COMMISSION BANCAIRE DE L'AFRIQUE CENTRALE

COBAC REGULATION R-2016/03 ON THE NET OWN FUNDS OF CREDIT INSTITUTIONS

The Central African Banking Commission,

Having regard to the Convention of October 16, 1990 establishing the Central African Banking Commission and its Annex;

Having regard to the Convention of January 17, 1992 on the harmonization of banking regulation in the States of Central Africa and its Annex;

Having regard to Article 31 of the Convention governing the Monetary Union of Central Africa of June 25, 2008, revising that of July 5, 1996;

Having regard to Regulation No. 04/CEMAC/UMAC/CM of October 2, 2012 establishing the Financial Stability Committee in Central Africa;

Having regard to Regulation No. 02/14/CEMAC/UMAC/COBAC/CM of April 25, 2014 on the treatment of credit institutions in difficulty in the Central African Economic and Monetary Community;

Having regard to Regulation No. 01/15/CEMAC/UMAC/COBAC/CM of March 27, 2015 on the supervision of financial holdings and cross-border surveillance;

Having regard to COBAC Regulation R-93/02 of April 19, 1993 on the net own funds of credit institutions, modified by COBAC Regulation R-2001/01 of May 7, 2001;

Having regard to COBAC Regulation R-2013/01 of September 17, 2013 supplementing COBAC Regulation R-93/02 of April 19, 1993 on the net own funds of credit institutions, modified by COBAC Regulation R-2001/01 of May 7, 2001;

Having regard to COBAC Regulation R-2014/01 of March 21, 2014 on the classification, accounting, and provisioning of credit institution claims;

Meeting in ordinary session on March 8, 2016 in Libreville,

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DECIDES:

CHAPTER 1: GENERAL PROVISIONS

Article 1

This Regulation sets out the procedures for determining the net own funds of credit institutions and their inclusion in the calculation of capital requirements.

Article 2

Net own funds consist of core capital and supplementary capital, less certain items, under the conditions set by this Regulation.

This Regulation applies both for the determination of net own funds on a solo basis and on a consolidated or combined basis.

Article 3

For the purposes of this Regulation, the following terms are defined as:

• Risk-weighted credit assets: the amount of credit risks weighted in accordance with COBAC Regulation R-2010/01 on risk coverage by credit institutions;

• Equity: the aggregate of share capital, reserves other than revaluation reserves, capital premiums, retained earnings (credit balance), and any other instrument meeting all criteria set forth in Article 6 below.

• Special Purpose Vehicle (SPV): an entity created exclusively for the execution of a transaction or a series of financial transactions;

• Operating entity: any entity created to conduct activities with customers with the intention of generating profit for itself;

• Deferred tax: the amount of recoverable tax (deferred tax asset) or payable tax (deferred tax liability) on profits in future periods. It arises notably from temporary differences between the accounting recognition of an expense or income and its effective inclusion in the fiscal result of a subsequent period, from carry-forward tax losses, carry-forward tax credits, differences between the book value of an asset or liability and the value assigned by the tax authority, entries recorded only in consolidated accounts or reporting (consolidation adjustments, elimination of internal transactions);

• Related party: an entity or person related to the credit institution subject to the provisions of Article 28 of COBAC Regulation R-2014/01 on the classification, accounting, and provisioning of credit institution claims;

• General banking risk provisions: amounts that approved management bodies, as defined in Title II of the Annex to the Convention of January 17, 1992, decide to allocate to cover such risks when prudential reasons require it, given the risks inherent in banking operations;

• Net risk-weighted amounts: amounts of risks borne by a credit institution and calculated in accordance with the provisions of COBAC Regulation R-2010/01 on risk coverage;

• Capital conservation buffer: the margin between the minimum requirement resulting from it and the normal threshold. Distribution constraints are set when the level of core capital places the institution within the capital conservation buffer.

CHAPTER 2: CORE CAPITAL

Article 4

The core capital of the credit institution aims to ensure the continuity of its operations. It consists of equity and other elements listed in Article 5 of this Regulation, less the items listed in Article 8.

