not liquidated within the statutory period shall be reported under the higher risk asset class with a 150% RW.

Other Assets

Question 15: The Credit Risk Standard states in section 5, that equity investment in commercial entities that are below the thresholds shall be risk weighted at 150% if the entity is unlisted. However, if the banking group has full control over the commercial subsidiary, can a lower risk weight be applied?
A 150% risk weight reflects the additional risk the commercial subsidiary underpins on unlisted equity (absence of regulatory requirement, illiquidity, etc.) exposures than listed equity exposures.

Issuer and Issuance Rating

Question 16: What will be the treatment of a rated entity (e.g. corporate) that issues a bond?
The bank must classify the bond based on the entity classification (Claim on Corporate) and assign risk weight based on the rating of the entity.

Question 17: What will be the treatment of a rated entity (e.g. corporate) that issues a bond with a guarantee by the sovereign specific to the issuance and the bond gets a higher rating than the entity itself?
Classify the bond based on the entity classification (Claim on Corporate) and assign risk weight based on the rating of the bond.

Question 18: What will be the treatment of a rated entity (e.g. corporate) that issues a bond with a lower rating than entity?
Classify the bond based on the entity classification (Claim on Corporate) and assign risk weight based on the rating of the bond.

Question 19: What will be the treatment if an unrated entity (e.g. corporate) that issues a bond (unrated), but the bond has the guarantee from sovereign, specific and direct guarantee?
Classify the bond based on the entity classification (Claim on Corporate) and assign the risk weight based on the bond rating (unrated). The guarantee should be used for credit risk mitigation by substituting the risk weight of the bond using the claims on sovereign mapping table (e.g. AAA - 0% risk weight).

Question 20: What will be the treatment if an unrated entity (e.g. corporate) that issues a bond with a guarantee given by the sovereign to the entity (and not the bond)?
Classify the bond based on the entity classification (Claim on Corporate) and assign the risk weight related to the unrated entity. The guarantee should be used for credit risk mitigation by substituting the risk weight of the bond using the claims on corporate mapping table (e.g. AAA - 20% risk weight).

Off Balance-sheet Items

Question 22: The Credit Risk Standards states that, “Any commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness must be converted into credit exposure equivalents using CCF of 0%”. For using CCF of 0%, please provide explanation on being cancellable at any time without prior notice.
Majority of the unconditionally cancellable commitments are subject to certain contractual conditions, which in practice may not render them as unconditionally cancelled and thereby do not qualify them for 0% CCF, implying that all the off-balance sheet items bear a risk to the bank. Bank shall conduct a formal review of the commitments at regular intervals to ensure that commitments can be cancelled from a legal and practical perspective.

Credit Risk Mitigation

Question 23: Is an approval required from the Central Bank to switch between the simple and comprehensive approach for Credit Risk Mitigation techniques? For a bank that applies the comprehensive approach, is an approval required to go back to the simple approach?
A bank that intends to apply the comprehensive approach requires prior approval from the Central Bank. Once approved and if the bank wishes to go back to simple approach, a bank requires the Central Bank's approval again to go to the simple approach.