Foundation and Advanced Approaches

Effective from Dec 28 2022 - Dec 31 2022
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10.30	For each of the asset classes covered under the IRB framework, there are three key elements:
	(1)	Risk components: estimates of risk parameters provided by banks, some of which are supervisory estimates.
	(2)	Risk-weight functions: the means by which risk components are transformed into risk-weighted assets and therefore capital requirements.
	(3)	Minimum requirements: the minimum standards that must be met in order for a bank to use the IRB approach for a given asset class.
10.31	For certain asset classes, there are two broad approaches: a foundation and an advanced approach. Under the foundation approach (F-IRB approach), as a general rule, banks provide their own estimates of PD and rely on supervisory estimates for other risk components. Under the advanced approach (A-IRB approach), banks provide their own estimates of PD, LGD and EAD, and their own calculation of M, subject to meeting minimum standards. For both the foundation and advanced approaches, banks must always use the risk-weight functions provided in this Framework for the purpose of deriving capital requirements. The full suite of approaches is described below.
10.32	For exposures to equities, as defined in paragraph 10.24, the IRB approaches are not permitted (see paragraph 10.41). In addition, the A-IRB approach cannot be used for the following:
	(1)	Exposures to general corporates (i.e. exposures to corporates that are not classified as specialized lending) belonging to a group with total consolidated annual revenues greater than SAR 2,230m.
	(2)	Exposures in the bank asset class in paragraph 10.17, and other securities firms and financial institutions (including insurance companies and any other financial institutions in the corporate asset class).
10.33	In making the assessment for the revenue threshold in paragraph 10.32, the amounts must be as reported in the audited financial statements of the corporates or, for corporates that are part of consolidated groups, their consolidated groups (according to the accounting standard applicable to the ultimate parent of the consolidated group). The figures must be based on the average amounts calculated over the prior three years, or on the latest amounts updated every three years by the bank.