Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Instructions No. (24) of 2021

Regarding the Application of the Leverage Ratio (Leverage Ratio)

Based on the provisions of Legislative Decree No. (9) of 2010 concerning Banks, particularly Articles (33) and (72) thereof, and in accordance with the authorities vested in us, and to achieve the public interest, we have issued the following Instructions:

Article (1)

Definitions

The words and phrases appearing in these Instructions shall carry the meanings specified below, unless the context indicates otherwise:

Leverage Ratio (LR): The ratio adopted in the international standards issued by the Basel Committee on Banking Supervision (Basel III framework), which is a capital measure (numerator) divided by an exposure measure (denominator).

Capital Measure: Tier 1 capital net of regulatory deductions as stipulated in Instructions No. (8) of 2018 regarding the application of regulatory capital requirements under Basel III, and Instructions No. (9) of 2018 regarding the application of capital adequacy requirements for Islamic banks.

Exposure Measure: Total on-balance sheet and off-balance sheet exposures, derivative exposures, and securities financing transactions as per the provisions of these Instructions.

Article (2)

Objective and Scope of Application

1. These Instructions aim to achieve the following: a. Limit the accumulation of leverage in banks in order to mitigate any pressures on the financial system and the economy in general. b. Enhance capital adequacy requirements through a simplified, risk-insensitive measure that prevents capital ratios from falling below certain thresholds.

2. The provisions of these Instructions shall apply to all banks licensed by the Palestine Monetary Authority to conduct banking business.

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Article (3)

Calculation Mechanism

1. The bank shall be required to calculate the Leverage Ratio as follows: "Leverage Ratio (LR) = Capital Measure ÷ Exposure Measure".

2. The Leverage Ratio shall in no case be less than 4%.

Article (4)

Implementation Guide

The attached Implementation Guide forms an integral part of these Instructions, and the bank shall be required to apply all its provisions.

Article (5)

Implementation and Enforcement

1. All competent authorities shall, each within their respective jurisdiction, implement and apply the provisions of these Instructions effective as of 2022/03/31.
2. The disclosure requirements regarding the Leverage Ratio shall apply effective as of the date of approval of the audited financial statements as of 2022/12/31.

Issued in Ramallah on 2021/11/24

Dr. Firas Malham Governor

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Footer Notes: Ramallah & Al-Bireh Governorate - Palestine P.O. Box 452 info@pma.ps | Fax: +970 2 2415310 | Tel: +970 2 2415251 Gaza - Palestine P.O. Box 4026 Fax: +970 8 2844487 | Tel: +970 8 2825713 www.pma.ps

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Leverage Ratio ("LR") Implementation Guide

The Leverage Ratio is one of the reforms introduced by the Basel Committee on Banking Supervision, aimed at limiting leverage accumulation in the banking system and helping to avoid potential negative impacts on the financial sector and the economy. Subsequent to the Palestine Monetary Authority's Instructions No. (08) of 2018 regarding the application of regulatory capital requirements under Basel III, and Instructions No. (9) of 2018 regarding the application of capital adequacy requirements for Islamic banks, and to guide the Authority towards supplementing capital measures with a simple ratio that does not rely on risk weights, the bank must calculate its Leverage Ratio using the forms provided in this Guide, taking the following considerations into account during calculation:

1. The bank shall comply with the minimum Leverage Ratio limit set at 4%, both at the solo and consolidated levels.

2. The bank shall calculate the Leverage Ratio (Capital Measure / Exposure Measure) on a quarterly basis, and shall submit the calculation form to the Palestine Monetary Authority according to Table No. (2), indicating the Leverage Ratio at the end of each quarter.

3. Leverage Ratio: The Leverage Ratio is measured as follows: Leverage Ratio (LR) = Capital Measure / Exposure Measure ≤ 4%.

4. Numerator of the Ratio (Capital Measure): The Capital Measure refers to Tier 1 capital as per the mechanisms outlined in Instructions No. (8) and (9) of 2018 mentioned above, with Tier 1 capital being net after deducting regulatory deductions applicable to this tier.

5. Denominator of the Ratio (Exposure Measure):

   5.1 General Measurement Principles

   5.1.1 The bank shall follow accounting policies for the purpose of calculating the exposure measure, adhering to the following:

   a. On-balance sheet exposures shall be included in the exposure measure at their net accounting value, taking into account specific provisions and adjustments to accounting values, except for securities financing transaction exposures.

   b. Offsetting between assets and liabilities (obligations) is not permitted.

   c. No financial or physical guarantees, including credit risk mitigation proceeds, shall be taken into account to reduce exposures.

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d. When calculating the exposure measure for leverage ratio purposes, items (regulatory adjustments) deducted from Tier 1 capital shall be deducted from the exposure measure – except those related to liabilities – in accordance with the requirements of the instructions on applying regulatory capital.

5.1.2 The total exposure measure comprises the sum of the following: a. On-balance sheet exposures. b. Derivative exposures. c. Securities financing transaction exposures. d. Off-balance sheet exposures, including contingent liabilities, direct credit substitutes, acceptances, and letters of credit (trade and performance-related).

5.2 On-balance Sheet Exposures

5.2.1 The bank shall include all on-balance sheet exposures for the purpose of calculating the exposure measure, which includes derivative guarantees and securities financing transaction guarantees (within what the applicable accounting standards consider as on-balance sheet assets).

