Chapter Eight: Controls and Limits on the Concentration of Investments of Banks Registered with the Central Bank of Egypt in Countries and Financial Institutions and Financial Groups Abroad

The Board of Directors of the Central Bank of Egypt, in its session held on January 4, 2011, issued Decision No. 1 regarding the determination of limits on the concentration of investments of banks registered with the Central Bank of Egypt in countries, financial institutions, and financial groups abroad. The decision was issued based on Decision No. 102 dated May 29, 2011.

First: Controls and Limits on the Concentration of Investments of Banks Registered with the Central Bank of Egypt in Countries and Financial Institutions and Financial Groups Abroad

The following definitions apply to the concepts accompanying each:

1. Total Investments in the Country:

   • Total exposures to financial institutions, whether the institution is a bank or not, engaged in financial activities.
   • Investments in treasury bills and bonds issued by the country's government.
   • Loans granted to individuals by financial institutions other than banks in a currency other than the country's currency.
   • Foreign trade liabilities other than trade liabilities with a maturity of more than one year, excluding those issued by the government of the same country.
   • Exposures in financial derivatives, represented by the replacement cost, as a percentage of the contractual value, which varies according to Table No. (3) based on the remaining term of the contract, ranging between zero and 7.5% for any other percentage of the investment.

   Exclusions from the above definition:

   1. Investments excluding investments in treasury bills and bonds issued by the government of the currency.
   2. Loans granted to individuals by financial institutions other than banks in a currency other than the country's currency, excluding those issued by the government of the same country.
   3. Foreign trade liabilities other than trade liabilities with a maturity of more than one year, excluding those issued by the government of the same country.

2. Capital Base: Based on the concept of calculating the bank's capital adequacy ratio, as defined for the branch of the foreign bank.

3. Financial Group: Includes the bank itself, its branches, and the banks affiliated with it in the same country.

Each bank must have a specific strategy regarding investment in the country.

Country Limits: Divided into total investment limits and investment limits below, according to the following details:

1. Total Investment Limits

(a) Each bank sets a ceiling for total investments in each currency (Limit Country), taking into account the concentration limits in Table No. (1) below, based on classifying the country into seven groups according to the 2 rating levels of the investment strategy assigned by international rating agencies.

Note: Regardless of the rating, the country must be stable and secure.

Table No. (1)

Concentration Limit	Moody's Rating	S&P Rating	Fitch Rating	Group	Capital Base %
125%	Aaa	AAA		1	Investment Grade
100%	Aa	AA		2	Investment Grade
75%	A	A		3	Investment Grade
50%	Baa	BBB		4	Investment Grade
20%	Ba	BB		5	Non-Investment Grade
10%	B	B		6	Non-Investment Grade
5%	Unrated Countries	Unrated	Unrated	7	Non-Investment Grade

(b) In the event that the bank determines a ceiling for total investments in any currency that exceeds the concentration limit specified in the previous table, the excess must not exceed the value used from the ceiling by the bank, which increases the concentration limit mentioned, regardless of the investment, after obtaining prior approval from the Central Bank of Egypt for that. The excess limits for calculating the capital adequ ratio based on the difference in the rating of the investment currency are as follows:

• The excess limit must not exceed 150% for countries that have an investment grade.
• The excess limit must not exceed 200% for countries that do not have an investment grade.

In the event that the bank's rating does not exceed the concentration limit specified in Table No. (1) as a result of investments in the form of deposits in financial institutions for up to one year in countries such as Canada, France, Germany, the United States of America, and Britain, which have a AAA rating or treasury bills issued by these governments, the excess limit must not exceed 40% without obtaining prior approval from the Central Bank of Egypt to exceed the concentration limit.

The exception mentioned in this paragraph does not apply to the branch of the foreign bank, where the concentration limits mentioned in the previous Table No. (1) are the maximum limits for the total investments of the branch of the foreign bank.

(c) In the event that the country's total nominal GDP is 25 billion dollars, the total investments in the country must not exceed the concentration limit mentioned in Table No. (1) or 2% of the total nominal GDP of the concerned country, whichever is lower.

(d) Regarding Special Purpose Vehicles (SPVs), they are considered as the investment currency country.

