7.For unrealized fair value reserves relating to financial instruments to be included in CET1 capital banks and their auditor must only recognize such gains or losses that are prudently valued and independently verifiable (e.g. by reference to market prices). Prior prudent valuations, and the independent verification thereof, are mandatory.

8.The amount of cumulative unrealized losses arising from the changes in fair value of financial instruments, including loans/financing and receivables, classified as “available-for-sale” shall be fully deducted in the calculation of CET1 Capital.

9.Revaluation reserves or cumulative unrealized gains shall be added to CET 1 with a haircut of 55%.

10.The amount of cumulative unrealized gains arising from the changes in the fair value or revaluation of bank’s own premises and real estate investment are not allowed to be included as part of Asset Revaluation reserve for regulatory purposes.

11.IFRS9 will be implemented during 2018. Banks that are impacted significantly from the implementation of IFRS9 may approach the Central Bank to apply for a transition period for the IFRS9 impact. Such applications will be analysed and considered on a case-by-case basis.

12.The amount reported under accumulated retained earnings (5.1.4.1) should be as per the audited financial statement at year end and should remain the same for the entire financial year.

13.Current financial year’s/quarter’s profits can only be taken into account after they are properly audited/ reviewed by the external auditors of the bank. Current financial years /quarter’s loss if incurred have to be deducted from the capital.

14.Dividend expected/ proposed for the financial year should be reported under 5.1.4.3 and will be deducted from Retained Earnings/ (Loss) (5.1.4). Expected dividend applies only for Q4 until dividend is actually paid.

15.The dividend deduction must be updated based on each of the following events, if the amount changes, after Annual General meeting, or the approval from the Central Ban, or the release of the Financial Statements by the auditors.

16.Other adjustments to the Retained Earnings includes

1. a.Prudential filter: Partial addback of ECL in accordance with the Regulation Regarding Accounting Provisions and Capital Requirements - Transitional Arrangements should be reported under 5.1.4.4 IFRS transitional arrangement.
2. b.CBUAE Regulatory deductions:
   1. i.Amount exceeding Large Exposure threshold: Any amount that is in violation of Large Exposure regulation of notice 300/2013 shall be deducted from the capital. Any amount deducted from CET1 under 5.1.4.5 of the BRF 95 due to a Large Exposure violation of notice no.226/2018 may be excluded for the calculation of risk weighted assets. However, amounts that are not deducted must be included in risk weighted assets. Furthermore, any counterparty credit risk (under CR2a) associated with such exposure must remain included in the calculation of risk weighted asset.
   2. ii.Loans to directors: The circular 83/2019 on Corporate Governance regulations for Banks, under the article (6) “Transaction with Related parties” requires if the transaction with the related parties are not provided on arm’s length basis, then on general or case by case basis, deduct such exposure from capital. The deduction should be reported under 5.1.4.5 of the BRF 95.

17.The buffer for internationally active banks will be a weighted average of the buffers deployed across all the jurisdictions to which it has credit exposures. The buffer that will apply to each bank will reflect the geographic composition of its portfolio of credit exposures. When considering the jurisdiction to which a private sector credit exposure relates, banks should use, where possible, an ultimate risk basis; i.e. it should use the country where the guarantor of the exposure resides, not where the exposure has been booked.

18.Banks will have to look at the geographic location of their private sector credit exposures (including non-bank financial sector exposures) and calculate their countercyclical capital buffer requirement as a weighted average of the buffers that are being applied in jurisdictions to which they have an exposure. Credit exposures in this case include all private sector credit exposures that attract a credit risk capital charge or the risk weighted equivalent trading book capital charges for specific risk and securitisation.

19.The weighting applied to the buffer in place in each jurisdiction will be the bank’s total credit risk charge that relates to private sector credit exposures in that jurisdiction, divided by the bank’s total credit risk charge that relates to private sector credit exposures across all jurisdictions. Banks must determine whether the ultimate counterparty is a private sector exposure, as well as the location of the “ultimate risk”, to the extent possible.

20.The charge for the relevant portfolio should be allocated to the geographic regions of the constituents of the portfolio by calculating the proportion of the portfolio’s total credit exposure arising from credit exposure to counterparties in each geographic region.

Please refer to Question 15 of the FAQs below for further guidance and examples of countercyclical buffers.