National Bank of Rwanda "*™*"°2 usr 4 : sana BNR Yomececewnne The Governor ‘Qur/Ret 0010/2018 1612 1GSR/pxe gal, 2" November, 2015 Managing Director ~ H&M Bank Rvands Ltd Acces Bank Randa Ltd ~ Bank ofkigat ad = KCB Rwands Denk Lad ~ GP Bank Rwanda Lad + auity Bank Randa Lid = Banque Populaire du Rwanda Led = COGEBANQUE Lid = mb Lid = gama C85 = Reobank Rwanda Lid = Urwege Opportanity Bank Ld = UNGUKA Rank Lad = BRD Commer Lt ~ CRANE BANK Led ~ AB Bank Lad = Bank of Africa Rand Ltd Dea SiMadam, Re: Directive on Capital Requirements ‘As you are aware, Basel IVIII are global regulatory reforms recommended by the Basel (Committee on Banking Supervision (BCBS). BNR'is supportive of the uncerlying objective of the Basel reform package to strengthen the resilience of the banking sector aginst shocks arising ‘rom financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector tothe real economy. These new global regulatory and supervisory standards mainly addressed the following areas: 4, Raise the quality and level of capital to ensure banks are better able to absorb losses on both a going concem and a gone concer basis fi, Increase the risk coverage ofthe eapital framework (Pillar 1) fi. Introduce leverage ratio to serve as a backstop to the risk - based eaptal measure iv, Raise the standards for the supervisory review process (Pillar) and ¥. Public disclosures (Pillar 3) Following these new global frameworks, BNR conducted a conducive Quanitative Impact Study (QIS) in 2013 to assess the preparedness of banks for implementing Basel IVI in Rwanda, Based on the findings of the QIS a roadmap and a project charter were approved by stakeholders to implement four equally underpinning milestones of Basel IVT package: Minimum capital requirements, supervisory review of capital adequacy, market discipline of the Basel Il capital avdequacy framework, and the liquidity requirements. *In light of the above, BNR has developed and discussed with the stakeholders the new capital framework. Under the minimum capital requirement, the framework will fer Standardized Approach for computing capital requirement for credit risk; Standardized Measure Method for smarket risk; Revised Standardized Approach for operational risk and capital buffers (ie. the capital conservation buffer and the Domestic Systemic Important Bank: D-SIE buffer) for macro ‘prudential aspect. ‘To this end, the directive on capital requirements sets out guidance regarding Minimum Copital Requirement (MCR), Adequate Capital and Disclosure requirements to be followed by all scheduled banks for the purpose of parallel runing regime of the existing capital regulation and the new directive on cepital requirements. The parallel running exercise ais at ensuring tht banks prepare adequate data and system requirements, and building capacity & skills to ensure full implementation in January, 2017. ‘The parallel run will start with end September 2015 data, however, banks will submit thei fist Capital requirement report forthe quarter ended by 30th November 3015. Further, banks are required to submit their quarterly reports by end of the menth following the ‘quarter ended, based on the new developed returns as stipulated in Chapters: Tl, IV, V, VI, VIL and VIII ofthe attached directive. ‘The Directive will remain inforee during the period ofthe parallel run until fill adoption ofthe new capital requirements. Should you have any questions regarding this Directive, please feel free to contact your usual supervisory conact- the Director of Banking Supervision, - Bxecutive Seeretary, RBAay ey National Bank of Rwanda Sipwespe! Banki Nkuru y’u Rwanda “Test omer DIRECTIVE N° 03/2015 OF 11/11/2015 ON CAPITAL REQUIREMENTS Pursuant to Law N° 55/2007 of 30/11/2007 governing the Central Bank of Rwanda, especialy in Astiles 5,6, 9,17, 52, 6, and 58; Pursuant to Law N° 007/2008 of 08/04/2008 concerning organization of banking especialy in its aticle 1; ‘The National Bank of Rwanda hereafter referred to as" Central Bank” Decrees: CHAPTER ONE: PRELIMINARY. Atticle One: Legal Authority ‘This Directive is issued under Article $6 ofthe Cental Bank law, which empowers the National Bank of Rwanda to issue Directives to be adhered to by banks in onder to mairtain a stable and lficient banking and financial system. (Chapter IIE of the Banking Law empowers the National Bank of Rwanda to prescribe the ‘minimum ratios that shall be maintained by banks as between their core capital and total capital fon the one hand and their risk weighted assets and off-balance shee items on the other, and for ‘that purpose, also to determine the method of classifying and evaluating asses. Article 2: Seope and application Without prejudice t the provisions of the Regulation N* 11/2009 on capital adequacy requirements of 20/10/2008, this Directive apples to banks ia Rwanda. The ecuirements apply on both a solo and consolidated basis as set out in Regulation N°12/2011 on Consolidated Supervision. Artiele3: Definitions In this Directive, unless reasonsbly implied by contextual usage, the following words and ‘expressions shall mean1, “Adequately capitalized”: in relation to a bank, a Total capital of not less than twelve point five percent (12.5%) of total risk- weighted asets of which ten percent (10%) is core capital 2. “Business Indicator (BI)": a combination of the three macro-components of a bank's income statement: the “interest component” the “services component", and the “financial component”, as defined in this Directive for the purpose of the caital requirement for ‘operational risk, 3. “Bank”: banks and other financial institutions regulated and supervised under the Banking Law. 4. “Capital Conservation Buffer: a requirement on banks to maintain common equty tir 1 capital in relation to risk weighted assets over and above their minimum eapital ratios as «4 buler for losses during periods of financial and economic tess. 5. *Contral Bank”: the National Bank of Rwanda. 