Bank of Israel

Supervision of Banks

Policy and Regulation Department

Jerusalem, 21 Sivan, 5773 May 30, 2013 Circular No. 06-2387

To: Banking Corporations and Credit Card Companies

Subject: Measurement and Capital Adequacy - Introduction, Applicability and Calculation of Requirements (Regulation on Sound Banking Practices No. 201)

Introduction

1. This regulation includes the applicability section of the regulations relating to measurement and capital adequacy, the method for calculating capital requirements, and the minimum capital targets.

2. Following the amendments made to Regulation on Sound Banking Practices No. 202 - Supervisory Capital, upon adoption of the Basel III recommendations, after consultation with the Advisory Committee on Banking Business matters and with the approval of the Governor, I have amended Regulation on Sound Banking Practices No. 201, regarding "Measurement and Capital Adequacy - Introduction, Applicability and Calculation of Requirements".

Main Amendments to the Regulation

3. Calculation of Minimum Capital Requirements

a. In accordance with the letter from the Superintendent of Banks dated March 28, 2012, a minimum Tier 1 Common Equity ratio to risk-weighted assets was established at 9% for the entire banking system and at 10% for a banking corporation whose consolidated balance sheet assets equal or exceed 20% of the total balance sheet assets in the banking system. These capital ratios include the requirement to hold a capital conservation buffer.

b. The minimum total capital ratio to risk-weighted assets shall stand at 12.5% for the entire banking system and at 13.5% for a banking corporation whose consolidated balance sheet assets equal or exceed 20% of the total balance sheet assets in the banking system.

c. The distinction between Pillar 1 and Pillar 2 in the calculation of the minimum total capital ratio has been abolished.

Explanatory Notes

At this stage, no separate requirement has been established for a minimum Tier 1 ratio beyond the Tier 1 Common Equity ratio. In light of this, banking corporations may meet the capital ratio above Common Equity through Tier 2 only. The Supervision of Banks intends to continue examining the need to establish a minimum Tier 1 ratio in the future.

Applicability

a. The applicability of the provisions of this circular is on January 1, 2014. b. Regarding the capital targets established, the start date for meeting the requirement for a Tier 1 Common Equity ratio of 9% and a total capital ratio of 12.5% is January 1, 2015. For banks required to meet the Tier 1 Common Equity ratio of 10% and a total capital ratio of 13.5%, the start date is January 1, 2017.

File Update

5. Attached are update pages for the Sound Banking Practices file. Below are the update instructions: Remove page: 201-1-4 [1] (6/10) Insert page: 201-1-4 [2] (5/13)

Respectfully,

David Zaken Superintendent of Banks

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Introduction, Applicability and Calculation of Requirements

Table of Contents

Topic	Location in Temporary Order*	Page
Introduction		201-2
Applicability	Sections 20-39	201-3
Calculation of Minimum Capital Requirements	Sections 40-49	201-4

* Framework for Measurement and Capital Adequacy (Temporary Order), December 2008.

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Introduction

1. In June 2006, the Basel Committee on Banking Supervision published a revised framework on capital adequacy requirements titled "International Convergence of Capital Measurement and Capital Standards" (hereinafter - Basel II). The purpose of the framework was to strengthen the soundness and stability of the international banking system while increasing the link between capital requirements and risk levels, and improving risk management systems in banking corporations.

In December 2010, the Basel Committee issued a new framework titled "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (hereinafter - Basel III). The new framework includes changes and additions relative to Basel II following lessons learned after the global financial crisis.

Regulations on Sound Banking Practices Nos. 201-211 adopt the Basel II and Basel III recommendations in the Israeli banking system.

2. The regulations reflect the Supervisor's position on each of the subjects where the Supervisor has discretion. The Supervisor's position was formulated through an examination of the approach to the subject by supervisory authorities worldwide, and an examination of its suitability to regulations, laws, and data of the Israeli economy, as necessary.

3. The regulations include guidelines for implementing advanced approaches to credit risk, and do not include the advanced approaches for calculating credit risk reduction, operational risk, and market risk. However, the Supervision of Banks encourages banking corporations to continue collecting data to build the information infrastructure required to operate advanced models in these areas in the future.

The numbering of sections in Regulations on Sound Banking Practices 201-211 corresponds to the numbering of sections in the original Basel II document, except for Regulation 202.

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Applicability

20. Regulations on Sound Banking Practices Nos. 201-211 shall be implemented on a consolidated basis by:
21. A banking corporation, excluding a foreign bank and a joint services company;
22. An auxiliary corporation, a credit card company;
23. A corporation as detailed in Section 11(a)(3) and 11(b)(1) of the Banking (Regulation) Law, 5741-1981, which is incorporated in Israel and supervised by corporations as mentioned in Section 1 or 2 above, subject to this regulation, unless one of the following conditions is met: a. The risk-weighted assets of the subsidiary calculated in accordance with these regulations do not exceed the greater of 1% of the capital base of the controlling corporation or NIS 50 million. b. The controlling corporation meets all of the following conditions:
24. It has provided indemnification for all its obligations;
25. It includes it in risk management processes and internal control processes;
26. There are no contractual obstacles whatsoever, including legal obstacles to the immediate transfer of capital sources or liquidity, or to the fulfillment of obligations of the subsidiary by the controlling corporation.

21-22. Repealed.

23. Furthermore, since one of the central goals of supervision is the protection of depositors, it is essential to ensure that the capital recognized for measuring capital adequacy is readily available to these depositors. Accordingly, the Supervisor must examine that every banking corporation holds adequate capital on a stand-alone basis.

24-39. Repealed.

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Calculation of Minimum Capital Requirements

40. Regulations on Sound Banking Practices Nos. 203-208 present the calculation of the total minimum capital requirements for credit risk, market risk, and operational risk (Pillar 1), and Regulation on Sound Banking Practices No. 211 presents the process of assessing the adequacy of capital adequacy (Pillar 2). The capital ratio is calculated using the definition of supervisory capital and risk-weighted assets.

41. The minimum capital targets shall be as follows:

42. The Tier 1 Common Equity ratio to risk-weighted assets shall not be less than 9%. A banking corporation whose consolidated balance sheet assets equal or exceed 20% of the total balance sheet assets in the banking system shall hold a Tier 1 Common Equity ratio to risk-weighted assets that does not fall below 10%.

43. The total capital ratio to risk-weighted assets shall not be less than 12.5%. A banking corporation whose consolidated balance sheet assets equal or exceed 20% of the total balance sheet assets in the banking system shall hold a total capital ratio to risk-weighted assets that does not fall below 13.5%.

44. Notwithstanding the above, the Supervisor may determine a higher minimum capital ratio for certain corporations.

a. Supervisory Capital

43. The definition is detailed in Regulation on Sound Banking Practices No. 202.

44. Repealed.

b. Risk-Weighted Assets

45. The total risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 12.5, and adding the result to the total risk-weighted assets for credit risk.

c. Transitional Provisions

46-49. Repealed.

Updates

Circular No.	Version	Details	Date
2268	1	Original Circular	20/6/10
2387	2	Update	30/5/13