Basel III for Bermuda Banks and Deposit Companies - Guidance Notes (Amended February 2024)

Summary

This is the BMA's consolidated Basel III guidance for Bermuda licensed banks and deposit companies, amended February 2024 to incorporate the Basel III post-crisis reforms. It sets out the capital, liquidity and disclosure framework these institutions must meet on an ongoing basis, and should be read together with the Basel Committee's Basel Framework text.

• Capital framework: Adopts CET1 as the primary capital form, with AT1 and Tier 2 permitted subject to Basel Framework loss-absorbency criteria; minimum ratios of 4.5% CET1, 6.0% Tier 1 and 8.0% Total Capital of RWA at all times, plus capital conservation buffer and leverage ratio requirements per the Annex I implementation timetable.
• Pillar 1 operational risk: Requires use of the standardised approach (Business Indicator Component/BIC methodology) for calculating operational risk capital charges, with worked examples in Annex II and gross loss inclusion/exclusion rules in Annex III.
• Pillar 1 credit risk: Requires use of the revised standardised approach for credit risk, including national discretions on risk-weighting of regulatory real estate exposures, effective January 2024 with a 12-month transition ending 31 December 2024.
• Large exposures and output floor: Revised large exposure framework and new output floor requirements took effect 1 January 2023, following a 12-month transition ending 31 December 2023.
• Operational risk management principles: Banks must maintain an operational risk management framework consistent with the Authority's revised operational risk principles, effective 1 January 2023.
• Liquidity (LCR): Institutions must meet Liquidity Coverage Ratio requirements; a national discretion allowing alternative outflow rates for trust, fund management and inward insurance customer deposits became effective 1 April 2022, available to institutions that submit annual behavioural analyses to the Authority.
• Pillar 2 and Pillar 3: Banks remain subject to the Capital Assessment and Risk Profile (CARP) Pillar 2 process for institution-specific capital levels, and must comply with Pillar 3 public disclosure requirements using the Authority's mandatory disclosure templates published on its website.

The guidance consolidates years of consultation papers and confirms current in-force capital, liquidity, operational risk and credit risk standards; readers should also consult the Authority's website for the mandatory Pillar 3 disclosure templates.

Key obligations

• Maintain CET1 capital of at least 4.5% of RWA, Tier 1 capital of at least 6.0% of RWA and Total Capital of at least 8.0% of RWA at all times.
• Calculate Pillar 1 operational risk capital charges using the standardised Business Indicator Component (BIC) methodology and apply the gross loss inclusion/exclusion criteria in Annex III.
• Apply the revised standardised approach for Pillar 1 credit risk capital charges, including applicable national discretions on real estate exposure risk weighting, from January 2024 (12-month transition to 31 December 2024).
• Comply with the revised large exposures framework and output floor requirements from 1 January 2023 (12-month transition ended 31 December 2023).
• Maintain an operational risk management framework consistent with the Authority's revised operational risk principles, effective 1 January 2023.
• Meet Liquidity Coverage Ratio requirements; to apply alternative outflow rates for trust, fund management and inward insurance customer deposits, submit annual behavioural analyses to the Authority.
• Undergo the Capital Assessment and Risk Profile (CARP) Pillar 2 process to determine institution-specific capital levels.
• Comply with mandatory Pillar 3 public disclosure requirements using the Authority's published disclosure templates.
• Report to the Authority in a Basel III consistent manner via the Prudential Information Return (PIR).

Applies to

banks, deposit companies

Deadlines

• 1 January 2015: 2017 rules (Basel III capital and liquidity framework) became effective, with PIR reporting in Basel III consistent manner starting Q1 2015.
• 31 March 2015: Deadline for each bank to make its one-time irrevocable election to exclude Other Comprehensive Income (OCI) from CET1.
• 1 April 2022: LCR national discretion allowing alternative outflow rates for trust, fund management and inward insurance customer deposits became effective.
• 1 January 2023: Revised operational risk, large exposures and output floor frameworks, and revised operational risk principles, came into effect.
• 31 December 2023: End of 12-month transition period for the revised operational risk, large exposures and output floor frameworks.
• January 2024: Revised standardised approach for credit risk came into effect.
• 31 December 2024: End of 12-month transition period for the revised standardised approach for credit risk.
• annually: Institutions seeking alternative LCR outflow rates for specific financial counterparties must submit annual behavioural analyses to the Authority.