Central Bank of Libya Circular 11/2022: Instructions for Calculating Capital Adequacy

Central Bank of Libya P.O. Box 11103, Telegram Address: LibyaBank - Tripoli, Libya

Reference Number / R M N ( ) Circular No. (2022/11) Date: 10 Rabi' al-Awwal 1444 AH Corresponding to: 06 October 2022

To: Presidents of the Boards of Directors of Commercial Banks To: General Managers of Commercial Banks

Subject: Circular on Instructions for Calculating Capital Adequacy

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Based on the provisions of Law No. (1) of 2005 concerning Banks, Article 83, and in accordance with the proposals of the Basel Committee on Banking Supervision regarding the measurement of capital adequacy and the inclusion of market and operational risks, and in harmony with the Basel II proposals concerning the capital adequacy of commercial banks.

And with reference to Circular No. (96/17) dated 22/8/1996, concerning capital adequacy, Therefore, we attach herewith the instructions for calculating capital adequacy, in accordance with the requirements of the Basel Committee on Banking Supervision II, for implementation within the jurisdiction of the unit implementing the instructions of the Basel Committee on Banking Supervision referred to in Circular R M N (2022/7), and with our approval of the results reached.

Peace be upon you...

Naji Mohammed Issa Director of the Banking and Currency Supervision Department

Copy to:

• Mr. / The Custodian
• Mr. / Deputy Director of the Banking and Currency Supervision Department
• Mr. / Deputy Director of the Banking and Currency Supervision Department for Office Supervision and Compliance Monitoring
• Mr. / Deputy Director of the Banking and Currency Supervision Department for Inspection
• Mr. / Deputy Director of the Banking and Currency Supervision Department for Islamic Banking Affairs
• The Directors of Risk Departments in Banks
• The Directors of Compliance Departments in Banks (Follow-up)

Basel Instructions www.cbl.gov.ly , swift code:CBLJLYLX , Fax: +218 21 444 1488 , Phone: +218 21 333 3591

Form No. 1 Calculation of Capital Adequacy Ratio

Current Period Capital Adequacy Ratio	Previous Period Capital Adequacy Ratio	Details
…………………………	…………………………	A - Net Capital: <br>1 - A Core Capital (according to Article 2) <br>2 - A Supplementary Capital (according to Article 2)
…………………………	…………………………	B - Represented Assets: <br>B - 1 Credit Risk and Other Asset Risks
…………………………	…………………………	C - Off-Balance Sheet Items:
…………………………	…………………………	D - Market Risk: <br>D - 1 Specific Interest Rate Risk <br>D - 2 General Interest Rate Risk: <br>D - 2 - 1 Yield less than 3% <br>D - 2 - 2 Yield more than 3% <br>D - 3 Market Risk for Trading Equity Positions <br>D - 4 Market Risk for Total Foreign Currency Position and Gold Position
…………………………	…………………………	E - Operational Risk
%	%	Capital Adequacy Ratio: A / (B + C + D + E)

Name and Signature of the Responsible Person Bank Approval

Form No. (1-1)

| | |
|---|---|
| A | - A - Liabilities arising from Credit Risk and Other Represented Asset Risks: Sum of Form No. (3) × 8% = |
| B | - B - Liabilities on Credit Risk Represented in Off-Balance Sheet: Sum of Form No. (4) × 8% = |
| C | - C - Total Liabilities on Credit Risk: Sum (A) + Sum (B) = |
| D | - D - Remaining Uncovered Credit Risk from Supplementary Capital: Total Liabilities on Credit Risk (Sum C above) - Supplementary Capital : |
| E | - E - Remaining Core Capital after deducting the balance of uncovered credit risk liabilities from supplementary capital |
| W | - W - 28.5% of Liabilities arising from Market Risk (Sum D from Form No. (1) × 28.5%) |
| Z | - Z - The balance of Paragraph (E) above must be at least equal to the balance of Paragraph (W) (W - E) greater than or equal to zero |

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Central Bank of Libya
Banking and Currency Supervision Department

Instructions for Calculating Capital Adequacy in accordance with the requirements of the Basel Committee on Banking Supervision II

Article (1):
In order to maintain sufficient and proportionate capital to the risks faced by each bank, its capital adequacy ratio must not fall below 12.5% at any time. This is calculated based on the consolidated financial statements of the general administration and branches in Libya and abroad, and the banks and institutions affiliated with them, provided that the amount of capital in no case is less than the amount of capital stipulated in Article (67) - "First" of Law No. (1) of 2005 concerning Banks and its amendments. Any bank whose capital adequacy ratio falls below 12.5% must immediately work to adjust its operations, limit its risks, or provide additional capital to strengthen this capital to reach the ratio stipulated in this Circular.

