7. Standardized Approach: Individual Exposures
Exposures to Sovereigns
7.1 Exposures to sovereigns and their central banks will be risk-weighted based on the external rating of the sovereign as follows:
Risk weight table for sovereigns and central banks Table 1 External rating AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated Risk weight 0% 20% 50% 100% 150% 100% 7.2 A 0% risk weight can be applied to banks’ exposures to Saudi sovereign (or SAMA) of incorporation denominated in Saudi Riyal and funded2 in Saudi Riyal (SAR).3 Exposures to Saudi sovereign of incorporation denominated in foreign currencies should be treated according to the Saudi sovereign external rating.
7.3 Sovereign exposures to the member countries of Gulf Cooperation Council (GCC) will also be risk-weighted based on the external rating of the respective country as per Table 1.
7.4 Exposures to the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Union, the European Stability Mechanism and the European Financial Stability Facility may receive a 0% risk weight.
2 This is to say that the bank would also have corresponding liabilities denominated in the domestic currency.
3 This lower risk weight may be extended to the risk-weighting of collateral and guarantees under the CRM framework (chapter 9)Exposures to Public Sector Entities (PSEs)
7.5 For the purposes of RWA treatment, domestic PSEs in general include government authorities, administrative and/or statutory bodies responsible to the government, which may be owned, controlled, and/or mostly funded by the government and not involved in any commercial undertakings.
7.6 Exposures to domestic PSEs will be risk-weighted based on the external rating of the Saudi sovereign external rating
Risk weight table for PSEs Based on external rating of sovereign Table 2 External rating of the sovereign AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated Risk weight 20% 50% 100% 100% 150% 100% 7.7 Foreign PSEs, including PSEs in GCC countries, shall be assigned a risk weight based on the external rating of the PSE respective country’s sovereign rating.
Exposures to Multilateral Development Banks (MDBs)
7.8 For the purposes of calculating capital requirements, a Multilateral Development Bank (MDB) is an institution created by a group of countries that provides financing and professional advice for economic and social development projects. MDBs have large sovereign memberships and may include both developed and /or developing countries. Each MDB has its own independent legal and operational status, but with a similar mandate and a considerable number of joint owners.
7.9 A 0% risk weight will be applied to exposures to specified MDBs that are recognized by the Basel Committee for Banking Supervision (BCBS) for fulfilling the following eligibility criteria:
1. very high-quality long-term issuer ratings, i.e. a majority of an MDB’s externalratings must be AAA;4
2. either the shareholder structure comprises a significant proportion of sovereigns with long-term issuer external ratings of AA– or better, or the majority of the MDB’s fund-raising is in the form of paid-in equity/capital and there is little or no leverage;
3. strong shareholder support demonstrated by the amount of paid-in capital contributed by the shareholders; the amount of further capital the MDBs have the right to call, if required, to repay their liabilities; and continued capital contributions and new pledges from sovereign shareholders;
4. adequate level of capital and liquidity (a case-by-case approach is necessary in order to assess whether each MDB’s capital and liquidity are adequate); and,
5. strict statutory lending requirements and conservative financial policies, which would include among other conditions a structured approval process,internal creditworthiness and risk concentration limits (per country, sector, and individual exposure and credit category), large exposures approval by the board or a committee of the board, fixed repayment schedules, effective monitoring of use of proceeds, status review process, and rigorous assessment of risk and provisioning to loan loss reserve.
7.10 The specified MDBs eligible for a 0% risk weight are as follows. This list is subject to review by SAMA from time to time.
1. The World Bank Group comprising the International Bank for Reconstruction and Development;
2. The International Finance Corporation;
3. The Multilateral Investment Guarantee Agency and the International Development Association;
4. The Asian Development Bank;
5. The African Development Bank;
6. The European Bank for Reconstruction and Development;
7. The Inter-American Development Bank;
8. The European Investment Bank,
9. The European Investment Fund;
10. The Caribbean Development Bank,
11. The Islamic Development Bank
12. The Nordic Investment Bank;
13. The Council of Europe Development Bank;
14. The International Finance Facility for Immunization; and
15. The Asian Infrastructure Investment Bank.
7.11 For exposures to all other MDBs, banks will assign to their MDB exposures the corresponding “base” risk weights determined by the external ratings according to Table 3.
Risk weight table for MDB exposures Table 3 External rating of counterparty AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated “Base” risk weight 20% 30% 50% 100% 150% 50% 4 MDBs that request to be added to the list of MDBs eligible for a 0% risk weight must comply with the AAA rating criterion at the time of the application to the BCBS. Once included in the list of eligible MDBs, the rating may be downgraded, but in no case lower than AA–. Otherwise, exposures to such MDBs will be subject to the treatment set out in paragraph 7.11
Exposures to Banks
7.12 For the purposes of calculating capital requirements, a bank exposure is defined as a claim (including loans and senior debt instruments, unless considered as subordinated debt for the purposes of paragraph 7.52) on any financial institution that is licensed to take deposits from the public and is subject to appropriate prudential standards and level of supervision5. The treatment associated with subordinated bank debt and equities is addressed in paragraphs 7.46 to 7.52.
Risk weight determination
7.13 Bank exposures will be risk-weighted based on the following hierarchy:
1. External Credit Risk Assessment Approach (ECRA): This approach applies to all rated exposures to banks. Banks will apply chapter 8 to determine which rating can be used and for which exposures.
2. Standardized Credit Risk Assessment Approach (SCRA): This approach is applicable to all exposures to banks that are unrated.
External Credit Risk Assessment Approach (ECRA)
7.14 Banks will assign to their rated bank exposures6 the corresponding “base” risk weights determined by the external ratings according to Table 4. Such ratings must not incorporate assumptions of implicit government support7, unless the rating refers to a public bank owned by its government. Banks may continue to use external ratings, which incorporate assumptions of implicit government support for up to a period of five years, from the date of effective implementation of this framework, when assigning the “base” risk weights in Table 4 to their bank exposures.
Risk weight table for bank exposures External Credit Risk Assessment Approach (ECRA) Table 4 External rating of counterparty AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– “Base” risk weight 20% 30% 50% 100% 150% Risk weight for short-term exposures 20% 20% 20% 50% 150% 7.15 Exposures to banks with an original maturity of three months or less, as well as exposures to banks that arise from the movement of goods across national borders with an original maturity of six months or less8 can be assigned a risk weight that correspond to the risk weights for short term exposures in Table 4.
7.16 Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the bank counterparties. If the due diligence analysis reflects higher risk characteristics than that implied by the external rating bucket of the exposure (i.e. AAA to AA– ; A+ to A– etc.), the bank must assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating. Due diligence analysis must never result in the application of a lower risk weight than that determined by the external rating.
