guidelines on - ambd...(ii) the components of, and the total amounts of tier two capital (including...

AUTORITI MONETARI BRUNEI DARUSSALAM 1 | P a g e GUIDELINES ON PILLAR 3 PUBLIC DISCLOSURE REQUIREMENTS

ANNEX 1

GUIDELINES

ON

PILLAR 3 - PUBLIC DISCLOSURE REQUIREMENTS

Date: 2 January 2018


CONTENTS

THE DISCLOSURE REQUIREMENT………………………………………………………………………………………………………..3

A. SCOPE AND GENERAL CAPITAL ADEQUACY (LOCALLY INCORPORATED BANKS ONLY)................3

1. SCOPE OF APPLICATION ………………………………………………………………………………...........................3

2. CAPITAL ……………………………………………………..………………………………………………………………………….5

3. CAPITAL ADEQUACY ………………………………………………………………………………………..…………………….6

B. RISK EXPOSURES AND ASSESSMENT (ALL LICENSED BANKS)……………………………….…………………….7

4. GENERAL QUALITATIVE DISCLOSURE REQUIREMENTS…………………………………..………………………7

5. CREDIT RISK………………………………………………………………………………………………………………………..15

6. CREDIT RISK MITIGATION ………………………………………………………………………………….………15

7. COUNTERPARTY CREDIT RISK………………………………………………………………………………….……..……15

C. OTHER RISKS (LOCALLY INCORPORATED BANKS ONLY)……………………………………………………………..15

8. MARKET RISK………………………………………………………………………………………………………………………15

9. OPERATIONAL RISK……………………………………………………………………………………………………………..15

10. EQUITY INVESTMENTS IN THE BANKING BOOK…………………………………………………………………..15

11. INTEREST RATE RISK IN THE BANKING BOOK………………………………………………………………………15


THE DISCLOSURE REQUIREMENT

A. SCOPE AND GENERAL CAPITAL ADEQUACY (LOCALLY INCORPORATED BANKS

ONLY)

1. SCOPE OF APPLICATION

1.1. Qualitative disclosures

1.1.1. Pillar 3 applies at the top consolidated level of the banking group. The following information must be disclosed in relation to the parent and/or bank (in Brunei Darussalam) and its banking and financial institution subsidiaries:

(a) The full legal name of the top corporate entity in the group to which the disclosure

requirements apply; (b) An outline of the differences in the basis of consolidation for accounting and

regulatory purposes, with a brief description of the entities1 within the group which for regulatory purposes are:

(i) Fully consolidated2; (ii) Pro-rata consolidated3; (iii) Given a deduction treatment4; (iv) Allowed to recognise surplus capital at the parent level4,5; and (v) Neither consolidated nor deducted (e.g. the investment is risk weighted)

(c) Any restrictions on the transfer of funds or regulatory capital within the group (e.g.

large exposure or exchange control regulations or covenants over the repayment of capital or the payment of dividends).

1 Entity refers to securities, insurance and other financial subsidiaries, commercial subsidiaries, significant minority

equity investments in insurance, financial and commercial entities. 2 Following the listing of significant subsidiaries in consolidated accounting, e.g. IAS 27. 3 Following the listing of subsidiaries in consolidated accounting, e.g. IAS 31. 4 May be provided as an extension (extension of entities only if they are significant for the consolidating bank) to the listing of significant subsidiaries in consolidated accounting, e.g. IAS 27 and 32. 5 Surplus capital in unconsolidated regulated subsidiaries is the difference between the amount of the investment in those entities and their regulatory capital requirements.


1.2. Quantitative Disclosures

1.2.1. The following information must be disclosed in relation to the parent bank and its banking and financial institution subsidiaries:

(a) The aggregate amount of surplus capital6 of insurance subsidiaries7;

(b) The aggregate amount of capital deficiencies8 in any subsidiaries that are not

included in the consolidation (i.e. that are deducted) and the name(s) and country of incorporation of such subsidiaries;

(c) The aggregate amounts (current book value) of the bank’s total interests in insurance entities, which are risk-weighted9 rather than deducted from capital or subjected to an alternate group-wide method10, as well as their name, their country of incorporation or residence, and proportion of ownership interest and, if different, the proportion of voting power in these entities. In addition, banks must disclose the quantitative impact on regulatory capital of using this method versus the deduction or alternate group-wide method;

(d) The aggregate capital deductions, and risk-weighted asset amounts of holdings of equities listed in paragraph 1(b) above which are given a deduction treatment in the accounts of the parent bank.

