SAMA requires that owned or controlled entities and securities entities should be fully consolidated for Basel II purposes to ensure that it captures the risk of the banking group.

Banking groups are groups that engage predominantly in banking activities and, in some countries, a banking group may be registered as a bank.

Banks are also required to ensure minimum capital adequacy on a consolidated as well as standalone basis by ensuring that the Parent banks also meet the SAMA mandated capital adequacy regulation under Pillar 1 of the Basel guidelines. Going forward all banks would be required to make two sets of prudential returns for Pillar 1 Capital Computations, the first one on a consolidated basis and the other on a standalone basis.

(Refer to Paragraph 21 of International Convergence of Capital Measurement and Capital Standards – June 2006)

“The new Basel framework requires that significant minority investments in financial entities, where control does not exist, be excluded from a bank’s capital by deduction of the equity and other investments under certain conditions, may be consolidated on a pro rata basis. National accounting and/or regulatory practices would determine the threshold above which minority investments will be deemed significant and be therefore either deducted or consolidated on a pro rata basis”.

SAMA requires that all significant minority interests in banking, securities or other financial entities that exceed 10% of the outstanding equity shares are a substantial minority investment and are to be deducted at 50 percent from Tier 1 capital, and 50 percent from Tier 2 capital.

The new Basel framework provides that significant minority and majority investments in commercial entities, which exceed certain materiality levels, are to be deducted from Banks capital”; that means materiality levels of 10% of the bank’s capital for individual significant investments in commercial entities and 60% of the bank’s capital for the aggregate of such investments. The amount exceeding this threshold would be risk weighted at 1250%.

Investments held below the 10% threshold will be risk weighted at 100% under the Standardized Approach, and as per section 7.2.1 for the IRB Approaches.

(Refer Paragraph 35 of International Convergence of Capital Measurement and Capital Standards – June 2006 & Para 90 of Basel III: A global regulatory framework for more resilient banks and banking systems)

“The new Basel framework highlights the need for supervisors to test that individual Banks are adequately capitalized on a stand-alone basis”.

SAMA recognizes that some Banks are currently in the process of designing the information system architecture required to support the new Basel framework. Banks are therefore encouraged to develop such internal systems that would enable them to provide an internal assessment of their stand-alone capital position on a legal entity basis. These internal systems should be designed to allow the Board, at a minimum, to have an informed view on the adequacy of capital on a legal entity basis including its major subsidiaries.

SAMA plans to discuss with the Banks the development of a framework for the supervisory review of a banks internal assessment of its stand-alone capital adequacy.

Regulatory Capital

Minor changes from the 1988 Accord with respect to treatment of general provisions – refer to IRB Approaches in Section 5.0.

Risk Weighted Assets

Total risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and adding the resulting figures to the sum of risk-weighted assets for credit risk.