Standardized Credit Risk Assessment Approach (SCRA)
7.17 Banks will apply the SCRA to all their unrated bank exposures. The SCRA requires banks to classify bank exposures into one of three risk-weight buckets (i.e. Grades A, B and C) and assign the corresponding risk weights in Table 5. Under the SCRA, exposures to banks without an external credit rating may receive a risk weight of 30%, provided that the counterparty bank has a Common Equity Tier 1 ratio which meets or exceeds 14% and a Tier 1 leverage ratio which meets or exceeds 5%. The counterparty bank must also satisfy all the requirements for Grade A classification. For the purposes of SCRA only, “published minimum regulatory requirements” in paragraphs 7.18 to 7.26 excludes liquidity standards.
Risk weight table for bank exposures Standardized Credit Risk Assessment Approach (SCRA) Table 5 Credit risk assessment of counterparty Grade A Grade B Grade C “Base” risk weight 40% 75% 150% Risk weight for shortterm exposures 20% 50% 150% SCRA: Grade A
7.18 Grade A refers to exposures to banks, where the counterparty bank has adequate capacity to meet their financial commitments (including repayments of principal and interest) in a timely manner, for the projected life of the assets or exposures and irrespective of the economic cycles and business conditions.
7.19 A counterparty bank classified into Grade A must meet or exceed the published minimum regulatory requirements and buffers established by its national supervisor as implemented in the jurisdiction where it is incorporated, except for bank-specific minimum regulatory requirements or buffers that may be imposed through supervisory actions (e.g. via the Supervisory Review Process) and not made public. If such minimum regulatory requirements and buffers (other than bank-specific minimum requirements or buffers) are not publicly disclosed or otherwise made available by the counterparty bank, then the counterparty bank must be assessed as Grade B or lower.
7.20 If as part of its due diligence, a bank assesses that a counterparty bank does not meet the definition of Grade A in paragraphs 7.18 and 7.19, exposures to the counterparty bank must be classified as Grade B or Grade C.
SCRA: Grade B
7.21 Grade B refers to exposures to banks, where the counterparty bank is subject to substantial credit risk, such as repayment capacities that are dependent on stable or favorable economic or business conditions.
7.22 A counterparty bank classified into Grade B must meet or exceed the published minimum regulatory requirements (excluding buffers) established by its national supervisor as implemented in the jurisdiction where it is incorporated, except for bank-specific minimum regulatory requirements that may be imposed through supervisory actions (e.g. via the Supervisory Review Process) and not made public. If such minimum regulatory requirements are not publicly disclosed or otherwise made available by the counterparty bank then the counterparty bank must be assessed as Grade C.
7.23 Banks will classify all exposures that do not meet the requirements outlined in paragraphs 7.18 and 7.19 into Grade B, unless the exposure falls within Grade C under paragraphs 7.24 to 7.26.
SCRA: Grade C
7.24 Grade C refers to higher credit risk exposures to banks, where the counterparty bank has material default risks and limited margins of safety. For these counterparties, adverse business, financial, or economic conditions are very likely to lead, or have led, to an inability to meet their financial commitments.
7.25 At a minimum, if any of the following triggers is breached, a bank must classify the exposure into Grade C:
1. The counterparty bank does not meet the criteria for being classified as Grade B with respect to its published minimum regulatory requirements, asset out in paragraphs 7.21 and 7.22 or
2. Where audited financial statements are required, the external auditor has issued an adverse audit opinion or has expressed substantial doubt about the counterparty bank’s ability to continue as a going concern in its financial statements or audited reports within the previous 12 months.
7.26 Even if the triggers set out in paragraph 7.25 are not breached, a bank may assess that the counterparty bank meets the definition in paragraph 7.24. In that case, the exposure to such counterparty bank must be classified into Grade C.
7.27 Exposures to banks with an original maturity of three months or less, as well as exposures to banks that arise from the movement of goods across national borders with an original maturity of six months or less,9 can be assigned a risk weight that correspond to the risk weights for short term exposures in Table 5.
7.28 To reflect transfer and convertibility risk under the SCRA, a risk-weight floor based on the risk weight applicable to exposures to the sovereign of the country where the bank counterparty is incorporated will be applied to the risk weight assigned to bank exposures. The sovereign floor applies when:
i. The exposure is not in the local currency of the jurisdiction of incorporation of the debtor bank; and
ii. For a borrowing booked in a branch of the debtor bank in a foreign jurisdiction, when the exposure is not in the local currency of the jurisdiction in which the branch operates. The sovereign floor will not apply to short-term (i.e. with a maturity below one year) self-liquidating, trade-related contingent items that arise from the movement of goods.
5 For internationally active banks, appropriate prudential standards (e.g. capital and liquidity requirements) and level of supervision should be in accordance with the Basel framework.
6 An exposure is rated from the perspective of a bank if the exposure is rated by a recognized “eligible credit assessment institution” (ECAI) which has been nominated by the bank (i.e. the bank has informed SAMA of its intention to use the ratings of such ECAI for regulatory purposes in a consistent manner paragraph 8.8 In other words, if an external rating exists but the credit rating agency is not a recognized ECAI by SAMA, or the rating has been issued by an ECAI which has not been nominated by the bank, the exposure would be considered as being unrated from the perspective of the bank
7 Implicit government support refers to the notion that the government would act to prevent bank creditors from incurring losses in the event of a bank default or bank distress.
8 This may include on-balance sheet exposures such as loans and off- balance sheet exposures such as self-liquidating trade-related contingent items.
9 This may include on-balance sheet exposures such as loans and off-balance sheet exposures such as self-liquidating trade-related contingent items.Exposures to Covered Bonds
7.29 Covered bonds are bonds issued by a bank or mortgage institution that are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.
Eligible assets
7.30 In order to be eligible for the risk weights set out in paragraph 7.34 the underlying assets (the cover pool) of covered bonds as defined in paragraph 7.29 shall meet the requirements set out in paragraph 7.33 and shall include any of the following:
1. claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;
2. claims secured by residential real estate that meet the criteria set out in paragraph 7.63 and with a loan-to-value ratio of 80% or lower;
3. claims secured by commercial real estate that meets the criteria set out in paragraph 7.63 and with a loan-to-value ratio of 60% or lower; or
4. Claims on, or guaranteed by banks that qualify for a 30% or lower risk weight. However, such assets cannot exceed 15% of covered bond issuances.
7.31 The nominal value of the pool of assets assigned to the covered bond instrument (s) by its issuer should exceed its nominal outstanding value by at least 10%. The value of the pool of assets for this purpose does not need to be that required by the legislative framework. However, if the legislative framework does not stipulate a requirement of at least 10%, the issuing bank needs to publicly disclose on a regular basis that their cover pool meets the 10% requirement in practice. In addition to the primary assets listed in this paragraph, additional collateral may include substitution assets (cash or short term liquid and secure assets held in substitution of the primary assets to top up the cover pool for management purposes) and derivatives entered into for the purposes of hedging the risks arising in the covered bond program.
7.32 The conditions set out in paragraphs 7.30 and 7.31 must be satisfied at the inception of the covered bond and throughout its remaining maturity.
