Capital Adequacy Regulatory Framework for Banks Operating in Lebanon

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Circular No. 689

To Banks, Financial Institutions, and Supervisory Commissioners

We enclose, with reference to Circular No. 13616 dated 2/2/2024 concerning the amendment of the Basic Decision, a copy of Circular Decision No. 6939 dated 25/3/1998 (The Regulatory Framework for the Capital Adequacy of Banks Operating in Lebanon) attached to Basic Circular No. 44.

Beirut, on February 2, 2024

Acting Governor of the Bank of Lebanon Dr. Wissam Mansouri

Circular Decision No. 13616 Amendment of Basic Decision No. 6939 dated 25/3/1998

The Acting Governor of the Bank of Lebanon, pursuant to the Monetary and Credit Law, specifically Articles 174 and 175 thereof, and pursuant to Basic Decision No. 6939 dated 25/3/1998 and its amendments concerning the Regulatory Framework for Capital Adequacy of Banks Operating in Lebanon, and pursuant to the decision of the Central Council of the Bank of Lebanon taken in its meeting held on 2/2/2024, hereby decides as follows:

Article One: The text of the second paragraph of "Article Eight (repeated)" of Basic Decision No. 6939 dated 25/3/1998 is amended.

Article Two: The text of paragraph (5) of "Article Ten" of Basic Decision No. 6939 dated 25/3/1998 is repealed and replaced with the following text: 5. « Contrary to the provisions of paragraphs (4) of this Article and exceptionally on a temporary basis, the ratio of the "Capital Conservation Reserve" may be reduced below the required ratio (i.e., 2.5%), in accordance with the gradual formation of this shortfall as per instructions issued by the Bank of Lebanon at a later date regarding this matter. »

Article Three: The text of Annexes No. (1), (2), and (3) attached to Basic Decision No. 6939 dated 25/3/1998 is repealed and replaced with the attached text.

Article Four: This Decision shall apply as of the financial statements closed on 31/12/2023.

Article Five: This Decision shall be published in the Official Gazette. Beirut, on February 2, 2024 Acting Governor of the Bank of Lebanon Dr. Wissam Mansouri

Annex No. 1 Common Shareholders' Equity (Tier 1)

Common Shareholders' Equity consists of the following elements:

1. The par value of common shares and other capital instruments meeting the criteria for elements accepted within Common Shareholders' Equity.
2. Capital reserves.
3. Premiums on the issuance of common shares and other capital instruments meeting the criteria for elements accepted within Common Shareholders' Equity, and merger premiums.
4. Cash advances allocated to capital that do not bear interest.
5. Funds allocated to real estate investments referred to in Article Seven of this Decision.
6. Legal and regulatory reserves and other reserves, including a real estate liquidation reserve and a special reserve against doubtful and non-performing debts not yet settled according to Basic Decision No. 7694 dated 18/10/2000.
7. Retained prior results, current financial year result, and the income and expense account.
8. Reserves related to other comprehensive income elements, including:

• Differences arising from the revaluation of real estate or other fixed assets accepted within Common Shareholders' Equity.
• Real estate held in satisfaction of debts pursuant to Article 154 of the Monetary and Credit Law are excluded.
• Net cumulative change in bank certificates and financial instruments classified at fair value through other comprehensive income (Cumulative Change in the Fair Value of Financial Instruments Classified as Fair Value Through OCI).
• Cumulative translation differences from converting foreign currency financial assets (Foreign Currency Translation Adjustment).
• Cash flow hedge revaluation reserve.
• Own credit risk changes reserve.
• Other reserves related to other comprehensive income elements.

9. Minority interest share accepted within Common Shareholders' Equity (Minority Interest).
10. "Regulatory adjustments", including the following deductions: a. The following deductions:

