Capital Guidelines 2024

2 REGISTRAR OF FINANCIAL INSTITUTIONS CAPITAL GUIDELINES BANK SUPERVISION DEPARTMENT DECEMBER 2024

3 PART I - PRELIMINARY

1. INTRODUCTION 1.1 The ability of a banking sector to absorb shocks arising from financial and economic stress or any other sources is paramount to ensuring financial stability. In this regard, the Basel Committee on Bank Supervision introduced the capital framework which requires banks to reserve adequate capital as the last line of defense for future unexpected losses. 1.2 The Registrar of Financial Institutions (Registrar) has developed these guidelines which prescribe regulatory capital requirements for banks and bank holding companies and complement the Financial Services (Capital Adequacy for Banks) Directive.
2. MANDATE 2.1 These guidelines are issued pursuant to Section 96 of the Financial Services Act.
3. OBJECTIVE 3.1 The objective of these guidelines is to ensure that banking institutions and bank holding companies: (a) Maintain adequate cushion of high-quality capital to absorb losses; (b) Protect the interests of depositors, creditors and the general public; (c) Maintain internationally recognized prudent capital requirements and; (d) Promote self-discipline in management of banks
4. SCOPE OF APPLICATION 4.1 These guidelines cover the computation of capital ratios for banking institutions and bank holding companies.
5. DEFINITIONS 5.1 In this guideline, (a) “bank” has the same meaning as in the Banking Act; (b) “Bank holding company” refers to a body corporate that owns or controls at least two financial institutions one of which is a bank, being its subsidiary or significant minority investment or interest. (c) “Common Equity Tier 1 Capital Adequacy Ratio” means the ratio of a bank's Common Equity Tier 1 capital (CET1) to its total risk-weighted assets (RWA)

4 (d) “Control” has the same meaning as prescribed in the Banking Act; (e) “Going-concern capital” means capital against which losses can be written off while a bank continues to operate or will absorb losses should the bank ultimately fail. (f) “Gone-concern capital” means capital that would not absorb losses until such time as a bank is wound up or the capital is otherwise written off or converted into ordinary shares. (g) Goodwill means an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. (h) Intangible asset means an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights. Separable assets can be sold, transferred, licensed, etc. (i) Related entity has the same meaning as ascribed in the Banking Act. (j) “Reporting bank” means a bank which is subject to the requirements of this guideline; (k) Total risk-weighted assets (Total RWA) mean Credit RWA plus Operational RWA plus Market RWA. PART II – CAPITAL FRAMEWORK 6. COMPONENTS OF CAPITAL 6.1 The total regulatory capital shall consist of the sum of the following two elements: (a) Tier 1 capital (going-concern capital), which comprises (i) Common Equity Tier 1 Capital (CET1) (ii) Additional Tier 1 Capital (AT1) (b) Tier 2 Capital (gone-concern capital)

5 6.2 For each of the three categories above, there is a set of criteria that the instruments are required to meet before they can be included in the relevant category. 7. LIMITS AND MINIMA 7.1 All elements shall be net of associated regulatory adjustments and subjected to the following restrictions at all times: (a) Common Equity Tier 1 must be at least 8.5 percent of risk-weighted assets; (b) Tier 1 capital must be at least 10.0 percent of risk-weighted assets; and (c) Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 15.0 percent of risk- weighted assets.

8. COMMON EQUITY TIER 1 8.1 CET 1 Elements 8.1.1 CET1 capital shall consist of the sum of the following elements: (a) Ordinary shares (paid-up equity capital) issued by the bank for classification as ordinary shares for regulatory capital purposes; (b) Share premium resulting from the issue of ordinary shares included in CET1; (c) Retained earnings after deducting any interim or final dividends that have been declared by the board of the bank or any banking group entity on any class of shares and any interim losses incurred since the end of the last financial reporting period; (d) Accumulated other comprehensive income and other disclosed reserves (general reserves), excluding revaluation surpluses on land and building assets; (e) 60.0 percent of after-tax profit (current year) and in case of a loss 100.0 percent. (f) Ordinary shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. minority interest) that meet the criteria for inclusion in CET1. This applies only on consolidated basis. Less regulatory adjustments (deductions) applied in the calculation of CET1.

