30. Annexure 1: Frequently Asked Questions (FAQ)

No: 44047144

Date(g): 27/12/2022 | Date(h): 4/6/1444

Status: In-Force

Article #	Question	Answer
Overview of risk management, key prudential metrics and RWA
12	For counterparty credit risk (CCR) (rows 6-9), the split requested is by the exposure at default (EAD) methodology classification used to determine exposure levels rather than the risk- weighted asset (RWA) methodology classification used to determine risk weights. This contradicts the presentation for credit risk (rows 1–5) and securitisation (rows 16-19). Should line items be added (where necessary) to reconcile the disclosure to the total RWA?	Template OV1 does not request CCR to be split by risk weighting methodology, but by EAD methodology. Nevertheless, banks should add extra rows, as appropriate, to split the exposures by risk weighting methodology, in order to facilitate the reconciliation with the RWA changes in Template CCR7. RWA and capital requirements under the Standardised Approach for credit risk weighting are to be subdivided in the standardised approach for counterparty credit risk (SA-CCR) and the internal models method (IMM), and the same for RWA and capital requirements under the internal ratings-based (IRB) approach for credit risk weighting.
Composition of capital TLAC
14	For the disclosure requirements under section 14 in the event a bank restates its prior year accounting balance sheet, does the bank restate the archived prior year reconciliation templates?	The requirement to keep an archive of a minimum period also applies to the reconciliation template. As such, any prospective/retrospective restatement of the balance sheet would require similar amendments to be reflected in the reconciliation templates within the archive with a clear indication that such a revision has been made.
Links between financial statements and regulatory exposures
16	In Template LI1, are assets deducted from regulatory capital in accordance with Basel III (eg goodwill and intangible assets) disclosed in column (g)?	Elements which are deducted from a bank's regulatory capital (eg goodwill and intangible assets and deferred tax assets) should be included in column (g), taking into consideration the different thresholds that apply where relevant. Assets should be disclosed for the amount that is actually deducted from capital. Some examples are shown below: - Goodwill and intangible assets: the amount to be disclosed in column (g) is the amount of any goodwill or intangibles,* including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation. The amount disclosed in the assets rows is net of any associated deferred tax liability which would be extinguished if the intangible assets become impaired or derecognised under the relevant accounting standards. The associated deferred tax liability is also to be disclosed in the liabilities rows of column (g). - Deferred tax assets: for all types of deferred tax assets to be deducted from own funds, the amount to be disclosed in column (g) is net of associated deferred tax liabilities that are eligible for netting. The associated deferred tax liabilities are to be disclosed in the liabilities rows of column (g). For deferred tax assets, for which the deduction is subject to a threshold, the amount disclosed in column (g) in the assets rows is the amount, net of any eligible deferred tax liability, above the threshold. The associated deferred tax liabilities are also to be disclosed in the liabilities rows of column (g). - Defined benefit pension fund assets: the amount disclosed is net of any deferred tax liabilities which would be extinguished if the asset should become impaired or derecognised under the relevant accounting standards. These deferred tax liabilities are also to be disclosed in the liabilities rows of column (g). - Investments in own shares (treasury stock) or own instruments of regulatory capital: when investments in own shares or own instruments of regulatory capital are not already derecognised under the relevant accounting standards, the deducted amount disclosed is net of short positions in the same underlying exposure or in the same underlying index allowed to be netted under the Basel framework. These short positions are also to be disclosed in the liabilities rows of column (g). * Under SACAP4.1.1, subject to SAMA approval, IFRS definition of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.
	In Template LI1, are exposures required to be 1,250% risk-weighted to be disclosed in column (g)?	1,250% risk-weighted exposures should be disclosed in the relevant credit risk or securitisation risk templates.
	Template LI1: Considering that the risk weighting framework bears on assets rather than liabilities, should all the liabilities be disclosed in column (g)? Should in any case deferred tax liabilities and defined benefit pension fund liabilities be included in column (g)?	The liabilities disclosed in column (g) are all liabilities under the regulatory scope of consolidation, except for the following, which are disclosed in columns (c), (d), (e) and (f) as applicable: liabilities that are included in the determination of the exposure values in the market risk or the counterparty credit risk framework; and liabilities that are eligible under the Basel netting rules.