Article (2):
The capital adequacy ratio is defined as the result of dividing the Net Capital appearing in the numerator by the sum of the following elements appearing in the denominator:

1. Credit Risk and Asset Risks and Off-Balance Sheet Items represented by the risk weights specified in this Circular.
2. Market Risk, which includes:
   a. Interest Rate Risk for Fixed or Floating Rate Financial Instruments held for Trading, after weighting each instrument according to its risk degree.
   b. Market Risk for Trading Equity Positions.
   c. Market Risk for Total Foreign Currency Position and Gold Position.
3. Operational Risk.

Capital:
Net Capital of the Bank consists of Core Capital and Supplementary Capital:

- A - Core Capital consists of:
   - Subscribed Capital
   - Legal Reserve
   - Unallocated General Reserves
   - Other Reserves (except revaluation differences)

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Central Bank of Libya
Banking and Currency Supervision Department

- Capital under Settlement
- Share Premiums
- Other Provisions (not allocated to cover any risks or potential expenses)
- Retained Earnings

Net profits of the previous fiscal year not yet approved (provided they are approved by the external auditor) and not yet transferred to Reserves, after excluding distributable profits to shareholders from these profits.

Less:
- Net Intangible Assets
- Net Shares and Contributions in Banks and Financial Institutions
- Ordinary Shares of the Bank to be purchased
- Net Book Losses until the end of the period
- Unrealized Losses resulting from changes in the Fair Value of Investments
- Shortfall in Provisions for Non-Performing Loans estimated and not constituted by the Bank
- Shortfall in estimated Provisions for other assets and not constituted
- Amounts granted to major shareholders and Board members or used by them as a maximum.

- B - Supplementary Capital consists of the following elements:
1. Revaluation differences.
2. 50% of Unrealized Profits from changes in the Fair Value of Investments.
3. Subordinated Debt resulting from borrowing from others, which meets the following conditions:
   - It must be subject to prior approval from the General Assembly of Shareholders and the Central Bank of Libya before concluding the borrowing contract.
   - These debts must not be repaid except at the discretion of the borrowing Bank after approval from the Banking and Currency Supervision Department, and these funds cannot be recovered before five years have passed from the date of borrowing.
   - The borrowing contract must stipulate the Bank's freedom to postpone the payment of associated interest, which must not exceed the rate of return prevailing on government bonds at the time of borrowing or any other rate specified by the Central Bank of Libya. If these bonds are in foreign currency, the calculated rate of return must not exceed the (LIBOR) rate. In all cases, these returns are only paid in the case of available free profits approved by the Banking and Currency Supervision Department at the Central Bank of Libya.

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Central Bank of Libya
Banking and Currency Supervision Department

- The borrowing or financing contract must stipulate the possibility of using the debt with unaccrued interest to cover the Bank's losses.
- These debts must not be repaid until all deposits and all debts of other lenders are settled in the event of the Bank's liquidation before the maturity date of these bonds, after obtaining approval from the Central Bank of Libya based on a proposal from the Banking and Currency Supervision Department regarding this repayment.

To calculate the capital adequacy ratio, the following is requested:
- Supplementary Capital must not exceed the value of Core Capital.
- The total of the above conditional debts must not exceed 50% of Core Capital, with an annual reduction of 20% after each year preceding the maturity date.
- Revaluation differences for properties are not included in Supplementary Capital unless the properties subject to revaluation are evaluated by an authorized expert office in accordance with prevailing laws and regulations, and after obtaining the opinion of the Bank's legal auditor regarding the validity and reality of this evaluation.

Credit Risk:
Article (3):
To calculate the capital adequacy ratio, Credit Risk appearing in the financial statement is weighted according to the approved weighting ratios within the instructions of the Basel Committee on Banking Supervision.

Market Risk:
Article (4):
Market Risk consists of the following elements:
1. Market Risk for Interest Rates, which includes:
   a. Specific Market Risk related to the financial instruments themselves or the issuer of these instruments, held for Trading.
   b. General Market Risk for Financial Instruments held for Trading, whose prices are affected by general market conditions and changes in prevailing interest rates.
2. Market Risk for Trading Equity Positions.
3. Market Risk for Foreign Currency Position and Gold Position.

