Capital Adequacy Regulatory Framework for Banks Operating in Lebanon

Central Bank Circular No. 595 To Banks, Financial Institutions, and Supervisory Agents

We enclose herewith Decision No. 13,362 dated September 21, 2021, concerning the amendment of Basic Decision No. 6,939 dated March 25, 1998 (The Regulatory Framework for the Capital Adequacy of Banks Operating in Lebanon), attached to Basic Circular No. 44.

Beirut, September 21, 2021 Governor of the Central Bank of Lebanon Riad T. Safeddine

Central Bank Decision No. 13,362 Amendment of Basic Decision No. 6,939 dated March 25, 1998

The Governor of the Central Bank of Lebanon, based on the Monetary and Credit Law, particularly Articles 174 and 175 thereof, and based on Basic Decision No. 6,939 dated March 25, 1998 and its amendments concerning the regulatory framework for the capital adequacy of banks operating in Lebanon, and based on the decision of the Central Council of the Central Bank of Lebanon taken in its meeting held on September 15, 2021, hereby decides as follows:

Article One: The following text is added to "Article Eight bis" of Basic Decision No. 6,939 dated March 25, 1998: The text of the following paragraph is as follows: « Exceptionally, up to 75% of Common Equity Tier 1 (CET1) capital may be accepted from unrealized gains on financial instruments classified as Fair Value Through Other Comprehensive Income (FVTOCI) approved by the Central Council, provided that a reserve is established against them at a minimum rate of 25% of the value of these gains, over ten years at an annual rate of (1/10). »

Article Two: The text of Annexes No. (1) and (3) attached to Basic Decision No. 6,939 dated March 25, 1998 is repealed and replaced by the new text attached to this Decision.

Article Three: The text of the fourth paragraph of Annex No. (4) attached to Basic Decision No. 6,939 dated March 25, 1998 is repealed and replaced by the following text: Fourth - Corporate Loan Portfolio: • 20% (AAA to AA-) • 50% (A+ to A-) • 100% (BBB+ to BB-) • 100% (Below BB - Rated) • 150% (Below BB - Unrated) • 100% (Unrated - Rated) • 100% (Unrated - Unrated) • 150% (Unrated - Unrated in countries with sovereign rating equivalent to risk weight)

Article Four: This Decision shall take effect upon its issuance. Article Five: This Decision shall be published in the Official Gazette.

Beirut, September 21, 2021 Governor of the Central Bank of Lebanon Riad T. Safeddine

Annex No. 1: Common Equity Tier 1 (CET1) Common Equity Tier 1 capital consists of the following elements:

1. The nominal value of ordinary shares and other capital instruments meeting the eligibility criteria for CET1 capital.
2. Capital reserves.
3. Ordinary share premium and other capital instruments meeting the eligibility criteria for CET1 capital.
4. Cash advances allocated to capital on which interest is paid.
5. Capital allocated to real estate investments referred to in Article Seven of this Decision.
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7. Legal and regulatory reserves and other reserves, including a real estate reserve for liquidation and a special reserve against doubtful and non-performing loans not yet settled according to Basic Decision No. 7,694 dated October 18, 2000, except for the reserve established against unrealized gains on FVTOCI shares approved by the Central Council pursuant to the second paragraph of Article Eight bis of this Decision.
8. Retained earnings, current financial year results, and income/expense accounts.
9. Reserves related to other comprehensive income items (Other Comprehensive Income - OCI Accumulated), including:
   • Unrealized gains/losses from revaluation of real estate or other fixed assets eligible for CET1, excluding real estate held to satisfy debts under Article 154 of the Monetary and Credit Law.
   • Net unrealized gains or losses on financial instruments classified as Fair Value Through Other Comprehensive Income (FVTOCI).
   • Cumulative foreign currency translation adjustments on financial assets.
   • Cash flow hedge revaluation reserves.
   • Own credit risk reserves.
   • Other reserves related to other comprehensive income items.
10. Minority interest share eligible for CET1 capital.
11. "Regulatory Adjustments", including: a. Deductions:
    • Current year profit and current income/expense account balance (if positive).
    • Gross unrealized gains on financial instruments classified as FVTOCI.
    • Positive cumulative foreign currency translation adjustments on financial assets.
    • Negative or positive cash flow hedge revaluation reserves.
    • Negative or positive own credit risk reserves.
    • Other positive reserves related to other comprehensive income items.
    • Shortfall in real estate and liquidation reserves that must be established against them.
    • Shortfall in the special reserve against doubtful and non-performing loans not yet settled according to Basic Decision No. 7,694 dated October 18, 2000.
    • Ordinary shares and related capital instruments repurchased directly or indirectly.
    • Goodwill and net other intangible fixed assets.
    • Shortfall in required provisions on on-balance sheet financial assets and off-balance sheet financial liabilities (producing and non-producing).*
    • Excess over the provisions of Articles 152 or 153 of the Monetary and Credit Law (whichever is greater).
    • Total shares (ordinary shares and related cash advances and other capital instruments meeting eligibility criteria) in banks, financial institutions, and insurance companies, eligible for deduction from CET1 capital.
    • "Reciprocal Cross Holdings".
    • Shortfall in the reserve established against unrealized gains on FVTOCI shares approved by the Central Council pursuant to the second paragraph of Article Eight bis of this Decision that must be established. b. Additions:
    • Provisions established on on-balance sheet financial assets and off-balance sheet financial liabilities (Stage 1) that have not experienced a significant increase in credit risk, excluding provisions on the investment portfolio in Lebanese government bonds and the investment portfolio at the Central Bank, including certificates of deposit, pursuant to Article Twelve bis**.
    • 75% of unrealized gains on FVTOCI shares approved by the Central Council pursuant to the second paragraph of Article Eight bis of this Decision.

Notes:

• The application of this item is suspended until the end of 2024, based on the limit specified in Article Twelve bis. ** This item applies until the end of 2024, based on the limit specified in Article Twelve bis.

Annex No. 3: Total Capital Total capital consists of the following elements: • Basic capital as specified in Annex No. (2) attached to this Decision. • Additional capital (Tier 2 Capital), consisting of the following elements:  The nominal value of preferred shares and other capital instruments meeting eligibility criteria for Tier 2 Capital.  Preferred share premium and other capital instruments meeting eligibility criteria for Tier 2 Capital.  Subordinated support loans and proceeds from subordinated debt issuances meeting eligibility criteria for Tier 2 Capital.  Minority interest share eligible for Tier 2 Capital.  "Regulatory Adjustments", including: 1. Additions: - 50% of positive cumulative foreign currency translation adjustments on financial assets. - 50% of gross unrealized gains on financial instruments classified as FVTOCI pursuant to the second paragraph of Article Eight bis of this Decision, excluding unrealized gains on shares approved by the Central Council. - "General Provisions" as referred to in Article Twelve of this Decision. - Provisions established against expected credit losses on on-balance sheet financial assets and off-balance sheet financial liabilities (Stage 1) that have not experienced a significant increase in credit risk, eligible for Tier 2 Capital.* 2. Deductions: - The amount drawn from subordinated support loans and proceeds from subordinated debt issuances. - The amount drawn from fixed-term preferred shares and other capital instruments meeting eligibility criteria for Tier 2 Capital. - Total shares, subordinated support loans, proceeds from subordinated debt issuances, and other capital instruments in banks, financial institutions, and insurance companies meeting eligibility criteria for Tier 2 Capital eligible for deduction from Tier 2 Capital. - "Reciprocal Cross Holdings".

Note:

• The application of this item is suspended until the end of 2024.