	What is the difference in Template LI2 between the required disclosure in row 2 (Liabilities carrying value amount under regulatory scope of consolidation) and row 6 (Differences due to different netting rules, other than those already included in row 2).	Row 2 refers to balance sheet netting, while row 6 refers to incremental netting in application of the Basel rules (when not already covered by balance sheet netting). The netting rules under the Basel framework are different from the rules under the applicable accounting frameworks. The incremental netting in row 6 could represent an additional deduction from the net exposure value before application of the Basel netting rules (when those rules lead to more netting than the balance sheet netting in row 2) or a gross-up of the net exposure value when the off-balance sheet netting operated in row 2 is broader than what the Basel netting rules allow.
	How does the disclosure in Template LI2, in particular row 3 (total net amount under regulatory scope of consolidated) relate to accounting equity?	The netting between assets and liabilities in Template LI2 does not lead to accounting equity under a regulatory scope of consolidation being disclosed in row 3. Assets and liabilities included in rows 1 and 2 are limited to those assets and liabilities that are taken into consideration in the regulatory framework. Other assets and liabilities not considered in the regulatory framework are to be disclosed in column (g) in Template LI1 and are consequently excluded from rows 1 and 2 of Template LI2.
	For Template LI2, how would the entry in row 10 (exposure amounts considered for regulatory purpose) differ from the balance sheet values under a regulatory scope of consolidation? Is it correct that there would be no differences to be explained, given that market risk does not have exposure values and the linkage for the other risk categories does not apply?	In general, under a regulatory scope of consolidation, the accounting carrying amount and the regulatory exposure value would vary due to the incidence of off-balance sheet elements, provisions, and different netting and measurement rules. Under market risk, the regulatory exposure value will also differ from the accounting carrying amount. Differences could be due to off- balance sheet items, netting rules and different measurement rules of market risk positions via prudent valuation (as opposed to fair valuation in the applicable accounting framework).
Credit risk
19	How should the disclosure be made in Template CR3, in an example where a loan has multiple types of credit risk mitigation and is overcollateralised (eg a loan of 100 with land collateral of 120 as well as guarantees of 50)?	When an exposure benefits from multiple types of credit risk mitigation mechanisms, the exposure value should be allocated to each mechanism by order of priority based on the credit risk mitigation mechanism which banks would apply in the event of loss. Disclosure should be limited to the value of the exposure (ie the amount of overcollateralisation does not need to be disclosed in the table). If the bank wishes to disclose information regarding the over-collateralisation, it may do so in the accompanying narrative. Refer to example in section 28.3.
	What are the values to be ascribed to collateral, guarantees and credit derivatives in Template CR3?	Banks should disclose the amount of credit risk mitigation calculated according to the regulatory framework, including both the costs to sell and of haircut.
	Where should exposures to central counterparties (CCPs) be included?	Exposures for trades, initial margins and default fund contributions are included in Template CCR8. Exposures stemming from loans to CCPs excluding initial margins and default fund contributions should be included within the credit risk framework considering the CCP as an asset class item. These loans should be included in the exposure class where the national implementation of the Basel framework allows exposures to CCPs to be included.
	In Template CR7, what is the required disclosure if an exposure is only partially hedged by a credit derivative? For instance, consider a loan with nominal exposure of 100 SAR, risk weight of 150% and therefore RWA of 150 SAR. The bank buys a credit default swap with a 30 SAR nominal amount, and the risk weight of the protection provider is 50%. Which values should be entered in columns (a) and (b)?	Under the IRB approach, credit derivatives are recognised as CRM techniques for the F-IRB and A-IRB. In both cases, banks can reflect the risk mitigating effect of credit derivatives on an exposure by adjusting their PD or loss-given-default (LGD). Banks should disclose in column (a), the RWA of an exposure secured by a credit derivative calculated without reflecting the risk mitigating effect of credit derivatives (in the example, banks would disclose 150 SAR). In column (b), the RWA of the same exposure calculated reflecting the risk mitigating effect of credit derivatives (in the example, banks would disclose 3050% + 70150% = 120) should be disclosed.
	Is the “weighted average PD” in column (d) of Template CR9 to be calculated based on the formula ∑(PDί *EADί)/(∑EADί)?	“Weighted” means exposure at default (EAD)-weighted. For this purpose, the formula in the question is correct since the data will be comparable to those reported in column (i).