Disclosure requirements
7.33 Exposures in the form of covered bonds are eligible for the treatment set out in paragraph 7.34, provided that the bank investing in the covered bonds can demonstrate to SAMA that:
1. It receives portfolio information at least on:
(a) the value of the cover pool and outstanding covered bonds;
(b) the geographical distribution and type of cover assets, loan size, interest rate and currency risks;
(c) the maturity structure of cover assets and covered bonds; and
(d) the percentage of loans more than 90 days past due; and
2. The issuer makes the information referred to in point (1) available to the bank at least semi-annually.
7.34 Covered bonds that meet the criteria set out in paragraphs 7.30 to 7.33 shall be risk-weighted based on the issue-specific rating or the issuer’s risk weight according to the rules outlined in chapter 8. For covered bonds with issue-specific ratings10, the risk weight shall be determined according to Table 6. For unrated covered bonds, the risk weight would be inferred from the issuer’s ECRA or SCRA risk weight according to Table 7.
Risk weight table for rated covered bond exposures Table 6 Issue-specific rating of the covered bond AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– “Base” risk weight 10% 20% 20% 50% 100% Risk weight table for unrated covered bond exposures Table 7 Risk weight of the issuing bank 20% 30% 40% 50% 75% 100% 150% “Base” risk weight 10% 15% 20% 25% 35% 50% 100% 7.35 Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the covered bond and the issuing bank. If the due diligence analysis reflects higher risk characteristics than that implied by the external rating bucket of the exposure (i.e. AAA to AA–; A+ to A– etc.), the bank must assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating. Due diligence analysis must never result in the application of a lower risk weight than that determined by the external rating.
10 An exposure is rated from the perspective of a bank if the exposure is rated by a recognized ECAI which has been nominated by the bank (i.e. the bank has informed its supervisor of its intention to use the ratings of such ECAI for regulatory purposes in a consistent manner (see paragraph 8.8). In other words, if an external rating exists but the credit rating agency is not a recognized ECAI by SAMA, or the rating has been issued by an ECAI, which has not been nominated by the bank, the exposure would be considered as being unrated from the perspective of the bank.
Exposures to Securities Firms and Other Financial Institutions
7.36 Exposures to all securities firms and financial institutions will be treated as exposures to corporates.
Exposures to Corporates
7.37 Exposures to corporates include exposures (loans, bonds, receivables, etc.) to incorporated entities, associations, partnerships, proprietorships, trusts, funds and other entities with similar characteristics, except those, which qualify for one of the other exposure classes. The treatment associated with subordinated debt and equities of these counterparties is addressed in paragraphs 7.46 to 7.54. The corporate exposure class includes exposures to insurance companies and other financial corporates that do not meet the definitions of exposures to banks, or securities firms and other financial institutions, as determined in paragraphs 7.12 and 7.36 respectively. The corporate exposure class does not include exposures to individuals. The corporate exposure class differentiates between the following subcategories:
1. General corporate exposures;
2. Specialized lending exposures, as defined in paragraph 7.41
General corporate exposures
7.38 For corporate exposures, banks will assign “base” risk weights according to Table 8. Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the counterparties. Banks which have assigned risk weights to their rated bank exposures based on paragraph 7.14 must assign risk weights for all their corporate exposures according to Table 8. If the due diligence analysis reflects higher risk characteristics than that implied by the external rating bucket of the exposure (i.e. AAA to AA–; A+ to A– etc.), the bank must assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating. Due diligence analysis must never result in the application of a lower risk weight than that determined by the external rating.
7.39 Where banks have overseas operations, unrated corporate exposures of banks incorporated in jurisdictions that allow the use of external ratings for regulatory purposes will receive a 100% risk weight, with the exception of unrated exposures to corporate micro, small or medium-sized entities (MSMEs), as described in paragraph 7.40.
Risk weight table for corporate exposures Table 8 External rating of counterparty AAA to AA– A+ to A– BBB+ to BBB– BB+ to BB– Below BB– Unrated “Base” risk weight 20% 50% 75% 100% 150% 100% 7.40 The definitions of MSMEs shall continue to apply as per SAMA Circular No. 381000064902, Date: 15 March 2017 or any subsequent circulars, corporate MSMEs for the purpose of capital requirements are defined as corporate exposures where the reported annual revenues for the consolidated group of which the corporate MSME counterparty is a part is less than or equal to SAR 200 million for the most recent financial year. For unrated exposures to corporate MSMEs, an 85% risk weight will be applied. Exposures to MSMEs that meet the criteria in paragraphs 7.57 will be treated as regulatory retail MSME exposures and risk weighted at 75%.
Specialized lending
7.41 A corporate exposure will be treated as a specialized lending exposure if such lending possesses some or all of the following characteristics, either in legal formor economic substance:
1. The exposure is not related to real estate and is within the definitions of object finance, project finance or commodities finance under paragraph 7.42. If the activity is related to real estate, the treatment would be determined in accordance with paragraphs 7.61 to 7.83;
2. The exposure is typically to an entity (often a special purpose vehicle (SPV)) that was created specifically to finance and/or operate physical assets;
3. The borrowing entity has few or no other material assets or activities, and therefore little or no independent capacity to repay the obligation, apart from the income that it receives from the asset(s) being financed. The primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of the borrowing entity; and
4. The terms of the obligation give the lender a substantial degree of control over the asset(s) and the income that it generates.
7.42 Exposures described in paragraph 7.41 will be classified in one of the following three subcategories of specialized lending:
1. Project finance
Refers to the method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the loan. This type of financing is usually for large, complex and expensive installations such as power plants, chemical processing plants, mines, transportation infrastructure, environment, media, and telecoms. Project finance may take the form of financing the construction of a new capital installation, or refinancing of an existing installation, with or without improvements.
2. Object finance
Refers to the method of funding the acquisition of equipment (e.g. ships, aircraft, satellites, railcars, and fleets) where the repayment of the loan is dependent on the cash flows generated by the specific assets that have been financed and pledged or assigned to the lender.
3. Commodities finance
Refers to short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities (e.g. crude oil, metals, or crops), where the loan will be repaid from the proceeds of the sale of the commodity and the borrower has no independent capacity to repay the loan.
7.43 Banks will assign to their specialized lending exposures the risk weights determined by the issue-specific external ratings, if these are available, according to Table 8. Issuer ratings must not be used (i.e. paragraph 8.13 does not apply in the case of specialized lending exposures).
7.44 For specialized lending exposures for which an issue-specific external rating is not available, and for all specialized lending exposures of banks incorporated in jurisdictions that do not allow the use of external ratings for regulatory purposes, the following risk weights will apply:
1. Object and commodities finance exposures will be risk-weighted at 100%;
2. Project finance exposures will be risk-weighted at 130% during the pre-operational phase and 100% during the operational phase. Project finance exposures in the operational phase, which are deemed to be high quality, as described in paragraph 7.45,will be risk weighted at 80%. For this purpose, operational phase is defined as the phase in which the entity that was specifically created to finance the project has
(a) a positive net cash flow that is sufficient to cover any remaining contractual obligation, and
(b) Declining long-term debt.
