Transcription
Revised Regulatory Framework in line with Basel IIBangladesh BankAugust 2010
Guidelines on Risk Based Capital Adequacy Team of editors K.M. Abdul Wadood, Deputy General Manager Mohammad Abul Hashem, Deputy Director Dipti Rani Hazra, Deputy Director Mohammad Shahriar Siddiqui, Deputy Director Md. Mahbubur Rahman, Assistant Director Bangladesh Bank August 2010
PrefaceTo cope with the international best practices and to make the bank’s capital more risk sensitive aswell as more shock resilient, ‘Guidelines on Risk Based Capital Adequacy (RBCA) for Banks’(Revised regulatory capital framework in line with Basel II) have been introduced from January01, 2009 parallel to existing BRPD Circular No. 10, dated November 25, 2002. At the end ofparallel run period, Basel II regime has been started and the guidelines on RBCA has come fullyinto force from January 01, 2010 with its subsequent supplements/revisions. Instructionsregarding Minimum Capital Requirement (MCR), Adequate Capital, and Disclosure requirementas stated in these guidelines have to be followed by all scheduled banks for the purpose ofstatutory compliance.With a view to ensuring transition to Basel II in a non-disruptive manner, Bangladesh Bank (BB)adopted a consultative approach. In this process, a high-level National Steering Committee (NSC)headed by a Deputy Governor of BB was formed comprising central bank and commercial banks’officials for working on the policy decisions. Furthermore, there is a Coordination Committee(CC) headed by an Executive Director of BB to assist the NSC in decision-making. AnImplementation Cell under Banking Regulation and Policy Department (BRPD) has been formedto assist and carry out the instructions of NSC and CC on Basel II implementation. During theparallel run period, CC has collected feedback on these guidelines. The NSC in its 4th meetingheld on December 22, 2009 has recommended for full enforcement of these guidelines asstatutory compliance subject to some adjustment in MCR and Risk Weight (RW). The NSC hasunanimously emphasized on drawing enforceable action plans for credit rating of the banks’counterparties, adopting Supervisory Review Process (SRP) for calculating adequate capital and acapital growth plan.Accordingly, these guidelines have been reviewed on the basis of feedback received. Now, therequired adjustments, revisions and supplements have been included in the guidelines. Scheduledbanks will follow the instructions contained in the revised ‘Guidelines on Risk Based CapitalAdequacy for Banks’. These guidelines are articulated with the following areas, viz;A) Introduction and constituents of Capital, B) Credit Risk, C) Market Risk, D) Operational Risk,E) Supervisory Review Process, F) Supervisory Review Evaluation Process, G) MarketDiscipline, H) Reporting Formats, and I) Annexure.These guidelines will be able to make the regulatory requirements more appropriate and will alsoassist the banks to follow the instructions more efficiently for smooth implementation of theBasel II framework in the banking sector of Bangladesh.Abu Hena Mohd. Razee HassanExecutive DirectorBangladesh Banki
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Table of ContentsPREFACE . ILIST OF TABLES. VLIST OF ACRONYMS .VICHAPTER 1.1.1.1.2.1.3.1.4.1.5.1.6.1.7.1.8.1.9.INTRODUCTION . 1SCOPE OF APPLICATION . 1CAPITAL BASE . 1CONDITIONS FOR MAINTAINING REGULATORY CAPITAL . 3ELIGIBLE REGULATORY CAPITAL . 3CALCULATION OF CAPITAL ADEQUACY RATIO . 4MINIMUM CAPITAL REQUIREMENTS . 4REPORTING REQUIREMENT . 4PENALTY FOR NON-COMPLIANCE. 5CHAPTER 2.2.1.2.2.2.3.2.4.2.5.2.6.SUPERVISORY REVIEW EVALUATION PROCESS . 54INTRODUCTION . 54PRINCIPLES OF SREP OF BB. 54SRP – SREP DIALOGUE . 