	How should “defaulted obligors” be defined, for the purpose of Template CR9? For column (f) (number of obligors), please clarify how “obligors” are defined from a retail perspective. Should “end of the previous year” include only non-defaulted accounts at the beginning of the year, or both defaulted and non-defaulted accounts? Should “end of the year” include all active accounts at the end of the year? For column (g) (defaulted obligors in the year), please clarify whether it is related to accounts that defaulted during the year or from inception.	The definition of obligors or retail obligors is the same as for other obligors; any individual person or persons, or a small or medium- sized entity. Furthermore, where banks apply the “transaction approach”, each transaction shall be considered as a single obligor. A defaulted obligor is an obligor that meets the conditions set out in SCRE16.67 to SCRE16.74. For column (f), the “end of the previous year” includes non- defaulted accounts at the beginning of the year of reference for disclosure. The “end of the year” includes all the non-defaulted accounts related to obligors already included in the “end of the previous year” plus all the new obligors acquired during the year of reference for disclosure which did not go into default during the year. Banks have discretion as to whether to include obligors who left during the year within the “end of the year” number. For column (g), “defaulted obligors” includes: (i) obligors not in default at the beginning of the year who went into default during the year; and (ii) new obligors acquired during the year– through origination or purchase of loans, debt securities or off-balance sheet commitments – that were not in default, but which went into default during the year. Obligors under (ii) are also separately disclosed in column (h). The PD or PD range to be included in columns (d) and (e) is the one assigned at the beginning of the period for obligors that are not in default at the beginning of the period.
	What considerations can institutions reference when disclosing a model performance test (backtesting) when the test is not aligned to the year- end disclosure timetable?	The frequency of the disclosure is not linked to the timing of the bank's backtesting. The annual disclosure frequency does not require a timetable of model backtesting that is calibrated on a calendar year basis. When the backtesting reference period is not calibrated on a calendar year basis, but on another time interval (for instance, a 12- month interval), “year” as used in columns (f), (g) and (h) of Template CR9 means “over the period used for the backtesting of a model”. Banks must, however, disclose the time horizon (observation period /timetable) they use for their backtesting.
Counterparty credit risk
20	The “purpose” of Template CCR5 asks for a breakdown of all types of collateral posted or received. The content section, however, asks for collateral used. These numbers differ as certain transactions are over-collateralised (ie >100% of exposure) and therefore not all collateral would be used for risk mitigation. Should the template include all collateral posted/received or just collateral that is applied?	The numbers reported in Template CCR5 should be the total collateral posted/received (ie not limited to the collateral that is applied/used for risk mitigation). The purpose of the template is to provide a view on the collateral posted/received rather than the value accounted for within the regulatory computation. If the bank wishes to disclose the collateral eligible for credit mitigation, it may do so using an accompanying narrative.
20	Template CCR7 refers to an RWA flow on internal models method (IMM) exposures. Row 4 (Model updates – IMM only) and row 5 (Methodology and policy – IMM only) are specifically to include only model and methodology/policy changes relating to the IMM exposures model. Where in the template would changes to the internal-ratings based (IRB) models that result in changes in risk weights for positions under the IMM be reported?	Template CCR7 is consistent with Template OV1, which requests a split by exposure at default (EAD) methodology and not by risk weighting methodology. Banks are recommended to add rows to report any changes relating to risk weighting methodology if they deem them useful. The row breakdown is flexible and intends to depict all the significant drivers of changes for the risk-weighted assets (RWA) under counterparty credit risk. Specific rows should be inserted when changes to the IRB model result in changes to the RWA of instruments under counterparty credit risk whose exposure value is determined based on the IMM.
Securitisation
21	Template SEC1 requires the disclosure of “carrying values”. Is there a direct link between columns (d), (h) and (l) of Template SEC1 and column (e) of Template LI1?	Reconciliation is not possible when Template SEC1 presents securitisation exposures within and outside the securitisation framework together. However, when banks choose to disclose Template SEC1 and SEC2 separately for securitisation exposures within the securitisation framework and outside that framework, the following reconciliation is possible: the sum of on-balance sheet assets and liabilities included in columns (d), (h) and (l) of Template SEC1 is equal to the amounts disclosed in column (e) of Template LI1.
21	Should institutions disclose RWA before or after the application of the cap?	RWA figures disclosed in Templates SEC3 and SEC4 should be before application of the cap, as it is useful for users to compare exposures and risk-weighted assets (RWA) before application of the cap. Columns (a)–(m) in Templates SEC3 and SEC4 should be reported prior to application of the cap, while columns (n)–(q) should be reported after application of the cap. RWA after application of the cap are disclosed in Template OV1.