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Basel 3 Pillar 3 RISK MANAGEMENT and CAPITAL ADEQUACY

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Basel 3 Pillar 3 RISK MANAGEMENT and CAPITAL ADEQUACY Basel 3 Pillar 3 RISK MANAGEMENT AND CAPITAL ADEQUACY For the year ended 31st December 2017 31st December 2017 GULF INTERNATIONAL BANK B.S.C. Risk management and capital adequacy report Table of contents Executive summary.…....……………………………………………………………………………... .. 1 1. The Basel 3 framework .................................................................................................................. 2 1.1 Pillar 1 .............................................................................................................................................. 2 1.2 Pillar 2 .............................................................................................................................................. 3 1.3 Pillar 3 .............................................................................................................................................. 3 2. Group structure, overall risk and capital management ............................................................. 4 2.1 Group structure ................................................................................................................................ 4 2.2 Risk and capital management .......................................................................................................... 4 2.3 Risk types ......................................................................................................................................... 5 2.4 Risk in Pillar 1 .................................................................................................................................. 5 2.5 Risk in Pillar 2 .................................................................................................................................. 8 2.6 Monitoring and reporting .................................................................................................................. 9 3. Regulatory capital requirements and the capital base ............................................................ 10 3.1 Capital requirements for credit risk ................................................................................................ 10 3.2 Capital requirements for market risk .............................................................................................. 10 3.3 Capital requirements for operational risk ....................................................................................... 11 3.4 Capital base ................................................................................................................................... 11 4. Credit risk – Pillar 3 disclosures ................................................................................................ 13 4.1 Definition of exposure classes ....................................................................................................... 13 4.2 External rating agencies ................................................................................................................ 14 4.3 Credit risk presentation under Basel 3 ........................................................................................... 14 4.4 Credit exposure .............................................................................................................................. 14 4.5 Impaired credit facilities and provisions for impairment ................................................................. 19 4.6 Past due facilities ........................................................................................................................... 21 5. Market risk – Pillar 3 disclosures ............................................................................................... 22 5.1 Market risk ...................................................................................................................................... 22 5.2 VaR model ..................................................................................................................................... 22 5.3 Sensitivity analysis ......................................................................................................................... 24 6. Operational risk – Pillar 3 disclosures ....................................................................................... 24 6.1 Operational risk .............................................................................................................................. 24 7. Off-balance sheet exposure and securitisations ...................................................................... 25 7.1 Credit-related contingent items ...................................................................................................... 25 7.2 Derivative and foreign exchange instruments ................................................................................ 25 7.3 Counterparty credit risk .................................................................................................................. 26 7.4 Securitisations ................................................................................................................................ 27 8. Internal capital including other risk types ................................................................................. 28 8.1 Economic capital model ................................................................................................................. 28 8.2 Other risk types .............................................................................................................................. 29 9. Capital adequacy ratios and other issues ................................................................................. 33 9.1 Capital adequacy ratios ................................................................................................................. 33 9.2 ICAAP considerations .................................................................................................................... 33 10. Glossary of abbreviations ........................................................................................................... 34 Gulf International Bank B.S.C. – Risk management and capital adequacy report: 31st December 2017 31st December 2017 GULF INTERNATIONAL BANK B.S.C. Executive summary The Central Bank of Bahrain (CBB) Basel 3 guidelines prescribe the capital adequacy framework for banks incorporated in the Kingdom of Bahrain. GIB adopted Basel 3 from 1st January 2015 as required by the CBB. This Risk Management and Capital Adequacy report encompasses the Pillar 3 disclosure requirements prescribed by the CBB based on the Basel Committee’s Pillar 3 guidelines. The report contains a description of GIB’s risk management and capital adequacy policies and practices, including detailed information on the capital adequacy process. For regulatory purposes, GIB has adopted the standardised approach for credit risk. GIB uses the internal models approach for market risk and the standardised approach for determining the capital requirement for operational risk. The disclosed tier 1 and total capital adequacy ratios comply with the minimum capital requirements under the CBB’s Basel 3 framework. GIB’s total risk-weighted assets at 31st December 2017 amounted to US$16,410.3 million. Credit risk accounted for 93.2 per cent, market risk 2.9 per cent and operational risk 3.9 per cent of the total risk-weighted assets. Tier 1 and total regulatory capital were US$2,410.9 million and US$2,563.5 million respectively. At 31st December 2017, GIB’s tier 1 and total capital adequacy ratios were 14.7 per cent and 15.6 per cent respectively. GIB aims to maintain a tier 1 capital adequacy ratio above 10.5 per cent and a total capital adequacy ratio in excess of 14.0 per cent. GIB views the Pillar 3 disclosures as an important contribution to increased risk transparency within the banking industry, and particularly important during market conditions characterised by high uncertainty. In this regard, GIB has provided more disclosure in this report than is required in accordance with the CBB’s Pillar 3 guidelines in order to provide the level of transparency that is believed to be appropriate and relevant to the Group’s various stakeholders and market participants. All figures presented in this report are as at 31st December 2017 unless otherwise stated. Gulf International Bank B.S.C. – Risk management and capital adequacy report: 31st December 2017 Page 1 of 34 31st December 2017 GULF INTERNATIONAL BANK B.S.C. 1. The Basel 3 framework The CBB’s Basel 3 framework is based on three pillars, consistent with the Basel 3 framework developed by the Basel Committee, as follows:- - Pillar 1: the calculation of the risk-weighted assets (RWAs) and capital requirement. - Pillar 2: the supervisory review process, including the Internal Capital Adequacy Assessment Process (ICAAP). - Pillar 3: the disclosure of risk management and capital adequacy information. 1.1 Pillar 1 Pillar 1 prescribes the basis for the calculation of the regulatory capital adequacy ratio. Pillar 1 sets out the definition and calculations of the RWAs, and the derivation of the regulatory capital base. The capital adequacy ratio is calculated by dividing the regulatory capital base by the total RWAs. With the introduction of Pillar 2, the CBB will implement a minimum ratio threshold to be determined for each institution individually, as described in more detail in the Pillar 2 section of this report. As at 31st December 2017, and pending finalisation of the CBB’s Pillar 2 guidelines,
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