54METHODOLOGY IN REVIEWING SRP . 55CHAPTER 7.7.1.7.2.7.3.7.4.7.5.SUPERVISORY REVIEW PROCESS . 40INTRODUCTION . 40IMPORTANCE OF SUPERVISORY REVIEW PROCESS . 40MAIN FEATURES OF A RIGOROUS REVIEW PROCESS . 40RECOMMENDATIONS FOR SOUND STRESS TESTING PRACTICES . 45RISKS TO BE COVERED UNDER SRP . 46CONSIDERATION OF EXTERNAL FACTORS IN CAPITAL PLANNING . 51CHAPTER 6.6.1.6.2.6.3.6.4.OPERATIONAL RISK . 37INTRODUCTION . 37THE MEASUREMENT METHODOLOGY . 37THE BASIC INDICATOR APPROACH . 37THE STANDARDIZED APPROACH . 38CHAPTER 5.5.1.5.2.5.3.5.4.5.5.5.6.MARKET RISK. 26INTRODUCTION . 26DEFINITIONS . 26SCOPE AND COVERAGE OF THE CAPITAL CHARGES . 26METHODOLOGY . 27CAPITAL CHARGES FOR INTEREST RATE RISK . 27CHAPTER 4.4.1.4.2.4.3.4.4.CREDIT RISK . 7INTRODUCTION . 7DEFINITIONS . 7METHODOLOGY . 10RISK WEIGHT FOR BALANCE SHEET EXPOSURE . 11RISK WEIGHT FOR OFF-BALANCE SHEET EXPOSURE . 14CREDIT RISK MITIGATION (CRM) . 18CHAPTER 3.3.1.3.2.3.3.3.4.3.5.INTRODUCTION AND CONSTITUENTS OF CAPITAL. 1MARKET DISCIPLINE . 58SCOPE AND PURPOSE. 58RELATIONS WITH ACCOUNTING DISCLOSURES . 58MATERIALITY OF DISCLOSURE . 58FREQUENCY OF DISCLOSURE . 58DISCLOSURE FRAMEWORK . 59iii
CHAPTER 8.8.1.8.2.REPORTING FORMAT. 66REPORTING COVER LETTER . 66REPORTING FORMS . 67ANNEX A: GUIDELINES ON SUBORDINATED DEBT . 80ANNEX B: EXAMPLE OF CHARGE FOR REPO TRANSACTIONS . 86ANNEX C: A WORKED OUT EXAMPLE ON CREDIT RISK MITIGATION (CRM) . 88ANNEX D: CALCULATION OF CAPITAL CHARGE FOR GENERAL MARKET . 89ANNEX E: AN EXAMPLE CALCULATION OF CAPITAL CHARGE ON OPERATIONAL RISK. 92ANNEX F: CAPITAL CHARGE AGAINST OPERATIONAL RISK. 94ANNEX G: LIST OF GOVERNMENT AND OTHER PUBLIC SECTOR ENTITIES. 100ANNEX H: PRUDENT VALUATION GUIDANCE . 107ANNEX I: FINDINGS OF SUPERVISORY REVIEW PROCESS. 109ANNEX J: RISK FACTORS RELATING TO ISLAMIC MODE OF INVESTMENT . 110iv
List of TablesTABLE 1 : ECAI’S CREDIT RATING CATEGORIES MAPPED WITH BB RATING GRADE . 10TABLE 2 : RISK WEIGHTS FOR BALANCE SHEET EXPOSURE . 12TABLE 3 : RISK WEIGHT FOR SHORT TERM EXPOSURES . 14TABLE 4 : RISK WEIGHT AGAINST ECA SCORE (PUBLISHED BY OECD) . 14TABLE 5 : CREDIT CONVERSION FACTOR UNDER CURRENT EXPOSURE METHOD . 15TABLE 6 : CREDIT CONVERSION FACTOR UNDER ORIGINAL EXPOSURE METHOD . 16TABLE 7 : CREDIT CONVERSION FACTOR FOR NON-MARKET-RELATED OBS TRANSACTIONS . 17TABLE 8 : SUPERVISORY HAIRCUT WEIGHTS . 21TABLE 9 : CAPITAL CHARGE WEIGHT FOR SPECIFIC RISK . 28TABLE 10 : MATURITY METHOD - TIME-BANDS AND WEIGHTS. 30TABLE 11 : DURATION METHOD - TIME-BANDS AND ASSUMED CHANGES IN YIELD . 30TABLE 12 : HORIZONTAL DISALLOWANCES . 32TABLE 13 : CALCULATION OF GENERAL MARKET RISK . 32TABLE 14 : SUMMARY OF TREATMENT OF INTEREST RATE DERIVATIVES . 34TABLE 15 : EXAMPLE (FOREIGN EXCHANGE RISK). 35TABLE 16 : A) SCOPE OF APPLICATION. 60TABLE 17 : B) CAPITAL STRUCTURE . 60TABLE 18: C) CAPITAL ADEQUACY . 61TABLE 19 : D) CREDIT RISK . 61TABLE 20: E) EQUITIES: DISCLOSURES FOR BANKING BOOK POSITIONS . 63TABLE 21: F) INTEREST RATE RISK IN THE BANKING BOOK (IRRBB). 64TABLE 22: G) MARKET RISK . 64TABLE 23: H) OPERATIONAL RISK . 65TABLE 24 : BUSINESS LINES BETA FACTORS . 96v
List of ernative Standardized ApproachBangladesh BankBasel Committee on Banking SupervisionBasic Indicator ApproachBank for International SettlementsCapital Adequacy RatioCredit Conversion FactorCredit Rating Agency of Bangladesh Ltd.Credit Rating Information and Services Ltd.Credit Risk MitigationExternal Credit Assessment InstitutionForward Rate AgreementGovernment of BangladeshInternal Capital Adequacy Assessment ProcessInterest Rate Risk in the Banking BookMinimum Capital RequirementMultilateral Development BankNon Performing AssetsOff-Balance SheetPublic Sector EntityRisk Based Capital AdequacyRisk Weighted AssetSecurities and Exchange CommissionSupervisory Review Evaluation ProcessSupervisory Review ProcessThe Standardized Approachvi
