St.VincentandtheGrenadines InternationalFinancialServicesAuthority StatementofGuidance CapitalAdequacy 1.

.StatementofObjectives To provide guidance to international banks on their obligations set out in Section 10(1) (c) of the InternationalBanksAct. 1.2.Importanceofcapital Capitaladequacyisakeyelementofbanksafetyandsoundnessandensuringconfidenceinthefinancial system. Due to its importance, capital adequacy is of interest to supervisors of financial institutions aroundthe world.Theimportanceofsafetyand soundnessconsiderations mustbefactoredinwhen decidingontheoptimallevelofcapitalbytheshareholders,directorsandmanagementofthebank. The 1988 Basel Accord explicitly considered credit risk and it required international banks to hold minimum total capital equal to eight percent (8%) of riskadjusted assets. Therefore the greater the amount of loans and investments and hence credit risk in a banks assets base, the more capital it is requiredtomaintain.TheAuthorityhasadoptedthis8%ratiooritsreciprocal12timesassetstocapital as the maximum requirement of the amount of capital appropriate for an international bank. This guidelinesetsouttheminimumcapitaladequacystandardsandrequirementsforaninternationalbank. Thepurposeofthisguidelineisto: i) ii) iii) iv) v) 1.3 Ensure that financial institutions have an adequate cushion of capital to absorb unexpected losses; Protecttheinterestsofdepositors,creditorsandtheinterestofthepublicingeneral; Ensurethatfinancialinstitutionsmaintaincapitalatinternationallyrecognizedstandards; Promoteselfdisciplineinthemanagementoffinancialinstitutions;and Promotepublicconfidenceinfinancialinstitutionsandthefinancialsystemasawhole. InitialCapitalandStatutoryDeposit

Inordertoobtainaninternationalbanklicence,apersonshallprovideevidenceoftheminimuminitial capitalrequirementasrequiredforaClassALicenceunderSection10(1)oftheInternationalBanks Act(Act)andthestatutorydepositassetoutinSection10(1)(b).Theinitialcapitalrequirementsfora ClassBLicencearesetoutinSection10(2)(a)andSection10(2)(b)oftheAct.

Suchevidenceshouldcompriseacertifiedbankstatementandanopeningbalancesheetcertifiedbyan approved auditor to the effect that the initial capital has been duly funded and meets the statutory requirement. Thestatutorydepositshouldsatisfythefollowingconditions: i) ii) iii) 1.4 MustbeintheformofcashorotherliquidformacceptabletotheAuthorityandmustbeheldin anapprovedcommercialbankinStVincentandtheGrenadines. Mustbederivedfromtheshareholdersownfunds. Mustbeincompliancewithantimoneylaunderinglawsandregulations. Requirementsformaintainingadequatecapital

Everylicensedfinancialinstitutionshallmaintainadequatecapitalinaccordancewiththefollowing: i) ii) 1.5 TheprovisionsofSection10(InitialCapital)oftheInternationalBanksAct. ThecapitalratiosasprovidedforundertheseGuidelines. TotalRegulatoryCapital

Total Regulatory Capital means capital, which is approved for regulatory purposes. It comprises of TierICapital(CoreCapital)andTierIICapital(supplementalcapital). 1.6 i) ii) iii) iv) v) vi) vii) viii) Less: CurrentYearLosses; i) ii) iii) TierIIorsupplementalcapitalincludesothertypesofreservessuchas: Any net loss positions on revaluation reserves arising from fair value accounting for financial assetsandliabilities; Bonussharesfromcapitalizationofunrealisedassetrevaluationreserves; Goodwill,capitalizedstartupexpensesandotherintangibleassets. TierIorCoreCapitalmeanstheaggregateof; Paidupordinarysharecapital; Paidupordinarysharecapitalsurplus Paidupperpetualnoncumulativepreferenceshares; Paidupperpetualnoncumulativepreferencesharesurplus; Statutoryreserves;theamountsetasidefromtheinstitutionsannualprofit; Capitalreservesexcludingassetrevaluations; Generalreservesexcludingreservelossesonassets; RetainedEarningsaspertheauditedstatements.

