By Bernardo Vizcaino

Bahrain has become the first country in the Gulf outside Saudi Arabia to clarify its treatment of capital-boosting instruments under Basel III rules, saying the instruments must include loss absorption features.

Its decision, which is in line with Saudi Arabia, a member of the committee which drafted Basel III, could influence regulators in other Gulf states that have not yet clarified their stance, such as the United Arab Emirates and Qatar.

Banks across the Gulf have been waiting for regulatory guidance on how subordinated debt instruments will be treated under Basel III, a set of stricter banking rules which are being phased in around the world over the next several years.

It is up to each national regulator to decide how to interpret the rules; Bahrain's central bank has drafted separate rule books for conventional and Islamic banks, proposing they both come into effect in January 2015.

Its rules detail the treatment of subsidiaries when calculating a bank's capital adequacy requirements and explain the use of subordinated debt, which can count towards Tier 1 core or Tier 2 supplementary capital.

Loss absorption is a requirement for capital-boosting instruments to be converted into equity if the issuer faces insolvency. Bahrain would require Tier 1 instruments to absorb losses either by converting them into common shares, or through a gradual write-down mechanism which forces losses on holders of the instruments in stages.

So far, Bahraini banks have not issued subordinated debt, in part because of a lack of regulatory guidance. Saudi Arabian banks have seen a flurry of such issuance since last year, when the regulator started implementing Basel III.