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Central Bank of Libya
Banking and Currency Supervision Department

A. Market Risk:
1. Specific Risk:
Specific Interest Rate Risk is represented by the opposite movement in the contractual interest rate resulting from negative changes in factors related to the source of this instrument. Specific Interest Rate Risk is calculated based on the market values of securities held by the Bank for Trading, weighted by ratios. This risk is determined according to the risk related to the issuer of these securities and according to their rating degree from internationally recognized rating agencies or those accepted by the Central Bank of Libya.

Table No. (1):
Specific Risk for Trading Securities and their Weighting Ratios to face Capital Liabilities:

| Issuer of Securities | Rating Degree* | Capital Liabilities** |
|-------------------------------|----------------|------------------------------|
| Libya                         | —              | 0%                       |
| Other Countries and Central Banks in these Countries (Regardless of Maturity) | AA- - AAA      | 0%                       |
|                               |                | Maturity of Securities     |
|                               |                | Less than 6 months               | Between 6 and 24 months | More than 24 months |
|                               | A- - A+        | 0.25%                        | 1.0%             | 1.6%             |
|                               | BBB- - BBB+    | 1.0%                         | 1.6%             | 4.0%             |
|                               | B- - BB+       | 8.0%                         | 8.0%             | 8.0%             |
|                               | Less than B-   | 12.0%                        | 12.0%            | 12.0%            |
|                               | Unclassified   | 8.0%                         | 8.0%             | 8.0%             |

* Rating must be from internationally known rating agencies or local rating agencies accepted by the Central Bank of Libya.
** If the capital adequacy ratio is 8.0%.

| Issuer of Securities | Rating Degree | Capital Liabilities |
|-------------------------------|---------------|-----------------------------|
|                               |               | Maturity of Securities     |
|                               |               | Less than 6 months               | Between 6 and 24 months | More than 24 months |
| Libya                         | —             | 0.25%                       | 1.0%             | 1.6%             |
|                               | AA- - AAA     | 0.25%                       | 1.0%             | 1.6%             |
|                               | A- - A+       | 4.0%                        | 4.0%             | 4.0%             |
|                               | BBB- - BBB+   | 8.0%                        | 8.0%             | 8.0%             |
|                               | B- - BB+      | 8.0%                        | 8.0%             | 8.0%             |
|                               | Less than B-   | 12.0%                       | 12.0%            | 12.0%            |
|                               | Unclassified   | 8.0%                        | 8.0%             | 8.0%             |

| Issuer of Securities | Rating Degree | Capital Liabilities |
|-------------------------------|---------------|-----------------------------|
|                               |               | Maturity of Securities     |
|                               |               | Less than 6 months               | Between 6 and 24 months | More than 24 months |
| Libyan Banks               | —             | 1.6%                        | 1.6%             | 1.6%             |
|                               | AA- - AAA     | 1.6%                        | 1.6%             | 1.6%             |
|                               | A- - A+       | 4.0%                        | 4.0%             | 4.0%             |
|                               | BBB- - BBB+   | 8.0%                        | 8.0%             | 8.0%             |
|                               | B- - BB+      | 8.0%                        | 8.0%             | 8.0%             |
|                               | Less than B-   | 12.0%                       | 12.0%            | 12.0%            |
|                               | Unclassified   | 8.0%                        | 8.0%             | 8.0%             |
| Banks in Other Countries       |               |                             |                 |                 |
| Large Private Sector Institutions |               | 8.0%                        | 8.0%             | 8.0%             |

Central Bank of Libya
Banking and Currency Supervision Department

### General Market Risk:

General Interest Rate Risk arises from changes in the contractual interest rate of fixed-rate financial instruments held for Trading due to negative changes in market interest rates.
General Interest Rate Risk for fixed-rate financial instruments held for Trading is calculated for each currency separately according to the Maturity Method.
According to this method, the book values of interest rate-sensitive financial instruments held for Trading, including financial derivatives, are categorized according to the remaining maturity if they have fixed rates, or according to the remaining time to repricing if they have floating rates, distributed over three main Time-Bands (zones).
Financial instruments are divided into two parts: The first part is for financial instruments with interest rates of 3% and above, while the second part includes financial instruments with interest rates less than 3%, where specific weighting ratios apply to each zone as shown in Table No. (2) below:

