6.Exposure to the Federal Government and Emirates Government receives 0% risk weight, if such exposures are denominated and funded in AED or USD for a transition period of 7 years from the date of implementation of this Standard. After the transition period, 0% risk weights are only applied to exposures that are denominated and funded in AED.

7.A 0% risk weight may also be applied to exposures to other GCC sovereigns and their central banks only if these exposures are denominated and funded in the domestic currency of that sovereign and the Supervisory authority of that sovereign has adopted such preferential treatment for exposures to its own sovereign and central bank.

8.Exposure to the Federal Government and Emirates Government in currencies other than AED or USD and claims on other sovereigns and central banks that do not meet the criteria set out in paragraph 6, are risk weighted as follows:

9.Exposure to the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Union, the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) receive a 0% risk weight.

10.PSEs include the following categories:

1. (i)Non-Commercial PSEs; and
2. (ii)Other PSEs including commercial PSEs (Government Related Entity (GRE) i.e. commercial PSEs that are fully owned or more than 50% in ownership by the UAE government).

11.Non-Commercial PSEs that are acknowledged by the Central Bank may be treated in the same as Claims on Bank. However, the preferential treatment for short-term claims under Claims on Bank must not be applied to non-commercial PSE. The Central Bank issues a GRE list to banks on a regular basis that the Central Bank considers Non-Commercial PSEs that qualify for this treatment. The Central Bank may allow certain domestic Non-Commercial PSEs to be treated same manner as claims on UAE sovereign if these entities have specific revenue raising powers and have specific institutional arrangements the effect of which is to reduce their risks of default.

12.Exposure to all other PSEs that are not included on the Central Bank’s list must be treated like exposures to corporates as per section III.F below.

13.With the exception of the MDBs that meet the criteria specified at paragraph 14 below, the risk weights applied to exposures to MDBs must be based on external credit assessments as set out in the table below.

14.A 0% risk weight will be applied to exposures to highly rated MDBs that meet the Basel Committee on Banking Supervision (BCBS) eligibility criteria for MDBs risk weighted at 0%.

1. (i)The BCBS will continue to evaluate eligibility on a case-by-case basis so it is not possible to provide a definitive list of the MDBs that satisfy the BCBS's eligibility criteria. The up-to-date list of MDBs that meet the BCBS's eligibility criteria can be found on the BCBS's website www.bis.org.
2. (ii)As a national discretion, exposures to the Arab Monetary Fund (AMF) receive 0% risk weight.

15.Claims on banks must be risk weighted based on the external credit assessment of the bank itself as set out in the table below. For the purposes of calculating capital requirements, a bank exposure is defined as a claim on any financial institution that is licensed to take deposits from the public and is subject to appropriate prudential standards and level of supervision.

16.Claims on unrated banks shall be risk-weighted at 50%. No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of incorporation.

17.A preferential risk weight that is one category more favourable shall be applied to claims with an original maturity of three months or less, subject to a floor of 20%. This treatment shall be available to both rated and unrated banks, but not to banks risk weighted at 150%. Short-term claims in the table below are defined as having an original maturity of three months or less. However, claims with (contractual) original maturity under three months which are rolled over (i.e., where the effective maturity is longer than three months) shall not qualify as short-term claims and shall not enjoy the preferential risk weighting treatment.

18.Claims on securities firms shall be treated as claims on banks provided the securities firms are authorized by a competent authority and subject to supervisory and regulatory arrangements that are the same or equivalent to those under this standards, including, in particular, risk-based capital requirements. Otherwise, such claims must follow the rules for claims on corporates as per section III F below.

19.The table provided below in the next paragraph illustrates the risk weighting of rated corporate claims, including claims on insurance companies.

20.The standard risk weight for unrated claims on corporates shall be 100%. No claim on an unrated corporate may be given a risk weight that is lower than that assigned to its sovereign of incorporation. For unrated exposures to Small- and Medium-sized Entities (SME) that do not meet the criteria in paragraph 21, an 85% risk weight will be applied. The Central Bank may, at its sole discretion, require a higher risk weighting for some unrated corporates as advised to banks directly where appropriate.

21.A 75% risk weighting may apply for exposures classified as “Retail” except as provided below for past due loans as per section III J below. For an exposure to be classified as “Retail” the Central Bank will need to be satisfied that the four criteria listed below are met:

1. (i)Orientation criterion – Exposure to a natural person or persons, or Small- and Medium-sized Entities (SME);
2. (ii)Product criterion – Eligible products included are credit cards, revolving credit, personal lending and small business credit facilities. Residential mortgage products are excluded as these are treated separately as “Claims Secured by Residential Property” as per section H below;
3. (iii)Granularity criterion – No exposure to any one counterparty can exceed 0.20% of the total regulatory retail portfolio being evaluated (exposure is gross before any credit risk mitigation; and one counterparty includes connected persons);
4. (iv)Value criterion –
   1. (i)Maximum aggregated exposure to one counterparty must not exceed the value of AED 4,000,000 for exposures to SME,
   2. (ii)For all other exposures, the maximum aggregated exposure to one counterparty must not exceed the value of AED 2,000,000.

