Sirs / Madam,
CAPITAL REQUIREMENTS – IMPLEMENTATION OF BASEL II
to the roadmap for implementation of Basel II in Pakistan
circulated vide BSD Circular No. 3 dated March 31, 2005,
the State Bank of Pakistan has prepared detailed instructions
for adoption of various approaches for calculating capital
adequacy requirements for credit, market and operational
risks under Pillar I of Basel II Capital Accord. These instructions
are enclosed herewith.
2) The timeframe for adoption of Basel II will be as under:
i) Standardized Approach for credit risk from 1st January,
ii) Internal Ratings Based (IRB) approaches from 1st January,
2010. Banks/DFIs interested in adopting any IRB Approach
before 1st January, 2010 may approach SBP for the purpose.
Their requests will be considered on case-to-case basis.
iii) For Operational Risk, Banks/DFIs can adopt either Basic
Indicator Approach or Standardized Approach from 1st January,
2008. However, the Advance Measurement Approach (AMA) is
not being offered at present. The decision on the timeline
to adopt AMA will be taken in due course keeping in view
the preparedness of banks/DFIs and after consulting with
Pakistan Banks Association. However, the banks/DFIs are
encouraged to follow the international best practices in
this regard and prepare themselves for an early adoption.
iv) For market risk, Internal Models Approach has also been
allowed along with the standardized approach. However, Internal
Models Approach will only be available to the banks/DFIs
adopting Foundation or Advanced IRB Approaches.
v) Banks/DFIs are advised to adopt a parallel run of one
and a half year for Standardized Approach and two years
for IRB Approach starting from 1st July, 2006 and 1st January,
2008 respectively. They are also advised to submit a quarterly
statement on the calculation of their capital adequacy ratio
based on the enclosed instructions within 30 days of the
end of each calendar quarter. First reporting, on the basis
of Basel II parallel calculations, will be made for the
quarter ending 31st December, 2006 by 30th January, 2007.
During the parallel run period banks will calculate their
Capital Adequacy Ratio (CAR) based on the instructions contained
in this Circular as well as on the basis of guidelines issued
vide BSD Circular No. 12 dated 25th August, 2004 and submit
the results of both the calculations on quarterly basis.
3) Adoption of Foundation or Advanced IRB for Credit Risk
and Internal Models Approach for Market Risk will be subject
to the prior written approval of the State Bank. Therefore,
banks/DFIs interested in adopting any of these approaches
are advised to approach the State Bank for getting necessary
4) Some products/exposure types and their treatment under
various approaches have been elaborated in the enclosed
instructions for facilitating the banks/DFIs to adopt Basel-II.
This should not be construed as a permission to launch such
products/conduct business in a particular manner. Therefore,
banks/DFIs are advised to ensure compliance of all relevant
provisions of law and SBP regulations while taking a decision
to deal in a particular type of business/transaction. For
instance, securitization of assets will be conducted only
after meeting the requirements of applicable laws and other
SBP regulations, etc.
5) Banks / DFIs are also required to follow the instructions
contained in BSD Circular No. 6 dated 28th October, 2005
regarding minimum paid-up capital requirement and CAR.
6) Other instructions on the subject shall, however, remain
Please acknowledge receipt.
Encl: As above
(Size in PDF 2 MB)