Scope of Application of Basel Framework
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Since the implementation of Basel II - SAMA’s Detailed Guidance Document Circular No.BCS290 dated June 2006, all local banks1 were required to apply the SAMA’s Basel requirements on a standalone and consolidated basis. The scope of application include, applying the framework to any holding company that is the parent entity within a banking group to ensure that it captures the risks of the banking group as a whole. As such, SAMA applies the framework to all local banks on a consolidated level and at every tier within the bank group, depending on the group structure to ensure that it captures the risk of the whole group, taking into account risks arising from individual entities in the group.
The scope remains unchanged since the issuance of Basel II –Detailed Guidance Document relating to Pillar 1 issued by SAMA in 2006 in addition, the prudential returns requirements are also aligned to the scope of application implemented by SAMA.
1 Local Banks who are engaged predominantly in banking business including licensed subsidiaries of banks located outside the kingdom, operating in Saudi Arabia.
Introduction
The Basel Framework comprises the minimum risk-based capital including the relevant capital buffers, leverage, liquidity and large exposure standards, the supervisory review process under Pillar 2 and public disclosures under Pillar 3, and designed to be applied on internationally active banks. The Basel framework is applied on a consolidated basis at the holding company level and at every tier within a banking group, depending on the group structure to ensure that it captures the risk of the whole banking group, taking into account risks arising from individual entities in the group.
Objective
The objectives of this Guidance Note is to clarify SAMA’s policy on the scope of application of the SAMA’s Basel Framework and the corresponding reporting requirements in view of banks’ enquiries on the revised Framework issued by SAMA in 2021 and 2022 as well as setting out SAMA’s expectations on banks’ group-wide risk oversight and monitoring practices. Banks should refer to the relevant policies on the specific requirements of the SAMA’s Basel Framework.
Definition
For the purpose of this Guidance Note only:
The Framework: Refers to SAMA Basel Framework which includes the minimum risk-based capital and the relevant capital buffers, leverage, liquidity and large exposure standards, the supervisory review process under Pillar 2 and public disclosures under Pillar 3.
Standalone (Solo) level: Refers to the local bank entity excluding it subsidiaries. For the avoidance of doubt, standalone level includes domestic and foreign branches and representative offices.
Consolidated level: Refers to the local bank entity and all consolidated financial subsidiaries2 where the bank have a majority ownership or – controlled.
Majority Ownership or –Controlled: Refers to ownership structure where one entity holds 50% or more of the equity of another entity or meet the control definition in the IFRS standards.
Financial subsidiary: Refers to a subsidiary engaged in predominantly financial activities3 including, but not limited to, investment firms, finance companies, payment companies and special purpose vehicles (SPVs) established to undertake financial-related activities.
2 Financial subsidiary does not include insurance company.
3 Financial activities include financial leasing, issuing credit cards, portfolio management, investment advisory, custodial and safekeeping services and other similar activities that are ancillary to the business of banking.Application of the Framework on Banking Groups in Saudi Arabia and Reporting Requirements
Scope of Application
1. Local banks must comply with SAMA’s Basel Framework (the Framework) at both standalone and consolidated level4.
2. For purposes of the Framework, the consolidation will include all subsidiaries undertaking financial or banking activities, which the bank have a majority ownership5 or –control, except insurance entities.
3. Where consolidation of a subsidiary is not feasible6, banks are required to seek SAMA’s approval to exclude the subsidiary from the scope of application and reporting requirements. The application should include proper justifications and risk management controls to ensure group risks are managed effectively.
4. Subject to SAMA discretion, the framework may apply to the bank subsidiaries at every tier or level within the banking group on a consolidated and/or on standalone basis, as applicable. In this regard, SAMA will, among others, take into consideration the type of subsidiary7, quantitative and qualitative factors such as size of assets and liabilities, nature of business activities and inter-connectedness within the group.
4 For avoidance of doubt, the Framework does not apply to branches of a bank licensed in another jurisdiction operating in Saudi Arabia (“foreign bank branches”). Foreign bank branches are to comply with their home regulator’s prudential requirements.
5 The minority interests (capital held by third parties) that arise can only be recognized in consolidated capital only if they meet the applicable definition of capital in SAMA's Final Guidance Document Concerning Implementation of Capital Reforms. Any minority interest in excess of the subsidiaries’ minimum regulatory capital requirements is not recognized.
6 For example subsidiaries acquired through debt previously contracted and held on a temporary basis, or subject to different laws and regulation that conflict with SAMA regulatory requirements.
7 The application will be restricted to financial subsidiaries that can follows SAMA regulatory requirementsPillar 2
5. For Pillar 2 purposes, SAMA applies its supervisory review process under Pillar 2 on a consolidated basis. This means SAMA’s supervisory assessment of banks’ risk management frameworks, capital and liquidity planning and adequacy will consider the nature and significance of business activities and associated risks of the subsidiaries, which are consolidated and not consolidated and their impact to the local bank and the overall banking group. This is consistent with SAMA’s consolidated supervision objective to ensure that risks within a banking group are adequately captured. In this regard, SAMA may also apply its supervisory discretion in extending the scope of application of other relevant prudential requirements, if warranted.
6. The bank’s Internal Capital Adequacy Assessment Plan (ICAAP) and its Internal Liquidity Adequacy Assessment Plan (ILAAP) should capture risks arising from consolidated subsidiaries in accordance to SAMA’s ICAAP and ILAAP requirements.
Pillar 3
7. For purposes of Pillar 3 Disclosure requirements, banks shall follow the Pillar 3 disclosure requirements, where disclosures shall be at the consolidated level only, unless otherwise specified by SAMA.
8. Banks are required to disclose that the insurance entity (within the group, if any) is not included in the scope of application as part of its Pillar 3 disclosures.
Reporting Requirements
9. Banks are required to report to SAMA two sets of prudential returns, the first set being the prudential returns at standalone level and the second set being the prudential returns at the consolidated level. For this purpose, banks shall use the relevant templates for the reporting of these prudential returns to SAMA.
10. Where reporting on standalone (e.g. reporting of risk-weighted assets, minimum regulatory capital and liquidity requirements at the bank entity level) is not feasible, banks are required to seek SAMA’s supervisory approval on a yearly basis for exemption from reporting on standalone basis. The application for exemption should include proper justifications and risk management controls to ensure risks are managed effectively.
11. Each consolidated subsidiary is not required to report its prudential returns to SAMA on a standalone basis. However, SAMA would expect the bank to have full risk oversight of its group’s subsidiary activities and be adequately informed of capital and liquidity adequacy of the overall group, including its major subsidiaries.
12. SAMA expect banks to have access to information on the activities and risk exposures of all their subsidiaries and attribute these risk exposures to the consolidated subsidiaries at all times. Banks are required to have internal systems to support the group-wide risk monitoring and reporting and to provide the information, as and when, required by SAMA.