22.The Central Bank reserves the right to increase the 75% risk weight if this risk weight value is deemed to be too low based on the default experience for these types of exposures in the UAE. Exposures to SMEs that do not meet all of the above criteria set out in paragraph 21 are treated as under the corporate asset class and must follow the rules for claims on corporates as per Section III F above.

23.A 35% risk weighting shall apply to exposures fully secured by eligible immovable residential property that is occupied by the owner or that is rented, and where the purpose of the facility is to fund the purchase of the property. This risk weight value shall be applied only where there exists a substantial margin of additional security over the amount of the loan.

24.Residential property shall be considered eligible immovable property if the following criteria are met:

1. (i)A mortgage is enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement and shall be appropriately filed within a reasonable time;
2. (ii)All legal requirements for establishing the mortgage have been fulfilled;
3. (iii)The protection agreement and the legal process underpinning it enable the bank to realise the value of the property within a reasonable timeframe;
4. (iv)Location of the property must be in the UAE; and
5. (v)Banks shall have in place procedures to monitor that the property taken as credit protection is adequately insured against the risk of damage.

25.Banks shall be responsible to monitor on an ongoing basis that the criteria listed in paragraph 24 above are met. In case of failure to conduct such internal monitoring or if the results of such internal monitoring indicate that the criteria are not met, the residential property cannot be considered eligible immovable property for the application of the 35% risk weight.

26.Banks shall clearly document the types of residential immovable property they accept and their lending policies in this regard.

27.Exposures secured by eligible residential real estate, as specified by the eligibility criteria set out in paragraph 24 above, and for which the 35% risk weight applies must not exceed any of the two items below:

1. (i)85% of the market value of the property (i.e., the LTV ratio must be less than or equal to 85%); and
2. (ii)AED 10 million;

28.If the two criteria listed above in paragraph 27 cannot be definitively established or met, then the 35% risk weight cannot be applied. If the exposure meets the criteria for regulatory retail claims as set out at paragraph 21 then a 75% risk weight applies, otherwise a 100% risk weighting must be used.

29.The Central Bank may increase the 35% risk weight if this risk weight is deemed to be too low based on the default experience for these types of exposures in the UAE.

30.A 100% risk weighting shall apply to exposures secured by commercial real estate. For the purposes of this paragraph, a commercial real estate exposure is an exposure secured by immovable property that is not residential real estate as per section III H above.

31.The unsecured portion of any loan (other than a residential mortgage loan as per section H above) that is past due for more than 90 days, net of specific provisions (including partial write-offs), must be risk-weighted as follows:

1. (i)150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan;
2. (ii)100% risk weight when specific provisions are 20% and above of the outstanding amount of the loan.

32.In the case of residential mortgage loans as per section H above, when such loans are past due for more than 90 days they shall be risk weighted at 100%, net of any specific provisions.

33.For the purpose of defining the secured portion of the past due loan, eligible collateral and guarantees shall be the same as for Credit Risk Mitigation set out below at section IV.

34.Past due retail loans are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion specified in Paragraph 21, for risk-weighting purposes.

35.The following claims shall be risk weighted at 150% or higher:

1. (i)Claims on sovereigns, PSEs, banks, and securities firms rated below B-;
2. (ii)Claims on corporates rated below BB-;
3. (iii)Past due loans as set out in section J above; and
4. (iv)Real estate acquired in settlement of debt and not liquidated within the statutory period (Article 93 of Federal Law).

36.The Central Bank may apply a 150% or higher risk weight reflecting the higher risks associated with the assets.

37.The risk weights applicable to securitisation and re-securitisation exposures are set out in the Standards on Capital for Securitisation Exposures.

38.Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities shall be treated as cash and therefore risk-weighted at 0%.

39.Cash items in the process of collection are risk-weighted at 20%.

40.Investments in commercial entities shall be treated as per the Capital Supply standard.

41.Exposure to investments in the capital of banking, securities, financial and insurance entities, must be treated as per the Capital Supply standard.

42.The treatment of securitisation exposures is presented separately in line with Securitisation Standard below in these standards.

43.The standard risk weight for exposure to all other assets not specifically mentioned shall be 100%.

44.Off-balance sheet items must be converted into credit exposure equivalents through the use of CCF.