Chapter 1.1.1.Introduction and Constituents of CapitalIntroductionThese guidelines are issued by Bangladesh Bank (BB) under section 13 and section 45of Ôe vsK †Kv úvbx AvBb, 1991Õ 1. BB has introduced these guidelines considering presentcomplexity and diversity in the banking industry and to make the banks' capital morerisk sensitive and shock absorbent. BB has made these guidelines as statutorycompliance for all scheduled banks in Bangladesh from January 01, 2010.These guidelines have been prepared in accordance with “International Convergence ofCapital Measurement and Capital Standards: A Revised Framework” of June, 2006(popularly known as ‘Basel II Capital Adequacy Framework’) released by BaselCommittee on Banking Supervision (BCBS). These guidelines will be called as‘Guidelines on Risk Based Capital Adequacy (RBCA) for Banks’.These guidelines are structured on following three aspects:a) Minimum capital requirements to be maintained by a bank against credit, market,and operational risks.b) Process for assessing the overall capital adequacy aligned with risk profile of a bankas well as capital growth plan.c) Framework of public disclosure on the position of a bank's risk profiles, capitaladequacy, and risk management system.1.2.Scope of applicationThese guidelines apply to all scheduled banks on ‘Solo’ basis as well as on‘Consolidated’ basis where-‘Solo Basis’ refers to all position of the bank and its local and overseasbranches/offices; and-‘Consolidated Basis’ refers to all position of the bank (including its local and overseasbranches/offices) and its subsidiary company(ies) engaged in financial (excludinginsurance) activities like merchant banks, brokerage firms, discount houses, etc (if any).1.3.Capital baseRegulatory capital will be categorized into three tiers: Tier 1, Tier 2, and Tier 3.1.3.1.Tier 1 capitalTier 1 capital called ‘Core Capital’ comprises of highest quality of capital elements thatconsists of :a) Paid up capital1Bank Company Act, 1991 with subsequent revisions1
Introduction and constituents of capitalChapter1b) Non-repayable share premium accountc) Statutory reserved) General reservee) Retained earningsf) Minority interest in subsidiariesg) Non-cumulative irredeemable preference sharesh) Dividend equalization account1.3.2.Tier 2 capitalTier 2 capital called ‘Supplementary Capital’ represents other elements which fall shortof some of the characteristics of the core capital but contribute to the overall strength ofa bank and consists of:a) General provision 2b) Revaluation reservesxRevaluation reserve for fixed assets 3xRevaluation reserve for securities 4xRevaluation reserve for equity instrumentc) All other preference sharesd) Subordinated debt 51.3.3.Tier 3 capitalTier 3 capital called ‘Additional Supplementary Capital’, consists of short-termsubordinated debt (original maturity less than or equal to five years but greater than orequal to two years) would be solely for the purpose of meeting a proportion of thecapital requirements for market risk.1.3.4.For foreign banks operating in Bangladesh, Tier 1 capital consists of the followingitems:a) Funds from head officeb) Remittable profit retained as capital2Maintained against Unclassified Loans/Advances, Special Mention Account & Off-balance sheet exposuresRef: BRPD Circular letter no.10/20024Ref: DOS Circular letter No. 05/20085Subordinated debt instruments, eligible to be considered as Tier 2 capital, shall comply with the regulatoryrequirements specified in Annex A.32