6 “Combined Buffer Requirement”: the total of the capital conservation butler, countereyelical buffer and the systemic risk buer. 7. “Comprehensive approach”: the Credit Risk Mitigation technique which allows fuller offset of collateral against exposures, by effectively reducing the expesure amount by the value ascribed to the collateral instruments by applying haircuts to bah the collateral and ‘the exposure to take into account possible price fluctuations. Where the exposure and the collateral are held in different currencies, an addtional downward adjustment shall be ‘made to the volatility-adjusted collateral amount to take account of possible future fluctuation in exchange rates 8. “Core Capital”: the total of Tier 1 capital, which is the sum of common equity Tier 1 capital plu addtional Tier 1 capital as prescribed in this Diretive, 9, “Countereycical capital buffer”: a roquiccmcut intended to protect the banking sector as 1 whole from the build-up of systemic rsk during an economic upswng, when aggregate credit growah tends to be excessive. 10, “Counterparty”: a party to whom a bank has an on- or off-balance shoot credit exposure ora potential credit exposure. That exposure may, for example, take the form of a loan of| ‘ash or securities (where the counterparty would traditionally be calle the borrower), of socurtes posted as collateral, of a commitment or of exposure under an OTC derivatives contract. 11. “Counterparty eredit risk” or “CCR: a risk thatthe counterparty to transaction could : Minimum ratings for investment grade ‘Minimum ratings [Rating agency ‘Securities [Money market Moody sTavestors Sevice (Moody) | Ps Standard & Poor's (S&P) APS itch Rating Services (ih) Capital charges for General market interest rate risk (Banks are required to measure general market rsk exposures wsing the “maturity ‘method. The capital requirement for general market risk i designed tc capture the ‘sk of loss arising ffom changes in market interest rates. Potions are allocated across a maturity ladder and the capital charge is then caleilated as a sum of following four components: The net short or long postion across the trading book; (Gd) The basis risk factor: a small proportion of the matched positors in each time-bend the “vertical disallowance"); Gi) The yield curve risk fuetor: a larger proportion of the matcbed postions across Afferent time-bands (te “horizontal disallowance”) (@v) A net factor for positions in options, where appropriate (see Section V, Artsle 74 ‘on the treatment of options). In this regard, the capital charge will be calculated on the bass ofthe following considerations: 8) Bank's underiying trading issues may exist in Tong or short and both (ie, elated to interest rate deivative/hedge). Where trading issues relate to only long postion, then total capital charge isto be calculated using the capital charge weight a stated in Table 3; and '5) Where any transaction relates to both long and short positon (i, rated to interest rate desivativeTnedge) then total capital charges iso be calculated using Table 3 and Table ‘Table 3: Maturity method: zones, time-bands and weight factors ‘Time-bands for] Time-bands for] Capital ‘Zones _|€00pon 3% or more [coupon less than charge Risk 3% and zero| weight . feoupon bonds | factors (%) 7 3 7 T Tmonth orless [month orless 0.001-3 months 13 months 020 5-6 mons 6 montis a0 | ‘© months 12 months |0.70 Tyas +Deus Taser | 2 3 yeas T928yeas (17S So yeas PESO yeas [225 yeas Bea3yeas——*(BIS ST year E37 years #525 7-10 yeas SAS yeas 375 TO-15 years 7393 yas 450 3 1520 yea 930 years [525 1330 Time Band afer decimal represents months 1.9 to bs ead wT year Smaniis ‘The next step in the calculation isto offset the weighted longs and shors in each time-band, resulting in a single short or long position foreach band. Since, however, each band would include different instruments and different maturities, a 10% capital risk chrge factor to reflect ‘basis risk and gap risk will be levied onthe smaller ofthe offsetting positions, be it long or shot ‘The multiplication with the bass risk factor results fr each time-band in absolute values, that is, they are neither long nor shor. The amounts for all time-bands in the maturity ladder are summed and included as an element ofthe general market risk capital calculation. Thus, if the sum of the weighted longs ina time-band is $100 million and the sum ofthe weighted shorts is Few 90 millon, the so-called “vertical disallowance” fr that ime band would be 10% of Frw 90 nillion (ie. Fv 9.0 million), ‘The result ofthe above calculations isto produce two sets of weighted postions, the net long or short positions in each ime-band (BDT 10 million long inthe example above) and the vertical isallowances, which have no sign. In addition, however, banks are allowed to conduct two ‘rounds of “horizontal offseting frst between the net positions in each ofthe three zone (zones 1, 2,3), and subsequently between the net postions inthe thre diferent zones. The oflsettngwillbe subject toa seae of cisallowances expressed asa fraction ofthe matched positions, asset out in Table 4 below. ‘Table 4: Horizontal disallowances Zones | Time-bands Within the] Between [Between zone ‘adjacent zones [zones Land 3 0-1 month 1.3 months 3-6 months 6-12 months 40% Tyee 2 23 yews 30% 3-4 years 100% yea 5-7 years 7-10 years 40% 10-15 years | 15-20 years | lover 20 years 1. The weighted long and short postions in each of three zones may be offset, so long as the matched portions are attributed a disallowance factor that is pat of the capital requirement calculation. The residual net postion in each zone may be cartied over and. ‘offset against opposite positions in adjacent zones, subject oa second set of disallowance factors. To arrive at the matched weighted positions between zones, the unmatched “weighted positions of a zone may be offset agaist positions in other zones as follows: (The unmatched weighted long shor) position in zone 1 may offet the unmatched ‘weighted shor (long) position in zone 2. The extent to which unmatched weighted positions in zone 1 and zone 2 are offet is described as the matched weighted position between zone I and zone 2 (i) Then, any residual unmatehed weighted long (short) postions ia zone 2 may be ratched by offcting unmatched weighted short (long) positions between zone 2 and zone 3 (Gi) Then, any residual unmatched weighted long (short) postions in zone 1 may be matched by offseting unmatched weighted short (long) positions in zone 3. The‘extent to which the unmatched positions in zone I and zone 3 are offeting is I yeario5 05% | 3% 7. 