12.2	Paragraphs 12.2 to 12.56, sets out the calculation of the risk components for corporate, sovereign and bank exposures. In the case of an exposure that is guaranteed by a sovereign, the floors that apply to the risk components do not apply to that part of the exposure covered by the sovereign guarantee (i.e. any part of the exposure that is not covered by the guarantee is subject to the relevant floors).
Probability of default (PD)
12.3	For corporate, sovereign and bank 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 16.76 to 16.78.
12.4	With the exception of exposures in the sovereign asset class, the PD for each exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than 0.05%.
Loss given default (LGD)
12.5	A bank must provide an estimate of the LGD for each corporate, sovereign and bank exposure. There are two approaches for deriving this estimate: a foundation approach and an advanced approach. As noted in paragraph 10.32, the advanced approach is not permitted for exposures to certain entities.
LGD under the foundation internal ratings-based (F-IRB) approach: treatment of unsecured claims and non-recognized collateral
12.6	Under the foundation approach, senior claims on sovereigns, banks, securities firms and other financial institutions (including insurance companies and any financial institutions in the corporate asset class) that are not secured by recognized collateral will be assigned a 45% LGD. Senior claims on other corporates that are not secured by recognized collateral will be assigned a 40% LGD.
12.7	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 F-IRB approach: collateral recognition
12.8	In addition to the eligible financial collateral recognized in the standardized approach, under the F-IRB approach some other forms of collateral, known as eligible IRB collateral, are also recognized. These include receivables, specified commercial and residential real estate, and other physical collateral, where they meet the minimum requirements set out in paragraphs 16.130 to 16.146. For eligible financial collateral, the requirements are identical to the operational standards as set out in the credit risk mitigation section of the standardized approach (see chapter 9).
12.9	The simple approach to collateral presented in the standardized approach is not available to banks applying the IRB approach.
12.10	The LGD applicable to a collateralized transaction (LGD*) must be calculated as the exposure weighted average of the LGD applicable to the unsecured part of an exposure (LGDU) and the LGD applicable to the collateralized part of an exposure (LGDS). Specifically, the formula that follows must be used, where:
	(1)	E is the current value of the exposure (i.e. cash lent or securities lent or posted). In the case of securities lent or posted the exposure value has to be increased by applying the appropriate haircuts (HE) according to the comprehensive approach for financial collateral.
	(2)	ES is the current value of the collateral received after the application of the haircut applicable for the type of collateral (HC) and for any currency mismatches between the exposure and the collateral, as specified in paragraphs 12.11 to 12.12. ES is capped at the value of E ∙ (1+HE).
	(3)	EU = E ∙ (1+HE) – ES. The terms EU and ES are only used to calculate LGD*. Banks must continue to calculate EAD without taking into account the presence of any collateral, unless otherwise specified.
	(4)	LGDU is the LGD applicable for an unsecured exposure, as set out in paragraphs 12.6 and 12.7.
	(5)	LGDS is the LGD applicable to exposures secured by the type of Collateral used in the transaction, as specified in paragraph 12.11.
12.11	Table 16 below specifies the LGDS and haircuts applicable in the formula setout in paragraph 12.10:
Table 16 Type of collateral LGDS Haircut Eligible financial collateral 0% As determined by the haircuts that apply in the comprehensive formula of the standardized approach for credit risk (paragraph 9.49). The haircuts have to be adjusted for different holding periods and non-daily re-margining or revaluation according to paragraphs 9.55 to 9.58 of the standardized approach. Eligible receivables 20% 40% Eligible residential real estate / commercial real estate 20% 40% Other eligible physical collateral 25% 40% Ineligible collateral Not applicable 100%
12.12	When eligible collateral is denominated in a different currency to that of the exposure, the haircut for currency risk is the same haircut that applies in the comprehensive approach (paragraph 9.51 of the standardized approach).
12.13	Banks that lend securities or post collateral must calculate capital requirements for both of the following: (i) the credit risk or market risk of the securities, if this remains with the bank; and (ii) the counterparty credit risk arising from the risk that the borrower of the securities may default. Paragraphs 12.37 to 12.43 set out the calculation the EAD arising from transactions that give rise to counterparty credit risk. For such transactions the LGD of the counterparty must be determined using the LGD specified for unsecured exposures, as set out in paragraphs 12.6 and 12.7.
LGD under the F-IRB approach: methodology for the treatment of pools of collateral
12.14	In the case where a bank has obtained multiple types of collateral it may apply the formula set out in paragraph 12.10 sequentially for each individual type of collateral. In doing so, after each step of recognizing one individual type of collateral, the remaining value of the unsecured exposure (EU) will be reduced by the adjusted value of the collateral (ES) recognized in that step. In line with paragraph 12.10, the total of ES across all collateral types is capped at the value of E ∙ (1+HE). This results in the formula that follows, where for each collateral type i:
	(1)	LGDSi is the LGD applicable to that form of collateral (as specified in paragraph 0).