Central Bank of Libya
Banking and Currency Supervision Department

### Table No. (2):
Weighting Ratios Adopted for Calculating Capital Liabilities for Net Long and Short Positions of Trading Financial Instruments
Affected by Interest Rate

| Weighting Ratio between First and Third Zones | Weighting Ratios for Adjacent Zones | Weighting Ratios for Horizontal Disallowance | Weighting Ratios for Vertical Disallowance | Interest Rate Yielding 3% or More | Interest Rate Yielding Less than 3% |
|-------------------------------------------|-------------------------------|-----------------------------------------------------|-----------------------------------------------------------------------------|----------------------------------|------------------------------|
| 100%                                      | 40%                           | 40%                                                 | 0<br>0.20%<br>0.40%<br>0.70%                                             | Less than 1 month<br>Between 1 and 3 months<br>Between 3 and 6 months<br>Between 6 and 12 months | Less than 1 month<br>Between 1 and 3 months<br>Between 3 and 6 months<br>Between 6 and 12 months |
|                                           |                               | 30%                                                 | 1.25%<br>1.75%<br>2.25%                                                    | Between 1 and 1.9 years<br>Between 1.9 and 2.8 years<br>Between 2.8 and 3.6 years | Between 1 and 2 years<br>Between 2 and 3 years<br>Between 3 and 4 years |
|                                           |                               | 30%                                                 | 2.75%<br>3.25%<br>3.75%<br>4.50%<br>5.25%<br>6.00%<br>8.00%<br>12.50%     | Between 3.6 and 4.3 years<br>Between 4.3 and 5.7 years<br>Between 5.7 and 7.3 years<br>Between 7.3 and 9.3 years<br>Between 9.3 and 10.6 years<br>Between 10.6 and 12 years<br>Between 12 and 20 years<br>Over 20 years | Between 4 and 5 years<br>Between 5 and 7 years<br>Between 7 and 10 years<br>Between 10 and 15 years<br>Between 15 and 20 years<br>Over 20 years |

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Central Bank of Libya
Banking and Currency Supervision Department

General Interest Rate Risk consists of the sum of the following liabilities:

1. The Absolute Value of the Lower of Vertically Weighted Positions (Vertical Disallowance):
Capital liabilities are calculated by multiplying the amount of each financial instrument by the weighting ratio of the time period in which this instrument matures or is repriced, as stated in Table No. (2) of this Circular. Then, the lower weighted amount in absolute value is adopted – regardless of whether this amount is long (positive sign) or short (negative sign) – and multiplied by 10%*, where this result is considered a capital liability.
Then, the same procedure is followed for each time period (column) in which a financial instrument matures or is repriced.
If all weighted positions appearing in the same period carry the same sign (+) or (-), then there are no capital liabilities at this stage.

2. The Absolute Value of the Lower of Horizontally Weighted Positions within each of the three zones mentioned in Table No. (2) (Horizontal Disallowance):
Capital liabilities for financial instruments and derivatives held for Trading appearing in these zones are calculated as follows:
A.2 The net between Long Weighted Positions (positive sign) and Short Weighted Positions (negative sign) is calculated in each time period (column). Then, the Net Long Values (positive sign) appearing within the First Zone are summed together, as are the Net Short Values (negative sign) appearing in the same Zone. The lower Net Value in absolute terms between the summed Net Long and Net Short Values is taken and then multiplied by 40%, and this result is considered a capital liability in the First Zone.
If the Net Values appear entirely with the same sign (long or short), then no capital liabilities are calculated at this stage for positions appearing in this Zone. (Horizontal Disallowance)
B.2 The same steps are followed for the Second and Third Zones, but the lower Net Value in absolute terms is multiplied by 30%, and this result is considered a capital liability.

3. The Absolute Value of the Lower of Weighted Positions between Adjacent and Distant Zones:
• The net of weighted positions in each zone is calculated *Net Weighted Long Amounts (positive sign) are compared with Net Weighted Short Amounts (negative sign) between adjacent Zones (First Zone with Second Zone and Second Zone with Third Zone), where the lower weighted balance is adopted and multiplied by 40%, and this result is considered a capital liability.
• As for the net of weighted positions between the Second and Third Zones, the same steps are followed as explained in the paragraph above, provided that the net of one position is long and the other is short (+) or (-), where the lower net weighted amount is multiplied by 40% and this result is considered a capital liability for positions between the Second and Third Zones.
• Capital liabilities between Distant Zones (First Zone with Third Zone) are calculated if the sign of the net of weighted positions in one of the zones is different from the sign of the net of weighted positions in the other zones. The lower Absolute Value is taken and multiplied by 100%, where this result is considered a capital liability.
If the compared positions carry the same sign, then no capital liabilities are calculated in this case, and the process moves to the next stage.