12% ‘Over 5 years 15% | 75%, e 15% ‘Once the credit equivalent amount forthe tts! replacsment cost (an exchange fate, interest rate contacts, ete) has been deteraincd using ‘he current exposure method, that amount shal! then be weighted according tothe risk weight ofthe counterparty, or if relevant, that of the guarantor or the collateral as indicated in Article 4 sub-paragraph ‘Treatment of Futures and forward contracts, including forward rato agreements and {forward curreney positions ‘Banks are required to teat futures and forward contracts asa combination oa long and a short positon in a notional government security. The maturity ofa future or Forward Rate Agreements (FRA) wil be the period until delivery or exercise ofthe coniract, plus ~ where applicable = the life ofthe underying instrument. ‘Swaps wil be treated as two notional positions in government securities with elevant maturities, For swaps that pay or receive a fixed or floating interest rate against some ther reference price, ‘©, a stock index, the interest rate component should be slotted into the appropriate reprcing ‘maturity category, with the equity component being included in the equity framework. The separate legs of cToss-cureney swaps are to be reported in the relevant maturity ladders forthe concerned curences, Forward currency positions will be valued at current spot market exchange rates, A bank which bases its normal management accounting on net present valucs is expected to use the net present ‘values ofeach position, discounted using current interest rates and valued at caret spot rates, to ‘measure its forward curency and gold positions.Caleutation of eapital charge for commodity derivatives All commodity derivatives and off-balance sheet positions affected by changes in commodity prices shal be included inthe commodities risk measurement framework. To calculate the market risk, commodity derivatives shall be converted into notional ‘commodities postions and assigned to maturities as follows: (i) Futures and forward contacts relating to individual commodities should be incorporated as notional amount of barrels kilos ec, and asigned a maturity with reference to expiry date GiCommodity swaps - where one le is fixed price and the other isthe curent market price - should be incorporated as two positions. Each postion sheuld be equal to the notional amount of the contract, witha position corresponding to each payment on the swap and slotted into the maturity ladder accordingly. The postions are long position if the bank is paying fixed and receiving floating, and shor positons if the bank is receiving fixed and paying floating (jv)Commodity swaps where the legs ae in different commodities shouldbe incorporated in the relevant maturity ladder. Offsetting shall be allowed only if the commodities belong to the same sub-category. Caleulation capital charges for interest and foreign currency derivatives Allowable offsetting of matched positions. Banks may exclude from the interest rate maturity framework altogether (for both specific and general market risk) long and shore positions (both ‘ctual and notional) in identical instruments with exactly the same istuer, ccupon, currency and ‘maturity. A matched position in a future ot forward and its corresponding underlying may also be fully offset, and thus excluded from the caleulation. When the Juture or the forward is ‘comprised of a range of deliverable instruments, offsetting of positions in te future or forward contract and its underlying is only permissible ix. casos where there is a readily identifiable underlying security which is most profitable forthe wader with a short position 10 deliver Movement of the price ofthis security, sometimes called the “cheapest-o-deiver”, and the price ‘ofthe future or forward contract shouldbe closely aligned in such cass, No offsetting i allowed between positions in different curences; the separate legs of crost-curency swaps or forward foreign exchange deals are to be treated as notional postions in the relevant instruments and include inthe appropriate calculation for each currency. Opposite positions in the same category of instruments can also be regarded as matched and allowed to offset fully in certain circumstances. To qualify for this treatment the postions must relate to the same underlying instruments, be ofthe same nominal value and be denominated in the same cureney. Furthermore: (ii) For futures: offsetting postions in the notional or underlying instruments related to the futures contract must be for identical products and mature within seven days of| cach other, Gi) For swaps and FRAS: the reference rate (for floating rate postions) must be identical and the coupon closely matched (within 15 basis points) and(iv) For swaps, FRAs and forwards: the next interest fixing date or, for fixed coupon positions or forwards, the residual maturity must correspond within the following Timits: + Jess than one month hence: same day; + between one month and one year hence: within seven days; * over one year hence: within tity days. Interest rate and currency swaps, FRAs, forvard foreign exchange contracts and interest rate ‘futures will not be subject to a specific risk charge. This exemption also applies to futures on an interest rate index (e.g. LIBOR). However, in the case of futures contracts where the underlying is a debt security or an index representing a basket of debt securities, a spefic risk charge will apply according to the eed sk of the isuer. ‘General market rsk applies to positions in all derivative products in the same manner as for cash positions, subject only to an exemption for flly ot very closely matched positions in identical instruments as defined above in the subsection “Allowable offieting of matched positions”. The ‘various categories of instruments should be slotted into the maturity ladder and treated according to the rules identified ealier. CCaleulation of capital charge for settlement risk. In the case of transactions in which debt instruments, equities, foreign currencies and ‘commodities (excluding repurchase and reverse repurchase agreements and securities or ‘commodities lendog and securities er commosities borrowing) are unsettled after their due