(e) The following investments are excluded for the bank/branch of the foreign bank from the investments subject to this chapter:

• Investments denominated in foreign currency deposits with the same bank/branch of the foreign bank, taking into account the coverage of exchange rate risk with appropriate hedging instruments.
• Investments covered by guarantees issued by Multilateral Development Banks, provided that:
  a. The rating of the Multilateral Development Bank is at least AAA from two rating agencies. b. The total guarantees issued by the Multilateral Development Bank do not exceed 40% of the bank's capital base calculated for investments.

(f) Regarding the bank that has a branch in one of the countries abroad, the concentration limit for the country is increased by 25%.

2. High-Risk Investment Limits

(a) The bank/branch of the foreign bank must adhere to the limits specified in Table No. (2) below for high-risk investments:

High-Risk Investment Limits

Types of High-Risk Investments	Limits
a. Investments excluding investments in treasury bills and bonds issued by the government of the currency. Loans granted to individuals by financial institutions other than banks in a currency other than the country's currency, excluding those issued by the government of the same country.	The total of investments in items a, b, and c does not exceed 40% of the country concentration limit.
b. Foreign trade liabilities other than trade liabilities with a maturity of more than one year, excluding those issued by the government of the same country.	The total of investments in items a, b, and c does not exceed 40% of the country concentration limit.
c.	The total of investments in items a, b, and c for all countries does not exceed 100% of the bank's capital base.
d.	The total investments of the bank in items a, b, and c for all countries with investment grades does not exceed 20% of the bank's capital base.

Table No. (2)

(b) The excess between the high-risk investments and the limits specified in the previous table, excluding the bank that has a branch in one of the countries abroad, increases the limit for the country by 25%.

Financial Institution Limits:

Subject to country limits, the maximum limit for the bank/branch of the foreign bank's investments in financial institutions -in the concept of banks- abroad is 10% of total investments in banks abroad or 40% of the capital base, whichever is lower.

The investment of foreign bank branches operating in the Arab Republic of Egypt is excluded from this, as is the investment of Egyptian banks abroad in foreign banks owned by Egyptian banks.

Article (5) Financial Group Limits:

Subject to country limits, the maximum limit for the bank/branch of the foreign bank's investments in financial groups is 50% of the bank's capital base.

In the event that the parent bank issues an irrevocable guarantee to the local bank, committing the parent bank to pay upon the first demand by the local bank, based on the request of a project implementation entity in the Arab Republic of Egypt in exchange for the local bank issuing/strengthening a guarantee with the same conditions in favor of the project implementation entity in the Arab Republic of Egypt, an additional limit is determined at 50% of the bank's capital base (in addition to the previously determined limit for the bank group - 50%), reaching a maximum limit of 100% for the total limits of the bank's financial group, to accept these guarantees, provided that the parent bank has a rating of AA or better. The additional limit is reduced to 25% of the capital base (maximum 75% for the total limits of the bank's financial group) in the event that the parent bank has a rating of A.

Investment limits of the branch of the foreign bank in its headquarters and its financial group:

Subject to country limits, the branch of the foreign bank is allowed to invest in its headquarters and its branches in the same country up to 100% of the branch's capital base.

The bank maintains a margin of at least 10% of any limit used for it to face exchange rate fluctuations.

The Governor of the Central Bank of Egypt issues the decisions mentioned regarding the detailed procedures for implementing the limits in this decision.

The Executive Management of the Central Bank of Egypt is entrusted with approving any exceptions to the limits in this decision.

Article (10)

Banks must implement the limits in this decision starting from January 1, 2010, or proportionally if these limits were exceeded on that date, taking into account the gradual reduction of these excesses over a period of four years to the specified limits, with a maximum deadline of December 31, 2011.

Article (11)

The decisions of the Board of Directors of the Central Bank of Egypt in its sessions held on October 29, 1992, and August 25, 1994, regarding the concentration of bank investments abroad, are repealed, as well as anything that contradicts the provisions of this decision.

Banks submit reports titled "Investments in Financial Institutions (Banks and Financial Groups) - Form No. 730" monthly and "Investments in Countries Abroad - Form No. 720" quarterly at the end of the first week of the month following the end of the month/quarter.