6 8.2 Criteria for inclusion in CET1 Capital 6.4.2.1. An instrument shall satisfy all of the following criteria to be included in CET1 capital: (a) It represents the most subordinated claim in liquidation of the bank. (b) The holder of the instrument is entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (i.e. there is an unlimited and variable claim, not a fixed or capped claim). (c) The principal amount of the instrument is perpetual (i.e. it has no maturity date) and is never repaid outside of liquidation. This excludes discretionary repurchases or other means of reducing capital in a discretionary manner that is allowable under relevant law. (d) The bank does not 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. (e) Distributions are paid out of distributable items (including retained earnings). The level of distributions must not be tied or linked to the amount paid up 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). (f) There are no circumstances under which the distributions are obligatory. Non￾payment of distributions is not an event of default. (g) Distributions are paid only after all legal and contractual obligations have been met and after 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 Common Equity Tier 1 Capital. (h) The instrument takes the first and proportionately greatest share of any losses as they occur (in cases where capital instruments have a permanent write-off feature, this criterion is still deemed to be met by ordinary shares). Within Common Equity Tier 1 Capital, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the other instruments included in Common Equity Tier 1 Capital. (i) Only the paid-up amount of the instrument, irrevocably received by the issuer, is recognized as equity capital (i.e. it is not recognized as a liability) for determining balance sheet insolvency.

7 (j) The paid in amount is classified as equity under the applicable accounting standards. (k) The instrument is directly issued and paid-up and the bank cannot directly or indirectly have funded the purchase of the instrument. (l) The paid-up amount of the instrument 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. (m) The instrument is only issued with the approval of the owners of the issuing bank, either given directly by the owners or, if permitted by the law, given by the board of directors or by other persons duly authorized by the owners. (n) The instrument is clearly and separately disclosed on the bank’s balance sheet. 9. ADDITIONAL TIER 1 CAPITAL 9.1 AT1 Elements 9.1.1 Additional Tier 1 (AT1) capital shall consist of the sum of the following elements: (a) Instruments issued by the bank that meet the criteria for inclusion in Additional Tier 1 capital (and are not included in CET1); (b) Share premium resulting from the issue of instruments included in Additional Tier 1 capital (share premium that is not eligible for inclusion in Common Equity Tier 1, will only be permitted to be included in Additional Tier 1 capital if the shares giving rise to the share premium are permitted to be included in Additional Tier 1 capital); (c) Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Additional Tier 1 capital and are not included in Common Equity Tier 1 (this only applies on consolidated basis); (d) Less regulatory adjustments applied in the calculation of Additional Tier 1 Capital. 9.2 Criteria for inclusion in Additional Tier 1 capital 9.2.1 An instrument shall satisfy the following criteria to be included in Additional Tier 1 Capital.

8 (a) The instrument is issued and fully paid-up; (b) The instrument represents the most subordinated in liquidation of the bank after CET1 Capital instruments. The instrument is subordinated to depositors and general creditors of the bank and subordinated debt of the bank; (c) The paid-up amount of the instrument 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; (d) The instrument is perpetual, i.e. there is no maturity date, and there are no step-ups or other incentives to redeem; (e) The instrument may only be callable at the initiative of the issuer only after a minimum of five years from the issue date, subject to the following requirements: (i) A call option can be exercised only with the prior approval of the Registrar; (ii) The bank shall not create an expectation that the call option will be exercised; and (iii) The bank must not exercise a call option unless: a. the bank replaces 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 b. the bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised. (f) Any repayment of principal (e.g. through repurchase or redemption) can only be made with the prior approval of the Registrar and banks should not assume or create market expectations that supervisory approval will be given; (g) With regard to dividend or coupon on the capital instrument: (i) the bank must have full discretion at all times to cancel distributions/payments. Any waived distributions are non-cumulative (i.e. are not required to be honored by the issuer at a later date). The instrument must not provide for payment of a higher dividend or interest rate if dividend or interest payments are not made on time; (ii) cancellation of discretionary payments by the bank must not be considered as an event of default;

9 (iii) the bank must have full access to cancelled payments to meet obligations as they fall due; (iv) the bank must ensure that cancellation of distributions/payments does not impose restrictions on the bank except in relation to distributions to ordinary shareholders. (h) Dividends/coupons on the instrument shall be paid out of distributable items; (i) 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 credit standing of the bank or the group or any other member of the group to which it belongs; (j) The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of any applicable insolvency law governing the provisions of the capital instrument; (k) Where the instrument is classified as a liability for accounting purposes, it must have principal loss absorption through either (i) conversion to ordinary shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the following effects: (i) It reduces the claim of the instrument in liquidation; (ii) It reduces the amount repaid when a call option is exercised; and (iii) It partially or fully reduces coupon/dividend payments on the instrument. (l) Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument; (m) 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; and