delivery dates; a bank must caleulate the price difference to which itis exposed. This isthe difference between the agreed setlement price for the debt instrument, equiy, foreign currency ‘or commodity in question and is eurent market value, where the difference could involve a loss fo the bank. A capital charge, as defined above, applies for setlement/dtivey rick in th case of ‘uasetled ‘transactions’ and counterparty risk in the case of “Tree deliveries, during the life of those transactions involving the delivery ofan instrument against receipt of cash whether or ot these ‘transactions occur in either the banking book othe trading book. ‘The bank must multiply this difference by the appropriate factor in column A oF the Table below in onder o calculate its capital requirement Number of working days | Factor after due settlement date 0-4 5 16-30 31-45 or more‘A bank must hold Regulatory Capital against a non-Delivery Vs Paymerttransation with a ‘normal setlement period where: (@) it has paid for debt instruments, equities, foreign curencies or commodities before receiving them or it has delivered debt instruments, equities, foreign currencies or ‘commodities before receiving payment fr them; and (©) inthe ease ofa cross-border transaction, one day or more has elapsed since it made that payment or delivery ‘The capital requirement for a non-DeP transaction refered to in the above paragraph is calelated as follows: (@) from the business day afer the bank has made its payment or delivery for up to and ‘including four business days aftr the counterparty payment or delivery is due, the bank ‘must teat the transaction as an exposure; and (©) from five business days after the bank has made its payment or delivery until extinction of the transaction, the bank must apply a 1250 per cent risk-weight to the valve transferred plus the positive current expose. ‘Where a non-DvP transaction is required to be treated as an exposure (refer to paragraph (3) above) a bank may apply the relevant risk-weight as according 10 asset classification, “Alternatively, where exposures are not matril, tbe bank may apply & 100 pet cent rsk-weight rovided that all such exposures are risk- weighted consistently. ‘Annex XII; Definition ofthe Business Indicator Ticone [Income Toe win frenet |sateweat | the Bitnes “Segment” | tem Indicator or Macro. Compenent Treat Tbeome “Interest” ‘Abeer sn =| Income =| anes, bot Intestfcome om Avail For Inst "| primary Goal | Sle, Ha to Matuty, Fair Value Expenos) |fnsrment | Open, Held for Trading Goclued cer [re income from alge intradg of oo | ccounting deaives i tang book) | Gtr ints income | snd balae | ooitog | derivatives, as | vel a ote | Tera Tara espns on dep Interest expenses fon Git ccs Ines(aeladed” either in trading of non trading books) snd hedge scconnting derivatives, as well as other interest expenses ‘Oia nares expenses erie Fee ‘and Income received Fe and referring 10 both ombalance and ofthalance sheet activities. Tt should also include “all expenses paid for futeourved Financial J Toan cemmienenis and guarantees | received * foreign transactions Other operating Income fom ordinary banking ‘operations not classified other “BI items but of similar nature, disposal group classified as held for sale not qualifying as discontinued ‘operations Other operating “Expenses for financial Teasing and operating leasingexpenses ‘ilinary banking [Losses fom non-recurrent assets ‘operations not | and disrosl group classified as held classified in| for side “not qualifying as fother “BI items | discontinued o ‘but of similar [Direct exarges to the PE and costs operation risk events (eg fines, ‘commissions, | penalties and litigation setlement), including ‘hich hive not been provisioned for cutsourcing —_| in advance ones), and (i) nature (eg fees | incurred as a consequence of and Nat Profit (Cos) | Abs (Net PAL Net gaicTosses on Gnanclal asses “Financial” |on financial | on TB) + Abs ‘and Tables held for tnding ‘operations (Net PAL on| Net gainslosses | (derivatives, debt securities, equity BB) fon financial | securities, loans and advances, short operations (bath | position, other assets and labiltes) trading and [Net gainvlosses on financial assets ‘banking books) | or liabilies measured at fair Value ‘through profit or lose t Realized not — gainwlosses on financial assets and liabilities not ‘measured at fur Value through profit or loss (available for sale Financial assets, loans and advances, held to maturity investments, financial liabilities measured at amortized oon a (Net gains and Tosies fom hedge accounting Net exchange differences | ___ fair value through profit or loss ‘The following sub-items should not contribute fo any ofthe items of the Business Indicator: Dividend income Income and expenses from insurance or reinsurance business Premiums paid and reimbursement/payments recived fo insurance or reinsurance polices purchased Recovery of taxes debited to customers ‘Administration expenses: staff expenses (including salaries, pension and similar benefits, outsourcing fees paid for the supply of non-financial services (je logistical, IT, human resources), other administrative expense (including expenses for IT, uilities, telephone, travel, office supplies, postage ete) tion of financial assets, non-financial assets liabilities not measured at> Depreciation”amortization (eg on properties, tangible eset, intangible ass) + Provisionsreversal of provisions (eg on pensions, commitments and guarantes given, legal issues) + Impairmentreversal of impairment (eg on financial assets, non-finarcil assets, investments in subsidiaries, joint ventures and associates) + Negative goodwill recognized in profit or loss ‘+ Share ofthe profit or los of investments in subsidiaries, joint ventures and associates + Income tax, corporat tx (1x based on profits, including current tax and deferred tx) ‘Mlustration: Following the proposed coefficients per Bucket “The coeiiiens per bucket BI (Rw millions) [ Coefficient 0-100 [10%] >100=1,000) (13%) 1000-3000 7% 3,000-30,000 (22%) 530,000 [0% Given the BI for the following banks, Operational rsk charge is calculated as follows Bank BI Capital ealeulation A 80 80F10%=8 B. 800 100*10%+ 700*13% = 101 ©. 