Chapter 3.1 Financial Leverage

In the context of the Central Bank of Egypt's keenness to apply the best global practices in the Egyptian banking sector, and given the importance of strengthening the foundations of the banking system, it has been decided to implement the Basel III financial leverage ratio, which was agreed upon by the Basel Committee on Banking Supervision in July 2014, as a supplementary measure to the risk-weighted capital adequacy ratio, but without replacing it as a risk measure. Accordingly, the following supervisory actions for the financial leverage ratio are to be implemented during the period not exceeding the quarter ending June 2017, at the latest, given that the period for implementing the rules is for the banks to be announced in the light of the possibility of their implementation in accordance with the Basel III framework for capital adequacy by April 2018, as a supervisory measure to reflect the relationship between the bank's capital and its assets (after adjusting for risk measures such that the ratio is not less than 3%), as follows:

1. Scope of Application

• These actions apply to all general banks in the Arab Republic of Egypt, including the excluded bank, along with the supervisory actions issued in December 2012 regarding the framework for capital adequacy in the context of Basel III.

• Banks must maintain a financial leverage ratio of not less than 3%, which reflects the adequacy of the bank's Tier 1 capital (after deductions) relative to its assets after adjusting for risk measures, as follows:

Financial Leverage Ratio = Tier 1 Capital after Deductions / Unweighted On and Off-Balance Sheet Assets ≤ 3%

• Banks must apply the financial leverage ratio of not less than 3% during the quarter preceding the quarter of the bank with the leverage ratio. The focus during any period is on the bank's monthly financial leverage ratio (see Appendix No. 2).

• Banks must disclose the financial leverage ratio monthly in the notes to their financial statements.

2. Components of the Ratio

2/1 Numerator Components

The numerator of the ratio is the Tier 1 capital (after deductions) used in the numerator of the capital adequacy ratio for the Central Bank of Egypt's actions mentioned with the asterisk.

2/2 Denominator Components

The denominator of the ratio consists of all the bank's assets, on and off-balance sheet, with the following financial exposures:

1. 2/2/1 Bank exposures on-balance sheet after deducting some components of the Tier 1 capital deductions as specified in item 2.
2. 2/2/2 Exposures resulting from derivative contracts.
3. 2/2/3 Exposures resulting from securities financing transactions.
4. 2/2/4 Off-balance sheet exposures.

Banks must treat the aforementioned exposures as follows:

2/2/1 Bank exposures on-balance sheet after deducting some Tier 1 capital deductions:

All on-balance sheet assets are included in the denominator of the financial leverage ratio, except for:

• Cash and cash equivalents deposited on-balance sheet with securities financing transactions, which are included in the denominator of exposures resulting from securities financing transactions.
• With the following considerations:
  • On-balance sheet assets are included in the net asset denominator after deducting specific impairment allowances for loans and advances, provided that this is taken into account in the numerator in accordance with the maximum impairment allowances known.
  • Credit risk mitigation techniques such as guarantees and sufficient collateral are not deducted from on-balance sheet assets.
  • No netting is performed with liquid collateral.

2/2/2 Exposures resulting from derivative contracts:

Derivative exposures resulting from cash settlement (net settlement exposures resulting from counterparty risk through netting agreements) and the current replacement cost (RC) for those exposures, plus the future potential exposure (PFE) for them, are calculated as follows:

Exposure Measurement = Replacement Cost (RC) + Future Potential Exposure (PFE)

Where:

• Replacement Cost (RC): Represents the cost incurred by the bank if the counterparty defaults, i.e., the amount that cannot be recovered from the counterparty.
• Future Potential Exposure (PFE): Represents the product of the probability of default (PD) and the exposure at default (EAD) according to the following table:

Remaining Period Until Maturity	Interest Rate Contracts	Foreign Exchange Contracts	Equity Contracts
Less than 1 year	1%	1%	0%
More than 1 year and less than 5 years	0.5%	0.5%	0%
More than 5 years and less than 7.5 years	1.5%	1.5%	0%
More than 7.5 years	5%	5%	0%

2/2/3 Exposures resulting from securities financing transactions:

Exposures resulting from securities financing transactions include any exposures resulting from:

• Margin lending.
• Securities lending.
• Repurchase transactions with a commitment to repurchase.

Banks must measure the exposure for each type of transaction as follows:

First: If the Bank is a Principal in the Securities Financing Transaction

a- The total exposures reported in the bank's assets resulting from the transaction, taking into account:

• Securities financing transactions where the bank has the right to sell or re-pledge the securities in the event of default of the counterparty, or in the event of bankruptcy or insolvency of the counterparty, or if there is a contractual agreement between the parties to sell or re-pledge the securities to cover the shortfall in value between the collateral and the transaction amount at the end of the transaction period.

b- Counterparty risk value: It is calculated by taking into account the Future Potential Exposure (PFE) between the difference in the global value of the securities and the global value of the cash or securities lent to the same counterparty for each transaction.

Second: If the Bank is an Agent and Guarantor in Securities Financing Transactions

In this case, the exposure arising from these transactions is measured by taking the difference between the global value of the securities and the value guaranteed by the bank to the other party, minus the global value of the securities and the value guaranteed by the other party.

2/2/4 Off-balance sheet exposures:

Off-balance sheet items that include commitments subject to cancellation, such as letters of credit, standby letters of credit, guarantees, etc., are included in the financial leverage ratio denominator by applying the conversion factors for off-balance sheet items specified in Appendix No. 1.

Off-balance sheet items are included net of specific impairment allowances for loans and advances and guarantees.

Appendix No. 1

Item	Conversion Factor (CCF)
A- Commitments
- Short-term self-liquidating trade letters of credit	20%
- Trade letters of credit	20%
- Guarantees for construction contracts	50%
- Guarantees for performance bonds	50%
- Letters of credit	100%
- Lease contracts	100%
- All other commitments	100%
B- Contingencies
- Financial guarantees	100%
- Guarantees for loans	100%
- Guarantees for construction contracts	100%
- Guarantees for bonds/notes (part after maturity)	100%
C- Cancellation Clauses
a. With immediate effect without notice:
1. 50%
2. 20%
b. With notice period not exceeding 30 days:
10%

For the earliest date of the commitment, the period of the commitment is taken into account.

Appendix No. 2 Financial Leverage Ratio Model

Item	Total	Tier 1 Capital after Deductions	Total On and Off-Balance Sheet Exposures
1. Total On-Balance Sheet Exposures and Securities Financing Transactions	0	1	0
1.1 On-Balance Sheet Exposures after Deducting Some Tier 1 Deductions	1.1	0	0
1.1.1 Exposures to the Central Bank of Egypt	1.1.1	0	0
1.1.2 Receivables from Banks	0	0	0
Cash and Cash Equivalents	0	0	0
Other Assets

Note: The provided text ends abruptly in the middle of Appendix No. 2.

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