The Central Bank of the United Arab Emirates has announced that Basel II, the new capital adequacy criteria system, has finished its trial run and is now ready to begin full implementation. The Standardized approach will be implemented as of the date of this circular, with major banks in their banking systems likely to transition to the Foundation Internal Ratings Based approach in due time. The Central Bank will communicate directly with concerned institutions in the coming months about these principles, as well as the evolutionary aspects of moving to Internal Ratings Based methods on a case-by-case basis.

The utilization of test features of Basel II, which the Central Bank will include as a prominent aspect of its ongoing supervisory examinations, is a key feature of the new rules. For the UAE to sustain a sound banking business, certain global standards (Basel II) must be implemented. To ensure that the local context is adequately assessed, the Central Bank will continue to apply National Discretions and supervisory powers. The instructions provided include National Discretions and Special Reporting Return Forms.

As per the Central Bank\’s Notice Number 4004/2009, all banks operating in the United Arab Emirates will be obliged to maintain a capital adequacy ratio of at least 11 percent at all times, increasing to 12 percent by 30 June 2010(temporary measure). The Special Banking Return Forms (CAR1 and CAR2) – Basel II are needed to be completed by all banks. A first pillar is a standardized approach. For the quarter ending September 30, 2009, the initial forms must be submitted. In addition, the Central Bank will periodically evaluate these forms for content.

Pillar 1 – Capital (Forms CAR1 and CAR2) must be submitted to the Central Bank electronically every quarter no later than 30 days after the end of the quarter.

Pillar 2 – Internal Capital Adequacy – Assessment Process (ICAAP) reports shall be submitted to the Senior Executive Director of BSED and copied to Mark Markani by the 1st of March every year, beginning in 2010.

The calculation of the Pillar 1 capital adequacy ratio for the last day of the previous financial year should be used in ICAAP reports. As a result, the 2010 report will use the Pillar 1 capital adequacy ratio as of December 31, 2009, calculated according to Basel II criteria (attachment 2), and will be filed before or on March 1, 2010.Pillar 3 – The criteria for Pillar 3 will begin with inclusion in a bank\’s annual report for the year 2009, and will be repeated annually. Thereafter. Until further notice, banks are expected to continue reporting under existing regulations, such as Circular 13/93 reporting of Risk Asset Ratio (RAR).