Introduction and constituents of capitalChapter1c) Any other items approved by BB for inclusion in Tier 1 capitalTier 2 capital consists of the following items:a) General provisionb) Borrowing from head office in foreign currency in compliance with the regulatoryrequirement as specified in Annex A.c) Revaluation reserve for securitiesd) Any other items approved by BB for inclusion in Tier 2 capital1.4.Conditions for maintaining regulatory capitalThe calculation of Tier 1 capital, Tier 2 capital, and Tier 3 capital shall be subject to thefollowing conditions:a) The amount of Tier 2 capital will be limited to 100% of the amount of Tier 1 capital.b) 50% of revaluation reserves for fixed assets and securities eligible for Tier 2 capital.c) 10% of revaluation reserves for equity instruments eligible for Tier 2 capital.d) Subordinated debt (definition and qualification is stated in Annex A) shall belimited to a maximum of 30% of the amount of Tier 1 capital.e) A minimum of about 28.5% of market risk needs to be supported by Tier 1 capital.Supporting of Market Risk from Tier 3 capital shall be limited up to maximum of250% of a bank’s Tier 1 capital that is available after meeting credit risk capitalrequirement 6.1.5.Eligible regulatory capitalIn order to obtain the eligible regulatory capital for the purpose of calculating CapitalAdequacy Ratio (CAR), banks are required to make following deductions from theirTier-1 capital;a) Intangible asset e.g., book value of goodwill and value of any contingent assets, etc.which are shown as assetsb) Shortfall in provisions required against classified assetsc) Shortfall in provisions required against investment in sharesd) Remaining deficit on account of revaluation of investments in securities after nettingoff from any other surplus on the securities.6Example: Suppose a bank requires BDT 90 crore for capital charge against market risk, 28.5% of that amount i.e. (28.5% of 90) BDT25.65 crore needs to be supported from Tier-1 capital that is available after meeting credit risk capital requirement. Again, suppose the bankhas Tier-1 Capital of BDT 120 crore and the capital requirement for credit risk is BDT 110 crore, the remaining Tier-1 Capital BDT 10 croreis available for market risk and thus the bank can have maximum eligible Tier-3 Capital is BDT (250% of 10) 25 crore.3
Introduction and constituents of capitalChapter1e) Reciprocal/crossholdings of bank’s capital/subordinated debt artificially intended toinflate the capital position of banksf) Any amount of investment exceeding the approved limit under section 26(2) of Ôe vsK†Kv úvbx AvBb, 1991Õ (Bank Company Act, 1991). The additional/unauthorizedamount of investment will be deducted at 50% from Tier 1 capital and 50% fromTier 2 capital.g) Investments in subsidiaries which are not consolidated. The normal practice is toconsolidate subsidiaries for the purpose of assessing the capital adequacy of bankinggroups. Where this is not done, deduction is essential to prevent the multiple uses ofthe same capital resources in different parts of the group. The deduction for suchinvestments will be 50% from Tier 1 capital and 50% from Tier 2 capital. The assetsrepresenting the investments in subsidiary companies whose capital had beendeducted from that of the parent would not be included in total assets for thepurposes of computing the CAR.Eligible Tier 2 capital will be derived after deducting components (if any) qualified fordeduction.Total eligible regulatory capital will be calculated by summing up the eligible Tier 1,Tier 2 and Tier 3 capital.1.6.Calculation of capital adequacy ratioIn order to calculate CAR, banks are required to calculate their Risk Weighted Assets(RWA) on the basis of credit, market, and operational risks. Total RWA will bedetermined by multiplying the amount of capital