Central Bank of Bahrain

CBB Basel II Update (Q1 2007) Page 1 of 2

Basel II Update: Q1 2007 This document – to be regularly issued on a quarterly basis – is intended to update the industry and other interested parties on the CBB’s progress towards implementing Basel II. Individual sections below address each Pillar of the Basel II Accord in turn, with an update on relevant developments. A further ‘background’ section, at the back of the document, outlines the CBB’s overall policy approach towards Basel II implementation, as well as provides a short summary of the key elements of Basel II. Pillar One The first drafts of the CBB Rulebook Modules required to implement Pillar One were produced in October 2006 and subsequently finalised in December 2006, after in-depth discussions between the CBB, industry working groups and Ernst & Young (in their capacity as project consultants). The Pillar One draft Modules were issued with a covering consultation paper in January 2007; these documents are available on the CBB website. The deadline for replies to the consultation is 31st March 2007. Replies will be reviewed by the CBB and changes made during April and May 2007 before a second consultation paper or a final set of Pillar One Rulebook Modules is issued, probably in June 2007. In the meantime, work on producing amended PIR and PIRI regulatory returns, to reflect Basel 2, has been underway. Final draft versions of these returns are to be issued to the Bankers’ Society for comment in early April 2007, with a target 31st May 2007 deadline for initial comments. Finalising the forms will subsequently take place in June and July, with the intention of an initial trial run based on June 2007 data taking place in July/August. The results of this trial run will dictate the pace and scope of future trials and the finalisation of the reporting forms in time for the targeted 2008 implementation of Pillar One. Pillar Two An extensive gap analysis has been undertaken within CBB during February 2007, to assess the supervisory implications arising out of Pillar Two. In the light of this assessment, an action plan is currently being finalised and approved within the CBB. The action plan identifies that significant work will be required in terms of developing new supervisory assessment processes. Further information in this area will provided in future quarterly updates.

Central Bank of Bahrain

CBB Basel II Update (Q1 2007) Page 2 of 2

Pillar Three The Central Bank began drafting Pillar 3 requirements in early 2007,, and these are now close to completion. The amended Rulebook Module concerned (Module PD), will be issued in April 2007 for industry consultation; this will be followed by trial disclosures based on end-June 2007 data. Background The CBB, in common with other GCC Banking supervisors, is committed to the implementation of the Revised Framework of International Convergence of Capital Measurement and Capital Standards (more popularly known as ‘Basel II’) in the Kingdom of Bahrain. Basel II replaces the 1988 Basel Capital Accord (‘Basel I’), which is currently used in over 120 countries worldwide. Over 100 countries are committed to the implementation of Basel II, with implementation dates ranging from 2005 to 2010. More details about Basel II and the Basel Committee can be found at www.bis.org. Basel II offers a variety of risk measurement options for capital adequacy measurement and day to day risk management for banks. More specifically, for credit risk, Basel II offers three approaches, namely the standardised approach (SA), the Foundation Internal Ratings Based approach (FIRB), and the Advanced IRB approach. For operational risk, Basel II offers three approaches as well: the Basic Indicator Approach (BIA), the Standardised Approach (SA) and the Advanced Measurement Approach (AMA). For market risk, the current two measurement approaches (Standardised and Internal Model), will continue to be available. The CBB intends to offer its licensed banks the choice among such approaches, excluding advanced IRB and the AMA due to the complexities associated with data availability. The CBB will consider whether the selected approaches are suitable taking into consideration the size and risk profile of the bank, and whether the concerned bank has satisfied the various minimum requirements and qualifying criteria in the case of the Foundation IRB, SA and Internal Model Approaches. The CBB plans to implement Basel II in the Kingdom of Bahrain from the first quarter of 2008 onwards.