An extract from The Banking Regulation Review, 11th Edition
Prudential regulationi UAE
The Central Bank has issued regulations on a whole range of issues and ensures compliance with those regulations on the basis of a bank–examiner-type approach.
In a significant development, the Central Bank issued Circular No. 52 of 2017, which came into effect on 1 February 2017, on capital adequacy norms by way of the phased implementation of Basel III. Article 2 of the regulations explains the quantitative requirements and states that the total regulatory capital comprises the sum of two tiers, where Tier 1 capital is composed of a Common Equity Tier 1 (CET1) and an additional Tier 1. Banks must comply with the following minimum requirements at all times: CET1 must be at least 7 per cent of risk-weighted assets (RWA); Tier 1 capital must be at least 8.5 per cent of RWA; and total capital, calculated as the sum of Tier 1 capital and Tier 2 capital, must be at least 10.5 per cent of RWA. The regulations were fully implemented on 1 January 2018.
Circular No. 16/93 issued by the Central Bank governed large exposures incurred by banks. Large exposures were funded exposures. Banks were restricted from exceeding the maximum exposure per client or group. Circular No. 32/2013 was issued by the Central Bank in November 2013 to replace Circular No. 16/93. Now large exposures include funded and unfunded exposures and unutilised committed lines. Revised restrictions have been imposed with regard to lending to government and government-owned entities. Banks cannot lend sums exceeding 100 per cent of their capital to governments and their related companies, or more than 25 per cent to an individual borrower. The rules also prescribe the manner in which different categories of assets are to be risk-weighted. Circular No. 32/2013 allows banks five years within which to bring their exposure within the prescribed limits. Given the current banking situation, the deadline is likely to be extended.
In 2012, a circular was issued by the Central Bank to restrict mortgage loans to expatriates to 50 per cent of the value of a first home and 40 per cent of the value of a second home. Loans to UAE nationals were capped at 70 per cent of the value of their first home and 60 per cent of their second home. At the request of the banks, the circular was reconsidered by the Central Bank and reissued in October 2013. As reissued, the mortgage caps have been revised, and banks are now permitted to grant mortgage loans to expatriates of up to 75 per cent of the value of a first home and up to 60 per cent of the value of a second. Loans to UAE nationals are capped at 80 per cent of the value of their first home and up to 65 per cent of the value of the second. If the value of the first home exceeds 5 million dirhams, the mortgage loan cap applicable to an expatriate and a UAE national is 65 and 70 per cent, respectively.ii DIFCRelationship with the prudential regulator
Firms authorised by the DFSA are required to notify the DFSA of all matters that could reasonably be expected to be notified to the DFSA. There are quarterly reporting requirements in respect of capital adequacy. The DFSA regularly conducts themed reviews. Previous reviews have focused on the prevention of money laundering and terrorism financing. The DFSA has also focused on authorised firms' compliance with restrictions imposed on dealing with Iranian counterparties arising from the United Nations sanctions relating to nuclear non-proliferation and politically exposed persons. Recent reviews have also looked at client take-on processes and suitability assessments.Management of banks
The DFSA requires all financial institutions active in the DIFC to have adequate systems and controls in place to ensure that they are properly managed. There are a number of mandatory appointments (senior executive officer, chief financial officer, etc.). Individuals holding these mandatory positions are subject to prior clearance by the DFSA. The DFSA does not impose any requirements or make any restrictions in respect of bonus payments to management and employees of banking groups other than recommending that remuneration structures and strategies are appropriate to the nature, scale and complexity of individual businesses.Regulatory capital
Those firms holding authorisations to accept deposits and provide credit fall into prudential category 1 (being the highest of categories 1 to 5). Category 1 firms have a base capital requirement of US$10 million. The actual capital requirement may be significantly higher, depending upon the volume of business being conducted and other factors set out in the DFSA Rulebook. Historically, most banking groups established branches in the DIFC and were able to obtain waivers of the capital adequacy requirements on that basis: in short, they looked to their head office balance sheet as support for their DIFC functions. This approach is becoming less and less acceptable to the DFSA, particularly for smaller financial institutions coming from jurisdictions other than Tier I jurisdictions.
In line with the revised rules outlined for Basel III implementation, the DFSA revised the Prudential Investment Business Module of the DFSA Rulebook in 2018. This introduced changes to minimum capital requirements, new capital buffers, leverage and liquidity coverage ratios, and disclosure and monitoring requirements.iii ADGM
The Prudential – Investments, Insurance Intermediation and Banking Rules (the PRU Rulebook) have been promulgated by the FSRA. Regulated firms are classified into five categories, primarily on the basis of the activities for which they are authorised. Banking activities, including taking deposits, fall into category 1, and attract stricter requirements such as a base capital requirement of US$10 million. Firms that are authorised to deal in investments as principal or provide credit but that cannot accept deposits fall under category 2, with a base capital requirement of US$2 million. These rules were revised by the ADGM in 2018 for the purposes of compliance with Basel III.
In November 2019, the FSRA published a consultation paper setting out a number of proposed updates to the PRU Rulebook. The proposals cover the prudential supervision of banks, insurance intermediaries and investment firms operating within and from the ADGM's jurisdiction and would align its internationally recognised prudential regime more closely with the regulatory framework developed by the Basel Committee on Banking Supervision. The main proposals are in relation to the net stable funding ratio, large exposures, disclosure requirements and further, miscellaneous amendments that will provide greater clarity to institutions operating in the ADGM. The deadline for providing comments was 5 January 2020, following which the ADGM is considering modifications. The updated rules are yet to be published.