	(2)	ESi is the current value of the collateral received after the application of the haircut applicable for the type of collateral (HC) (as specified in paragraph 0).
LGD under the advanced approach
12.15	Subject to certain additional minimum requirements specified below (and the conditions set out in paragraph 10.32), SAMA may permit banks to use their own internal estimates of LGD for corporate and sovereign exposures. LGD must be measured as the loss given default as a percentage of the EAD. Banks eligible for the IRB approach that are unable to meet these additional minimum requirements must utilize the foundation LGD treatment described above.
12.16	The LGD for each corporate exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than the parameter floors indicated in table 17 below (the floors do not apply to the LGD for exposures in the sovereign asset class):
LGD parameter floors for corporate exposures Table 17 Unsecured Secured 25% Varying by collateral type: • 0% financial • 10% receivables • 10% commercial or residential real • estate 15% other physical
12.17	The LGD floors for secured exposures in the table above apply when the exposure is fully secured (i.e. the value of collateral after the application of haircuts exceeds the value of the exposure). The LGD floor for a partially secured exposure is calculated as a weighted average of the unsecured LGD floor for the unsecured portion and the secured LGD floor for the secured portion. That is, the following formula should be used to determine the LGD floor, where:
	(1)	LGDU floor and LGDS floor are the floor values for fully unsecured and fully secured exposures respectively, as specified in the table in paragraph 12.10.
	(2)	The other terms are defined as set out in paragraphs 12.10 and 0.
12.18	In cases where a bank has met the conditions to use their own internal estimates of LGD for a pool of unsecured exposures, and takes collateral against one of these exposures, it may not be able to model the effects of the collateral (i.e. it may not have enough data to model the effect of the collateral on recoveries). In such cases, the bank is permitted to apply the formula set out in paragraphs 12.10 or 12.14, with the exception that the LGDU term would be the bank’s own internal estimate of the unsecured LGD. To adopt this treatment the collateral must be eligible under the F-IRB and the bank’s estimate of LGDU must not take account of any effects of collateral recoveries.
12.19	The minimum requirements for the derivation of LGD estimates are outlined in paragraphs 16.82 to 16.87.
Treatment of certain repo-style transactions
12.20	Banks that want to recognize the effects of master netting agreements on repo style transactions for capital purposes must apply the methodology outlined in paragraph 12.38 for determining E* for use as the EAD in the calculation of counterparty credit risk. For banks using the advanced approach, own LGD estimates would be permitted for the unsecured equivalent amount (E*) used to calculate counterparty credit risk. In both cases banks, in addition to counterparty credit risk, must also calculate the capital requirements relating to any credit or market risk to which they remain exposed arising from the underlying securities in the master netting agreement.
Treatment of guarantees and credit derivatives
12.21	There are two approaches for recognition of credit risk mitigation (CRM) in the form of guarantees and credit derivatives in the IRB approach: a foundation approach for banks using supervisory values of LGD, and an advanced approach for those banks using their own internal estimates of LGD.
12.22	Under either approach, CRM in the form of guarantees and credit derivatives must not reflect the effect of double default (see paragraph 16.101). As such, to the extent that the CRM is recognized by the bank, the adjusted risk weight will not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardized approach, banks may choose not to recognize credit protection if doing so would result in a higher capital requirement.
Treatment of guarantees and credit derivatives: recognition under the foundation approach
12.23	For banks using the foundation approach for LGD, the approach to guarantees and credit derivatives closely follows the treatment under the standardized approach as specified in paragraphs 9.69 to 9.83. The range of eligible guarantors is the same as under the standardized approach except that companies that are internally rated may also be recognized under the foundation approach. To receive recognition, the requirements outlined in paragraphs 9.69 to 9.74 of the standardized approach must be met.
12.24	Eligible guarantees from eligible guarantors will be recognized as follows:
	(1)	For the covered portion of the exposure, a risk weight is derived by taking:
		(a)	The risk-weight function appropriate to the type of guarantor, and
		(b)	The pd appropriate to the guarantor’s borrower grade.
	(2)	The bank may replace the LGD of the underlying transaction with the LGD applicable to the guarantee taking into account seniority and any collateralization of a guaranteed commitment. For example, when a bank has a subordinated claim on the borrower but the guarantee represents a senior claim on the guarantor this may be reflected by using an LGD applicable for senior exposures (see paragraph 12.6) instead of an LGD applicable for subordinated exposures.
	(3)	In case the bank applies the standardized approach to direct exposures to the guarantor it may only recognize the guarantee by applying the standardized approach to the covered portion of the exposure.