10 (n) 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 Additional Tier 1 capital; 10. TIER 2 CAPITAL 10.1 T2 Elements 10.1.1 Tier 2 Capital includes other components of capital that, to varying degrees, fall short of the quality of Tier 1 Capital but nonetheless contribute to the overall strength of a bank and its capacity to absorb losses. 10.1.2 Tier 2 capital consists of the sum of the following elements: (a) Eligible subordinated debt (limited to 50% of Tier 1 capital) (b) General loan-loss reserves which are held against future, presently unidentified losses and are freely available to meet losses which subsequently materialize, subject to a maximum of 1.25 percentage points of credit risk-weighted assets calculated under the standardized approach. (c) Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tier 1 capital); (d) Less regulatory adjustments applied in the calculation of Tier 2 Capital. 10.2 Criteria for inclusion in Tier 2 Capital 10.2.1 An instrument shall meet the following minimum set of criteria in order for it to be included in Tier 2 capital; (a) The instrument should be issued by the bank and fully paid-up. (b) The instrument represents the most subordinated claim in liquidation of the issuer after Common Equity Tier 1 and Additional Tier 1 capital instruments;

11 (c) The paid-up amount of the instrument 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; (d) The instrument must have a minimum original maturity of at least five years and there are no step-ups or other incentives to redeem; (e) The amount of the instrument that will be eligible for inclusion in Tier 2 capital shall be amortized or discounted by a cumulative factor of 20.0 percent per year during the last five years to maturity. (f) The instrument may be callable at the initiative of the issuer only after a minimum of five years from the issue date, subject to the following requirements: (i) A call option can be exercised only with the prior approval of the Registrar; (ii) The bank shall not do anything which creates an expectation that the call will be exercised; and (iii) The bank shall not exercise a call unless: a. The bank replaces 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 b. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised; (g) The instrument shall confer no rights on holders to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation; (h) Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument; and (i) 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 (this only applies on a consolidated basis).

12 11. TREATMENT OF MINORITY INTEREST (I.E. NON-CONTROLLING INTEREST) AND OTHER CAPITAL ISSUED OUT OF CONSOLIDATED SUBSIDIARIES THAT IS HELD BY THIRD PARTIES 11.1 Ordinary shares issued by consolidated subsidiaries 11.1.1 Minority interest arising from the issue of ordinary shares by a fully consolidated subsidiary of the bank may receive recognition in Common Equity Tier 1 only if: (a) the instrument giving rise to the minority interest would, if issued by the bank, meet all of the criteria for classification as ordinary shares for regulatory capital purposes; and (b) the subsidiary that issued the instrument is itself a bank. 11.2 Tier 1 qualifying capital issued by consolidated subsidiaries 11.2.1 Tier 1 capital instruments issued by a fully consolidated subsidiary of the bank to third party investors shall 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. 11.3 Special Purpose Vehicle 11.3.1 Where capital has been issued to third parties out of a special purpose vehicle (SPV), none of this capital can be included in Common Equity Tier 1. However, such capital can be included in consolidated Additional Tier 1 and treated as if the bank itself had issued the capital directly to the third parties only if it meets all the relevant entry criteria and 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. 11.3.2 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 Additional Tier 1 capital. PART III – REGULATORY ADJUSTMENTS 12. REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 CAPITAL

13 A bank shall make the following regulatory adjustments to determine Common Equity Tier 1 capital at the solo or group level. Assets deducted from Common Equity Tier 1 capital should not be included in risk-weighted assets. 12.1 Goodwill and other intangibles 12.1.1 Deduct goodwill and all other intangibles including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation. However, this treatment excludes intangible assets associated with systems software and licenses that are less than eight (8) years. The full amount is to be deducted net of any associated deferred tax liability which will be extinguished if the intangible assets become impaired or derecognized under the relevant accounting standards. 12.2 Deferred tax assets 12.2.1 Deduct deferred tax assets (DTAs) that rely on future profitability of the bank. DTAs may be netted with associated deferred tax liabilities(DTLs) prior to being deducted in the calculation of Common Equity Tier 1 Capital. The DTLs permitted to be netted against DTAs shall exclude amounts that have been netted against the deduction of goodwill, intangible assets and defined benefit pension assets. In the event that deferred tax liabilities exceed the amount of deferred tax assets, the excess cannot be added to Common Equity Tier 1 Capital (i.e. the net deduction is zero). 12.2.2 DTAs arising from any other source will be required to be deducted from Common Equity Tier 1 as a prudent measure. 12.3 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation 12.3.1Deduct direct, indirect and synthetic holdings of Common Equity Tier 1 Capital instruments in financial entities. These are also known as investments in unconsolidated subsidiaries. This includes: (a) holdings of Common Equity Tier 1 Capital instruments held in the banking book; and (b) the net long positions in Common Equity Tier 1 Capital instruments held in the trading book. 12.4 Treatment of underwriting positions