Article 5

Core capital must meet the inclusion criteria defined respectively in Article 6 for equity and in Article 7 for other core capital elements of this Regulation. It includes:

• equity, comprising:

  • share capital;
  • capital premiums;
  • reserves other than revaluation reserves;
  • consolidated reserves;
  • retained earnings when in credit (undistributed profits);
  • any other instrument meeting all criteria set forth in Article 6 below, subject to prior authorization from the COBAC Secretary-General;

• other core capital elements, comprising:

  • financing and guarantee funds actually received and definitively acquired, consisting of own resources from the allocation of results, external donations, or parafiscal taxes;
  • the result of the last closed fiscal year, approved by the board of directors and having received an unqualified audit opinion, pending its allocation, less the amount of dividends to be distributed that the board of directors has decided to propose for approval by the general meeting of shareholders;
  • the equity of consolidated subsidiaries of the credit institution held by third parties (minority interests) under the conditions set forth in Article 17 below;
  • any other instrument meeting all inclusion criteria set forth in Article 7 below, subject to prior authorization from the COBAC Secretary-General.

Capital is considered, in addition to the share capital of subject institutions constituted as commercial companies, the sums that represent it or are assimilated to it, in accordance with current legislation, in the accounting of institutions governed by a special status, notably definitively acquired endowments or fixed or variable capital represented by effectively paid-up partnership shares or cooperative investment certificates.

Article 6

Sums admitted as equity must respect all the following inclusion criteria:

• they are the most subordinated claim in the liquidation of the credit institution;

• they are a claim on residual assets proportional to the share of capital issued, after all senior claims have been repaid, in the event of liquidation (in other words, it is an unlimited and variable claim, not fixed or capped);

• the principal has an indefinite duration and is never repaid outside of liquidation (except in cases of discretionary buyback or other means of substantially reducing capital at the discretion of the institution within the limits permitted by applicable legislation);

• the credit institution does not give any reason to expect, at the time of issuance, that the liability element will be bought back, repaid, or cancelled, and the statutory or contractual provisions do not include any clause that could give rise to such an expectation;

• payments (including undistributed profits) are made by drawing from distributable profits. The level of payments is in no way linked or associated with the amount paid at issuance and is not subject to a contractual cap (except to the extent that a credit institution can only make payments up to the amount of distributable profits);

• the distribution of profits is in no case mandatory. Their non-payment therefore does not constitute a default event;

• payments are only made once all legal and contractual obligations have been honored, and payments on senior capital elements have been made. This means there are no preferential payments, even for other elements classified in the highest quality capital;

• these are the issued equity that absorb the first – and, proportionally, the largest share – of losses, if any, as soon as they occur. In the highest quality capital, each element absorbs losses to ensure operational continuity proportionally and pari passu with all others;

• the amount paid is recorded as equity (and not as debt) to cover insolvency risks;

• the amount paid is classified in equity in accordance with applicable accounting standards;

• the amount is issued directly and paid up, and the credit institution cannot have directly or indirectly financed its purchase;

• the amount paid is not backed by any security, nor by a guarantee from the issuer or a related entity, and is not subject to any device enhancing, in a legal or economic form, the rank of the claim;

• the issuance was made with the express agreement of the owners of the issuing credit institution, given either directly or, if applicable legislation permits, by the board of directors or by other persons duly authorized by the owners;

• the amount paid appears clearly and separately on the balance sheet of the credit institution.

Article 7

Other core capital elements must respect all the following inclusion criteria:

• the instrument is issued and paid up;

• the claim has a rank inferior to that of depositors and unsecured creditors, as well as to the subordinated debt of the credit institution;

• the amount paid is not backed by any security, nor by a guarantee from the issuer or another related entity, and is not subject to any device enhancing, in a legal or economic form, the rank of the claim relative to those of the credit institution's creditors;

• the element has an indefinite duration, meaning it has no maturity date and contains no coupon step-up or any other incentive for buyback;

