The Cayman Island Monetary Authority (CIMA) has commenced the implementation of the Basel II Framework. The Basel II Framework describes a more comprehensive measure and minimum standard for capital adequacy that seeks to improve on the existing Basel I rules by aligning regulatory capital requirements more closely to the underlying risks that banks face.
The Framework promotes a more forward looking approach to capital supervision that encourages banks to identify risks and to develop or improve their ability to manage those risks. As a result, it is more flexible and better able to evolve with advances in markets and risk management practices. A key objective of the revised Framework is to promote the adoption of stronger risk management practices by the banking industry.
The Basel II Framework applies to banks that are locally incorporated in the Cayman Islands (Category A and B banks), all home regulated banks and host regulated banks (subsidiaries of foreign banks), with or without a physical presence.
Branches of foreign banks operating the Cayman Islands, will not be required to maintain a separate capital requirement, and as such will be excluded from the local Basel II requirements. However, these foreign banks including the operations of the Cayman Islands branches must maintain the minimum capital adequacy requirements as stipulated by their home jurisdictions.
CIMA took the decision to implement the Basel II Framework in two phases, leveraging a practical measured approach.
The first phase of the implementation was completed on December 31, 2010 and comprised the following Pillar 1 approaches:
• Credit Risk – Standardized
• Market Risk – Standardized
• Operational Risk – Basic Indicator Approach and The Standardized Approach
The first phase of the Basel II implementation also included Pillar 2 – Supervisory Review Process and Pillar 3 - Market Discipline. However, given the scope of Pillar 2 and Pillar 3 and the possible impact to banks, CIMA elected to implement Pillar 2 in September 2012 and defer Pillar 3 to the second phase.
The second phase of the CIMA Basel II implementation will include Pillar 3 – Market Discipline and consideration of advanced approaches, specifically Pillar 1 – Credit Risk – Advanced Approaches (IRB), Operations Risk – Advanced Measurement Approaches (AMA) and Market Risk – Internal Risk Management Models
A comprehensive set of prudential standards for Basel II - Pillar I.
The Authority has now completed its work on the Pillar 2 – Supervisory Review Process of the Basel II Framework and is pleased to attach the Rules and Guidelines with respect to the Supervisory Review Process (the “Guidelines”).
The Basel II Framework: Rules and Guidelines - Market Discipline Disclosure Requirements (Pillar 3) has been finalised. The implementation of Pillar 3 marks the promotion of market discipline amongst banks by increasing transparency. Increased transparency allows for independent and timely scrutiny by stakeholders (i.e. investors, analysts, financial customers and other market participants).
Since the majority of banks impacted by the application of the Basel II Framework are members of the Cayman Island Bankers Association (CIBA), CIMA has established a joint CIMA/CIBA Basel II Working Committee. The primary objective of the working committee is to provide banks and CIMA a forum for consultation, discussion and agreement on Basel II related issues. CIMA proposes to obtain the majority of feedback on Basel II related issues from the CIBA/CIMA Basel II Working Committee.
CIMA also proposes to communicate directly with those banks that are not members of CIBA or those banks that have principal agents that are not members of CIBA. However, these banks will not have the benefit of consultation or participation in discussions on Basel II issues with the majority of impacted banks. Banks wishing to participate in the CIBA consultations and discussions should contact CIBA directly.
CIMA has implemented the following Basel III components:
The effective date for the Rules and Guidelines on Liquidity Risk Management is 01 June 2019.
The effective date for the Rules and Guidelines on the Leverage Ratio is 01 December 2019.