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Major Section 5.2: Application and Examination Procedures for Adoption of the IRB Approach
Effective from Jun 12 2006 - Dec 31 2007 To view other versions open the versions tab on the right
Purpose
5.2.1
This section sets out:
The application and recognition process that banks will go through if they wish to use the IRB Approach for capital adequacy purposes; and
SAMA’s preliminary approach to conducting IRB validations.
5.2.2
Self-assessment questionnaires (currently in draft form) that will be used by banks for the recognition of their internal rating systems are also provided for reference.
Background
5.2.3
Under its implementation proposals, SAMA plans to allow various IRB Approaches applicable to different asset classes to banks that are capable of meeting the relevant requirements. SAMA will aim to make available for adoption by bank the Foundation IRB Approach based on SAMA’s bi-lateral discussions
5.2.4
Banks wishing to adopt the IRB Approach are expected to discuss their plans with SAMA. Whether they will be able to use the IRB Approach for capital adequacy purposes is subject to the prior approval of SAMA and to their satisfying the minimum qualifying criteria. These criteria are set out in major Section 5.1 Entitled “Implementation Proposed for the IRB Approach”:
Various qualitative and quantitative requirements in relation to internal rating systems and the estimation of probability of default (“PD”) / loss given default (“LGD”) / exposure at default (“EAD”), and the controls surrounding them. (See paragraphs 5.1.29 to 5.1.38 and the guidance papers as Attachment 5.4 and Attachment 5.5 for details.
5.2.5
SAMA will conduct on-site validation and recognition exercises starting some time in 2007 to ensure that banks’ internal rating systems and the corresponding risk estimates meet the minimum requirements. It should however be stressed that a bank’s management has the primary responsibility for validating and ensuring the quality of its internal rating systems.
IRB Recognition Process
5.2.6
The first step of the IRB recognition process is to identify those banks with a firm commitment to implement the IRB Approach for capital adequacy purposes. In order to provide sufficient time for SAMA to conduct the necessary IRB validations, such banks should lodge an application with SAMA, using the IRB recognition request form attached at Attachment 5.6. In completing this form, banks are required to provide information on its IRB implementation plan, the target date for adopting the IRB Approach, the estimated level of IRB coverage, and the contact person for the IRB implementation project.
5.2.7
Banks that are planning to start using the Foundation IRB Approach or the Advanced IRB Approach for capital calculation should submit the IRB recognition request form to SAMA no later than 31 December 2006. This is to ensure that their recognition requests can be taken into account in SAMA’s validation schedule for the next few years. Banks that intend to adopt the IRB Approach in later periods may also submit this form to facilitate SAMA’s scheduling of validation visits, but the priority for conducting IRB validations will be given to those with an earlier IRB adoption date.
5.2.8
Upon receipt of the IRB recognition request, SAMA will work with the bank concerned to satisfy itself that the IRB systems/models and the risk management practices surrounding the use of such systems/models meet the minimum standards specified by SAMA. The IRB recognition process, as depicted under Attachment 5.7, generally includes the following steps:
(i)
Pre-examination meeting – SAMA will arrange a meeting with the banks to discuss the details of its Implementation Plan and other matters related to the recognition process. Prior to the meeting, SAMA will provide the Bank with a set of self-assessment questionnaires for its completion;
(ii)
Self-assessment – Banks will complete the questionnaire in the stipulated time frame. Completed questionnaire and supporting documentation will be submitted for SAMA’s approval.
(iii)
On-site examination – SAMA will conduct the on-site examination to review both the technical details of the systems/models and the risk management practices that govern the use of such systems/models. The examination may take three weeks to a month, depending on the quality of the bank’s self-assessment, the complexity of its IRB systems and any compliance issues identified. After concluding the assessment, SAMA will issue the examination report, including the decision of whether to allow the bank to use the IRB Approach;
5.2.9
In the case of banks that are branches of foreign banking groups, SAMA will liaise with the relevant home supervisor, particularly on their Implementation Plans and validation arrangements, to assess the extent of reliance that it may place on the validation work done by the home supervisor.
Approach to IRB Recognition
5.2.10
While SAMA is still developing its detailed approach to IRB recognition, Attachment-5.8 will facilitate banks’ IRB implementation efforts.
Self-assessment Questionnaires
5.2.11
Self-assessment questionnaires are being developed by SAMA. Banks that would implement the IRB approaches will be given questionnaire. It is important for banks to make a detailed self-assessment and support the assessment with adequate documentation and internal reports.
Final Applications and Executive Procedures
5.2.12
SAMA is planning to issue before Dec. 2005 its final application and assessment procedures for IRB recognition as described in this section.