• the capital element may include a redemption option at the issuer's initiative, but this can only be exercised after a minimum of 5 years. To exercise its buyback option, the credit institution must receive prior agreement from the COBAC Secretary-General. The institution must not give any impression that it will exercise its buyback option and must not exercise its buyback option, unless: (i) the institution replaces the bought-back instrument with capital of equal or higher quality and on viable terms based on its income, or (ii) it demonstrates that its capital position is well above its minimum requirement after exercising the buyback option;

• any repayment of principal (buyback or amortization) requires prior agreement from the COBAC Secretary-General;

• dividend/coupon payments must be entirely discretionary:

  • the credit institution must have full freedom to cancel payments at any time;
  • the cancellation of discretionary payments must not constitute a default event;
  • the credit institution must have full use of cancelled payments to meet its obligations at maturity;
  • the cancellation of payments must not impose restrictions on the credit institution, except regarding payments to equity holders;

• the payment of dividends/coupons must be charged to distributable profits;

• the element cannot contain a clause linking the dividend to credit risk, meaning the dividend/coupon cannot be redefined periodically, fully or partially, based on the credit rating of the institution;

• the element cannot show a liability exceeding assets if regulation determines that, in this case, the credit institution is insolvent;

• elements designated as liabilities for accounting purposes must have loss absorption capacity, in principal, through either (i) their conversion into equity at a predefined threshold level, or (ii) a write-down mechanism that allocates losses to the capital element at a predefined threshold level. The write-down will have the following effects:

  • reduction of the claim represented by the element, in the event of liquidation;
  • reduction of the amount repaid, in the event of exercising an option;
  • partial or full reduction of the dividend/coupon payment on the capital element;

• the instrument cannot have been purchased by the credit institution, nor by a related party over which the credit institution exercises control or significant influence, and the credit institution cannot have directly or indirectly financed the purchase of the instrument;

• the instrument cannot present characteristics detrimental to recapitalization, such as provisions requiring the issuer to compensate investors if a new instrument is issued at a lower price during a specified period;

• if the capital element is not issued by an operating entity or the holding company of the consolidated group (by an ad hoc structure, or SPV – Special Purpose Vehicle, for example), the proceeds of the placement must be immediately and unlimitedly available to an operating entity or the holding company of the consolidated group in such a way that all other inclusion criteria in other core capital elements are met or exceeded.

Article 8

Items to be deducted (non-values) from core capital include:

a) to be deducted from equity:

• the unpaid portion of capital;

• treasury shares held, valued at their book value;

• retained earnings when in debit;

• pending losses awaiting approval;

• dividends to be distributed relating to prior profits;

• goodwill appearing as an asset in consolidated accounts;

• deferred tax assets that depend on the future profitability of the credit institution.

b) to be deducted from other core capital elements:

• interim results when in deficit;
• net intangible assets and fixed assets less amortization and provisions;
• additional provisions to be made for depreciation or non-recovery risks of assets or for various losses and charges.

CHAPTER 3: SUPPLEMENTARY CAPITAL

Article 9

The supplementary capital of the credit institution aims to absorb losses in the event of liquidation. It notably includes:

a) revaluation reserves, subject to their certification by auditors;

b) special provisions and regulated reserves;

c) definitively acquired investment grants;

d) general banking risk provisions net of foreseeable tax, excluding any provision allocated to cover defined, probable, or certain charges or risks;

e) general provisions for credit risk coverage constituted in accordance with COBAC Regulation R-2014/01 net of foreseeable tax, excluding provisions constituted to cover the observed deterioration of specific assets or known liabilities, taken individually or collectively;

f) profit determined at interim dates, provided:

• it is determined after accounting for all charges related to the period and provisions for amortization and depreciation;
• it is calculated net of foreseeable tax and advance dividends or dividend forecasts under the conditions set forth in Article 5;
• it is certified by auditors;

g) the hidden reserve that appears in the financial accounting of credit lease or lease-purchase operations, provided their amount has been verified by auditors;

h) grants other than those definitively acquired meeting the conditions set forth in Article 10 below;

i) funds from partners' accounts, loans, or the issuance of securities, which meet the provisions of Article 10 below and the following conditions:

• they can only be repaid at the initiative of the borrower and with prior agreement from the COBAC Secretary-General;
• the issuance or loan contract gives the subject institution the option to defer interest payments;
• the issuance or loan contract provides that the debt and unpaid interest allow for loss absorption, enabling the subject institution to continue its activity;

j) funds from the issuance of securities or subordinated loans that meet the conditions set forth in Article 10 below and for which, if no initial duration and no maturity are set, the debt can only be repaid with five years' notice, unless it has ceased to be considered capital with prior agreement from the COBAC Secretary-General.