2,000 100*10% +-900°13%6 + 1,000%17% = 297 D. 20,000 10010% + 900*13% + 2,000°17% + 17,000822% = 4.207 E. 40,000 100%10%% + 900%13% + 2,0008172% + 27,000¥22% + 10,000°30%4 = 9,407 Form_Op-RiskAnnex XIV: Disclosure requirements for Capit Capital structure tl structure and Adequacy Qualitative Disclosures ‘Summary information ca the terms and condition ofthe main features of all capital instruments, especially inthe ease of ‘capital instruments eligible for inclusion in CET 1,Additional ‘Tier 1 or Tier 2. ‘Quantitative Disclosures The amount of Regulaiory capital, with separate disclosure of: CET 1 Capital ‘Additional Tier 1 Capital Total Tier 1: Tier2 Capital Regulatory AdjustmentsDeductions from [Capital Adequacy. ‘Qualitative Disclosures JA summary discussion of the bank's approach to asessing the Adequacy fiscal support current ‘Quantitative Disclosures Capital requirement for Operational Risk ‘Total capital, CET 1 capital, Total Tier 1 ‘capital and Tier 2 capital ratio: ‘For the consolidated grosp; and “For stand alone ‘Capital Conservation Bui D-SIB Capital Buffer | Requirement Leverage Ratio ‘Available Capital 2 fal under Pillar‘Annex XV: Methodology for assessment of D-SIBS 1. Assessment methodology for D-SIBS ‘The assessment of SIBs in Rwanda follows the BCBS's principles for assesment methodology of Domestic Systemically Important Banks (D-SIBs)1. The BCBS D-SIB framework set out twelve principles categorized into two groups the frst group (Principles 1 to 7) focuses mainly fon the assessment methodology for D-SIBs while the second group (Principles 8 to 12) focuses et loss absorbency (HLA) for D-SIBS. For assessment of D-SIBs, BCBS suggests that the impact of a D-SIB's failure on the domestic ‘economy shoul, n prineple, be assessed having regard to bank-speifie indicators that include: Size, Interconnectedness, "Substtuablityfinancial institution infrastucture (including ‘considerations related to the concentrated nature of the banking sect); and Complexity (including the additional complexities from cross-border activity), ‘The overall benchmark seore for systemic importance is stat 10 percent. Thus, the bank wil be designated as a D-SIB if its weighted score (including siz, interconneciedaess, substitutability and complesity) is 10 percent of above, supplemented with supervisory judgrent. Indicators are judged on the basis of bow well they measure risk contribution as well as which incentive effects they may create. | Indicator Weights Based on the methodology developed by the BCBS to identify D-SIBs, the BNR has chosen the indiator-based measurement approach to determine whether a bank is reckoned as & D-SIB, On ‘the basis of the importance of a D-SIB, the level of cepital surcharge to be applied will then be calibrated, FFor assessment purpose, the BNR will apply a 40% weighting to the size indicator. ‘Consequently, the quantitative indicators for iterconnectedness, substitutability, and complexity are given lower weights, with a proposed weighting of 20% foreach factor respectively ‘Where there is more-than one indicator in @ particular category, the 20% weight is allocated equally among the indicators (that is, an indicator is given a 10% weight Waere a category has {wo indicators and 6.67% weight where a eategory has thre indicators). Tae table below lists the indicator with their coresponding weights: ‘Table 1: Indicator-based measurement approach for identifying Rwandan D-SIBs TNR Tndicaior Category ‘Weighting | Individual indicator weighting Stee 40% | Total assets (on and of talance sheet) 40% ranetedness | 20% {Inra-fioancal sytem ase 6.67% In-Snaneial sytem abi __| ser} 5 A romewerk or deang with domes steal portant Fans, BCBS, October 232Wholesale funding ratio 6.67% Payments cleared and settled through payment systems 6.67% 20% Substitutability a a Lending to main sectors 6.6% Complexity 20% | Swaps notional value 10% “Trading book value, available Tor sale value ad financial instruments held to 10% maturity = [Note that summing the scores for all the individual indicators gives the overall score for each bank out of 100 being maximum possible total score (Le if there were only one bank in the country). Below, a description of each indicators provided. Sie Size is a key measure of systemic importance. "The larger the bank, the more widespread the effect ofa sudden withdrawal of its services and therefore the greater the chance that its distress or failure would cause disruption to the financial markets and systems in which it operates, and to the broader functioning ofthe economy. For the purpose of the Rwandan framework, the quantitative indicator used in the D-SIb ‘framework to measure a bank’s size 1s the foal exposure as defined for use in the Basel IHL leverage ratio. This allows considering non-balance sheet items in addition to on-baance sheet items. Therefore in the Rwandan framework, the size ofa bank will be measured as the sum of total consolidated on-balance sheet assets and off-balance sheet items. 1b) Imterconnectedness ‘This measure captures the extent of @ bank's interconnections with othe financial institutions that could give rise to extemalities affecting the financial system and domestic ezonomy in Rwanda. The FSB and BCBS frameworks measure interconnectedness using thee indicators namely: intra-financial system asses that reflect an institution's credit exposure tothe rest ofthe system and thus an institution's potential contribution to a systemic even, inrafinancil sytem liabitties that capture credit risk to the rest of the system and thus an institution's potential contribution toa systemic event, and wholesale funding ratio that isthe share of funding raised fiom sources other than retail deposits in total liabilities and assess the degree to which bank is reliant on wholesale finding from other financial institutions. ‘The quantitative indicators used to capture interconnectedness are illustrated in able below, ‘Table 2: Interconnected ‘measurement* Lending to Fis ‘+ Securities issued by other Fis + Repos 1 Deposits with other FIs + Financial derivatives, ‘Deposits by Fls ‘Securities issued to Fis + Repos © Borrowings from Fis ‘+ Financial derivatives eae [FSB and BCBS identified thee ind!cators to measure substitutability namely: asets the SIB holds as