Basel II Directive for Botswana: A Summary

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Tier II Capital Eligibility Criteria

The Basel II Directive outlines the minimum set of criteria that an instrument must meet in order to be included in Tier II capital. This includes:

• The instrument must be issued and paid-in.
• It must be subordinated to depositors and general creditors of a bank.
• There can be no security or guarantee from the issuer or related entities.
• Minimum original maturity of at least five years, with recognition in regulatory capital over the remaining five years before maturity being amortized on a straight-line basis.

Tier II Capital Regulatory Adjustments

The directive specifies which items must be deducted from Tier II capital:

• Direct investments in own Tier II capital.
• Indirect investments in own Tier II capital.
• Own Tier II capital that could be contractually obliged to purchase.
• Reciprocal cross holdings and the capital of banking, financial, and insurance entities outside the scope of regulatory consolidation.
• Significant investments in the capital of banking, financial, and insurance entities outside the scope of regulatory consolidation.

Tier II Capital Threshold Deductions

The directive states that instead of a full deduction, non-significant investments in Tier II capital of unconsolidated financial institutions will receive limited recognition when calculating Tier II capital. This is capped at 10 percent of the bank’s common equity after applying all regulatory adjustments.

Capitalization of Interim Profits

The directive mentions that during the year, a bank may capitalize interim profits in Tier I capital. However, this topic does not appear to be fully addressed in the provided text.

By following these guidelines, banks in Botswana can ensure compliance with the Basel II Directive and maintain a strong regulatory capital position.