• BANK Part 3.1 BANK Part 3.1 General

    • BANK 3.1.1 Introduction

      (1) This Chapter sets out capital adequacy requirements.
      (2) A banking business firm's total regulatory capital is the sum of its tier 1 capital and tier 2 capital. The categories and elements of regulatory capital, as well as the limits, restrictions and adjustments to which they are subject are set out in this Chapter.
      (3) Capital supports the firm's operation by providing a buffer to absorb losses from its activities and, in the event of problems, it enables the firm to continue to operate in a sound and viable manner while the problems are resolved. Capital management must be an integral part of a banking business firm's credit risk management process and must align the firm's risk tolerance and risk profile with its capacity to absorb losses.

      Note For the governing body's responsibilities in relation to capital management and capital adequacy — see rule 3.1.3(2).
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.1.2 Chapter 3 and its application to branches

      (1) This chapter does not apply to a banking business firm that is a branch insofar as this chapter would require the branch to hold capital.
      (2) A branch is required to comply with the reporting requirements under this chapter. In relation to the branch’s ICAAP, the branch may rely on the head office’s ICAAP (if available) to demonstrate compliance.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.1.3 BANK 3.1.3 Governing body's responsibilities

      (1) A banking business firm's governing body must consider whether the minimum financial resources required by these rules are adequate to ensure that there is no significant risk that the firm's liabilities cannot be met as they fall due. The firm must obtain additional financial resources if its governing body considers that the minimum required does not adequately reflect the risks of its business.
      (2) The governing body is also responsible for:
      (a) ensuring that capital management is part of the firm's overall risk management and is aligned with its risk tolerance and risk profile;
      (b) ensuring that the firm has, at all times, financial resources of the kinds and amounts required by these rules;
      Note Financial resources is a broader concept than captial resources. Financial resources could include liquid assets (such as cash in hand), irrevocable lines of credit and irrevocable guarantees.
      (c) ensuring that the firm has capital, of adequate amount and appropriate quality, for the nature, scale and complexity of its business and for its risk profile;
      (d) ensuring that the amount of capital it has exceeds its minimum capital requirement;
      (e) monitoring the adequacy and appropriateness of the firm's systems and controls and the firm's compliance with them; and
      (f) approving the firm's ICAAP and any significant changes to it.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 3.1.3 Guidance

        1 A banking business firm's risk management strategy will usually refer to risk tolerance although risk appetite may also be used. The terms 'risk tolerance' and 'risk appetite' embrace all relevant definitions used by different institutions and supervisory authorities. These 2 terms are used interchangeably to describe both the absolute risks a firm is open to take (which some may call risk appetite) and the actual limits within its risk appetite that a firm pursues (which some call risk tolerance).
        2 If the firm is a member of a financial group, the authority expects the capital of the financial group to be apportioned among the group's members, based on the allocation of risks between them.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.1.4 Systems and controls

      (1) A banking business firm must have adequate systems and controls to allow it to calculate and monitor its minimum capital requirement.
      (2) The systems and controls must be in writing and must be appropriate for the nature, scale and complexity of its business and for its risk profile.
      (3) The systems and controls must enable the firm to show at all times whether it complies with this Chapter.
      (4) The systems and controls must enable the firm to manage available capital in anticipation of events or changes in market conditions.
      (5) The systems and controls must include ICAAP, and the firm must have contingency arrangements to maintain or increase its capital in times of stress.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.1.5 Internal capital adequacy assessment

      (1) A banking business firm's internal capital adequacy assessment process or ICAAP is the process by which the firm continuously demonstrates that it has implemented methods and procedures to ensure that it has adequate capital resources to support the nature and level of its risks.
      (2) A firm's ICAAP (and any significant changes to it) must be in writing and must have been approved by the firm's governing body. A copy of the ICAAP must be given to the Regulatory Authority on request.
      (3) An ICAAP must reflect the nature, scale and complexity of the firm's operations and must include:
      (a) adequate policies and staff to continuously identify, measure, evaluate, manage and control or mitigate the risks arising from its activities, and monitor the capital held against such risks;
      (b) a strategy for ensuring that adequate capital is maintained over time, including specific capital targets set out in the context of its risk tolerance, risk profile and capital requirements;
      (c) plans for how capital targets are to be met and the means available for obtaining additional capital, if required;
      (d) procedures for monitoring its compliance with its capital requirements and capital targets;
      (e) triggers to senior management to, and specified actions to avert and rectify, possible breaches of capital requirements;
      (f) procedures for reporting on the ICAAP and its outcomes to the firm's governing body and senior management, and for ensuring that the ICAAP is taken into account in making business decisions;
      (g) policies about the effect on capital of significant risks not covered by explicit capital requirements;
      (h) triggers, scope and procedures for reviewing the ICAAP under rule 1.1.7(3) and in the light of changed conditions and factors affecting the firm's risk tolerance, risk profile and capital;
      (i) procedures for stress-testing and the review of stress scenarios;
      (j) procedures for reporting the results of reviews; and
      (k) an adequate recovery plan for restoring the firm's financial situation after a significant deterioration.
      (4) In addition to the periodic review under rule 1.1.7(3), a firm's ICAAP must be reviewed by an appropriately qualified person at least once every 3 years. The person must be independent of the conduct of the firm's capital management.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.1.6 Use of internal models

      (1) The Regulatory Authority's requirements for banking business firms to maintain adequate capital and manage prudential risk are based on the approaches set out by the Basel Committee on Banking Supervision in the Basel Accords. The Accords allow firms to use internal models to assess capital adequacy and prudential risk, and this rule governs the use of such models.
      (2) A firm must not use its own model to assess capital adequacy or prudential risk unless the Regulatory Authority has approved the model. The authority may approve a model subject to 1 or more conditions.
      (3) In making its decision, the authority will take into account:
      (a) the nature, scale and complexity of the firm's business;
      (b) the standards proposed by the firm, the rigour of its compliance with them, and the ease with which the authority can assess that compliance;
      (c) whether the model can be relied upon as a reasonable reflection of the risks undertaken by the firm; and
      (d) any other matter that the authority considers relevant.
      (4) The authority may revoke the approval if it is satisfied that the firm has failed to comply with any condition specified by the authority or any standard proposed by the firm.
      (5) The firm must not stop using an approved model, or make significant changes to it, without the authority's approval.

      Note The use of internal models to measure IRRBB is allowed under rule 8.1.5(b).
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.1.7 References to particular currencies [Deleted]

      Deleted by QFCRA RM/2019-6 (as from 1st January 2020).