7.45 A high quality project finance exposure refers to an exposure to a project finance entity that is able to meet its financial commitments in a timely manner and its ability to do so is assessed to be robust against adverse changes in the economic cycle and business conditions. The following conditions must also be met:
1. The project finance entity is restricted from acting to the detriment of the creditors (e.g. by not being able to issue additional debt without the consent of existing creditors);
2. The project finance entity has sufficient reserve funds or other financial arrangements to cover the contingency funding and working capital requirements of the project;
3. The revenues are availability-based11 or subject to a rate-of-return regulation or take-or-pay contract;
4. The project finance entity’s revenue depends on one main counterparty and this main counterparty shall be a central government, PSE or a corporate entity with a risk weight of 80% or lower;
5. The contractual provisions governing the exposure to the project finance entity provide for a high degree of protection for creditors in case of a default of the project finance entity;
6. The main counterparty or other counterparties which similarly comply with the eligibility criteria for the main counterparty will protect the creditors from the losses resulting from a termination of the project;
7. All assets and contracts necessary to operate the project have been pledged to the creditors to the extent permitted by applicable law; and
8. Creditors may assume control of the project finance entity in case of its default.
11 Availability-based revenues mean that once construction is completed, the project finance entity is entitled to payments from its contractual counterparties (e.g. the government), as long as contract conditions are fulfilled. Availability payments are sized to cover operating and maintenance costs, debt service costs and equity returns as the project finance entity operates the project. Availability payments are not subject to swings in demand, such as traffic levels, and are adjusted typically only for lack of performance or lack of availability of the asset to the public
Subordinated Debt, Equity and Other Capital Instruments
7.46 The treatment described in paragraphs 7.50 to 7.52. applies to subordinated debt, equity and other regulatory capital instruments issued by either corporates or banks, provided that such instruments are not deducted from regulatory capital or risk-weighted at 250% according to the Regulatory Capital Under Basel III Framework (Article 4.4 – Section A of SAMA Circular No. 341000015689, Date: 19 December 2012), or risk weighted at 1250% according to paragraph 7.54. It also excludes equity investments in funds treated under chapter 24.
7.47 Equity exposures are defined on the basis of the economic substance of the instrument. They include both direct and indirect ownership interests,12 whether voting or non-voting, in the assets and income of a commercial enterprise or of a financial institution that is not consolidated or deducted. An instrument is considered to be an equity exposure if it meets all of the following requirements:
1. It is irredeemable in the sense that the return of invested funds can be achieved only by the sale of the investment or sale of the rights to the investment or by the liquidation of the issuer;
2. It does not embody an obligation on the part of the issuer; and
3. It conveys a residual claim on the assets or income of the issuer.
7.48 In addition to instruments classified as equity as a result of paragraph 7.47, the following instruments must be categorized as an equity exposure:
1. An instrument with the same structure as those permitted as Tier 1 capital for banking organizations.
2. An instrument that embodies an obligation on the part of the issuer and meets any of the following conditions:
(a) The issuer may defer indefinitely the settlement of the obligation;
(b) The obligation requires (or permits at the issuer’s discretion) settlement by issuance of a fixed number of the issuer’s equity shares;
(c) The obligation requires (or permits at the issuer’s discretion) settlement by issuance of a variable number of the issuer’s equity shares and (ceteris paribus) any change in the value of the obligation is attributable to, comparable to, and in the same direction as, the change in the value of a fixed number of the issuer’s equity shares13; or,
(d) The holder has the option to require that the obligation be settled in equity shares, unless either (i) in the case of a traded instrument, SAMA is content that the bank has demonstrated that the instrument trades more like the debt of the issuer than like its equity, or (ii) in the case of non-traded instruments, SAMA is content that the bank has demonstrated that the instrument should be treated as a debt position. In cases (i) and (ii), the bank may decompose the risks for regulatory purposes, with the approval of SAMA.
7.49 Debt obligations and other securities, partnerships, derivatives or other vehicles structured with the intent of conveying the economic substance of equity ownership are considered an equity holding14. This includes liabilities from which the return is linked to that of equities15. Conversely, equity investments that are structured with the intent of conveying the economic substance of debt holdings or securitization exposures would not be considered an equity holding.16
7.50 Banks will assign a risk weight of 400% to speculative unlisted equity exposures described in paragraph 7.51 and a risk weight of 250% to all other equity holdings.
7.51 Speculative unlisted equity exposures are defined as equity investments in unlisted companies that are invested for short-term resale purposes or are considered venture capital or similar investments, which are subject to price volatility and are acquired in anticipation of significant future capital gains17.
7.52 Banks will assign a risk weight of 150% to subordinated debt and capital instruments other than equities.
7.53 Notwithstanding the risk weights specified in paragraphs 7.50 to 7.52, the risk weight for investments in significant minority- or majority-owned and – controlled commercial entities depends upon the application of two materiality thresholds:
1. For individual investments, 15% of the bank’s capital; and
2. For the aggregate of such investments, 60% of the bank’s capital.
7.54 Investments in significant minority- or majority-owned and –controlled commercial entities below the materiality thresholds in paragraph 7.52 must be risk- weighted as specified in paragraphs 7.47 to 7.52. Investments in excess of the materiality thresholds must be risk-weighted at 1250%.
12 Indirect equity interests include holdings of derivative instruments tied to equity interests, and holdings in corporations, partnerships, limited liability companies or other types of enterprises that issue ownership interests and are engaged principally in the business of investing in equity instruments.
13 For certain obligations that require or permit settlement by issuance of a variable number of the issuer’s equity shares, the change in the monetary value of the obligation is equal to the change in the fair value of a fixed number of equity shares multiplied by a specified factor. Those obligations meet the conditions of item (c) if both the factor and the referenced number of shares are fixed. For example, an issuer may be required to settle an obligation by issuing shares with a value equal to three times the appreciation in the fair value of 1,000 equity shares. That obligation is considered to be the same as an obligation that requires settlement by issuance of shares equal to the appreciation in the fair value of 3,000 equity shares.
14 Equities that are recorded as a loan but arise from a debt/equity swap made as part of the orderly realization or restructuring of the debt are included in the definition of equity holdings. However, these instruments may not attract a lower capital charge than would apply if the holdings remained in the debt portfolio.
15 SAMA may decide not to require that such liabilities be included where they are directly hedged by an equity holding, such that the net position does not involve material risk.
16 SAMA may consider to re-characterize debt holdings as equites for regulatory purposes and to otherwise ensure the proper treatment of holdings under the supervisory review process.
