Regulation on Bank Capital Adequacy

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ii. Such other instruments as may be approved by the CBK as permissiblepermanent capital from time to time by rule or order.e) Tier 2 capital includes a bank’s:i. Reserves for loan losses up to a maximum of 1.25 % (one point twenty-fivepercent ) of its risk weighted assets at any one time or such other percentage asmay be established by the CBK from time to time by rule or order;ii. Ordinary preferred shares (being preferred shares which have maturities or areredeemable at the option of their holders and which are cumulative (have theright to payment of past dividends missed) if the bank has the option to deferpayment of dividends;iii. Term preferred shares (shares whose holders have the right to redeem themand which have terms of 5 years or more). These shares are subject toapproval as capital from time to time throughout their terms by the CBK. Theamount of long-term preferred shares (shares with maturities in excess of ten(10) years eligible to be included in Tier 2 capital will be reduced by 20 %(twenty percent) of their original amounts at the beginning of each of the last 5years of their terms;iv. Term debt instruments which are fully subordinated to the rights of depositors(those which, in the event of liquidation of the bank, are not paid any amountsuntil all depositors have been paid. The amount of long-term subordinateddebt instruments (those with maturities in excess of ten years) eligible to beincluded in Tier 2 capital will be reduced by 20% (twenty percent) of theiroriginal amounts at the beginning of each of the last five (5) years of theinstrument’s life;v. Debt instruments which are mandatory convertible into common shares andwhich are unsecured and fully paid-in.f) Total capital – means the sum of a bank’s Tier 1 capital and its Tier 2 capital.g) Risk-asset – means any monetary asset which is carried on the balance sheet of abank such as a loan which entails any risk of loss in value to that bank.h) Off-balance sheet items – means the contingent liabilities of a bank including directcredit substitutes issued by it such as guarantees of indebtedness, standby letters ofcredit and other contingencies which must be disclosed as footnotes on its balancesheet but for which no definite risk value is available for purposes of inclusion in theprinciple part of its balance sheet.i) Goodwill – means the excess of the current value of a bank asset over the value atwhich it is carried on the bank’s books as more fully defined under internationalaccounting standards.j) Intangible asset – means the identifiable non-monetary assets of a bank, which haveno physical substance, which are carried and controlled by it as a result of past events
and from which future economic benefits are expected to flow as more fully definedunder international accounting standards.k) A direct credit substitute – means any arrangement in which a bank assumes risk ofcredit-related losses from assets or other claims that it has not transferred, when therisk of credit loss exceeds the banks pro rata share of the assets or other claims.l) Trade-related letters of credit – means short-term self-liquidating instruments used tofinance the movement of goods and are collateralized by the underlying goods.m) Operational risk – means the risk of loss resulting from inadequate or failed internalprocesses, people and systems or from external events. This definition includes legalrisk, but excludes strategic and reputation risk.n) Loan-to-value ratio – is or means defined as the outstanding principal balance on theloan amount divided by the current estimated market value of the residence.o) Deductions From Regulatory Capital- The following deductions should be made fromthe capital base for the purpose of calculating the risk-based capital ratios inaccording to Article 5 of this <strong>Regulation</strong>:i. Goodwill and intangible assets are to be deducted from a bank’s Tier 1 capitalbefore the Tier 2 capital portion of the calculation is made;ii. Equity investments in other banks or credit institutions. In effect, investment inanother credit institution where the invested capital will be leveraged based onthe prevailing capital adequacy requirements represent a transfer of capital to theaffiliate, where the capital transferred is no longer available to the parent tosupport unforeseen losses. Such investments are thus required to be nettedagainst the bank’s capital for determining capital adequacy;iii. Subordinated term debt are liabilities, but if subordinated term debt was issuedwith an original term to maturity of over five years, then it may be included asTier 2 capital to a maximum of 50% (fifty percent) of Tier 1 capital.iv. Tier 2 capital cannot be higher than 100% (one hundred percent) of Tier 1capital.v. The CBK shall deduct any lending to a Bank-Related Person from capital forpurposes of calculating regulatory capital ratios pursuant to Article 15 andArticle 16 of the Law.Article 3Minimum Capital1. According to paragraph 1 of Article 15 of the Law on Banks, banks should have at leastseven (7) million Euros of paid-in capital, subject to the restrictions in paragraph 2 of Article15 of the Law on Banks, at all times.2. The requirement from the paragraph 1 of this Article must be satisfied within 6 months ofthe Law on Banks coming into force.
Page 1: Pursuant to Article 35, paragraph 1
Page 5 and 6: component of the own funds of those
Page 7 and 8: Article 9Leverage Ratio1. Under par
Page 9 and 10: ANNEX IIFormula for calculating the

Regulation on Bank Capital Adequacy

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