Question 1: When will the Standards, Guidance and Template with regards to Solo reporting be issued by the Central Bank?
The Central Bank will issue all related material regarding Solo reporting during 2020. Formal communication will be issued in advance.

Question 2: What is meant by the book value of an investment?
The book value of an investment shall be in accordance with the applicable accounting framework (IFRS). This valuation must be accepted by an external auditor.

Question 3: Are capital shortfalls of non-consolidated insurance companies to be deducted from CET1?
Yes, any capital shortfall on a company has to be deducted.

Question 4: If the Bank meets minimum CET1 ratios can the excess CET1 also be counted to meet AT1 and Total CAR?
Yes.

Question 5: Please clarify whether minority interest related to any other regulated financial entity (which is not a bank) should be included or not.
Only minority interest of the subsidiary that are subject to the same minimum prudential standards and level of supervision as a bank be eligible for inclusion in the capital.

Question 6: Is the bank able to include the profit & loss in the year-end CAR calculation before the issuance of the audited financial statements?
Bank may include interim profit/ yearend profit in CET1 capital only if reviewed or audited by external auditors. Furthermore, the expected dividend should be deducted in Q4.

Question 7: Is subordinated Debt currently considered Tier 2 as per Basel III, hence no amortization is required?
Grandfathering rule plus amortization in last 5 years - refer to Standards for Capital Adequacy of banks in UAE, Tier Capital Supply Standard- paragraph 27 (iv)(b) . Reference should also be made to the Tier Capital Instruments Standards.

Question 8: Do dividends need to be deducted from CET1 after the proposal from the Board or after Central Bank approval or after approval from shareholders at the Annual General Meeting?
Please refer to Question 6

Question 9: How do you treat goodwill and intangible assets arising on an insurance subsidiary? Should it be considered since the standards mentions insurance subsidiaries are to be completely deconsolidated and hence there will be no goodwill?
Goodwill and other intangible must be deducted in the calculation of CET1. In particular deduction is also applied to any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of consolidation.

Question 10: Subsidiaries which are used for providing manpower services at cost, should these be classified as commercial entities or financial entities?
A non-financial sector entity is an entity that is not:

1. a)a financial sector entity; or
2. b)a direct extension of banking; or
3. c)ancillary to banking; or
4. d)leasing, factoring, the management of unit trusts, the management of data processing services or any other similar services"

Question 11: Obtain an understanding to the timeline by when the Central Bank may advise specific Banks of specific countercyclical buffers?
The underlying process for the implementation of countercyclical buffers will be set and communicated during 2018

Question 12: Criterion 4 for Additional Tier 1 capital. Can the Central Bank give additional guidance on what will be considered to be an incentive to redeem?
The following list provides some examples of what would be considered to be an incentive to redeem:

A call option combined with an increase in the credit spread of the instrument if the call is not exercised.

A call option combined with a requirement or an investor option to convert the instrument into shares if the call is not exercised.

A call option combined with a change in reference rate where the credit spread over the second reference rate is greater than the initial payment rate less the swap rate (ie the fixed rate paid to the call date to receive the second reference rate). For example, if the initial reference rate is 0.9%, the credit spread over the initial reference rate is 2% (ie the initial payment rate is 2.9%), and the swap rate to the call date is 1.2%, a credit spread over the second reference rate greater than 1.7% (2.9-1.2%) would be considered an incentive to redeem.

Conversion from a fixed rate to a floating rate (or vice versa) in combination with a call option without any increase in credit spread will not in itself be viewed as an incentive to redeem. However, as required by criteria 5, the bank must not do anything that creates an expectation that the call will be exercised.

The above is not an exhaustive list of what is considered an incentive to redeem and so banks should seek guidance from Central Bank on specific features and instruments. Banks must not expect Central Bank to approve the exercise of a call option for the purpose of satisfying investor expectations that a call will be exercised.

Question 13: Criteria 4 and 5 for Additional Tier 1 capital. An instrument is structured with a first call date after 5 years but thereafter is callable quarterly at every interest payment due date (subject to supervisory approval). The instrument does not have a step-up. Does instrument meet criteria 4 and 5 in terms of being perpetual with no incentive to redeem?
Criterion 5 allows an instrument to be called by an issuer after a minimum period of 5 years. It does not preclude calling at times after that date or preclude multiple dates on which a call may be exercised. However, the specification of multiple dates upon which a call might be exercised must not be used to create an expectation that the instrument will be redeemed at the first call date, as this is prohibited by criterion.

Question 14: Can an option to call the instrument after five years but prior to the start of the amortisation period viewed as an incentive to redeem?
No, it can’t be viewed as an incentive to redeem.

Question 15: With regards to countercyclical buffer, what are “private sector credit exposures”? What does “geographic location” mean? How should the geographic location of exposures on the banking book and the trading book be identified? What is the difference between (the jurisdiction of) “ultimate risk” and (the jurisdiction of) “immediate counterparty” exposures?
“Private sector credit exposures” refers to exposures to private sector counterparties which attract a credit risk capital charge in the banking book, and the risk weighted equivalent trading book capital charges for specific risk, the incremental risk charge, and securitisation. Interbank exposures and exposures to the public sector are excluded, but non-bank financial sector exposures are included. The geographic location of a bank’s private sector credit exposures is determined by the location of the counterparties that make up the capital charge, irrespective of the bank’s own physical location or its country of incorporation. The location is identified according to the concept of “ultimate risk”. The geographic location identifies the jurisdiction that has announced countercyclical capital buffer add-on rate is to be applied by the bank to the corresponding credit exposure, appropriately weighted

The concepts of “ultimate risk” and “immediate risk” are those used by the BIS' International Banking Statistics. The jurisdiction of “immediate counterparty” refers to the jurisdiction of residence of immediate counterparties, while the jurisdiction of “ultimate risk” is where the final risk lies. For the purpose of the countercyclical capital buffer, banks should use, where possible, exposures on an “ultimate risk” basis.

For example, a bank could face the situation where the exposures to a borrower is in one jurisdiction (country A), and the risk mitigant (e.g. guarantee) is in another jurisdiction (country B). In this case, the “immediate counterparty” is in country A, but the “ultimate risk” is in country B. This means that if the bank has a debt claim on an investment vehicle, the ultimate risk exposure should be allocated to the jurisdiction where the vehicle (or if applicable, its parent/guarantor) resides. If the bank has an equity claim, the ultimate risk exposure should be allocated proportionately to the jurisdictions where the ultimate risk exposures of the vehicle resides.