1.

Standardised Approach for UAE Banks - Summary

TocomplimenttheCentralBankoftheUnitedArabEmirates(CBUAE)guidelinesfor
implementationoftheBaselIICapitalAccord,thisSummaryofkeyissueshasbeenprepared
asareferencetoolonly.ItisnotexhaustiveandthefullCBUAEguidelines,related
AppendicesandtheBaselIIAccorddocumentsthemselvesshouldbereferredtoasthe
prevailingauthorities.

Minimumcapitaladequacyratiois10%ofRiskWeightedAsset(RWA)valuesinclusiveof
Credit,MarketandOperationalrisks.

2. Pillar 1 Calculations: Credit Risk

AssetsmayberiskweightedbasedonpublicratingsassignedbyanapprovedExternalCredit
AssessmentInstitution(ECAI)onthefollowingbasis:

Rating GCC Other Banks Banks Corporates

Sovereigns Sovereigns (short
&Central &Central term
Banks Banks exposures)
AAA
AA+
0% 20% 20%
AA
AA
A+
20% 20%
A 50%

A
50%
BBB+
BBB 50%
0%
BBB
100%
BB+
BB
BB
100% 100% 50%
B+
B
150%
B
BelowB 150% 150% 150%
Unrated 100% 50% 20% 100%
Inaddition,forparticularassetclassesthefollowingriskweightingswillapply:

75%RetailPortfolios

35%Claimssecuredbyresidentialproperty

3. Pillar 1 Calculations: Market Risk

Banksarerequiredtoallocatecapitalinrespectofmarketriskunderthegeneralguidelines
andframeworksetoutunderBaselIISectionVI,MarketRisk,whichdefinesthisriskasthe
riskoflossesinonandoffbalancesheetpositionsarisingfrommovementsinmarket
prices.

ThissectiondealswiththeStandardisedApproachofmeasurementasmostbankswillnot
beinapositiontobasetheircalculationsonamodelsapproachwhichmaybeacceptedona
casebycasebasis.

Themarketriskssubjecttoacapitalchargeareasfollows:

InterestRateRisk,

Foreign exchange Risk,

Equity Exposure Risk,
Commodity Risk, and
Options Risk

Thescopeofthechargesisrestrictedtotradingbookonlyforinterestrateriskandequity
positionswhilsttheremainingwillapplytothebanksentirepositions.

4. Pillar 1 Calculations: Operational Risk

Operationalriskisdefinedastheriskoflossresultingfrominadequateorfailedinternal
processes,peopleandsystems,orfromexternalevents.Thisdefinitionincludeslegalrisk
butexcludesstrategicandreputationalrisk.

BaselIIframeworkoutlinesthreemethodsforcalculatingtheriskchargeforoperational
risk:

1. BasicIndicatorApproach

2. Standardised Approach/Alternative Standardised Approach (ASA)

3. Advanced Measurement Approach
CBUAEpermitsbankstouseanyoftheaboveapproachesprovidedtheymeetthecriteria
laiddownunderBaselIIandsubjecttoapprovalfortheAdvancedMeasurementApproach
(AMA)forwhichbankswouldneedtodemonstratetoCBUAEtheappropriatenessofthe
chosenapproach.
5. Pillar 2: Supervisory Review Process

CBUAEconsidersthePillar2requirementsoftheAccordtobeparticularlyrelevantforbanks
initsjurisdiction.Consequently,notwithstandingPillar1capitalcalculationsandimplied
capitalrequirementsdeterminedtherefrom,thesupervisoryreviewprocesswillfocuson
eachbanksInternalCapitalAdequacyAssessmentProcess(ICAAP).

TheICAAPmustbedocumentedandfullyintegratedwiththeenterprisewiderisk
managementframework.Itshouldbeundertakenannually,havetheexplicitinvolvement
andapprovalofbothBoardandSeniorManagement,andbepresentedtotheCBUAEasa
keypointofdiscussionbetweenthebankandregulator.

6. Pillar 3: Market Discipline

CBUAEsupportsenhancedmarketdisciplinebydevelopingasetofdisclosurerequirements
whichwillallowmarketparticipantstoassesskeypiecesofinformationonthescopeof
application,capital,riskexposures,riskassessmentprocesses,andhencethecapital
adequacyoftheinstitution.

Inprinciple,banksdisclosuresshouldbeconsistentwithhowseniormanagementandthe
boardofdirectorsassessandmanagetherisksofthebank.

UnderPillar1,banksusespecifiedapproaches/methodologiesformeasuringthevarious
riskstheyfaceandtheresultingcapitalrequirements.TheCBUAEbelievesthatproviding
disclosuresthatarebasedonacommonframeworkisaneffectivemeansofinformingthe
marketaboutabanksexposuretothoserisksandprovidesaconsistentandunderstandable
disclosureframeworkthatenhancescomparability.