5.2. Eligible Credit Risk Mitigation (CRM) Techniques
Effective from Sep 08 2019 - Sep 07 2019
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| Eligible credit risk mitigation techniques for large exposures purposes are those that meet the minimum requirements and eligibility criteria for the recognition of unfunded credit protection5 and financial collateral that qualify as eligible financial collateral under the standardised approach for risk-based capital requirement purposes. (Note: SAMA does not consider equities, including convertible bonds and Undertakings for Collective Investments in Transferable Securities as eligible CRM mitigants) | ||
| Other forms of collateral that are only eligible under the Internal-ratings based (IRB) approach in accordance with Paragraph 31, Basel III IRB Approaches Prudential Returns And Guidance Notes, 2014 (Only Equities for margin lending exposures has been allowed in the aforementioned paragraph, as eligible CRM. SAMA does not recognize any IRB collaterals i.e. financial Receivable, Residential Real Estate. Commercial Real Estate. Physical Cards, etc., under the IRB approach) are not eligible to reduce exposure values for large exposures purposes. | ||
| A bank must recognize an eligible CRM technique in the calculation of an exposure whenever it has used this technique to calculate the risk-based capital requirements, and provided it meets the conditions for recognition under the large exposures framework; | ||
| i. | Treatment of maturity mismatches in CRM | |
| a. | In accordance with provisions set out in the risk-based capital framework6, hedges with maturity mismatches are recognised only when their original maturities are equal to or greater than one year and the residual maturity of a hedge is not less than three months. | |
| b. | If there is a maturity mismatch in respect of credit risk mitigants (collateral, on-balance sheet netting, guarantees and credit derivatives) recognised in the risk-based capital requirement, the adjustment of the credit protection for the purpose of calculating large exposures is determined using the same approach as in the risk-based capital requirement.7 | |
| ii. | On-balance sheet netting8 | |
| a. | Where a bank has in place legally enforceable netting arrangements for loans and deposits, it may calculate the exposure values for large exposures purposes according to the calculation it uses for capital requirements purposes - i.e. on the basis of net credit exposures subject to the conditions set out in the approach to on-balance sheet netting in the risk-based capital requirement.9 | |
5 Unfunded credit protection refers collectively to guarantees and credit derivatives the treatment of which is described in Section 6, Basel II - SAMA's Detailed Guidance Document relating to Pillar 1, June 2006, and GN 2 of Basle II Package of Bank Prudential Returns and Guidance Notes Concerning Standardized Approach, 2007.
6 See, Credit Risk Mitigation - Chapter 6.5 Pages 164/165, Basel II - SAMA's Detailed Guidance Document 2006 and GN 2, Pages No 12/13,Basel II, Package Of Bank Prudential Returns And Guidance Notes Concerning Standardized Approach, 2007.
7 See Credit Risk Mitigation - Chapter 6.5 Page 164/165, Basel II - SAMA's Detailed Guidance Document, 2006.
8 This should not be currently applied to exposures based in KSA as netting is not currently permitted within the legal framework.
9 See Credit Risk Mitigation - Chapter 6.2 Page 158 and 159, Basel II - SAMA's Detailed Guidance Document, 2006.