An extract from The Banking Regulation Review, 11th Edition
Prudential regulationi Relationship with the prudential regulator
As further detailed in Section II, one of the main functions of the CBE is determining the regulatory and supervisory standards necessary to guarantee the sound financial positions of banks operating in Egypt as well as their efficient performance. The CBE is also vested with substantial powers pertaining to the evaluation of efforts exerted in connection with guaranteeing the soundness of bank credit and ensuring the application of standards of credit quality and financial soundness.
The provisions of the Banking Law grant the CBE various roles that enable it to directly supervise as well as monitor the various aspects of the banking sector, particularly with respect to the supervision of the management and boards of directors of banks. To this end, banks operating in Egypt are required to disclose to the CBE any changes introduced into their founding documents or their statutes, and changes to any of the information provided by banks in their registration forms as received by the CBE. Such changes to any of the above-mentioned documents shall not take effect until they are approved by the CBE. Moreover, banks operating in Egypt are required to disclose to the CBE on a regular basis, as detailed further in Section VI, the names of the shareholders who own more than 1 per cent of the bank's capital. With respect to a bank's day-to-day operations, banks are obligated to present to the CBE monthly data reflecting their financial position as well the required financial and audit-related data. The CBE retains the right, as provided for under the Banking Law, to examine the books and registers of banks operating in Egypt whereby it ensures the obtainment of the data and clarifications it deems necessary for realising its purposes.
For the purpose of ensuring the continuous provision of banking services to customers in Egypt, the prior approval of the Board must be obtained by any bank operating in Egypt and wishing to cease its operations and activities. Moreover, any bank may merge into another bank only after having obtained the required licence for such merger from the Board and after having met the requirements for such as issued by the Board.
To this end, and for the purpose of ensuring the efficient operations of the various types of banks in Egypt, Article 56 of the Banking Law stipulates that the Board shall determine:
(1) the minimum capital adequacy requirements; (2) the maximum limits of concentration of a bank's investments abroad; (3) the maximum limits of the debt due abroad and the limits on guarantees provided against any finance payable abroad; (4) the maximum limits of the lending value of the collateral/guarantees provided against finance and credit facilities, and the determination of maturities; (5) a determination of the liquidity and reserve ratios; (6) the maximum limits of a bank's investments in securities, in real estate finance, and in credit extended for consumption purposes; (7) the regulations governing the opening accounts, and conducting banking transactions; (8) the standards followed in determining the value of each type of the bank's assets; (9) the rules governing disclosure, and the data to be disseminated, as well as the means of dissemination; (10) the rules concerning the maximum limit of the bonds each bank may issue or guarantee, and the conditions governing the issuance of bonds and guarantees; and (11) the maximum limits of exposure to one customer and his connected parties.
Additionally, the Board shall determine the standards to be upheld by banks in classifying the finance and credit facilities extended to customers. The Board shall also determine the liquidity ratios to be upheld by banks operating in Egypt, in addition to determining the fields in which banks can invest and those fields in which banks are prohibited from investing.
The aim of the CBE's supervisory process is to sustain an attentive approach and develop an early warning system. This allows the CBE to take proactive approaches to ensure the safety and soundness of the banking system, that banks comply with the Banking Law and Supervision Regulations, and that banks develop risk management systems and enhance their internal control practices. To this end, the banking supervision sector of the CBE is composed of a number of units that are collectively responsible for implementing the CBE's supervisory objectives and principles to ensure the stability, integrity, soundness and efficiency of the banking system.
The banking supervision sector is comprised of the following units:
- on-site supervision unit;
- off-site supervision unit;
- licensing supervision unit;
- macroprudential unit;
- regulations unit;
- central credit registry and legal cases unit; and
- Basel II implementation unit.
With respect to the corporate governance requirements formulated by the CBE, the Banking Law stipulates that 'the Governor of the CBE shall be consulted on the appointment of the chairman and members of the bank's boards of directors, as well as the executive directors in charge of credit, investment, portfolio management, and external transactions including swaps; and internal inspection.' Moreover, the Governor of the CBE may request the removal of one or more of the persons nominated by the bank in question to fill any of the aforementioned positions. Such a request for removal shall be issued by the Governor of the CBE in the event that the investigation undertaken by the CBE reveals that such banks are in violation of the rules pertaining to depositors' safety and those pertaining to the bank's assets.
The Supervision Regulations include two chapters dedicated to an extensive overview of the internal audit requirements in addition to the governance standards and regulations to be upheld by banks operating in Egypt.
The CBE published a number of circulars outlining the corporate governance as well as internal audit requirements to be adhered to by banks operating in Egypt. The most extensive of these was the circular published by the CBE, dated 23 August 2011, which was further amended by a number of more recently issued circulars. The aforementioned circular issued in 2011 provides a comprehensive set of requirements, procedures and standards pertaining to, among other things:
- banks' board of directors, their composition and their obligations, as well as the evaluation of boards' efficiency;
- the relationship between a bank's board of directors and the bank's upper management, including a clear division with respect to the powers and obligations of each;
- transparency and disclosures; and
- the relationship between a bank's board of directors and the bank's shareholders.