6 Surplus capital in unconsolidated regulated subsidiaries is the difference between the amount of the investment in those entities and their regulatory capital requirements. 7 Refer to AMBD Capital Adequacy Framework, dated 15 March 2017. 8 A capital deficiency is the amount by which actual regulatory qualifying capital is less than regulatory capital requirement. Any deficiencies which have been deducted on a group level in addition to the investment in such subsidiaries are not to be included in the aggregate capital deficiency. 9 Refer to AMBD Capital Adequacy Framework, dated 15 March 2017. 10 Refer to AMBD Capital Adequacy Framework, dated 15 March 2017


2. CAPITAL

2.1. Qualitative Disclosures

2.1.1. All locally incorporated banks must disclose summary information on the terms and conditions of the main features of all capital instruments, especially in the case of innovative, complex or hybrid capital instruments.


2.2.1. All locally incorporated banks must disclose the following:-

(i) The amount of Tier One Capital with separate disclosures of:

(a) Paid-up share capital/common stock; (b) Breakdown of reserves and retained earnings; (c) Minority interests in the equity of subsidiaries;

(d) Innovative capital instruments11; (e) Other capital instruments such as hybrid capital instruments; (f) Surplus capital from insurance companies;12 (g) Regulatory deductions from Tier One Capital, including goodwill and

investments;

(ii) the components of, and the total amounts of Tier Two Capital (including any

subordinated capital instruments), prior to and after any adjustments or deductions (e.g. amortisations).

(iii) the aggregate general deductions from Tier One and Tier Two Capital (i.e. in respect

of significant or material holdings of equities in respect of investments in banks, financial institutions and commercial companies);

(iv) total eligible capital after all deductions and adjustments, and after observing all

ceilings on Tier 2 Capital.

11 Innovative instruments are covered under the Basel Committee on Banking Supervision’s press release, Instruments eligible for inclusion in Tier 1 capital (27 October 1998). 12 Refer to AMBD Capital Adequacy Framework, dated 15 March 2017.


3. CAPITAL ADEQUACY


3.1.1. All locally incorporated banks must present a summary discussion of the bank’s approach to assessing the adequacy of capital to support current and future activities (i.e. relevant sections of the ICAAP).


3.2.1. All locally incorporated banks must separately disclose the following: -

(a) The regulatory capital requirements for credit risk for each standard portfolio (as

defined below);

(b) Capital requirements for market risk;

(c) Capital requirements for operational risk;

(d) Total and Tier One (including proportion of innovative capital instruments)

capital ratios on the following basis:

(i) For the consolidated group in Brunei Darussalam; and (ii) For any significant bank subsidiary whose regulatory capital amounts to over

5% of group consolidated regulatory capital whether on a stand-alone or sub-consolidated basis).

3.2.2. The expression “standard portfolio” used above refers to the major categories of credit

portfolios ((a) to (g) below):

(a) Sovereign portfolio (including claims on international organisations and claims on

multilateral development banks (MDBs); (b) Public Sector Entities (PSEs) Portfolio; (c) Banks Portfolio (including claims on securities/investment business firms eligible

for treatment as banks – such firms are not eligible for the concessionary risk weighting treatment for certain claims under 3 months original maturity);

(d) Corporate Portfolio; (e) Regulatory Retail Portfolio (including claims on SMEs eligible for 75% risk weight); (f) Residential Retail Portfolio (qualifying for 35% risk weight only); and

(g) Equity portfolio (contains all equities held in the banking book.

Portfolios (a) – (f) must not contain any holdings of equities. The equity portfolio contains all holdings of equities which are risk weighted at 100% or 150% and which are not consolidated in or deducted from the Tier One and Two capital of the bank).


B. RISK EXPOSURES AND ASSESSMENT (All LICENSED BANKS)

4. GENERAL QUALITATIVE DISCLOSURE REQUIREMENTS

4.1. For each separate risk area (including those listed below), a bank must describe its risk

management objectives and policies, including:

(a) Strategies and processes and provide information on whether or not strategies used have been effective throughout the reporting period;

(b) The structure and organization of the relevant risk management function; (c) The scope and nature of risk reporting and/or measurement systems; and (d) Policies for hedging and/or mitigating risk and strategies and processes for monitoring

the continuing effectiveness of hedges/mitigants.

4.2. The separate risk areas referred to above include:

(a) Credit Risk (see also paragraphs 14 – 15); (b) Market Risk (see also paragraph 21); (c) Operational Risk (see also paragraph 22); (d) Equity Risk in the Banking Book (see also paragraph 23); and (e) Banking Book interest rate risk (see also paragraph 24)

The abovementioned separate risk areas are addressed in the following pages.