17 For example, investments in unlisted equities of corporate clients with which the bank has or intends to establish a long-term business relationship and debt-equity swaps for corporate restructuring purposes would be excluded.Retail Exposure Class
7.55 The retail exposure class excludes exposures within the real estate exposure class. The retail exposure class includes the following types of exposures:
1. Exposures to an individual person or persons; and
2. Exposures to MSMEs (as defined in paragraph 7.40) that meet the “regulatory retail” criteria set out in paragraph 7.57 below. Exposures to MSMEs that do not meet these criteria will be treated as corporate MSMEs exposures under paragraph 7.40.
7.56 Exposures within the retail exposure class will be treated according to paragraphs 7.57 to 7.59 below. For the purpose of determining risk weighted assets, the retail exposure class consists of the follow three sets of exposures:
1. “Regulatory retail” exposures that do not arise from exposures to “transactors” (as defined in paragraph 7.58).
2. “Regulatory retail” exposures to “transactors”.
3. “Other retail” exposures.
7.57 “Regulatory retail” exposures are defined as retail exposures that meet all of the criteria listed below:
1. Product criterion:
The exposure takes the form of any of the following: revolving credits and lines of credit (including credit cards, charge cards and overdrafts), personal term loans and leases (e.g. instalment loans, auto loans and leases, student and educational loans, personal finance) and small business facilities and commitments. Mortgage loans, derivatives and other securities (such as bonds and equities), whether listed or not, are specifically excluded from this category.
2. Low value of individual exposures:
The maximum aggregated exposure to one counterparty cannot exceed an absolute threshold of SAR 4.46 million.
3. Granularity criterion:
No aggregated exposure to one counterparty18 can exceed 0.2%19 of the overall regulatory retail portfolio. Defaulted retail exposures are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion.
7.58 “Transactors” are obligors in relation to facilities such as credit cards and charge cards where the balance has been repaid in full at each scheduled repayment date for the previous 12 months. Obligors in relation to overdraft facilities would also be considered as transactors if there has been no drawdown over the previous 12 months.
7.59 “Other retail” exposures are defined as exposures to an individual person or persons that do not meet all of the regulatory retail criteria in paragraph 7.57.
7.60 The risk weights that apply to exposures in the retail asset class are as follows:
1. Regulatory retail exposures that do not arise from exposures to transactors (as defined in paragraph 7.58) will be risk weighted at 75%.
2. Regulatory retail exposures that arise from exposures to transactors (as defined in paragraph 7.58)will be risk weighted at 45%.
3. Other retail exposures will be risk weighted at 100%.
18 Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of retail exposures, excluding residential real estate exposures. In case of off-balance sheet claims, the gross amount would be calculated after applying credit conversion factors. In addition, “to one counterparty” means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank’s aggregated exposure on both businesses).
19 To apply the 0.2% threshold of the granularity criterion, banks must: first, identify the full set of exposures in the retail exposure class (as defined in paragraph 7.55); second, identify the subset of exposure that meet product criterion and do not exceed the threshold for the value of aggregated exposures to one counterparty (as defined in paragraph 7.57); and third, exclude any exposures that have a value greater than 0.2% of the subset before exclusionsReal Estate Exposure Class
7.61 Real estate is immovable property that is land, including agricultural land and forest, or anything treated as attached to land, in particular buildings, in contrast to being treated as movable/personal property. The real estate exposure asset class consists of:
1. Exposures secured by real estate that are classified as “regulatory real estate” exposures.
2. Exposures secured by real estate that are classified as “other real estate” exposures.
3. Exposures that are classified as “land acquisition, development and construction” (ADC) exposures.
7.62 “Regulatory real estate” exposures consist of:
1. “Regulatory residential real estate” exposures that are not “materially dependent on cash flows generated by the property”.
2. “Regulatory residential real estate” exposures that are “materially dependent on cash flows generated by the property”.
3. “Regulatory commercial real estate” exposures that are not “materially dependent on cash flows generated by the property”.
4. “Regulatory commercial real estate” exposures that are “materially dependent on cash flows generated by the property”.
Regulatory real estate exposures
7.63 For an exposure secured by real estate to be classified as a “regulatory real estate” exposure, the loan must meet the following requirements:
1. Finished property:
The exposure must be secured by a fully completed immovable property. This requirement does not apply to forest, desert and agricultural land. This criteria can be met by loans to individuals that are secured by residential property under construction or land upon which residential property would be constructed, provided that: (i) the property is a one-to-four family residential housing unit that will be the primary residence of the borrower and the lending to the individual is not, in effect, indirectly financing land acquisition, development and construction exposures described in paragraph 7.82; or (ii) sovereign or PSEs involved have the legal powers and ability to ensure that the property under construction will be finished.
2. Legal enforceability:
Any claim on the property taken must be legally enforceable in all relevant jurisdictions. The collateral agreement and the legal process underpinning it must be such that they provide for the bank to realize the value of the property within a reasonable time frame.
3. Claims over the property:
The loan is a claim over the property where the lender bank holds a first lien over the property, or a single bank holds the first lien and any sequentially lower ranking lien(s) (i.e. there is no intermediate lien from another bank) over the same property. However, where junior liens20 provide the holder with a claim for collateral that is legally enforceable and constitute an effective credit risk mitigant, junior liens held by a different bank than the one holding the senior lien mayalso be recognized.21 In order to meet the above requirements, the national frameworks governing liens should ensure the following: (i) each bank holding a lien on a property can initiate the sale of the property independently from other entities holding a lien on the property; and (ii) where the sale of the property is not carried out by means of a public auction, entities holding a senior lien take reasonable steps to obtain a fair market value or the best price that may be obtained in the circumstances when exercising any power of sale on their own (i.e. it is not possible for the entity holding the senior lien to sell the property on its own at a discounted value in detriment of the junior lien).
4. Ability of the borrower to repay:
The borrower must meet the requirements set according to paragraph 7.65.
5. Prudent value of property:
The property must be valued according to the criteria in paragraphs 7.66 to 7.68 for determining the value in the loan-to- value ratio (LTV). Moreover, the value of the property must not depend materially on the performance of the borrower.
6. Required documentation:
All the information required at loan origination and for monitoring purposes must be properly documented, including information on the ability of the borrower to repay and on the valuation of the property.
7.64 SAMA may require banks to increase the risk weights in the corresponding risk weight tables as appropriate if they are determined to be too low for real estate exposures based on default experience and other factors such as market price stability. Banks will be informed accordingly.
7.65 Banks should put in place underwriting policies with respect to the granting of mortgage loans that include the assessment of the ability of the borrower to repay. Underwriting policies must define a metric(s) (such as the loan’s debt service coverage ratio) and specify its (their) corresponding relevant level(s) to conduct such assessment22. Underwriting policies must also be appropriate when the repayment of the mortgage loan depends materially on the cash flows generated by the property, including relevant metrics (such as an occupancy rate of the property).
7.66 The LTV is the amount of the loan divided by the value of the property. When calculating the LTV, the loan amount will be reduced as the loan amortizes. The value of the property will be maintained at the value measured at origination, with the following exceptions:
1. SAMA may require banks to revise the property value downward. If the value has been adjusted downwards, a subsequent upwards adjustment can be made but not to a higher value than the value at origination.