• Financial year result, if positive, and the income and expense account if positive. ***
• 25% of the net cumulative change in bank certificates and financial instruments classified through other comprehensive income, if positive (Changes in Fair Value of the Financial Instruments Classified as Fair Value Through OCI – If positive).
• Negative or positive reserve arising from cash flow hedge revaluation.
• Negative or positive reserve arising from changes in own credit risk.
• Other positive reserves related to other comprehensive income elements.
• Shortfall in the required real estate and liquidation reserves against which it must be formed. ***
• Shortfall in the special reserve required against doubtful and non-performing debts not yet settled according to Basic Decision No. 7694 dated 18/10/2000. ***
• Common shares and bonds related to capital instruments repurchased directly or indirectly.
• Goodwill and net other intangible fixed assets (Other Intangible Assets).
• Shortfall in required provisions.
• Negative difference between the available provision balance and the total expected losses calculated systematically on financial assets within the balance sheet and off-balance sheet financial liabilities, productive and non-productive. *
• Excess over the provisions of Articles 152 or 153 of the Monetary and Credit Law (whichever is greater). ****
• Total cross-holdings (common shares and related cash advances and other capital instruments meeting the criteria for elements accepted within Common Shareholders' Equity) in banks, financial institutions, and insurance companies, which are deductible from Common Shareholders' Equity (applicable to this item on a temporary basis) (Reciprocal Cross Holdings). b. The following additions:
• Provisions formed on financial assets within the balance sheet and productive off-balance sheet financial liabilities that have not experienced a significant increase in (Stage 1) credit risk, except for provisions formed on the portfolio of investments in Lebanese treasury bonds and on the portfolio of investments at the Bank of Lebanon, including certificates of deposit, as per Article Twelve (repeated), paragraph "first". **
• Losses resulting from the currency swap mechanism (purchasing US dollars from the Bank of Lebanon in exchange for Lebanese Lira banknotes) intended to reduce liquidity positions, in accordance with the provisions of paragraph "second" of "Article Twelve (repeated)".

Notes:

• The application of this item is suspended until the end of 2024, based on the mechanism specified in paragraph "first" of Article Twelve (repeated). ** This item applies until the end of 2024, in accordance with the mechanism specified in paragraph "first" of Article Twelve (repeated). *** The application of this item's provisions is suspended temporarily until further notice. **** The deduction of the excess over Article 153 of the Monetary and Credit Law is suspended temporarily until further notice.

Annex No. 2 Core Capital (Tier 1)

Core Capital consists of the following elements: • Common Shareholders' Equity as specified in Annex No. (1) attached to this Decision. • Additional Core Capital (Tier 1 Additional), which consists of the following elements:

• The par value of preferred shares and other capital instruments meeting the criteria for elements accepted within Additional Core Capital.
• Premiums on the issuance of preferred shares and other capital instruments meeting the criteria for elements accepted within Additional Core Capital.
• Cash advances allocated to capital that bear interest.
• Minority interest share accepted within Additional Core Capital (Tier 1 Additional) (Minority Interest).
• "Regulatory adjustments", including the following deductions:
  • Total cross-holdings and other capital instruments in banks, financial institutions, and insurance companies, which meet the criteria for elements accepted within Additional Core Capital and are deductible from Additional Core Capital. * (Reciprocal Cross Holdings)

Note:

• The application of this item's provisions is suspended temporarily until further notice.

Annex No. 3 Total Capital

Total Capital consists of the following elements: • Core Capital as specified in Annex No. (2) attached to this Decision. • Supporting Capital (Tier 2), which consists of the following elements:

• The par value of preferred shares and other capital instruments meeting the criteria for elements accepted within Supporting Capital.
• Premiums on the issuance of preferred shares and other capital instruments meeting the criteria for elements accepted within Supporting Capital.
• Subordinated loans and proceeds from subordinated debt issuances meeting the acceptance criteria within Supporting Capital.
• Minority interest share accepted within Supporting Capital (Minority Interest).
• "Regulatory adjustments", including:

1. The following additions:

• "General provisions" (Provisions General) as referred to in Article Twelve of this Decision.
• Provisions formed against expected credit losses on financial assets within the balance sheet and financial liabilities outside the balance sheet, productive, that have not experienced a significant increase in credit risk (Stage 1), and are accepted within Supporting Capital. *

2. The following deductions:

• The amount amortized from subordinated loans and proceeds from subordinated debt issuances.
• The amount amortized from issued preferred shares for a fixed term and other capital instruments meeting the acceptance criteria within Supporting Capital.
• Total cross-holdings, subordinated loans, proceeds from subordinated debt issuances, and other capital instruments in banks, financial institutions, and insurance companies meeting the criteria for elements accepted within Supporting Capital and deductible from Supporting Capital. ** (Reciprocal Cross Holdings)

Note:

• The application of this item is suspended until the end of 2024. ** The application of this item's provisions is suspended temporarily until further notice.

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