Revised Framework for Regulatory Capital Assessment (Banks and Deposit Companies Act 1999) — December 2008

Summary

This is the Bermuda Monetary Authority's handbook implementing the Basel II capital adequacy framework for Bermuda banks under the Banks and Deposit Companies Act 1999. It replaces the Authority's previous capital methodology with a three-pillar structure covering minimum capital calculation (Pillar 1), supervisory review (Pillar 2), and market discipline disclosures (Pillar 3).

• Pillar 1: Sets out detailed methodologies for calculating minimum capital requirements for credit risk (standardised and IRB approaches, securitisation), operational risk, and market risk, retaining the 8% risk-weighted assets floor.
• Pillar 2: Introduces the Capital Assessment and Risk Profile (CARP) process and the Supervisory Assessment Process (SAP), under which the Authority sets an overall capital requirement above the Pillar 1 minimum.
• Pillar 3: Imposes market discipline disclosure requirements (capital structure, capital adequacy, credit risk, market risk, securitisation, operational risk) with defined frequency and confidentiality treatment.
• Scope of application: Capital requirements apply at solo and consolidated levels, covering banking, securities and other financial subsidiaries; insurance and significant commercial entity investments are generally deducted from capital subject to specified rules.
• Transitional arrangements: Sets out a phased approach for 2009 whereby the Authority applies a proxy Pillar 2:Pillar 1 ratio and expects banks to maintain capital buffers consistent with pre-existing management expectations while Pillar 2 SAP reviews are completed.

The framework applies primarily to Bermuda-licensed banks and to selected investment businesses by bilateral agreement with the Authority; deposit companies may remain on the prior capital methodology until they agree with the Authority to migrate to the new approach.

Key obligations

• Banks and selected investment businesses must calculate and hold regulatory capital using the new Basel II Pillar 1 methodology from 1 January 2009, subject to the 8% minimum capital to risk-weighted-assets floor.
• Institutions must consolidate majority-owned or controlled banking, securities and other financial entities for capital purposes, and deduct equity/regulatory capital investments in non-consolidated financial, insurance and significant commercial entity holdings as specified.
• Banks must publicly disclose the regulatory approach taken for insurance entities within their group and disclose any surplus capital recognised from insurance subsidiaries.
• Banks must comply with Pillar 3 market discipline disclosure requirements at the specified frequency, covering capital structure, capital adequacy, credit risk, market risk, securitisation, and operational risk.
• During the transitional period, firms are likely to be required to submit two sets of regulatory capital returns as at end-December, showing calculations under both the existing and new (Basel II) methodologies.
• Banks must operate at all times with capital exceeding the minimum resulting from the Pillar 1 calculation and consistent with the overall capital requirement set by the Authority following the Pillar 2 supervisory review.
• Deposit companies wishing to remain on the current capital adequacy framework must agree this case-by-case with the Authority; otherwise migration to the new methodology is expected.

Applies to

banks, deposit companies, selected investment businesses/investment firms

Deadlines

• 1 January 2009: New Basel II capital framework takes effect for all Bermuda banks and selected investment businesses.
• Transitional period during 2009: Authority applies transitional capital requirements and proxy Pillar 2:Pillar 1 ratios while completing initial Pillar 2 SAP assessments for all banks.
• By end of Q2 2009 (illustrative): Example timeline by which the Authority completes a Pillar 2 SAP review and communicates any additional capital requirement to bank management.
• By end-2009: Authority expects to have completed its initial round of Pillar 2 SAP assessments for all banks and is unlikely to impose capital floors beyond this point.