 i) ii) iii) iv) v) vi) vii) viii) ix) x) Fixedassetrevaluationreserves(limitedto20%ofTierIcapital); General provisions and reserves for losses on asset (limited to 1.25% of total assets); specific reservesforloanlossesarenoteligibleforinclusionincapital. Paidupperpetualcumulativepreferenceshares; Paidupperpetualcumulativepreferencesharesurplus; Bonussharesissuedfromcapitalizationofunrealizedassetrevaluationreserves; Unauditedundividedprofits; Assetrevaluationreserve Mandatory convertible debt instruments; that is all instruments which must be converted to sharesasperthetermsandconditionsstipulatedintheoriginaldocument Subordinatedtermdebtandlimitedlifepreferenceshares(limitedto50%ofTierIcapital). Otherhybridcapitalinstrumentswithcombinedcharacteristicsofequityanddebt.

The following item must be deducted from the combined Tier I and Tier II Capital before arriving at TotalRegulatoryCapital: i) ii) Investmentsinfinancialsubsidiariesnotconsolidatedinthegroup. Each financial institution shall maintain a capital base comprising not less than 50 % Tier I capital Maximumcapitaladequacyratio

1.7

Further to Section 10(c) of the International Banks Act, every international bank shall maintain a maximumleverageratioof12times(assetsincludingoffbalancesheetitemsthenumeratordivided byregulatorycapitalthedenominator). Where one or more of the following conditions exists, the Authority may require a licensed financial institutiontoreducetheleverageratio: i) ii) iii) iv) TheratioofunsatisfactoryassetstoTierIcapitalisgreaterthan25%; Aggregateinvestmentsinequitiesexceed5%oftotalassets; Fixedassetsexceed25%oftotalcapital; Risk management processes to identify, measure, monitor and control material risks are deemed unsatisfactory by the Authority and/or the external auditor and there is potential for unexpectedlossestobeincurred. Compliancewiththelegislationandthisguideline Each financial institution shall have in place adequate systems and procedures satisfactory to theAuthoritytocomputethecapitaladequacyratio. Theinstitutionshallcalculateitscapitaladequacyratio

1.8. i) ii)

Withregardtoitsonbalancesheetassets,inaccordancewithScheduleII(a)WorksheetIofthe GuidelinesInstructions: i) ii) Withregardtoitsoffbalancesheetassets,inaccordancewithScheduleII(a)WorksheetIIof theGuidelinesInstructions; Withregardtoitscapitalcomputation,inaccordancewithScheduleII(b)WorksheetIIIofthe GuidelinesInstructions; Financial institutions whose capital adequacy ratio falls below the minimum required amount shallemployoneoracombinationofthefollowingstrategiesinordertoachievecompliance: Reduce the risk profile of its balance sheet by reducing its assets including offbalance sheet items; i) ii) Increase its total regulatory capital, by way of capital injection that must come from shareholdersfundsandadheretoAMLguidelines. The capital position must be fully reconstituted within the time period specified by the Authority. Failure to reconstitute capital within the specified time period may cause the Authoritytoapplyadditionalsanctions. Sanctionsandfornoncompliance RemedialMeasures i) When the Authority determines that a financial institution does not meet the capital adequacy requirement of these Guidelines and thus has a capital deficiency, it may take certainactionsasspecifiedunderSection20oftheInternationalBanksAct. ii) When the Authority determines that a banks capital deficiency is severe enough to have resultedinimpairedcapitalandsuchcapitalimpairmentisjudgedtobedetrimentaltothe interestsofdepositors,itmayrecommendtotheMinisterthatthelicenceberevokedunder Section21subsection(2)(a)oftheInternationalBanksAct. Additionalremedialmeasures Inadditiontotheremedialmeasuresavailableasspecifiedabove,theAuthoritymay,inaccordance withprovisionsundersection20(d)oftheInternationalBanksAct,issueanyorallofthefollowing directionstoabankencounteringacapitaldeficiency: i) ii) iii) iv) v) Suspension of the establishment of new branches and/or expansion into new banking or financialactivities; Prohibitionfromdeclaringand/orpayingdividends; Suspensionoftheacceptanceofnewdeposits; Suspensionofacquisitionoffixedassets; Suspensionoflendingoperations; 4

1.9

1.10

vi)

Suspensionofnewinvestments.