4.1 Risk-Weighted Assets for Corporate, Sovereign and Bank Exposures
Effective from Jun 12 2006 - Jun 11 2006
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| Formula for derivation of risk-weighted assets | |||||||||||||||||
| 4.1.1 | The derivation of risk-weighted assets is dependent on estimates of PD, LGD, EAD and, in some cases, M, for a given exposure. Paragraphs 4.2.7 to 4.2.13 below discuss the circumstances in which the maturity adjustment applies. | ||||||||||||||||
| 4.1.2 | Throughout this section, PD and LGD are measured as decimals, and EAD is measured in Saudi Riyals. For exposures not in default, the formula for calculating risk-weighted assets is 1,2 | ||||||||||||||||
| Correlation ® = 0.12 × (1 - EXP (-50 × PD)) / (1 - EXP (-50)) + 0.24 × [1 - (1 - EXP (-50 × PD)) / (1 - EXP (-50))] | |||||||||||||||||
| Maturity adjustment (b) = (0.11852 - 0.05478 × ln (PD))^2 | |||||||||||||||||
| Capital requirement 3 (K) = [LGD × N [(1 - R)^-0.5 × G (PD) + (R / (1 - R))^0.5 × G (0.999)] - PD x LGD] x (1 - 1.5 x b)^ -1 × (1 + (M - 2.5) × b) | |||||||||||||||||
| Risk-weighted assets (RWA) = K x 12.5 x EAD | |||||||||||||||||
| 4.1.3 | The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD and the bank‘s best estimate of EL (see paragraphs 4.5.1, 4.5.2 and 4.5.5 of ―Minimum Requirements for Risk Quantification under IRB Approach‖). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and EAD. | ||||||||||||||||
| 4.1.4 | Purposely Missing. | ||||||||||||||||
| 4.1.5 | Under the IRB Approach for corporate credits, banks are permitted to separately distinguish exposures to SME borrowers (defined as corporate exposures where the reported sales for the consolidated group of which the firm is a part is less than SR 15 million) from those to large firms4. A firm-size adjustment (i.e. 0.04 x (1 - (S-5) / 45)) is made to the corporate risk-weight formula for exposures to SME borrowers. S is expressed as total annual sales in millions of SR with values of S falling in the range of equal to or less than SR 15 million or greater than or equal to SR 5 million. Reported sales of less than SR 5 million will be treated as if they were equivalent to SR 5 million for the purposes of the firm-size adjustment for SME borrowers. | ||||||||||||||||
| Correlation ® = 0.12 × (1 - EXP (-50 × PD)) / (1 - EXP (-50)) + 0.24 × [1 - (1 - EXP (-50 × PD)) / (1 - EXP (-50))] - 0.04 × (1 - (S - 5) / 10) | |||||||||||||||||
| In the case where total sales are not a meaningful indicator of firm size for particular companies, SAMA may on an exceptional basis allow banks to substitute total assets of the consolidated group for total sales in calculating the SME threshold and the firm-size adjustment. However, banks should not make use of this special treatment to obtain capital relief. | |||||||||||||||||
| Risk weights for SL | |||||||||||||||||
| 4.1.6 | Banks that do not meet the requirements for the estimation of PD under the IRB Approach for corporate exposures will be required to map their internal grades for the SL exposures to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping should be based are provided in Table 2. | ||||||||||||||||
| 4.1.7 | The risk weights for UL associated with each supervisory category broadly correspond to a range of external credit assessments5 as outlined below: | ||||||||||||||||
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| 4.1.8 | Subject to SAMA approval a Bank may assign preferential risk weights of 50% to ―"strong" exposures, and 70% to ―"good" exposures, provided they have a remaining maturity of less than 2.5 years or if SAMA determines that a Banks‘ underwriting and other risk characteristics are substantially stronger than specified in the slotting criteria for the relevant supervisory risk category. | ||||||||||||||||
| 4.1.9 | Banks that meet the requirements for the estimation of PD are able to use the Foundation IRB Approach for corporate exposures to derive risk weights for SL sub-classes. | ||||||||||||||||
| 4.1.10 | Banks that meet the requirements for the estimation of PD and LGD and/or EAD are able to use the Advanced IRB Approach for corporate exposures to derive risk weights for SL sub-classes. | ||||||||||||||||
1 In denotes the natural logarithm.
2 N(x) denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). G(z) denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value of x such that N(x) = z). The normal cumulative distribution function and the inverse of the normal cumulative distribution function are, for example, available in Excel as the functions NORMSDIST and NORMSINV.
3 If this calculation results in a negative capital charge for any individual sovereign exposure, banks should apply a zero capital charge for that exposure.
4 Banks should not apply a firm-size adjustment to a corporate customer which cannot make available the sales figure for the consolidated group of which the customer is a part. Also refer to Table –1 on Page 41 for Illustration.
5 The notations follow the methodology used by Standard & Poor‘s. The use of Standard & Poor‘s credit ratings is for reference only; those of some other SAMA approved external credit assessment institutions ("ECAIs") could equally well be used.
* Refer to Table-2 – Attachment 5.9.