Claims on sovereigns and their central banks will be risk weighted as follows;

“Under the Standardized Approach, the applicable risk weight for claims on sovereigns is based on the rating assigned to the sovereign by a recognized external credit assessment institution (ECAI) such as a rating agency. A national supervisory authority may apply a lower risk weight to its banks’ exposures to their own sovereign when the exposures are denominated in the local currency and funded in the local currency. Other national supervisory authorities may also permit their banks to apply the same risk weight to domestic currency exposures to this sovereign. In these instances, there is no trans-border risk”.

SAMA requires that banks operating in Saudi Arabia, with exposures to other sovereigns meeting the above criteria, to use the preferential risk weight assigned to the sovereign by the relevant national supervisory authority.

“Risk weights for claims on sovereigns can also be determined using the country risk scores assigned by Export Credit Agencies (ECAs).

SAMA will not allow the use of ECAs’ of other countries to provide credit rating for sovereigns.

The new Basel framework allows national supervisory authorities to implement one of two options for risk-weighting claims on banks and securities firms.

Option-1:

Under option 1, the risk weight is one category less favorable than that assigned to claims on the Sovereign of the country of incorporation. However, for claims on Banks in countries with sovereign rated BB+ to B- and on banks in unrated countries the risk weight will be capped at 100%.

Option-2:

Under option 2, the risk weight is based on the external rating a bank by a recognized ECAI.

SAMA requires banks operating in Saudi Arabia to use Option 2

National supervisory authorities, who choose to allow preferential treatment for claims on sovereigns may also allow preferential treatment for certain short term claims on banks. To be eligible for this treatment, these exposures must be denominated and funded in the local currency and have an original maturity of three months or less. These exposures may receive a risk weight that is one category less favourable than that assigned to claims on the Sovereign, subject to a floor of 20 percent. However, this preferential treatment is not available for banks risk weighted at 150%.

SAMA will allow banks to adopt the preferential treatment option

A “0” risk weight may be given to those MDB’s that meet qualifying criteria under Basel-II. Alternatively, MDBS will be risk weighted in accordance with their individual ratings as per banks option 2 without any preferential treatments for short-term exposures.

SAMA intends to adopt a 0% risk weight for qualifying MDB’s and in general the risk weights to be determined on the basis of individual MDB rating as for option # 2 for banks.

SAMA proposes to continue with the current definition of PSEs as specified in its Capital Adequacy Requirements (CAR) guidelines in ERMs-Q-14.

The new Basel framework allows claims on (PSEs) to be risk weighted using either option 1 or option 2 for claims on Banks.

SAMA requires banks operating in Saudi Arabia to use Option -2.

Under the new Basel framework, the risk weight for corporate exposures is determined using the rating assigned by a recognized ECAI’s. However, national supervisory authorities may allow banks to use the 100 percent risk weight for all corporate exposures in lieu of using external ratings.

SAMA requires the risk weight for all corporate exposures to be in accordance with their external ratings. Unrated corporate exposures to be at 100%.

There are qualifying requirement based on product type, and the size of the exposure itself. These exposure include loans to individuals, leases, small business facilities, or car loans and other consumer loans, etc. In specific the new Basel framework attaches small business facilities enterprises (SBFE) qualifying criteria for claims that may be treated as retail claims for regulatory capital purposes and included in a regulatory retail portfolio. These criteria include a granularity criterion, which requires that the portfolio be sufficiently diversified to reduce the risk to a level warranting the 75 percent risk weight.

Specifically, with respect to exposure size, national supervisory authorities have the option of setting a numerical limits on the amount of gross exposure before taking into account credit risk mitigation to one counterparty¹. For example, this limit could be set at 0.2 percent of the total retail portfolio as proposed in the framework.

To meet the 75% RW criteria SAMA requires the non-mortgage retail portfolio claims to meet the above criteria and should not exceed SR. 5 million.

National supervisory authorities should evaluate whether the risk weights in Para 69 are considered to be too low based on default experience for these types of exposures in their jurisdictions. Supervisors therefore may require higher weights. SAMA does not require higher risk weights for such exposures.

¹ Aggregate exposure means gross amount subject to the above conditions in para

“The new Basel framework allows claims secured by residential mortgages to receive a risk weight of 35 percent. Investments in hotel properties and time-share properties would be excluded from the definition of residential mortgage property. However, this reduced risk weight would only be applicable if there is a substantial security margin. Further, the loan default experience should also be considered”.

SAMA will continue to apply a 100 percent retail risk weight to such claims and continue to monitor the default experience of this asset class for future consideration.

“Under the new Basel framework, mortgages on commercial real estate are risk weighted at 100 percent. However, national supervisory authorities may apply a preferential risk weight of 50 percent to parts of commercial real estate loans under exceptional circumstances”.

SAMA will continue to apply 100% risk weight.

“The new Basel framework proposes the following subject to national discretion.

SAMA requires the above treatment with exception if the level of provisioning is more than 50%; the RW is reduced to 50%. In such cases the RW will be at 100%.

¹ On outstanding loans balance

Other Assets

The standard risk weight for all other assets will be 100%.

At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion, liabilities can be treated as cash and therefore risk- weighted at 0%.

SAMA requires that the treatment of gold bullion to be equivalent to cash.

Off-balance-sheet items under the Standardized Approach will be converted into credit exposure equivalents through the use of credit conversion factors (CCF).

Commitments with an original maturity of up to one year and commitments with an original maturity over one year will receive a CCF of 20% and 50%, respectively. However, any commitments that are unconditionally cancelable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness, will receive a 0% CCF.

For short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralized by the underlying shipment), a 20% CCF will be applied to both issuing and confirming banks.

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 CCFs.

CCFs not specified above remain as defined in the 1988 Accord.

The credit equivalent amount of OTC derivatives and SFTs that expose a bank to counterparty credit risk is to be calculated under the rules set forth in Annex 4 of International Convergence of Capital Measurement and Capital Standards, 2006.

(Refer to Paragraph 87 of International Convergence of Capital Measurement and Capital Standards – June 2006).

With regard to unsettled securities, commodities, and foreign exchange transaction, SAMA requires that bank’s prepares its Prudential return submission based on trade date rather than settlement date as per the accounting convention. Banks are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis. Furthermore, when such transactions are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism, banks must calculate a capital charge as set forth in Annex 3 of International Convergence of Capital Measurement and Capital Standards – June 2006

(Refer to Paragraph 89 of International Convergence of Capital Measurement and Capital Standards – June 2006)

As a general rule, Banks should use solicited ratings from eligible ECAIs. However, the new Basel framework allows national supervisory authorities to permit the use of unsolicited ratings.

SAMA will not allow Banks to use unsolicited ratings.