2. The value must be adjusted if an extraordinary, idiosyncratic event occurs resulting in a permanent reduction of the property value.
3. Modifications made to the property that unequivocally increase its value could also be considered in the LTV.
7.67 The LTV must be prudently calculated in accordance with the following requirements:
1. Amount of the loan:
Includes the outstanding loan amount and any undrawn committed amount of the mortgage loan23. The loan amount must be calculated gross of any provisions and other risk mitigants, except for pledged deposits accounts with the lending bank that meet all requirements for on-balance sheet netting and have been unconditionally and irrevocably pledged for the sole purposes of redemption of the mortgage loan.24
2. Value of the property:
The valuation must be appraised independently25 using prudently conservative valuation criteria. To ensure that the value of the property is appraised in a prudently conservative manner, the valuation must exclude expectations on price increases and must be adjusted to take into account the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan.26
7.68 A guarantee or financial collateral may be recognized as a credit risk mitigant in relation to exposures secured by real estate if it qualifies as eligible collateral under the credit risk mitigation framework (chapter 9). This may include mortgage insurance27 if it meets the operational requirements of the credit risk mitigation framework for a guarantee. Banks may recognize these risk mitigants in calculating the exposure amount; however, the LTV bucket and risk weight to be applied to the exposure amount must be determined before the application of the appropriate credit risk mitigation technique.
Definition of “regulatory residential real estate” exposures
7.69 A “regulatory residential real estate” exposure is a regulatory real estate exposure that is secured by a property that has the nature of a dwelling and satisfies all applicable laws and regulations enabling the property to be occupied for housing purposes (i.e. residential property).28
Definition of “regulatory commercial real estate” exposures
7.70 A “regulatory commercial real estate” exposure is regulatory real estate exposure that is not a regulatory residential real estate exposure.
Definition of exposures that are “materially dependent on cash flows generated by the property”
7.71 Regulatory real estate exposures (both residential and commercial) are classified as exposures that are “materially dependent on cash flows generated by the property” when the prospects for servicing the loan materially depend on the cash flows generated by the property securing the loan rather than on the underlying capacity of the borrower to service the debt from other sources. The primary source of these cash flows would generally be lease or rental payments, or the sale of the property. The distinguishing characteristic of these exposures compared to other regulatory real estate exposures is that both the servicing of the loan and the prospects for recovery in the event of default depend materially on the cash flows generated by the property securing the exposure.
7.72 It is expected that the material dependence condition, set out in paragraph 7.71 above, would predominantly apply to loans to corporates, MSMEs or SPVs, but is not restricted to those borrower types. As an example, a loan may be considered materially dependent if more than 50% of the income from the borrower used in the bank's assessment of its ability to service the loan is from cash flows generated by the residential property.
7.73 As exceptions to the definition contained in paragraph 7.71 above, the following types of regulatory real estate exposures are not classified as exposures that are materially dependent on cash flows generated by the property:
1. An exposure secured by a property that is the borrower’s primary residence;
2. An exposure secured by an income-producing residential housing unit, to an individual who has mortgaged less than two properties or housing units;
3. An exposure secured by residential real estate property to associations or cooperatives of individuals that are regulated under national law and exist with the only purpose of granting its members the use of a primary residence in the property securing the loans; and
4. An exposure secured by residential real estate property to public housing companies and not-for-profit associations regulated under national law that exist to serve social purposes and to offer tenants long-term housing.
Risk weights for regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property
7.74 For regulatory residential real estate exposures that are not materially dependent on cash flow generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV ratio in Table 9 below. The use of the risk weights in Table 9 is referred to as the “whole loan” approach.
Whole loan approach risk weights for regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property Table 9 Risk weight LTV ≤ 50% 50% < LTV ≤ 60% 60% < LTV ≤ 80% 80% < LT ≤ 90% 90% < LTV ≤ 100% LTV > 100% 20% 25% 30% 40% 50% 70% 7.75 As an alternative to the whole loan approach for regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property, banks may apply the “loan splitting” approach. Under the loan splitting approach, the risk weight of 20% is applied to the part of the exposure up to 55% of the property value and the risk weight of the counterparty (as prescribed in paragraph Error! Reference source not found.) is applied to the residual exposure29. Where there are liens on the property that are not held by the bank, the treatment is as follows:
1. Where a bank holds the junior lien and there are senior liens not held by the bank, to determine the part of the bank’s exposure that is eligible for the 20% risk weight, the amount of 55% of the property value should be reduced by the amount of the senior liens not held by the bank. For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, where there is also a senior ranking lien of SAR 10,000 held by another institution, the bank will apply a risk weight of 20% to SAR 45,000 (=max (SAR 55,000 – SAR 10,000, 0)) of the exposure and, according to paragraph Error! Reference source not found. a risk weight of 75% to the residual exposure of SAR 25,000. (this does not take into account the other loan taken by the borrower from the senior lien holder).
2. Where liens not held by the bank rank pari passu with the bank’s lien, to determine the part of the bank’s exposure that is eligible for the 20% risk weight, the amount of 55% of the property value, reduced by the amount of more senior liens not held by the bank (if any), should be reduced by the product of:
(i) 55% of the property value, reduced by the amount of any senior liens (if any, both held by the bank and held by other institutions); and
(ii) The amount of liens not held by the bank that rank pari passu with the bank’s lien divided by the sum of all pari passu liens. For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, where there is also a pari passu ranking lien of SAR 10,000 held by another institution, the bank will apply a risk weight of 20% to SAR 48,125 (=SAR 55,000 – SAR 55,000 * SAR 10,000/SAR 80,000) of the exposure and, according to CRE20.89(1), a risk weight of 75% to the residual exposure of SAR 21,875. If both the loan and the bank’s lien is only SAR 30,000 and there is additionally a more senior lien of SAR 10,000 not held by the bank, the property value remaining available is SAR 33,750 (= (SAR 55,000 – SAR 10,000) - ((SAR 55,000 – SAR 10,000) * SAR 10,000/(SAR 10,000+ SAR 30,000)), and the bank will apply a risk weight of 20% to SAR 30,000.
Risk weights for regulatory residential real estate exposures that are materially dependent on cash flows generated by the property
7.76 For regulatory residential real estate exposures that are materially dependent on cash flows generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV ratio in Table10 below.
Risk weights for regulatory residential real estate exposures that are materially dependent on cash flows generated by the property Table 10 Risk weight LTV ≤ 50% 50% < LTV ≤ 60% 60% < LTV ≤ 80% 80% < LTV ≤ 90% 90% < LTV ≤ 100% LTV > 100% 30% 35% 45% 60% 75% 105% Risk weights for regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property
7.77 For regulatory commercial real estate exposures that are not materially dependent on cash flow generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV in Table 11 below (which sets out a whole loan approach). The risk weight of the counterparty for the purposes of Table 11 below and 7.78 below is prescribed in paragraph Error! Reference source not found..