12.25	The uncovered portion of the exposure is assigned the risk weight associated with the underlying obligor.
12.26	Where partial coverage exists, or where there is a currency mismatch between the underlying obligation and the credit protection, it is necessary to split the exposure into a covered and an uncovered amount. The treatment in the foundation approach follows that outlined in paragraphs 9.79 to 9.80 of the standardized approach, and depends upon whether the cover is proportional or tranched.
Treatment of guarantees and credit derivatives: recognition under the advanced approach
12.27	Banks using the advanced approach for estimating LGDs may reflect the riskmitigating effect of guarantees and credit derivatives through either adjusting PD or LGD estimates. Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type. In doing so, banks must not include the effect of double default in such adjustments. Thus, the adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. In case the bank applies the standardized approach to direct exposures to the guarantor it may only recognize the guarantee by applying the standardized approach to the covered portion of the exposure. In case the bank applies the F-IRB approach to direct exposures to the guarantor it may only recognize the guarantee by determining the risk weight for the comparable direct exposure to the guarantor according to the F-IRB approach.
12.28	A bank relying on own-estimates of LGD has the option to adopt the treatment outlined in paragraphs 12.23 to 12.26 above for banks under the F-IRB approach, or to make an adjustment to its LGD estimate of the exposure to reflect the presence of the guarantee or credit derivative. Under this option, there are no limits to the range of eligible guarantors although the set of minimum requirements provided in paragraphs 16.103 to 16.104 the type of guarantee must be satisfied. For credit derivatives, the requirements of paragraphs 16.109 to 16.110 must be satisfied57. For exposures for which a bank has permission to use its own estimates of LGD, the bank may recognize the risk mitigating effects of first-to-default credit derivatives, but may not recognize the risk mitigating effects of second-to-default or more generally nth-to-default credit derivatives.

Exposures that give rise to counterparty credit risk
12.37	For exposures that give rise to counterparty credit risk according to The Counterparty Credit Risk (CCR) Framework (i.e. OTC derivatives, exchange- traded derivatives, long settlement transactions and securities financing transactions (SFTs)), the EAD is to be calculated under the rules set in chapters 3 to 8 of the Counterparty Credit Risk (CCR) framework.
12.38	For SFTs, banks may recognize a reduction in the counterparty credit risk requirement arising from the effect of a master netting agreement providing that it satisfy the criteria set out in paragraphs 9.61 and 9.62 of the standardized approach. The bank must calculate E*, which is the exposure to be used for the counterparty credit risk requirement taking account of the risk mitigation of collateral received, using the formula set out in paragraph 9.64 of the standardized approach. In calculating risk-weighted assets and expected loss (EL) amounts for the counterparty credit risk arising from the set of transactions covered by the master netting agreement, E* must be used as the EAD of the counterparty.
12.39	As an alternative to the use of standard haircuts for the calculation of the counterparty credit risk requirement for SFTs set out in paragraph 12.38, banks may be permitted to use a value-at-risk (VaR) models approach to reflect price volatility of the exposures and the financial collateral. This approach can take into account the correlation effects between security positions. This approach applies to single SFTs and SFTs covered by netting agreements on a counter party-by-counterparty basis, both under the condition that the collateral is revalued on a daily basis. This holds for the underlying securities being different and unrelated to securitizations. The master netting agreement must satisfy the criteria set out in paragraphs 9.61 and 9.62 of the standardized approach. The VaR models approach is available to banks that have received supervisory recognition for an internal market risk model according to paragraph 10.2 in The Market Risk Framework. Banks which have not received market risk model recognition can separately apply for supervisory recognition to use their internal VaR models for the calculation of potential price volatility for SFTs, provided the model meets the requirements of paragraph 10.2 in The Market Risk Framework. Although the market risk standards have changed from a 99% VaR to a 97.5% expected shortfall, the VaR models approach to SFTs retains the use of a 99% VaR to calculate the counterparty credit risk for SFTs. The VaR model needs to capture risk sufficient to pass the back testing and profit and loss attribution tests of paragraph 10.4 in The Market Risk Framework. The default risk charge of paragraphs 13.18 to 13.39 in The Market Risk Framework is not required in the VaR model for SFTs.
12.40	The quantitative and qualitative criteria for recognition of internal market risk models for SFTs are in principle the same as in paragraphs 10.5 to 10.16 and 13.1 to 13.12 in The Market Risk Framework. The minimum liquidity horizon or the holding period for SFTs is 5 business days for margined repo-style transactions, rather than the 10 business days in paragraph 13.12 in The Market Risk Framework. For other transactions eligible for the VaR models approach, the 10 business day holding period will be retained. The minimum holding period should be adjusted upwards for market instruments where such a holding period would be inappropriate given the liquidity of the instrument concerned.
