2.2. Significant Minority Equity Investments in Non-Insurance Financial Entities
“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.
2.2.1 Subsidiaries and Significant Minority Interests in Insurance Entities
SAMA requires that all subsidiaries and significant minority interest in insurance entities at 10% or more are to be excluded from banks capital at 50% from Tier-I, and 50% from Tier-II capital.
In addition, SAMA would not permit the recognition of surplus capital of an insurance subsidiary for the capital adequacy of the group.
(Refer to Paragraph 33 of International Convergence of Capital Measurement and Capital Standards – June 2006)
SAMA will ensure that majority-owned or controlled insurance subsidiaries, which are not consolidated and for which capital investments are deducted, are themselves adequately capitalized to reduce the possibility of future potential losses to the bank. SAMA, through the parent banks will monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall will also be deducted from the parent bank’s capital.
(Refer to Paragraph 34 of International Convergence of Capital Measurement and Capital Standards – June 2006)