5.2.2 Risk weights shall not be applied to on-balance sheet exposures.

5.3 Derivative Exposures:

5.3.1 The bank shall calculate counterparty default risk in derivative contracts using the Original Exposure Method or the Mark-to-Market Valuation Method outlined in Paragraph (15.11) of Chapter Three of Instructions No. (2016/07) regarding the application of capital adequacy requirements under Basel II.

5.4 Securities Financing Transaction Exposures:

5.4.1 Securities financing transactions include, for example, repurchase agreements, reverse repurchase agreements, secured borrowing and lending, and margin lending transactions, where the value of such transactions is based on market valuations and transactions typically related to margin agreements.

5.4.2 The calculation of the securities financing transaction exposure measure shall differentiate between: (a) Cases where the bank acts as a principal, and (b) Cases where the bank acts as an agent and provides a guarantee to one or both counterparties in the transaction.

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5.4.3 The total amounts specified in paragraphs (a) and (b) below shall be included in the exposure measure if the bank acts as a principal in a securities financing transaction:

a. Total eligible accounting assets for securities financing transactions (without offsetting).

b. Counterparty credit default risk shall be calculated using the current exposure method for each transaction, where the current exposure value (E*) equals the greater of zero or the fair value of the securities and the fair value of cash and securities received from the counterparty (Ei) lent to the counterparty (Ci), according to the following equation:

E* = max {0, [Ei - Ci]}

It should be noted that in the event of a master netting agreement, the aforementioned values shall be taken in aggregate for the counterparty, according to the following equation:

E* = max {0, [ΣEi - ΣCi]}

5.4.4 If the bank acts as an agent in a securities financing transaction and provides compensation or guarantees to a client or counterparty to cover any difference between the value of securities or cash declared by the client and the collateral provided by the counterparty, the bank shall calculate its exposure according to paragraph (b) of 5.4.3.

5.5 Off-balance Sheet Exposures:

5.5.1 The exposure measure for off-balance sheet items shall be calculated by multiplying the off-balance sheet item value by the appropriate Credit Conversion Factor (CCF), similar to conversion factors applied within the standardized approach under Basel II, subject to a minimum rate of 10%.

5.5.2 Credit Conversion Factors (CCFs) shall be applied based on the likelihood of credit drawdown and the time to maturity, according to Table No. (1) below:

Table No. (1)

Off-balance Sheet Exposure Type	Credit Conversion Factor
- Obligations that can be cancelled by the bank without prior notice, or automatically cancelled due to deterioration in the borrower's creditworthiness.	10%
- Unutilized payment facilities provided to service providers that can be cancelled without conditions.	20%
- Obligations (excluding payment facilities and liquidity facilities) with original maturities of up to one year (which cannot be cancelled unconditionally).	50%
- Obligations arising from the issuance and certification of letters of credit for the transport of goods (such as irrevocable letters of credit secured by movable goods).	100%

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- Obligations arising from the issuance and certification of letters of credit for the transport of goods (such as irrevocable letters of credit secured by movable goods).	100%
- Obligations (excluding payment facilities and liquidity facilities) with original maturities of up to one year (which cannot be cancelled unconditionally).	50%
- Certain contingent liabilities related to performance, such as performance guarantees, surety bonds, warranties, and standby letters of credit.	50%
- Debt instrument issuances and revolving credit facilities.	50%
- Eligible liquidity facilities.	50%
- Direct credit substitutes acting as debt guarantees (including standby letters of credit acting as financial guarantees for loans and debt instruments).	100%
- Acceptances.	100%
- Purchase of forward assets, forward deposits, shares, and paid securities.	100%
- Partially drawn commitments.	100%
- All off-balance sheet discounting exposures except eligible liquidity facilities or eligible cash facilities for service providers.	100%

6. Disclosure Requirements:

6.1 The bank shall disclose the Leverage Ratio within its interim and final financial statements (in both unconsolidated and consolidated statements) starting from the year 2022, in accordance with the requirements specified in Item (6.3) below, and shall include the historical series of these disclosures on its website.

6.2 The bank shall submit the form provided in paragraph (a) of Item (6.3) to the Palestine Monetary Authority on a quarterly basis, effective as of 2022/03/31.

6.3 The following data and information relate to disclosure requirements:

a. Table No. (2) showing the calculation of the Leverage Ratio.

Table No. (2)

Item	Amount (US Dollars)
	Exposure Measure for Leverage Ratio Purposes
1	Total value of assets.
2	Regulatory adjustments related to investments in banks and institutions.

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| 3 | Adjustments related to derivative exposures. | | 4 | Adjustments related to securities financing transactions. | | 5 | Adjustments related to off-balance sheet items. | | 6 | Other adjustments/exposures. | | 7 | Total exposure measure for Leverage Ratio purposes. | | | Capital | | 8 | Net Tier 1 capital. | | | Leverage Ratio | | 9 | Leverage Ratio (8/7). |

b. A breakdown of the sources of material differences between the bank's assets in its financial statements and its on-balance sheet exposures within the disclosure form.

c. An explanation of the main reasons for changes in the leverage ratio between the end of the last reporting period and the end of the current reporting period.