custodian, amount ofits payments cleared and setled through payment systems, and the value of its underwriting transactions in debt and equity markets. As a result identification of D- STB also takes into account the types of roles that banks play in domestic ancl markets and in domestic financial infastructures, which inform views regarding substittbiity. ‘There are certain functions performed by certain banks in Rwanda that would obviously be dificult, ifnot impossible, to substitute at sheet notice. Consequently, a failure ofthat bank will not only cause inconvenience to customers in Seeking the same service from another institutions but also increase the degree of distress at other banks in terms of servic: gaps and reduced market liquidity. These eritical fanctionsservices include: Branch nework (number of branches), payments cleared and settled through payment systems (RTGS payments - annual, Complexity ‘An institution's systemic importance is higher, ifthe institution has a business model, structure and operations which make it particulary dificult to assess (with respect to sks), hard to resolve, and costly to wind up. Assessing building up of risks in more complex banks is more Aifficul, and winding-up of complex institutions is likely to generate higher costs than winding up less complex institutions, and will therefore, all else being equal, have 2 greater impact on financial stability The Basel Commitee takes three indicators o asess complexity, and they are broadly linked to ‘bank's involvement in financial markets. These indicators are: = The notional outstanding amount ofa bank's Over-The-Counter (OTC) derivatives, ~ Level 3 assets: Assets whose fair value (market value) cannot be determined using observable measures, such as market prices, These assets are generally liquid and can only be calculated using estimates or risk-adjusted valve ranges, ~The value of bank's securities that are ‘held-or-tading” (HFT) and ‘available forsale” (AES), HFT and AFS exposures are used as proxies for complexity because all svch instruments are measured at fair valu, thereby increasing the potextial volatility of a 'SIB's balance sheet and income statement. Considering above, inorder to assess the complexity of the banks in Rwanda, two indicators “notional amount of over-the-counter (OTC) derivatives; investments in “trading and available- for-sale securities AFS and securities held for trading - HET”12. Individual aggregate scores Determining bank’s aggregate score, which isthe measure of is systemic importance under the indieatorbased measurement approach, can be illustrated through 4 step process ‘The steps involved in assigning a score to each institution are described below. For illustration purposes, the table below contains a simple numeric example. This table features the methodology applied toa hypothetical financial system. ‘First, in the case of each one of the above mentioned variables, Subsequenty, the relative share ‘of each variable is multiplied by the weight coefficient established for each one of them (hid ‘column of each variable), ‘Step 1: For each bank, first the scores fora particular indicator are estimated by getting the relative share of cach institution in the total amount ofall banks inthe barking sector (‘aking {nto account thee relevant seale and unit; se in the table, the first column of each variable). (se second column of each variable in table attached). This approach is used forall indicators except Tor the wholesale funding ratio, Eg, Sie for Bank A ‘Total exposures ‘Amount in billions of FRW. For Bank A 1325 Banking system 14403, ‘Score 009 “The special estimation ofthe wholesale funding ratio is calculated by aividing total liabilities net of retail funding by total Tiabiltes. Retail fining is defined as the sun of retail deposits (including certificates of deposits) and debt secuitics issued that are held by retail customers. ‘The wholesale funding rato is then adjusted agsinst the average ratio across all banks. The ‘by its designated indicator weighting established foreach ‘one of them. Using the example i Step 1, the indicator weight fr total exposures is 40%. Banke ‘A weighted score for ths particular indicator is 0.02 (see the second columt ofeach variable in {able attached). ———— ‘Total exposures | For Bank A (in bilions of FRW) Banking system (in billions of FRW) ‘Score Weighted score ‘Step 3: The final score ofeach bank —established for classification purposes — isthe result of adding up all weighted values ofeach variable ineluded inthe analysis (see the last coluzan of the table). The adjusted scores for all five categories are totaled to obtain the aggregate score for the bank. The higher the sore, the more systemically important the bank i,Example: Bank A’s assumptions Sie 0.08 Interconnesiodness 0.08 ‘Substitutability 0.06: Complexity 0.02 Total 020 Step 4: The overall score for each bank is then calculated by taking a simple average of its five ‘category scores or Each category score fr each bank is determined by taking a simple average of | the indicator scores in that category. ‘This score is then multiplied by 1(,000 to exprest the indicator score in terms of basis points. The maximum total sore, that i, te score that a bank ‘would have if t were the only bank in sample, is 10,000 bass points (ie. 100%). Size 0.09 Interconneciodness 0.03 Subsitutabilty 0.06 ‘Complexity ‘0.02 Total 020 15 10,000] [Adjusted seores( basis points) [400] ‘The overall score is then mapped to their ecrresponding bucket to determine the additional loss absorbency equirement. 