Whole loan approach risk weights for regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property Table 11 Risk weight LTV ≤ 60% LTV > 60% Min (60%, RW of counterparty) RW of counterparty 7.78 Banks may apply the “loan splitting” approach, as an alternative to the whole loan approach, for regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property. Under the loan splitting approach, the risk weight of 60% or the risk weight of the counterparty, whichever is lower, is applied to the part of the exposure up to 55% of the property value30, and the risk weight of the counterparty is applied to the residual exposure
Risk weights for regulatory commercial real estate exposures that are materially dependent on cash flows generated by the property
7.79 For regulatory commercial real estate exposures that are materially dependent on cash flows generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV in Table 12 below.
Whole loan approach risk weights for regulatory commercial real estate exposures that are materially dependent on cash flows generated by the property Table 12 Risk weight LTV ≤ 60% 60% < LTV ≤ 80% LTV > 80% 70% 90% 110% Definition of “other real estate” exposures and applicable risk weights
7.80 An “other real estate” exposure is an exposure within the real estate asset class that is not a regulatory real estate exposure (as defined in paragraph 7.63 above) and is not a land ADC exposure (as defined in paragraph 7.82 below).
7.81 Other real estate exposures are risk weighted as follows:
1. The risk weight of the counterparty is used for other real estate exposures that are not materially dependent on the cash flows generated by the property. For exposures to individuals the risk weight applied will be 75%. For exposures to SMEs, the risk weight applied will be 85%. For exposures to other counterparties, the risk weight applied is the risk weight that would be assigned to an unsecured exposure to that counterparty.
2. The risk weight of 150% is used for other real estate exposures that are materially dependent on the cash flows generated by the property.
Definition of land acquisition, development and construction exposures and applicable risk weights
7.82 Land ADC exposures31 refers to loans to companies or SPVs financing any of the land acquisition for development and construction purposes, or development and construction of any residential or commercial property. ADC exposures will be risk-weighted at 150%, unless they meet the criteria in paragraph 7.83.
7.83 ADC exposures to residential real estate may be risk weighted at 100%, provided that the following criteria are met:
1. prudential underwriting standards meet the requirements in paragraph 7.63 (i.e. the requirements that are used to classify regulatory real estate exposures) where applicable;
2. Pre-sale or pre-lease contracts amount to a significant portion of total contracts or substantial equity at risk. Pre-sale or pre-lease contracts must be legally binding written contracts and the purchaser/renter must have made a substantial cash deposit which is subject to forfeiture if the contract is terminated. Equity at risk should be determined as an appropriate amount of borrower-contributed equity to the real estate’s appraised as-completed value.
20 Please refer to Art 24, the ‘Registered Real Estate Mortgage’s Law issued via Royal Decree No. M/49 dated 03/07/2012.
21 Likewise, this would apply to junior liens held by the same bank that holds the senior lien in case there is an intermediate lien from another bank (i.e. the senior and junior liens held by the bank are not in sequential ranking order
22 Metrics and levels for measuring the ability to repay should mirror the Financial Stability Board (FSB) Principles for sound residential mortgage underwriting practices (April 2012).
23 If a bank grants different loans secured by the same property and they are sequential in ranking order (i.e. there is no intermediate lien from another bank), the different loans should be considered as a single exposure for risk-weighting purposes, and the amount of the loans should be added to calculate the LTV
24 The loan amount of the junior liens must include all other loans secured with liens of equal or higher ranking than the bank’s lien securing the loan for purposes of defining the LTV bucket and risk weight for the junior lien. If there is insufficient information for ascertaining the ranking of the other liens, the bank should assume that these liens rank pari passu with the junior lien held by the bank. This treatment does not apply to exposures that are risk weighted according to the loan splitting approach (paragraphs 7.75 and 7.78), where the junior lien would be taken into account in the calculation of the value of the property. The bank will first determine the “base” risk weight based on Tables 9, 10, 11 or 12 as applicable and adjust the “base” risk weight by a multiplier of 1.25, for application to the loan amount of the junior lien. If the “base” risk weight corresponds to the lowest LTV bucket, the multiplier will not be applied. The resulting risk weight of multiplying the “base” risk weight by 1.25 will be capped at the risk weight applied to the exposure when the requirements in paragraph 7.63 are not met.
25 The valuation must be done independently from the bank’s mortgage acquisition, loan processing and loan decision process.
26 In the case where the mortgage loan is financing the purchase of the property, the value of the property for LTV purposes will not be higher than the effective purchase price.
27 A bank’s use of mortgage insurance should mirror the FSB Principles for sound residential mortgage underwriting (April 2012).
28 For residential property under construction described in paragraph 7.63(1), this means there should be an expectation that the property will satisfy all applicable laws and regulations enabling the property to be occupied for housing purposes.
29 For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, the bank will apply a risk weight of 20% to SAR 55,000 of the exposure and, according to paragraph 7.82(1), a risk weight of 75% to the residual exposure of SAR 15,000. This gives total risk weighted assets for the exposure of SAR 22,250 = (0.20 * SAR 55,000) + (0.75 * SAR 15,000).
30 Where there are liens on the property that are not held by the bank, the part of the exposure up to 55% of the property value should be reduced by the amount of the senior liens not held by the bank and by a pro-rata percentage of any liens pari passu with the bank’s lien but not held by the bank. See paragraph 7.75 for examples of how this methodology applies in the case of residential retail exposures.
31 ADC exposures do not include the acquisition of forest or desert or agricultural land, where there is no planning consent or intention to apply for planning consent.Risk Weight Multiplier to Certain Exposures with Currency Mismatch
7.84 For unhedged retail and residential real estate exposures to individuals where the lending currency differs from the currency of the borrower’s source of income, banks will apply a 1.5 times multiplier to the applicable risk weight according to paragraphs 7.55 to 7.60 and 7.74 to 7.76, subject to a maximum risk weight of 150%.
7.85 For the purposes of paragraph 7.84, an unhedged exposure refers to an exposure to a borrower that has no natural or financial hedge against the foreign exchange risk resulting from the currency mismatch between the currency of the borrower’s income and the currency of the loan. A natural hedge exists where the borrower, in its normal operating procedures, receives foreign currency income that matches the currency of a given loan (e.g. remittances, rental incomes, salaries). A financial hedge generally includes a legal contract with a financial institution (e.g. forward contract). For the purposes of application of the multiplier, only these natural or financial hedges are considered sufficient where they cover at least 90% of the loan instalment, regardless of the number of hedges.
Off-Balance Sheet Items
7.86 Off-balance sheet items will be converted into credit exposure equivalents through the use of credit conversion factors (CCF). In the case of commitments, the committed but undrawn amount of the exposure would be multiplied by the CCF. For these purposes, commitment means any contractual arrangement that has been offered by the bank and accepted by the client to extend credit, purchase assets or issue credit substitutes.32 It includes any such arrangement that can be unconditionally cancelled by the bank at any time without prior notice to the obligor. It also includes any such arrangement that can be cancelled by the bank if the obligor fails to meet conditions set out in the facility documentation, including conditions that must be met by the obligor prior to any initial or subsequent drawdown under the arrangement. Counterparty risk weightings for over-the-counter (OTC) derivative transactions will not be subject to any specific ceiling.
