| | Corporate, sovereign and bank exposures
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| 4.1.1 | Banks adopting the IRB Approach should have a two dimensional rating system that provides separate assessment of borrower and transaction characteristics. This approach assures that the assignment of borrower ratings is not influenced by consideration of transaction specific factors.
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| | Borrower rating
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| 4.1.2 | The first dimension should reflect exclusively the risk of borrower default. Collateral and other facility characteristics should not influence the borrower rating.1 Banks should assess and estimate the default risk of a borrower based on the quantitative and qualitative information regarding the borrower’s creditworthiness (see subsection 4.4 below for risk assessment criteria). Banks should rank and group borrowers into individual grades each associated with an average PD.
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| 4.1.3 | Separate exposures to the same borrower should be assigned to the same borrower grade, irrespective of any differences in the nature of each specific transaction. Once a borrower has defaulted on any credit obligation <5% threshold> to a bank (or the banking group2 of which it is a part), all of its facilities with that bank (or the banking group of which it is a part) are considered to be in default (see the definition of default in subsection 4.2 of the “Minimum Requirements for Risk Quantification under IRB Approach”).
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| 4.1.4 | There are two exceptions that may result in multiple grades for the same borrower. First, to reflect country transfer risk3, a bank may assign different borrower grades depending on whether the facility is denominated in local or foreign currency. Second, the treatment of associated guarantees to a facility may be reflected in an adjusted borrower grade.
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| 4.1.5 | In assigning a borrower to a borrower grade, banks should assess the risk of borrower default over a period of at least one year. However, this does not mean that banks should limit their consideration to outcomes for that borrower that are most likely to occur over the next 12 months. Borrower ratings should take into account all possible adverse events that might increase a borrower’s likelihood of default (see subsection 4.5 below).
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| | Facility rating
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| 4.1.6 | The second dimension should reflect transaction specific factors (such as collateral, seniority, product type, etc.) that affect the loss severity in the case of borrower default.
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| 4.1.7 | For banks adopting the Foundation IRB Approach, this requirement can be fulfilled by the existence of a facility dimension which may take the form of: A facility rating system that provides a measure of EL by incorporating both borrower strength (PD) and loss severity (LGD); or an explicit quantifiable LGD rating dimension,
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| | Representing the conditional severity of loss, should default occur, from the credit facilities.
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| | In calculating the regulatory capital requirements, these banks should use the supervisory estimates of LGD.
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| 4.1.8 | For banks using the Advanced IRB Approach, facility ratings should reflect exclusively LGD. These ratings should cover all factors that can influence LGD including, but not limited to, the type of collateral, product, industry, and purpose. Borrower characteristics may be included as LGD rating criteria only to the extent they are predictive of LGD. Banks may alter the factors that influence facility grades across segments of the portfolio as long as they can satisfy the SAMA that it improves the relevance and precision of their estimates.
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| 4.1.9 | Banks using the supervisory slotting criteria for the specialized lending (“SL”) exposures need not apply this two-dimensional requirement to these exposures. Given the interdependence between borrower and transaction characteristics in SL, Banks may instead adopt a single rating dimension that reflects EL by incorporating both borrower strength (PD) and loss severity (LGD) considerations.
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| | Retail exposures
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| 4.1.10 | Rating systems for retail exposures should reflect both borrower and transaction risks, and capture all relevant borrower and transaction characteristics. Banks should assign each retail exposure to a particular pool. For each pool, banks should estimate PD, LGD and EAD. Multiple pools may share identical PD, LGD and EAD estimates.
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| 4.1.11 | Banks should demonstrate that this grouping process provides for a meaningful differentiation of risk and results in sufficiently homogeneous pools that allow for accurate and consistent estimation of loss characteristics at the pool level.
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| 4.1.12 | Banks should have specific criteria for slotting an exposure into a pool. These should cover all factors relevant to the risk analysis. At a minimum, banks should consider the following risk drivers when assigning exposures to a pool:
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| | Borrower risk characteristics (e.g. borrower type, demographics such as age/occupation);
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| | Transaction risk characteristics including product and/or collateral type. One example of split by product type is to group exposures into credit cards, installment loans, revolving credits, residential mortgages, and small business facilities. When grouping exposures by collateral type, consideration should be given to factors such as loan-to-value ratios, seasoning4, guarantees and seniority (first vs. second lien). Banks should explicitly address cross-collateral provisions, where present;
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| | Delinquency status: Banks should separately identify delinquent and non-delinquent exposures.
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1 For example, in an eight-grade rating system, where default risk increases with the grade number, a borrower whose financial condition warrants the highest investment grade rating should be rated a 1 even if the bank‘s transactions are unsecured and subordinated to other creditors. Likewise, a defaulted borrower with a transaction fully secured by cash should be rated an 8 (i.e. the defaulted grade) regardless of the remote expectation of loss.
2 The banking group covers all entities within the group that are subject to the capital adequacy regime in Saudi Arabia.
3 Country transfer risk is the risk that the borrower may not be able to secure foreign currency to service its external debt obligations due to adverse changes in foreign exchange rates or when the country in which it is operating suffers economic, political or social problems.
4 Seasoning can be a significant element of portfolio risk monitoring, particularly for residential mortgages, which may have a clear time pattern of default rates.
