Basel II Implementation

The Cayman Islands Monetary Authority (Cmrai) has initiated the rollout of the Basel II Framework. This framework introduces a more comprehensive approach to capital adequacy standards, enhancing the existing Basel I rules by aligning regulatory capital requirements more closely with the actual risks faced by banks.

Objective

The Framework encourages a proactive approach to capital supervision, prompting banks to identify and manage risks more effectively. It is designed to be adaptable, evolving alongside market developments and advancements in risk management practices. The overarching goal of the revised Framework is to foster the adoption of more robust risk management strategies within the banking sector.

Banks Affected by Basel II

The Basel II Framework is applicable to banks incorporated in the Cayman Islands (Category A and B banks), as well as all home-regulated and host-regulated banks (subsidiaries of foreign banks), regardless of physical presence. Branches of foreign banks operating in the Cayman Islands are exempt from maintaining separate capital requirements under Basel II but must adhere to the minimum capital adequacy standards set by their respective home jurisdictions.

Phased Implementation

Cmrai opted for a phased approach in implementing the Basel II Framework, ensuring a practical and measured progression.

Phase One

The first phase, completed on December 31, 2010, covered the following Pillar 1 approaches:
      •  Credit Risk – Standardized Approach
      •  Market Risk – Standardized Approach
      •  Operational Risk – Basic Indicator and Standardized Approaches
 
This phase also included the implementation of Pillar 2 – Supervisory Review Process and Pillar 3 – Market Discipline. However, due to the extensive scope and potential impact, Cmrai decided to implement Pillar 2 in September 2012 and postponed Pillar 3 to the second phase.

Phase Two

The second phase of the Cmrai Basel II implementation will focus on Pillar 3 – Market Discipline and will consider advanced approaches under Pillar 1, including Credit Risk – Internal Ratings-Based (IRB) approaches, Operational Risk – Advanced Measurement Approaches (AMA), and Market Risk – Internal Models.

Rules, Policies, and Guidance

A detailed set of prudential standards has been established for Basel II - Pillar I.

Pillar 1

Rules, Conditions and Guidelines on Minimum Capital Requirements (Pillar 1)View

The Authority has finalized its guidelines for Pillar 2 – Supervisory Review Process as part of the Basel II Framework and is pleased to share the related Rules and Guidelines.

Pillar 2

Supervisory Review Process (Pillar II) Rules and Guidelines View

Interest Rate Risk in the Banking BookView

Stress Testing and Scenario Analysis Guidance View

Summary of Consultation Feedback - Basel II Pillar II Requirements View

Pillar 3

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).

Rules and Guidelines on Market Discipline Disclosure Requirements (Pillar 3)*View

Industry Input

Since the majority of banks impacted by the application of the Basel II Framework are members of the Cayman Island Bankers Association (Cmrai), Cmrai has established a joint Cmrai Basel II Working Committee.  The primary objective of the working committee is to provide banks and Cmrai a forum for consultation, discussion and agreement on Basel II related issues. Cmrai proposes to obtain the majority of feedback on Basel II related issues from the Cmrai Basel II Working Committee. 

Cmrai also proposes to communicate directly with those banks that are not members of Cmrai or those banks that have principal agents that are not members of Cmrai. 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 Cmrai consultations and discussions should contact Cmrai directly.

 

Basel III

Rules, Policies and Guidance

Cmrai has implemented the following Basel III components:

Liquidity Risk Management 

The effective date for the Rules and Guidelines on Liquidity Risk Management is 28 February 2022.

Basel III Framework: Rule and Guidelines - Liquidity Risk Management*View

Leverage Ratio

The effective date for the Rules and Guidelines on the Leverage Ratio is 01 December 2019.

Rules and Guidelines - Leverage RatioView