Basel II 

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.

Purpose

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.

Banks to Which Basel II Applies

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.
  

Implementation Phases

CIMA took the decision to implement the Basel II Framework in two phases, leveraging a practical measured approach.

First Phase

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. 

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

Rules, Policies and Guidance 

A comprehensive set of prudential standards for Basel II - Pillar I. 

Pillar 1

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

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”). 

Pillar 2

Supervisory Review Process (Pillar II) Rules and Guidelines View

Interest Rate Risk in the Banking BookDownload

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 (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.

Basel III

Rules, Policies and Guidance

CIMA 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