Banking Supervision: New Capital Adequacy Standards

Introduction

In 2017, the central bank of Algeria issued a new circular that sets out the capital adequacy standards for banks operating in the country. This report provides an overview of key aspects of this circular.

Definition of Equity

The circular introduces two components of equity:

• Tier 1: This refers to the core equity component of a bank’s capital.
• Tier II: This includes subordinated debt and other supplementary capital components.

Article 75 of the banking law outlines rules for shareholding, which are applied in conjunction with the Tier I component. Shareholdings and subordinated debt in other banks and financial institutions are deducted from their corresponding Tier I component.

Credit Risk

The circular introduces new capital requirements for counterparty risk on over-the-counter derivative instruments. It also reviews certain credit risk weights for consistency.

Market Risks

The report covers the following market risks:

• Foreign Exchange Risks: Institutions with an overall net foreign exchange position exceeding 2% of their equity are subject to foreign exchange risk.
• General and Specific Interest Rate Risks: The trading book and banking book are subject to interest rate risks, with thresholds set at 5% of the total net balance sheet (relative threshold) and 40 million dirhams (absolute threshold).
• Settlement-Delivery Risks: The circular outlines approaches for calculating minimum capital requirements for foreign exchange risk and equity and interest rate risk.

Solvency Standards for Islamic Banks

The circular sets solvency standards that meet the specifics of Islamic banking operations, including displaced commercial risk and remuneration of investment accounts.