Contractual Value Percentages for Financial Derivative Contracts Added to Replacement Cost

Table No. (3)

Remaining Period Until Maturity	Interest Rate Contracts	Foreign Exchange Contracts
One year or less	0%	1%
More than one year and up to 5 years	0.5%	5%
More than 5 years	1.5%	7.5%

Second: Detailed Rules and Procedures for Decision No. 102 of the Board of Directors of the Central Bank of Egypt in its session held on January 4, 2011, regarding controls and limits on the concentration of investments of banks registered with the Central Bank of Egypt in countries, financial institutions, and financial groups abroad

Based on the aforementioned decision, the following detailed procedures are issued, which banks registered with the Central Bank of Egypt must adhere to, based on the necessity of having an approved strategy from the competent authority regarding investments in countries, financial institutions, and financial groups, alongside detailed policies and work procedures consistent with that strategy:

Article One:

The following high-risk investments are excluded:
a. High-risk investments denominated in a currency different from the counterparty's currency, provided the country's rating is at least A.

b. Guarantees issued by foreign banks abroad, provided they are local guarantees or strengthen the counterparty's rating to at least A.

c. Direct investments resulting from export transactions with a maturity of one year or less.

Article Two:

The bank must comply with the Governor's decision by the remaining deadline for issuing the mentioned strategy.

Article Three: First: Paragraph (1)

1. The bank determines the investment ceiling for each currency according to its strategy and detailed policies, taking into account the risks the bank wishes to absorb in each country, to determine a value that depends on many criteria, including:

   • The country's rating according to international rating agencies.
   • The size of the country's debt.
   • The bank's capital base.
   • The bank's total investments.
   • The bank's total assets.

2. The bank (including the branch of the foreign bank), in the event of its desire to determine a ceiling exceeding the concentration limit specified in Table (1) by decision, must submit a request to the Governor of Supervision once annually, explaining the increase in investments based on the bank's future strategy for that country, consistent with its strategy, and adhering to the conditions mentioned in paragraph (b)-1 of Article Three of the Board's decision.

We confirm that approval of the request does not result in an increase in high-risk investment limits as a percentage of the country concentration limit.

3. The competent authority for the bank must review the approved investment ceilings for the country at least once a year, with a mechanism to monitor the specified limits.

4. Banks must adhere to the excess limits mentioned in paragraph (b)-1 of Article Three to the value of the excess in investments in addition to the excess limits calculated based on the capital adequacy ratio according to the nature of each investment.

Regarding ratings from the four international rating agencies, the following is considered:

• The second rating is considered in the event of more than two ratings.
• The most conservative rating is considered in the event of a difference in rating between two rating agencies.
• A country is considered rated if Moody's, S&P, or Fitch issues a rating; otherwise, the country is considered unrated.

The ratings determined for the country should be updated regularly, and ratings older than six months are not considered.

5. In the event of a downgrade in the rating of any country that causes the concentration limit to be exceeded, the bank must comply with the Governor's decision with a specific deadline to implement the rules.

6. Banks use the Nominal GDP to calculate the concentration limit for countries with a total nominal GDP of 25 billion dollars.

Second: Paragraph (2):

• Unused portions of the limit allocated for high-risk investments in the country (up to 40%) can be directed to investments in the lowest risk limits, and vice versa, without increasing the concentration limit determined for the country.

• Regarding managed accounts by third parties that invest their funds abroad in investment funds established abroad or in Egypt, their funds invested abroad are treated as follows:

  • In the event of the possibility of determining the country in which the investment is made, the value of each investment is recorded according to the investment currency.
  • In the event that it is not possible to determine the country in which the investment is made, the value of the investment is recorded as high-risk investments for the country with investment grades up to 20% of the bank's capital base.

Article Four:

In the event of using the additional limit mentioned in the second paragraph of Article Five of the decision, investments in the parent bank that are subject to the limits of the financial institution can be excluded.

Article Five:

The branch of the foreign bank is excluded from the concept of the local bank in the second paragraph of Article Five of the decision.

Article Ten:

Banks must comply with the Governor's decision regarding the concentration of investments in the second half of 2011, with a gap between monthly concentration limits for countries, financial institutions, and financial groups.

Continuing compliance with the Governor's decision regarding monthly reports on the concentration of bank investments abroad according to the attached forms until the end of January 2011, after which they are repealed starting from February 1, 2011.

Third: Special Cases for Implementing the Decision

Case	Treatment Method with Attached Forms
Case A: Unrated Counterparties	Investments are recorded according to the country (currency) of the counterparty.
Case B: Rated Counterparties	Investments are recorded according to the country of the counterparty.
Case C: Other Cases	Investments are recorded according to the nature of the investment.

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