Credit Conversion Factor of 100%

45.The following items must be converted into credit exposure equivalents through the use of CCF of 100%:

1. (i)All direct credit substitutes, including general guarantees of indebtedness (such as standby letters of credit serving as financial guarantees for loans and securities) and acceptances (such as endorsements with the character of acceptances);
2. (ii)Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank;
3. (iii)Forward asset purchases, forward deposits and commitments for the unpaid portion of partly-paid shares and securities which represent commitments with certain draw-downs, and which shall be risk-weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into;
4. (iv)The lending of banks’ securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e., repurchase/reverse repurchase and securities lending/securities borrowing transactions). Section IV on credit risk mitigation sets out the requirements for the calculation of risk-weighted assets where the credit converted exposure is secured by eligible collateral;
5. (v)Off-balance sheet items that are credit substitutes not explicitly included in any other category (including credit derivatives such as credit default swaps).

Credit Conversion Factor of 50%

46.The following items must be converted into credit exposure equivalents through the use of CCF of 50%:

1. (i)Transaction-related contingent items (e.g., performance bonds, bid bonds warranties, and standby letters of credit related to particular transactions);
2. (ii)Underwriting commitments under note issuance and revolving underwriting facilities regardless of maturity of the underlying facility;
3. (iii)Other commitments that are not unconditionally cancellable with an original maturity exceeding one year.

Credit Conversion Factor of 20%

47.The following items must be converted into credit exposure equivalents through the use of CCF of 20%:

1. (i)Other commitments not unconditionally cancellable with an original maturity of one year or less; and
2. (ii)Short-term self-liquidating trade letters of credit arising from the movement of goods (e.g., documentary credits collateralised by the underlying shipment), for both issuing and confirming banks.

Credit Conversion Factor of 0%

48.Any commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness must be converted into credit exposure equivalents using CCF of 0%.

Other Principles

49.Where there is an undertaking to provide a commitment on an off-balance sheet item (i.e., commitment for a commitment), banks shall apply the lower of the two applicable CCFs.

50.The credit equivalent amount of OTC derivatives that expose a bank to counterparty credit risk shall be calculated under the rules set forth below in the Counterparty Credit Risk Standard below.

Failed Trades and Non-DvP Transactions

51.Banks shall closely monitor securities, commodities, and foreign exchange transactions that have failed or not been timely settled.

Principles for Failed Trades and Non-DvP Transactions

52.DvP also refers to PvP transactions for the purpose of this Standard. Transactions settled through a DvP system, providing simultaneous exchanges of securities for cash, expose firms to a risk of loss on the difference between the transaction valued at the agreed settlement price and the transaction valued at current market price (i.e., positive current exposure). Transactions where cash is paid without receipt of the corresponding receivable (securities, foreign currencies, gold, or commodities) or, conversely, deliverables were delivered without receipt of the corresponding cash payment (i.e., non-DvP, or free-delivery transactions) expose firms to a risk of loss on the full amount of cash paid or deliverables delivered. Specific capital charges address these two kinds of exposures.

53.The following capital treatment is applicable to all transactions on securities, foreign exchange instruments, and commodities that give rise to a risk of delayed settlement or delivery. This includes transactions through recognised clearing houses that are subject to daily mark-to-market and payment of daily variation margins and that involve a mismatched trade. Repurchase and reverse-repurchase agreements as well as securities lending and borrowing that have failed to settle are excluded from this capital treatment. (All repurchase and reverse-repurchase agreements as well as securities lending and borrowing, including those that have failed to settle, shall be treated in accordance with the sections on CRM below).

54.In cases of a system wide failure of a settlement or clearing system, the Central Bank may use its discretion to waive capital charges until the situation is rectified.

55.Failure of a counterparty to settle a trade in itself shall not be deemed a default for purposes of credit risk.

Capital Requirements for Failed Trades and Non-DvP Transactions

56.The capital requirement for failed trades and Non-DvP transactions shall be calculated as follows:

1. (i)For DvP transactions, if the payments have not yet taken place five business days after the settlement date, firms must calculate a capital charge by multiplying the positive current exposure of the transaction by the appropriate factor, according to the table below.
    

   Number of working days after the agreed settlement date	Corresponding risk multiplier
   From 5 to 15	8%
   From 16 to 30	50%
   From 31 to 45	75%
   46 or more	100%

2.  
3. (ii)For Non-DvP transactions (i.e., free deliveries), after the first contractual payment/delivery leg, the bank that has made the payment shall treat its exposure as a loan if the second leg has not been received by the end of the business day. This means that a bank shall use the risk weights set forth in the exposure classes set out in this Standard. However, when exposures are not material, banks may choose to apply a uniform 100% risk-weight to these exposures, in order to avoid the burden of a full credit assessment.
4. (iii)If five business days after the second contractual payment/delivery date the second leg has not yet effectively taken place, the bank that has made the first payment leg shall deduct from capital the full amount of the value transferred plus replacement cost, if any. This treatment shall apply until the second payment/delivery leg is effectively made.