For corporate and bank exposures, the PD is the greater of the one-year PD associated with the internal borrower grade to which that exposure is assigned, or 0.03%. For sovereign exposures, the PD is the one-year PD associated with the internal borrower grade to which that exposure is assigned. The PD of borrowers assigned to a default grade(s), consistent with the reference definition of default, is 100%. The minimum requirements for the derivation of the PD estimates associated with each internal borrower grade are outlined in paragraphs 4.4.1 to 4.4.9 of “Minimum Requirements for Risk Quantification under IRB Approach”.
Banks where, SAMA has disallowed the application of foundation or advanced approaches to HCVRE must map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are the same as those for IPRE, as provided in Annex 6 International Convergence of Capital Measurement and Capital Standards – June 2006, . The risk weights associated with each category are:
Supervisory categories and UL risk weights for high-volatility commercial real estate.
The above table provides illustrative risk weights for UL calculated for the corporate asset class and he three retail sub-classes under the IRB Approach to credit risk. Each set of risk weights is produced using the appropriate risk-weight functions set out in this paper. The inputs used to calculate the illustrative risk weights include measures of PD, LGD, and an assumed M of 2.5 years.
2.
A firm-size adjustment applies to exposures made 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 250 million). Accordingly, the firm-size adjustment is made in determining the second set of risk weights provided in second column of corporate exposures given that the turnover of the firm receiving the exposure is assumed to be SR 5 million.
Loss given default (LGD)
4.2.2
Banks should provide an estimate of the LGD for each corporate, sovereign and bank exposure. There are two approaches for deriving this estimate: the Foundation IRB Approach and the Advanced IRB Approach.
LGD under the Foundation IRB Approach
Treatment of unsecured claims and non-recognised collateral
4.2.3
Under the Foundation IRB Approach, senior claims on corporates, sovereigns and banks not secured by recognised collateral will be assigned a 45% LGD.
4.2.4
All subordinated claims on corporates, sovereigns and banks will be assigned a 75% LGD. A subordinated loan is a facility that is expressly subordinated to another facility.
LGD under the Advanced IRB Approach
4.2.5
Subject to the minimum requirements specified in subsection 4.5 of “Minimum Requirements for Risk Quantification under IRB Approach”, banks are allowed to use their own internal estimates of LGD for corporate, sovereign and bank exposures. The LGD should be measured as a percentage of the EAD. Banks eligible for the IRB Approach that are unable to meet these minimum requirements should utilise the foundation LGD treatment described in paragraphs 4.2.3 to 4.2.4 above.
Exposure at default (EAD)
4.2.6
The following paragraphs on EAD apply to both on and off-balance sheet positions. All exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of:
(i)
The amount by which a bank‘s regulatory capital would be reduced if the exposure were written-off fully; and
For Banks using the Foundation IRB Approach for corporate exposures, the M will be 2.5 years except for repo-style transactions where the M will be 6 months. Banks using any element of the Advanced IRB Approach are required to measure the M for each facility as defined below.
4.2.8
M is defined as the greater of one year and the remaining effective maturity in years. In all cases, the M will be no greater than five years.
4.2.9
For an instrument subject to a determined cash flow schedule, the M is defined as:
Where CFt flows (principal, interest payments and fees) contractually payable by the borrower in periodt .
4.2.10
If a bank is not in a position to calculate the M of the contracted payments as noted above, it is allowed to use a more conservative measure of M. An example of this measurement is the maximum remaining time (in years) that the borrower is permitted to take to fully discharge its contractual obligation (principal, interest, and fees) under the terms of the loan agreement. Normally, this will correspond to the nominal maturity of the instrument.
4.2.11
For derivatives subject to a master netting agreement, the weighted average maturity of the transactions should be used when applying the explicit maturity adjustment. Further, the notional amount of each transaction should be used for weighting the maturity.
4.2.12
For repo-style transactions subject to a master netting agreement, the weighted average maturity of the transactions should be used when applying the explicit maturity adjustment. A five-day floor will apply to the average. Further, the notional amount of each transaction should be used for weighting the maturity.
