Circulars/Notifications - Banking Supervision Department  
 BSD Circular No. 08 of 2006
June 27, 2006 

The Presidents/Chief Executives
All Banks/DFIs

Dear Sirs / Madam,

MINIMUM CAPITAL REQUIREMENTS – IMPLEMENTATION OF BASEL II

Further 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, 2008.
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 approval.

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 unchanged.

Please acknowledge receipt.

Encl: As above (Size in PDF 2 MB)

Yours faithfully,

(JAMEEL AHMAD)
Director
       
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