5. CREDIT RISK


5.1.1. In addition to the general qualitative disclosure requirements (see paragraph

4- General Qualitative Disclosure Requirements, above), a bank is required also

to make the following disclosures:

(a) Definition of past due and impaired credit facilities (for accounting purposes); (b) Description of the approaches for specific and collective impairment provisions

and statistical methods used (where applicable); (c) Discussion of the bank’s Credit risk management policy; (d) The names of External Credit Assessment Institutions (ECAIs) used for the

purpose of assigning risk weights to assets; (e) The types of exposure for which each ECAI is used; and (f) A description of the process used to transfer ECAI public issue ratings onto

comparable (loan) assets in the banking book.


5.2.1. All banks must disclose the following:

(a) Total gross credit exposures13 plus average gross exposures14 over the period15

broken down by major types of credit exposure.16 (b) Geographic distribution of exposures, broken down into significant areas by major

types of credit exposure.17;

13 That is, after accounting offsets in accordance with the applicable accounting regime and without taking into account the effects of credit risk mitigation techniques, e.g. collateral and netting. 14 Where the period end position is representative of the risk positions of the bank during the period, average gross exposures need not be disclosed. 15 Where average amounts are disclosed in accordance with an accounting standard or other requirement which specifies the calculation method to be used, that method should be followed. Otherwise, the average exposure must be calculated using the most frequent interval that an entity’s system generates for management, regulatory or other reasons, provided that the resulting averages are representative of the bank’s operations. The basis used for calculating averages need be stated only if not on a daily average basis. 16 The breakdown could be that applied under accounting rules, and might, for instance, be (a) loans, commitments and other non-derivative off balance sheet exposures, (b) debt securities, and (c) OTC derivatives. 17 Geographical areas may be individual countries, or groups of countries. Banks may define the geographical area according to how they manage the concerned areas internally. The criteria used to allocate exposures to particular geographical areas must be specified


(c) Distribution of exposures by industry or counterparty type, broken down by major

types of credit exposure.

(d) Residual contractual maturity breakdown of the whole credit portfolio18, broken down by major types of credit exposure;

(e) By major industry or counterparty type: (i) Amount of impaired loans/facilities and past due loans/facilities reported

separately, with an analysis of the ageing of past-due loans; (ii) Specific and collective impairment allowances; and (iii) Charges for specific impairment allowances and write-offs during the period.

(f) Amount of impaired and past due loans and credit facilities, separately broken down by significant geographic areas, including if practical, the amounts of specific and collective impairment provisions related to each geographical area. The portion of general allowance that is not allocated to geographical area must be disclosed separately.

(g) Reconciliation of changes in the allowances for loan impairment: The reconciliation must show separately in respect of specific and collective credit impairment allowances, the following information: (i) Description of the type of allowance; (ii) Opening balance of the allowance; (iii) Charge-offs taken against the allowance during the period; (iv) Amounts set aside (or reversed) for estimated probable loan losses during the

period; (v) Any other adjustments (e.g. exchange rate differences, business

combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing of the allowance.

(h) Charge-offs and recoveries that have been recorded directly to the income

statement must be disclosed separately.

(i) For exposure amounts after risk mitigation subject to the standardized approach, amount of a bank’s outstandings (rated and unrated) in each risk bucket as well as those that are deducted.

18 This may already be covered by accounting standards, in which case a bank may wish to use the same maturity groupings used in accounting.


6. CREDIT RISK MITIGATION


6.1.1. A bank must make the disclosures below in relation to credit risk mitigation that

has been recognised in the Capital Adequacy Framework for the purpose of

reducing the capital adequacy requirement.

6.1.2. The general qualitative disclosure requirement (see paragraph 4- General

Qualitative Disclosure Requirements, above) with respect to credit risk

mitigation includes:

(a) Policies and processes for, and an indication of the extent to which the bank

makes use of, on-and off-balance sheet netting; (b) Policies and processes for collateral valuation and management; (c) A description of the main types of collateral taken by the bank; (d) The main types of guarantor / credit derivative counterparty and their

creditworthiness; and (e) Information about (market or credit) risk concentrations within the credit risk

mitigation taken.


6.2.1. The general qualitative disclosure requirement with respect to credit risk

mitigation includes the following – a bank must disclose for each standard

portfolio (as previously described, above):

(a) the total exposure (after on- or off-balance sheet netting), after the

application of haircuts, that is covered by eligible financial collateral;

(b) the total exposure (after on- or off-balance sheet netting) that is

covered by guarantees / credit derivatives.

