Circular dated May 7, 2017 regarding locally systemically important banks

For the attention of the Chairman of the Board of Directors of Tahya Misr Bank,

In light of the continuous efforts of the Central Bank of Egypt to develop the banking sector in order to enhance its safety and stability and support its effective role in contributing to achieving comprehensive and sustainable economic growth for the state, and within the framework of the constant commitment to keeping pace with the latest international practices in banking supervision aimed at addressing risks and responding to existing and potential shocks by strengthening the capital base of banks.

And since the global crisis showed that some financial institutions of importance to the global financial system, which may be exposed to risks that threaten the stability and performance of the entire financial system in the event of their failure or default, the Basel Committee on Banking Supervision issued in November 2011 a practical methodology for identifying "Globally Systemically Important Banks (G-SIBs)" (updated in July 2013), and thus additional requirements for loss absorbency capital were imposed on those banks in order to reduce the likelihood and impact of their failure or default. And since the systemic importance of banks is not limited to the global level only, but this principle also applies at the local level due to the potential negative effects of such banks on the entire local banking system, which in turn can affect the local economy as a whole, the Basel Committee on Banking Supervision established in October 2012 a supervisory framework complementary to the previous one but at the level of banks within a single country to identify "Locally Systemically Important Banks" (L-SIBs). The general framework through which central banks set the determinants and basic principles is included.

This, the Central Bank has prepared a study to identify locally systemically important banks, and based on it, the Board of Directors of the Central Bank of Egypt in its meeting held on March 29, 2017 decided the following:

The Central Bank of Egypt identifies locally systemically important banks according to the attached methodology.

1. The Supervision and Inspection Sector of the Central Bank of Egypt applies the aforementioned methodology and notifies the results and determines the additional capital requirements that these banks must hold according to the following table:

Additional Capital Requirements	Score Range	Bucket
1.25%	> 3200	5
1%	2501 - 3200	4
0.75%	1801 - 2500	3
0.5%	1101 - 1800	2
0.25%	400 - 1100	1
0	0 - 399	Non-Locally Systemically Important Banks

2. The Central Bank of Egypt reviews and updates the methodology according to market developments, with a maximum frequency of once every three years.

3. These instructions apply to banks operating in Egypt starting from January 1, 2019, for banks whose annual financial statements are prepared at the end of December of each year, and starting from July 1, 2019, for banks whose annual financial statements are prepared at the end of June of each year.

Please accept our highest respect,

Gamal Naguib

(Attachment) Central Bank of Egypt Methodology for Identifying Locally Systemically Important Banks

1. A sample of banks is selected based on the size criterion represented by "Total Exposures" used in calculating the leverage ratio.

2. The following main indicators are used:

• Bank size.
• Degree of correlation with other banks within the country.
• Lack of alternatives for similar financial services provided by the bank or its role in the financial sector infrastructure.
• Degree of development or complexity of the bank's activities.

3. These indicators are given relative weights as follows: 40%, 25%, 20%, 15% respectively. The main indicators may be divided into two sub-indicators, with equal relative weights as shown in the following table.

Weight	Sub-Indicator	Main Indicator
20%	"Total Exposures" used in calculating the leverage ratio: Assets inside and outside the balance sheet, unweighted by risk weights.	1. Bank Size (40%)
20%	Total deposits. Assets due to other banks within the country.
12.5%	2. Degree of correlation with other banks. Liabilities due to other banks within the country.	2. Degree of Correlation with Other Banks (25%)
12.5%	3. Lack of alternatives for similar financial services provided by the bank, or its role in the infrastructure. Payments settled through the payment system. Claims on non-residents.	3. Lack of Substitutes for Financial Services (20%)
7.5%	Liabilities due to non-residents.	4. Degree of Development or Complexity of Bank Activities (15%)
7.5%

4. The indicators for the bank are calculated in basis points by following the steps below:

a. Calculate the value of the sub-indicator = (Bank's Indicator Value / Total Banks' Indicator Value) * 10,000

b. Calculate a simple average of the sub-indicators within the main indicator.

c. Calculate a weighted average with specified weights for the four main indicators of the bank to reach the bank's result.