4. The final stage for calculating General Risk on Trading Financial Instruments and Derivatives is to calculate the net positions between all zones and multiply the result by the Absolute Value by 100%, where this result is considered a capital liability.

5. Capital liabilities against General Interest Rate Risk are summed according to the paragraphs above and the result is multiplied by (12.5), where this result is added to the denominator of the adequacy ratio.
Market Risk for Trading Equity Positions:
Market Risk for Trading Equity Positions consists of Specific Market Risk and General Market Risk.
Specific Risk for Equity Positions arises from the deterioration of the issuer's situation, while General Risk arises from the systematic change in the price index of the financial market in which these shares are traded.

Central Bank of Libya
Banking and Currency Supervision Department

General Market Risk is calculated based on the sum of net positions for financial portfolios of the same type and conditions, after weighting this sum by 8%, while Specific Market Risk for Equity Positions is calculated based on the sum of Net Long Positions and the sum of Net Short Positions, after weighting each sum by 8%, then the result is multiplied by 12.5% which is added to the denominator of the adequacy ratio.
Banks must calculate the capital liabilities arising from Market Risk for Trading Equity Positions.

.2 Foreign Exchange Rate Risk:
To calculate the capital adequacy ratio, liabilities are imposed on this capital to face Foreign Exchange Rate Risk for positions that are the Bank's foreign currency exposure, where these liabilities arise from fluctuations in the prices of these currencies against the Libyan Dinar. These positions include:

A.2 Net Operational Foreign Currency Position:
The Net Operational Foreign Currency Position represents the difference between the sum of Operational Foreign Currency Payable Positions and the sum of Operational Foreign Currency Receivable Positions, for each major foreign currency separately, with respect to balance sheet items and off-balance sheet items after converting them to the Libyan Dinar, according to the prevailing Libyan Dinar exchange rates at the time of calculating the capital adequacy ratio, as follows:

- Assets from this currency minus Liabilities in this currency plus the Net Forward Position in the same currency (Foreign Currencies for Receipt minus Foreign Currencies for Payment).

Any fixed foreign currency positions held by the Bank against its capital and other positions held against investments in banks and financial institutions abroad are excluded from the Net Operational Foreign Currency Position, provided that these positions are subject to prior approval from the Central Bank of Libya.

B.2 Total Foreign Currency Position:
The Total Foreign Currency Position represents the sum of Operational Foreign Currency Payable Positions or the sum of Operational Foreign Currency Receivable Positions (as defined above), whichever is greater, after converting these positions to the Libyan Dinar according to the prevailing foreign exchange rates at the time of calculating the capital adequacy ratio.

C.2 Gold Position:
The Absolute Value of the Net Value of Gold held by the Bank is added to the Total Foreign Currency Position, regardless of whether this Gold Position is payable or receivable. This value is converted to the Libyan Dinar according to the best gold ounce price at the time of calculating the capital adequacy ratio.

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Central Bank of Libya
Banking and Currency Supervision Department

D.2 Capital Liabilities for Foreign Exchange Rate Risk:
To calculate Capital Liabilities against the Foreign Currency Position, the sum of the Total Foreign Currency Position as stated above and the Gold Position is multiplied by the Absolute Value by 8%, and then this multiplication result is added by 12.5%, where it is added to the denominator of the capital adequacy ratio.

Article (5):
In the event that the remaining Core Capital after excluding Credit Risk liabilities falls below 28.5% of the liabilities arising from Market Risk, the Bank must in this case either reduce the volume of these risks (Market Risk) or increase its Core Capital to cover this excess.
In this regard, the attached Form No. (1-1) for calculating the Capital required to cover Market Risk should be considered.

Operational Risk:
Article (6):
To measure the Capital Liabilities arising from Operational Risk, the "Basic Indicator" approach adopted by the Basel Committee on Banking Supervision instructions regarding "International Convergence on Capital Measurement and Standards" is followed, where capital is maintained for this type of risk equal to 15% of the average total income during the previous three years, without taking into account the year in which total income is negative, and replacing it with the positive total income of the preceding year.

Article (7):
The capital adequacy ratio is calculated in the year as well as at the end of the month and reported to the Banking and Currency Supervision Department at the Central Bank of Libya after being certified by the external auditor, according to the forms specified in Article Three above. The capital adequacy ratio is declared within a maximum period of one month from the beginning of the month following the half-year declared.

Article (8):
To calculate the above capital adequacy ratio, Form No. (1) attached to this letter is adopted. It is experimental until its final issuance.

End...

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