2. Allocation of banks into Buckets ‘The magnitude of additional los absorbency forthe highest populated bucket is 2.5 percent of riskoweighted assets at all times, with an intially empty top bucket of 35 per cent of risk- ‘weighted assets. The magnitude of additional loss absorbency for the lowest bucket is 1.0 per cent of rsk- weighted assets. ‘Banks classified as D-SIBs willbe subjected to additional Common Equity Ter! (CET!) capital requirement ‘The overall score foreach bank is assessed against the specified cut-off threshold, above which all banks will be required 10 maintain higher capital to meet the additoral loss absorbency requirement. Banks above the threshold will be assigned to different buckets depending on thet score. This allows forthe application of varying levels of higher capital requirements depending ‘onthe bank’s bucket,A simplified three-bucket approach is proposed for Rwandan D-SIBs with te additional capital Starting at | percent, the 2 percent and the upper limit set at 3.5 percent of RWA. (see Table below) ‘Table 4: The Rwandan D-SIB bucketing approach Backer ‘Score range | Minimam additional low absorbency (common equity as a percentage of rsk-weighted asets) | 38000% 8 32000-3000 = % T 1000-3000 1% For each D-SIB the capital surcharge ean be redaced or inereased by BNR if the systemic ‘importance ofthe SIB changes, ‘The capital surcharge for D-SIBs will be implemented through an exteasion of the capital conservation buffer. Thus all banks subject to a D-SIBs surcharge will hve an additonal capital requirement added to the minimum capital ratios. 3. Supervisory approach for D-SIBs ‘Based onthe D-SIB assessment results, the BNR wil fine-tune the intensity of, and tailor the strategy for, supervising individual D-SIBs in Rwanda. This will include, among othe things i. more intensive supervision inthe form of higher frequency and higher intensity of on- and offsite monitoring; fi, enhanced macro-prudential analysis to identify potential risks and threats to the domestic financial system that might adversely affect the risk profile of individual D-SIBs; iil, inthe case of locally incorporated D-SIBs, more intensive supervisor interaction and ‘engagement, including between the MA and the D-SIB’s board, and rik committee ‘members iv. Ttisalso important that these banks should adopt sound corporate govemance of risk and risk management culture. The BNR expects D-SIBs to adhere to higher standards general, in terms of risk culture and risk management; corporate governance; and internal controls. Banks are expected generally, and D-SIBs in particular, to be proactive in cultivating a sound risk culture, and ensuring that aneffetve risk govemance framework isin place. D-SIBs should undertake more regular assessments and evaluations of, and ‘generate regular internal repots on, the effectiveness of their risk governance stucture fad thei isk profiles; and use these assessments, evaluations and maragement information (¢, risk or auit reports) as a bass for discussion with the board and risk ‘committe for the purpose of identifying any actions required tobe taken towards ‘enhancing rsk governance practices.4. Higher loss absorbency (HLA) requirements for D-SIBs ‘The BNR will apply HLA requirements to any locally incorporated bank that are designated as -SIBs in a manner commensurate with their depree of systemic importance. Section 5 prescribes a D-SIB HLA range of I-3.5% of total RWA in line with the Basel Committee's G- SIB framework. The D-SIB will be notified in writing ofits HLA requiremert. ‘Table : HLA requirement (for D-SIBs in Bucket 1) Capi Core] Total capital capital | Hier 1+ Tier vier) |) "lus aitonal capital (HLA) ~ for D-SIBs for @ bank im) 108% | 123% Bucket 1; at 16) lus capil conservation buffer —Torallbanks @3%™) | 123%) 1% “Minimum capital requirement ~ or qualifing banks (ora | 133% 18% bank in Bucket 1 a 1%) Ifa D-SIB breaches the addtional loss abso-benry vequirement, it wil be required to submit a plan to retum to compliane: over « timeframe #0 be established by the Bank. Until the D-SIB ‘Fetus to compliance, it will be subject to the Timtations on dividend pay-out and to other restrictions as may be required bythe Bank. If D-SIB progresses to a bucket requiring «higher loss absorbency requirement, it will be ‘required to submit a restoration plan within a timeframe of $ working days as provided in capital Directive 5. Application of HLA requirement fo Subsidiaries of foreign banks ‘To ensure tha the application of the G-SIB and D-SIB framework is compatible globally and ‘between national jurisdictions, Principle 10 of the BCBS D-SIB Principles draws a distinction ‘between the level of application of D-SIB HLA requirements for home and host authorities: “Home authorities should impose HLA requirements that they calibrate a the parent and/or consolidated level, and host authorities should impose HLA requirements that they calibrate at ‘the sub-consolidated/subsidiary level” ‘The BCBS D-SIB Principles allow host authorities to apply the D-SIB framework to a bank regardless of whether itis subsidiary ofa foreign banking group, ora subsidiary of aG-SIB. AS explained in the D-SIB framework, the objective ofthe host authorities’ power to impose HLA ‘on subsidiaries is to bolster capital inorder to mitigate the potential heightened impact ofthe subsidiaries’ failure on the domestic economy due to their systemic natureConsistent with the BCBS DSIB framework, the BNR will consider whether any actions need to ‘be taken forthe purpose of strengthening the bass of home-host coordination inthis regard, for ‘example by amending existing, or entering into further, Memoranda of Understanding (MoU). ‘The BNR will also enter nto discussion withthe relevant home authority in spect of: i. the resolution regimes (including recovery and resolution plans) in beth jurisdictions, fi, possible resolution strategies and any specific resolution plan in place forthe D-SIB, and fil, the extent which such arangements should influence the respective HLA requirements {In addition, for any D-SIB that is a subsidiary of a foreign G-SIB and/or ofa foreign bank thet is ‘D-SIB in its home jurisdiction, the BNR proposes to assess whether some degree of reliance ‘may be placed on the group HLA requirement. If there are clear and credible assurances from the ‘parent bank in terms of forthcoming capital support should the subsidiary come unde stress, and ‘there is an evident ability to execute such support, with no apparent restctons and with no ‘objections fiom the home authority, the BNR’ may consider allowing such subsidiary to be subject to lower HLA requirement locally 6, Announcement, Periodi review and refinement ‘The BNR will conduct an annual D-SIB identification exercise and disclose the names of the ‘banks classified as D-SIBs by March every year stating from 2017, In exceptional case, the (Central Bank may also update the D-SIB lst outside ofthe