6.2.2. Banks are encouraged to give further information about mitigants that have not

been recognized for the purpose of reducing the capital adequacy requirement.


7. COUNTERPARTY CREDIT RISK


7.1.1. All banks must make the following quantitative disclosures regarding

counterparty credit risk:

(a) The general qualitative disclosures (see paragraph 4- General Qualitative

Disclosure Requirements, above) with respect to derivatives and

counterparty credit risk, including:

(i) Discussion of methodology used to assign economic capital and credit limits

for counterparty credit exposures; (ii) Discussion of policies for securing collateral and establishing credit reserves; (iii) Discussion of policies with respect to wrong-way risk exposures; (iv) Discussion of the impact of the amount of collateral the bank would have to

provide if given a credit rating downgrade.


7.2.1. All banks must make the following quantitative disclosures regarding

counterparty credit risk:

(a) Gross positive fair value of contracts, netting benefits, netted current credit

exposures, collateral held (including type: e.g. cash, government securities, etc.), and net derivatives credit exposure19. (see paragraph 4 - General Qualitative Disclosure Requirements, above);

(b) Measures for exposure at default, or exposure amount under the Stardardised Method and the notional value of credit derivative hedges, and the distribution of current credit exposure by type of credit exposure (e.g. interest rate contracts, FX contracts, equity contracts, commodity contracts, etc.);

(c) Any credit derivative transactions which create exposures to counterparty credit risk (notional value), segregated between use for the institution’s own credit portfolio, as well as in its intermediation activities, including the distribution of the credit derivative products used, broken down further by protection bought and sold within each product group.

19 Net credit exposure is the credit exposure on derivatives transactions after considering both the benefits from legally enforceable netting agreements and collateral arrangements. The notional amount of credit derivative hedges alerts market participants to an additional source of credit risk mitigation.


C. OTHER RISKS (LOCALLY INCORPORATED BANKS ONLY)

8. MARKET RISK


8.1.1. All locally incorporated banks must disclose the general qualitative disclosure

requirements for market risk (see paragraph 4- General Qualitative Disclosure

Requirements, above), identifying the portfolios covered by the standardized

approach;


8.2.1. The capital requirements for:

(i) Interest rate risk; (ii) Equity position risk; (iii) Foreign exchange risk; (iv) Commodity risk.


9. OPERATIONAL RISK


9.1.1. All locally incorporated banks must disclose the general qualitative disclosures

(see paragraph 4- General Qualitative Disclosure Requirements, above) and also

the approach(es) for operational risk which the bank employs to control such

risk, and disclosures of any issues considered to be individually significant.


10. EQUITY INVESTMENTS IN THE BANKING BOOK


10.1.1. All locally incorporated banks must make the following disclosures for any

equities held in the Banking Book:

(a) The general qualitative disclosure requirement (see paragraph 4 - General

Qualitative Disclosure Requirements, above) with respect to equity risk, including:

(i) Differentiation between holdings on which capital gains are expected and

those taken under other objectives including for relationship and strategic reasons; and

(ii) Discussion of important policies covering the valuation and accounting of

equity holdings in the banking book. This includes the accounting policies and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices.


10.2.1. The quantitative disclosure requirement with respect to equity risk, including:

(i) Value of investments disclosed in the balance sheet, as well as the fair value of those investments. For quoted securities, a comparison to publicly quoted share values where the share price is materially different from fair value;

(ii) The types and nature of investments, including the amount that can be classified

as publicly traded or privately held; (iii) The cumulative realised gains (or losses) arising from sales or liquidations in the

reporting period; (iv) Total unrealised gains (or losses) recognised in the balance sheet but not

through the Profit & Loss account; (v) Total latent revaluation gains (or losses) i.e. unrealized gains (or losses) not

recognized either in the balance sheet or through the profit and loss account; (vi) Any unrealised gains and losses included in Tier One and Tier Two capital; and (vii) Capital requirements broken down by appropriate equity groupings and risk

weighted assets consistent with bank’s risk management practices.


11. INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)


11.1.1. All locally incorporated banks must make the following disclosures

concerning IRRBB:-

(a) The general qualitative disclosure requirement (see paragraph 4 -

General Qualitative Disclosure Requirements, above) outlining the

nature of interest rate risk in the banking book and key assumptions,

including assumptions concerning loan prepayments and the

behaviour of deposits without a fixed maturity, and the frequency of

IRRBB measurement.


11.2.1. The increase (or decline) in earnings or economic value (or relevant measure

used by management) for upward and downward rate shocks according to

management’s method for measuring IRRBB, broken down by currency

(where applicable).

- END -

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