7.87 A 100% CCF will be applied to the following items:
1. Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances).
2. Sale and repurchase agreements and asset sales with recourse33 where the credit risk remains with the bank.
3. The lending of banks’ securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e. repurchase/reverse repurchase and securities lending/securities borrowing transactions). The risk-weighting treatment for counterparty credit risk must be applied in addition to the credit risk charge on the securities or posted collateral, where the credit risk of the securities lent or posted as collateral remains with the bank. This paragraph does not apply to posted collateral related to derivative transactions that is treated in accordance with the counterparty credit risk standards.
4. Forward asset purchases, forward forward deposits and partly paid shares and securities,34 which represent commitments with certain drawdown.
5. Off-balance sheet items that are credit substitutes not explicitly included in any other category.
7.88 A 50% CCF will be applied to note issuance facilities and revolving underwriting facilities regardless of the maturity of the underlying facility.
7.89 A 50% CCF will be applied to certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions).
7.90 A 40% CCF will be applied to commitments, regardless of the maturity of the underlying facility, unless they qualify for a lower CCF.
7.91 A 20% CCF will be applied to both the issuing and confirming banks of short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralized by the underlying shipment). Short term in this context means with a maturity below one year.
7.92 A 10% CCF will be applied to commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness. SAMA may require applying higher CCF to certain commitments as appropriate based on various factors, which may constrain banks’ ability to cancel the commitment in practice.
7.93 Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCFs35.
32 Certain arrangements might be exempted from the definition of commitments provided that the following conditions are met: (i) the bank receives no fees or commissions to establish or maintain the arrangements; (ii) the client is required to apply to the bank for the initial and each subsequent drawdown; (iii) the bank has full authority, regardless of the fulfilment by the client of the conditions set out in the facility documentation, over the execution of each drawdown; and (iv) the bank’s decision on the execution of each drawdown is only made after assessing the creditworthiness of the client immediately prior to drawdown. Exempted arrangements that meet the above criteria are limited to certain arrangements for corporates and MSMEs, where counterparties are closely monitored on an ongoing basis.
33 These items are to be weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.
34 These items are to be weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.
35 For example, if a bank has a commitment to open short-term self- liquidating trade letters of credit arising from the movement of goods, a 20% CCF will be applied (instead of a 40% CCF); and if a bank has an unconditionally cancellable commitment described in paragraph 7.92 to issue direct credit substitutes, a 10% CCF will be applied (instead of a 100% CCF).Exposures that Give Rise to Counterparty Credit Risk
7.94 For exposures that give rise to counterparty credit risk according to paragraph 5.3 in The Counterparty Credit Risk (CCR) Framework (i.e. OTC derivatives, exchange-traded derivatives, long settlement transactions and securities financing transactions), the exposure amount to be used in the determination of RWA is to be calculated under the rules set out in chapters 3 to 8 in The Counterparty Credit Risk (CCR) Framework.
Credit Derivatives
7.95 A bank providing credit protection through a first-to-default or second-to-default credit derivative is subject to capital requirements on such instruments. For first- to-default credit derivatives, the risk weights of the assets included in the basket must be aggregated up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk- weighted asset amount. For second-to-default credit derivatives, the treatment is similar; however, in aggregating the risk weights, the asset with the lowest risk-weighted amount can be excluded from the calculation. This treatment applies respectively for nth-to-default credit derivatives, for which the n-1 assets with the lowest risk-weighted amounts can be excluded from the calculation.
Defaulted Exposures
7.96 For risk-weighting purposes under the standardized approach, a defaulted exposure is defined as one that is past due for more than 90 days, or is an exposure to a defaulted borrower. A defaulted borrower is a borrower in respect of whom any of the following events have occurred:
1. Any material credit obligation that is past due for more than 90 days. Overdrafts will be considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than current outstanding;
2. Any material credit obligation is on non-accrued status (e.g. the lending bank no longer recognizes accrued interest as income or, if recognized, makes an equivalent amount of provisions);
3. A write-off or account-specific provision is made as a result of a significant perceived decline in credit quality subsequent to the bank taking on any credit exposure to the borrower;
4. Any credit obligation is sold at a material credit-related economic loss;
5. A distressed restructuring of any credit obligation (i.e. a restructuring that may result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or (where relevant) fees)is agreed by the bank;
6. The borrower’s bankruptcy or a similar order in respect of any of the borrower’s credit obligations to the banking group has been filed;
7. The borrower has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of any of the credit obligations to the banking group; or
8. Any other situation where the bank considers that the borrower is unlikely to pay its credit obligations in full without recourse by the bank to actions such as realizing security.
7.97 For retail exposures, the definition of default can be applied at the level of a particular credit obligation, rather than at the level of the borrower. As such, default by a borrower on one obligation does not require a bank to treat all other obligations to the banking group as defaulted.
7.98 With the exception of residential real estate exposures treated under paragraph 7.99, the unsecured or unguaranteed portion of a defaulted exposure shall be risk- weighted net of specific provisions and partial write-offs as follows:
1. 150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan; and
2. 100% risk weight when specific provisions are equal or greater than 20% and less than 50% of the outstanding amount of the loan.
3. 50% risk weight when specific provisions are equal to or greater than 50% of the outstanding amount of the loan.
7.99 Defaulted residential real estate exposures where repayments do not materially depend on cash flows generated by the property securing the loan shall be risk- weighted net of specific provisions and partial write-offs at 100%. Guarantees or financial collateral which are eligible according to the credit risk mitigation framework might be taken into account in the calculation of the exposure in accordance with paragraph 7.68.
7.100 For the purpose of defining the secured or guaranteed portion of the defaulted exposure, eligible collateral and guarantees will be the same as for credit risk.
Other assets
7.101 Article 4.4 – Section A of SAMA Guidance Document Concerning the Implementation of Basel III (Circular No. 341000015689, Date: 19 December 2012) - specifies a deduction treatment for the following exposures: significant investments in the common shares of unconsolidated financial institutions, mortgage servicing rights, and deferred tax assets that arise from temporary differences. The exposures are deducted in the calculation of Common Equity Tier1 if they exceed the thresholds set out in that article. A 250% risk weight applies to the amount of the three “threshold deduction” items listed in the article that are not deducted by the article.
7.102 The standard risk weight for all other assets will be 100%, with the exception of the following exposures:
1. A 0% risk weight will apply to:
(a) Cash owned and held at the bank or in transit; and
(b) Gold bullion held at the bank or held in another bank on an allocated basis, to the extent the gold bullion assets are backed by gold bullion liabilities.
2. A 20% risk weight will apply to cash items in the process of collection.