14 12.4.1 Deduct underwriting positions in Common Equity Tier 1 Capital instruments held for longer than twenty-one working days. 12.4.2 where the total of the underwritten position above exceeds 20.0 percent of the bank’s common equity tier 1 capital (after applying all other relevant regulatory adjustments in full) then the amount above 20.0 percent is to be deducted, applying a corresponding deduction approach. 12.4.3 The corresponding deduction approach requires the amount above 20.0 percent to be multiplied by the ratio of Common Equity Tier 1 capital to Total Capital (sum of Tier 1 and Tier 2); and then the resultant deducted from Common Equity Tier 1 Capital. 12.4.4 The amount of the underwritten position that does not exceed the 20% threshold calculated in accordance with the paragraph 6.9.4.3 above shall be risk- weighted according to the banking and trading book rules. 12.5 Other adjustments 12.5.1 Where a bank acquires commercial entities in lieu of repayment of credit and upon receipt of an approval from the Registrar, the investment shall be risk weighted at 1250.0 percent. 13. REGULATORY ADJUSTMENTS APPLIED TO ADDITIONAL TIER 1 CAPITAL A bank shall apply the following regulatory adjustments in the calculation of its Additional Tier 1 Capital at the solo or group level, as the case may be: 13.1 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation 13.1.1 Deduct direct, indirect and synthetic holdings of Additional Tier 1 Capital instruments in financial entities. These are also known as investments in unconsolidated subsidiaries. This includes: (a) holdings of Additional Tier 1 Capital instruments held in the banking book; and (b) the net long positions in Additional Tier 1 Capital instruments held in the trading book. 13.2 Treatment in underwriting positions

15 13.2.1 These comprise: (a) underwriting positions in Additional Tier 1 Capital instruments held for more than twenty-one working days. (b) the amount of such capital investments to be deducted in the calculation of Additional Tier 1 Capital shall be in accordance with section 9.2 above. 14. REGULATORY ADJUSTMENTS APPLIED TO TIER 2 CAPITAL A reporting bank shall apply the following deductions in the calculation of its Tier 2 Capital at solo or group level, as the case may be. 14.1 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation 14.1.1 Deduct direct, indirect and synthetic holdings of Tier 2 Capital instruments in financial entities. These are also known as investments in unconsolidated subsidiaries. This includes: (a) holdings of Tier 2 Capital instruments held in the banking book; and (b) the net long positions in Tier 2 Capital instruments held in the trading book. 14.2 Treatment of underwriting positions 14.2.1These comprise

(a) underwriting positions in Tier 2 Capital instruments held for more than twenty-one working days. (b) the amount of such capital investments to be deducted in the calculation of Tier 2 Capital shall be in accordance with section 6.6 above. 15. GENERAL RULES FOR REGULATORY ADJUSTMENTS 15.1 For the purposes of regulatory adjustments to Additional Tier 1 Capital and Tier 2 Capital:

16 (a) where the amount of Additional Tier 1 Capital is insufficient to cover the amount of deductions required to be made from this category of capital, the shortfall must be deducted from Common Equity Tier 1 Capital; and (b) where the amount of Tier 2 Capital is insufficient to cover the amount of deductions required to be made from this category of capital, the shortfall must be deducted from Additional Tier 1 Capital and, if Additional Tier 1 Capital is insufficient to cover the amount of the deductions required, the remaining amount must be deducted from Common Equity Tier 1 Capital. PART IV: DISCLOSURE REQUIREMENTS 16.1 Banks shall disclose the following in order to improve transparency of regulatory capital and improve market discipline (a) a description of the main features of capital instruments issued and resultant prudential ratios. (b) a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements; (c) separate disclosure of all regulatory adjustments and the items not deducted from Common Equity Tier 1; and (d) a description of all limits and minima, identifying the positive and negative elements of capital to which the limits and minima apply. 16.2 Banks shall submit the above disclosures to the Registrar and make the same available on their websites in accordance to the Financial Services (Disclosure of Information by Banks) Directive.

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