Article 10

Items to be included in supplementary capital must comply with the following conditions:

• the instrument is issued and paid up. In all cases, only amounts actually received are taken into account;

• the sums derived from the element can be freely used by the credit institution to cover risks normally associated with the exercise of banking activity, when losses or impairments have not yet been identified;

• the element appears in the institution's accounting;

• the claim has a rank inferior to that of depositors and unsecured creditors of the credit institution;

• the paid-up capital is not backed by any security, nor by a guarantee from the issuer or another related entity, and is not subject to any device enhancing, in a legal or economic form, the rank of the claim relative to those of depositors and unsecured creditors of the credit institution;

• the element has an initial duration of five (5) years minimum;

• its inclusion in regulatory capital during the five years preceding maturity is carried out on the basis of linear amortization;

• the element contains no coupon step-up or any other incentive for buyback;

• the element may include an early redemption option at the issuer's initiative, but this can only be exercised after a minimum of five (5) years under the following conditions: (i) to exercise its buyback option, the credit institution must receive prior agreement from the COBAC Secretary-General and (ii) the credit institution must not give the impression that it will exercise its buyback option. In the latter case, a buyback option for the element at a horizon of five (5) years, but before the start of the repayment period, will not be considered a redemption incentive clause as long as the credit institution does nothing that could give the impression that the option will be exercised at such a time;

• the credit institution must not exercise its buyback option unless: (i) it replaces the bought-back element with capital of equal or higher quality and on viable terms based on its income, or (ii) it demonstrates that its capital position is well above its minimum requirement after exercising the buyback option;

• the credit institution must not have the right to make advance payments of scheduled payments (coupon or principal), except in the event of bankruptcy and liquidation;

• the element cannot contain a clause linking the dividend to credit risk, meaning the dividend/coupon cannot be redefined periodically, fully or partially, based on the credit rating of the credit institution;

• the element cannot have been purchased by the credit institution, nor by a related party over which the credit institution exercises control or significant influence, and the credit institution cannot have directly or indirectly financed the purchase of the element;

• if the element is not issued by an operating entity or the holding company of the consolidated group (by an ad hoc structure, or SPV in particular), the proceeds of the placement must be immediately and unlimitedly available to an operating entity or the holding company of the consolidated group, in such a way that all other inclusion criteria in supplementary capital are met or exceeded.

CHAPTER 4: DEDUCTIBLE ITEMS

Article 11

Holdings and portfolio activity securities held in subject credit or microfinance institutions or foreign institutions, as well as participatory loans and subordinated loans to said institutions, and any other amount constituting the capital of other credit or microfinance institutions, are deducted from the sum of core capital and supplementary capital.

Holdings and portfolio activity securities are defined in the sense of COBAC Regulation R-2003/03 on the accounting and prudential treatment of securities transactions carried out by credit institutions.

Also deducted from the total of core capital and supplementary capital are holdings and portfolio activity securities held in insurance and reinsurance companies, participatory loans and subordinated loans to said companies, and any other amount constituting their capital.

An instruction from the President of COBAC defines, if necessary, the treatment reserved for the credit institution's holdings in other credit or microfinance institutions and in insurance companies that fall outside the scope of regulatory consolidation.

Article 12

When they exceed 5% of the amount of net own funds, net exposures held, directly or indirectly, by a credit institution on a related party are deducted from the amount of net own funds.

Article 13

In the event of exceeding the limits set on a credit institution's holdings in the capital of enterprises, the amount of the excess is subtracted from the amount of its own funds.