charge for market risk and operationalrisk by the reciprocal of the minimum CAR and adding the resulting figures to the sumof risk weighted assets for credit risk. The CAR is then calculated by taking eligibleregulatory capital as numerator and total RWA as denominator.1.7.Minimum capital requirementsa) No Scheduled Bank in Bangladesh shall commence and carry on its business unlessit has the minimum required capital fixed by BB from time to time as per section 13of Ôe vsK †Kv úvbx AvBb, 1991Õ (Bank Company Act, 1991).b) Banks have to maintain minimum CAR on ‘Solo’ basis as well as on ‘Consolidated’basis as per instruction(s) given by BB from time to time.c) Banks have to maintain at least 50% of required capital as Tier 1 capital.1.8.Reporting requirementAll banks are required to submit the RBCA report (according to the prescribed formats)on consolidated as well as on solo basis within the specified timeline to the Departmentof Off-site Supervision of BB.4
Introduction and constituents of capital1.9.Chapter1Penalty for non-compliancea) BB may impose penalty and/or punishment as per Ôe vsK †Kv úvbx AvBb, 1991Õ (BankCompany Act, 1991), if a bank fails to meet minimum capital or CAR within thestipulated period.b) BB may impose penalty and/or punishment as per Ôe vsK †Kv úvbx AvBb, 1991Õ (BankCompany Act, 1991), if a bank willfully furnishes any false information in thereporting.c) BB may impose penaltiy as per Ôe vsK †Kv úvbx AvBb, 1991Õ (Bank Company Act,1991), if a bank fails to submit the RBCA report within stipulated time without anyacceptable/ satisfactory reason.5
Introduction and constituents of capitalChapter16
Chapter 2.2.1.Credit RiskIntroductionCredit risk is the potential that a bank borrower or counterparty fails to meet itsobligation in accordance with agreed term.2.2.Definitions2.2.1.Claims: Exposures such as deposits (including foreign currency), placements,investments, loans and advances underlying with counterparties.2.2.2.Claims on sovereign and central bank: Loans and advances to the Government ofBangladesh (GoB), and investments in GoB securities, BB securities, and DevelopmentBonds including Foreign Currency Bonds. All deposit and reserves (including foreigncurrency) maintained with BB.2.2.3.Claims on other sovereigns and central banks: Loans and advances to andinvestments in securities of governments and central banks except GoB and BB.2.2.4.Claims on the Bank for International Settlements (BIS), the InternationalMonetary Fund (IMF), European Central Bank and the European Community:Loans and advances to and investments in BIS, IMF, European Central Bank, and theEuropean Community.2.2.5.Claims on multilateral development banks (specific): Loans and advances to andinvestments in the following:a) The World Bank Group comprising of the International Bank for Reconstructionand Development (IBRD) and the International Finance Corporation (IFC)b) The Asian Development Bank (ADB)c) The African Development Bank (AfDB)d) The European Bank for Reconstruction and Development (EBRD)e) The Inter-American Development Bank (IADB)f) The European Investment Bank (EIB)g) The European Investment Fund (EIF)h) The Nordic investment Bank (NIB)i) The Caribbean Development Bank (CDB)j) The Islamic Development Bank (IDB)k) The Council of Europe Development Bank (CEDB)7