annual cycle if there are important structural changes within the hanking system, e.g. merger ora substantial take-over. Relevant banks which the BNR proposes to identily as D-SIBs and in the case of locally incorporated Fs fo designate as D-SIBs under tis guideline, will be informed of the BNR’s intention and may discuss the proposed identifcation/desigation and the reason for it withthe [BNR. Thereafter the BNR will finalize its decision and the relevant banks ientifed/designated ‘as D-SIBs will be formally advised. Subsequently where applicable a publi notice will be made ofthe identification designation of D-SIBs and their corresponding HLA requirement o promote transparency. Public disclosure of the list should facilitate intemational co-ordination and splementation of te SIF framework. [A bank's systemic importance is expected to change overtime and for variety of reasons. For ‘example, it may be in response to changes in its busicess strategies. The introduction of new regulations, such as Basel II] and the additional loss absorbency requtement, could also influence a bank’ operations In addition, there may be situations where bank merges increase ‘an institution's systemic importance. For these reasons, the list of SIBs and their bucket postions will change overtime, The Bank ill review thelist of SIBs on an annual basis. This will iavolve updating ind vidual bank scores and bucket positions. ‘The score of the potential systemically important banks wil also be ealeulated cach year based ‘on their end of year financial retums. A format of the retum detailing the information to be submitted to the Bank every year is povided at Annex 1‘The score range willbe reviewed every three years as from the effective dat of the regulation on capital adequacy. 7. Disclosures Al banks forming part ofthe sample wil be required to disclose the values fr various indicators ‘on an annual basis Any locally incorporated D-SIB will be required to disclose its specific D-SIB HLA requirement in the standard capital disclosure template for the purpose of making disclosures on the composition ofthe bank's capital base under the capital disclosure requirement Appendices: Appendix 1: (Excel spreadsheet): Rwanda SIBs - Indicator based measurement approach =a 218 Reporting reauvements T ‘mw 0) ending oon insta tonsneudng undo cred He th fmoncolnstestins th ugh th SS RTT sons ng ner Cr manana bas a to ed rai in tre reports grt wh ohn Put ar rt car org rom fiance ates E 1 [rite seers inured byte Bank Seared) | [Pent cere and cle hough the payment Randa Svar hea sya i args ag dae Toran seaion =|Appendix 2: BCBS D-SIBs principles Assessment methodology Principle 1: National authorities should establish a methodology for assessing the degree to hich banks are systemically important in a domestic context. Principle 2: The assessment methodology fora D-SIB should reflect the potent ‘extemalty imposed by, a bank's failure The reference system for assessing the impact of failure of a D-SIB should be the domestic economy. Principle 4: Home authorities should asses banks for their degree of systemic importance at the consolidated group level, while host authorities should asses subsidiaries in their jurisdictions, consolidated to include any oftheir own downstem subsidiaries, {or their degre of systemic importance. Principle S: The impact of a D-SIB's failure on the domestic economy shoul, in principle, be assessed having regard to bank-specitfic factors: impact of, or Principle (@ Size; () Interconnectedness; () Substituabilityfinancal institution infrastructure (including considerations ‘elated to the concentrated nature ofthe banking sector}; ad (Complexity (including the aiitional complexities ftom cress-border activity) In addition, national authorities can consider other measuresidata that would inform these bankcspecific indicators within each of the abeve fates, such as size of the domestic economy. Principle 6: National authorities should undertake regular assessments of the systemic importance of the banks in ther jurisdictions to ensure that their assessment reflects the curent state of the relevant financial systems and thatthe interval ‘between D-SIB assessments not be significantly longer thar the G-SIB assessment frequency. Principle 7: National authorities should publicly disclose information that provides an outline of the methodology employed to asess the systemic importance of banks in theit domestic economy, Higher loss absorbency Principle 8: National authorities should document the methodologies and considerations used to calibrate the level of HLA that the framework Would require for D-SIBs in their Jurisdiction, The level of HLA calibrated for D-SIBs should be informed. by ‘quantitative methodologies (where available) and country-specific Factors without prejudice to the use of supervisory judgment Principle 9: The HLA requirement imposed on a bank should be commensuate with the degree ‘of systemic importance, as identified under Principe 5: National authorities should ensure thatthe application of the G-SIB and D-SIB. frameworks is compatible within their jurisdictions. Home authorities should impose HLA requirements that they calibrate st the parent and/or consolidated level, and host authorities should impose HLA requirements that they calibrate at the sub-consolidated/Subsidiary level. The home authority should test that the parent bank is adequately capitalised on a stand-alone bass, including cases which a D-SIB HLA requirement is applied at the subsidiary level. Home authorities should impose the higher of either the D-SIB or G-SIB HLA ‘requirements inthe ease where the banking group has been identified as a D-SIB inthe home jurisdiction as well asa G-SIB, In cases where the subsidiary of a hank is considered to be a D-SIB by a host authority, home and host authorities should make arangemers to coordinate and ‘cooperate onthe appropriate HLA requirement, within the constraints imposed by relevant favs in the bos jurisdiction. Principle 12: The HLA requirement should be met flly by Common Equity Tier 1 (CET1). In dition, national authorities should putin place any additonal requirements and ‘other policy measures they consider to he appropriate to addkes the risks posed byaDSIB.