Moreover, the aforementioned circular requires that banks operating in Egypt disclose to the CBE the net amount (based on a monthly average) received by the 20 most highly paid (including both wages and bonus payments) employees in the bank.
For the purpose of ensuring the efficient operation of a bank's management, the CBE issued a circular in September 2018 increasing the frequency of a bank's board meetings to 12 per year and permitting board members to attend up to four board meetings per year by way of video conference or teleconference. In January 2019, the CBE issued a circular amending the frequency of board meetings to eight times per year, with board members permitted to attend up to two board meetings per year by video conference or teleconference.iii Regulatory capital and liquidity
With respect to the capital adequacy requirements (CAR), which is the ratio of banks' minimum capital requirements in relation to their risk-weighted assets to be maintained by banks operating in Egypt, the CBE dedicated a chapter in the Supervision Regulations to outlining the minimum CAR to be maintained by local banks as well as those requirements to be maintained by branches of foreign banks. The circular stipulates that Egyptian banks are required to maintain a minimum CAR of 10 per cent.
To further ensure that banks operating in Egypt hold adequate capital to cover any losses as well as support the relevant risks, particularly in times of financial and economic crisis, the CBE issued a circular on 17 April 2016 outlining the capital conservation buffer (CCB) ratio to be applied by banks operating in Egypt starting from 2016. The aforementioned circular introduced a new CCB of 0.625 per cent, raising the minimum Tier 1 ratio to 6.625 per cent (from the previous 6 per cent) and the total CAR and CCB to 10.625 per cent (from the previous 10 per cent). Moreover, the circular stipulated that the CCB would be raised gradually every year to reach 2.5 per cent by January 2019, thus raising the minimum total CAR and CCB to 12.5 per cent, and the minimum Tier 1 to 8.5 per cent.
A circular issued by the CBE on 2 July 2016 outlined the Basel III requirements pertaining to the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) to be upheld by banks operating in Egypt, starting from July 2016. The circular stipulated that the minimum LCR to be maintained by banks for both local and foreign currency was 70 per cent in 2016, increasing to 100 per cent in 2019.
To this end, the implementation of the LCR and the NSFR has been finalised in Egypt.iv Recovery and resolution
For the purpose of ensuring the continuous and efficient operation of banks as well as safeguarding the rights of banks' depositors, the Banking Law requires that banks maintain with the CBE a credit balance as reserve, whereby such balance represents a ratio of the total reserves held by a bank as determined by the Board. Additionally, the Banking Law stipulates that a bank operating in Egypt is required to have funds inside Egypt equivalent to its total payable obligations in addition to an amount of no less than the bank's minimum issued and paid capital requirements stipulated under the Banking Law. The aims of the requirements are to ensure that banks, at all points in time, are able to meet their obligations as they become due and payable, thus limiting the possibility of failure. Moreover, the Banking Law further stipulates that in the event that a bank operating in Egypt is believed to be facing financial difficulties that may affect the bank's financial position, the Board shall intervene and require that the bank's board of directors make available the necessary financial resources in the form of an increase in paid capital or through the injection of support funds. Moreover, the Board shall determine the procedures for such increase in paid capital or injection of funds as well as determine the time limit for undertaking such procedures. In the event that such procedures are not undertaken by the bank within the specified period of time, the Board shall determine the increase in capital that it deems necessary and offer it for subscription; issue a decision for the merger of the bank into another bank after having obtained the approval of the bank with which it will be merging; or delist the bank facing financial difficulties in accordance with the regulations governing said delisting.
To this end, Article 79 of the Banking Law stipulates that:
a bank shall be considered exposed to financial difficulties upon occurrence of any of the following events: (1) the insufficiency of the bank's assets to cover its liabilities in a way prejudicing the funds of depositors; (2) a tangible drop in the bank's assets or revenues, due to a violation of the laws, or as a result of engaging in any risky practices not in accordance with the bases of banking business; (3) the pursuance of improper methods in managing the banks' activity, which result in a tangible reduction of the shareholders equities, or affect the rights of depositors and other creditors; (4) the existence of strong evidences establishing that the bank will not be able to meet the depositors' demands or fulfil its obligation in normal conditions; or (5) a decline in the value of the equities of the shareholders at the bank below the provisions required to be formed.
Banks operating in Egypt shall, according to the provisions of the Banking Law, be delisted by virtue of a decision issued by the Board in the event that:
- it is established that the bank is in violation of the provisions of the Banking Law or its implementing regulations, and has not removed the violation during the period and under the conditions set by the Board;
- the bank adopts policies that would harm the general economic interest or the interests of depositors or shareholders;
- the bank ceases its operations;
- the bank becomes bankrupt or undergoes liquidation; or
- the bank's licence is found to have been based on erroneous data submitted to the CBE.