Credit riskChapter 22.2.6.Claims on multilateral development banks (Others): Loans and advances to andinvestments in Multilateral Developments Banks (MDBs) other than those specified in2.2.5 above.2.2.7.Claims on government/ public sector entities (PSE): Loans and advances to andinvestments (excluding equity exposure) in all public corporations, statutory boards andauthorities, local government bodies etc. owned or controlled by GoB or any entitycategorized as PSE (See Annex G) by BB.2.2.8.Claims on banks and non-bank financial institutions (NBFIs): Loans and advances,placements, deposits (including Nostro Accounts), debentures (which are not treated ascapital of the issuing bank or NBFI), dues on various trade bills, repurchase agreementand investments (excluding equity exposure) in all scheduled banks, NBFIs, and foreignbanks.2.2.9.Claims on corporate: Loans and advances to and investments (excluding equityexposure) in corporate. “Corporate” refers to any proprietorship, partnership or limitedcompany that is neither PSE, bank, NBFI nor borrower within the definition of retailportfolio and small enterprises (having exposure with in the limit stipulated in thesection below).2.2.10. Claims categorized as retail portfolio and small enterprise: Qualifying criteria forthe retail portfolio and small enterprise are as follows:Orientation criterion: The exposure to an individual person or persons or to a smallenterprise (The definition of small enterprise will be the same as defined by BB fromtime to time).Product criterion: The exposure takes the form of any of the following product types:a) Revolving credit and lines of credit (including overdrafts)b) Term loans and leases (e.g. installment loans, vehicle loans formanufacturing/production and leases, student and educational loans, micro businessfacilities and commitments)The following claims, both fund based and non fund based, will be excluded from retailportfolios:a) Exposures by way of investments in securities (such as bonds and equities), whetherlisted or not;b) Mortgage loans to the extent that they qualify for treatment as claims secured byresidential property (section 2.2.12) or claims secured by commercial real estate(section 2.2.13);c) Loans and advances to bank’s own staff which are fully covered by superannuationbenefits and / or mortgage of flat/ house;d) Consumer finance;e) Capital market exposures; andf) Venture capital funds.8
Credit riskChapter 2Granularity criterion: Exposures under this category must be sufficiently diversifiedto a degree that reduces the risks. In order to meet this criterion, aggregate exposurewithout considering Credit Risk Mitigation (CRM), to one counterpart should notexceed 0.2% of the overall exposures under this category excluding past due loans. ‘Toone counterpart’ means one or several entities that may be considered as a singlebeneficiary (e.g. in the case of a small business that is affiliated to another smallbusiness, the limit would apply to the banks’ aggregate exposure on both businesses).Exposure limit: The maximum aggregate exposure to a person or persons will belimited to BDT 75.00 (seventy five) lac. The maximum aggregate exposure to a smallenterprise will be the amount as mentioned in ‘Small and Medium Enterprise (SME)Credit Policy and Programs’ issued by BB from time to time.2.2.11. Consumer finance: Loans and advances to individuals for meeting their personal,family or household needs that includes credit cards, auto/vehicle loans for personal use,personal loans, and any purpose loan etc.2.2.12. Claims secured by residential property: Lending fully secured by mortgages onresidential property that is or will be occupied by the borrower or that is or will berented. Loans for the purpose of constructing/purch
a) Minimum capital requirements to be maintained by a bank against credit, market, and operational risks. b) Process for assessing the overall capital adequacy aligned with risk profile of a bank as well as capital growth plan. c) Framework of public disclosure on the position of a bank's risk profiles, capital adequacy, and risk management system.