12.41	The calculation of the exposure E* for banks using their internal model to calculate their counterparty credit risk requirement will be as follows, where banks will use the previous day's VaR number:
12.42	Subject to SAMA’s approval, instead of using the VaR approach, banks may also calculate an effective expected positive exposure for repo-style and other similar SFTs, in accordance with the internal models method set out in the counterparty credit risk standards.
12.43	As in the standardized approach, for transactions where the conditions in paragraph 9.36 are met, and in addition, the counterparty is a core market participant as specified in paragraph 9.37, banks can apply a zero H. A netting set that contains any transaction that does not meet the requirements in paragraph 9.36 of the standardized approach is not eligible for this treatment.
Effective maturity (M)
12.44	Effective maturity (M) will be 2.5 years for exposures to which the bank applies the foundation approach, except for repo-style transactions where the effective maturity is 6 months (i.e. M=0.5). Banks using the foundation and advanced approaches are required to measure M for each facility using the definition provided below.
12.45	Banks using any element of the A-IRB approach are required to measure effective maturity for each facility as defined below.
12.46	Except as noted in paragraph 12.51, the effective maturity (M) is subject to a floor of one year and a cap of 5 years.
12.47	For an instrument subject to a determined cash flow schedule, effective maturity M is defined as follows, where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t:
12.48	If a bank is not in a position to calculate the effective maturity of the contracted payments as noted above, it is allowed to use a more conservative measure of M such as that it equals 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 loan agreement. Normally, this will correspond to the nominal maturity of the instrument.
12.49	For derivatives subject to a master netting agreement, the effective maturity is defined as the weighted average maturity of the transactions within the netting agreement. Further, the notional amount of each transaction should be used for weighting the maturity.
12.50	For revolving exposures, effective maturity must be determined using the maximum contractual termination date of the facility. Banks must not use the repayment date of the current drawing.
12.51	The one-year floor, set out in paragraph 12.46 above, does not apply to certain short- term exposures, comprising fully or nearly-fully collateralized59 capital market- driven transactions (i.e. OTC derivatives transactions and margin lending) and repo- style transactions (i.e. repos/reverse repos and securities lending/borrowing) with an original maturity of less than one year, where the documentation contains daily re-margining clauses. For all eligible transactions the documentation must require daily revaluation, and must include provisions that must allow for the prompt liquidation or setoff of the collateral in the event of default or failure to re-margin. The maturity of such transactions must be calculated as the greater of one-day, and the effective maturity (M, consistent with the definition above), except for transactions subject to a master netting agreement, where the floor is determined by the minimum holding period for the transaction type, as required by paragraph 12.54.
12.52	The one-year floor, set out in paragraph 12.46 above, also does not apply to the following exposures:
	(1)	Short-term self-liquidating trade transactions. Import and export letters of credit and similar transactions should be accounted for at their actual remaining maturity.
	(2)	Issued as well as confirmed letters of credit that are short term (i.e. have a maturity below one year) and self-liquidating.
12.53	In addition to the transactions considered in paragraph 12.51 above, other short term exposures with an original maturity of less than one year that are not part of a bank’s ongoing financing of an obligor may be eligible for exemption from the one-year floor. After a careful review of the particular circumstances, SAMA will define the types of short-term exposures that might be considered eligible for this treatment. The results of these reviews might, for example, include transactions such as:
	(1)	Some capital market-driven transactions and repo-style transactions that might not fall within the scope of paragraph 12.51.
	(2)	Some trade finance transactions that are not exempted by paragraph 12.52.
	(3)	Some exposures arising from settling securities purchases and sales. This could also include overdrafts arising from failed securities settlements provided that such overdrafts do not continue more than a short, fixed number of business days.
	(4)	Some exposures arising from cash settlements by wire transfer, including overdrafts arising from failed transfers provided that such overdrafts do not continue more than a short, fixed number of business days.
	(5)	Some exposures to banks arising from foreign exchange settlements.
	(6)	Some short-term loans and deposits.
12.54	For transactions falling within the scope of paragraph 12.51 subject to a master netting agreement, the effective maturity is defined as the weighted average maturity of the transactions. A floor equal to the minimum holding period for the transaction type set out in paragraph 9.56 of the standardized approach will apply to the average. Where more than one transaction type is contained in the master netting agreement a floor equal to the highest holding period will apply to the average. Further, the notional amount of each transaction should be used for weighting maturity.
12.55	Where there is no explicit definition, the effective maturity (M) assigned to all exposures is set at 2.5 years unless otherwise specified in paragraph 12.44.

⁵⁷ When credit derivatives do not cover the restructuring of the underlying obligation, the partial recognition set out in paragraph 9.74 of the standardized approach applies.
⁵⁸ A revolving loan facility is one that lets a borrower obtain a loan where the borrower has the flexibility to decide how often to withdraw from the loan and at what time intervals. A revolving facility allows the borrower to drawdown, repay and re-draw loans advanced to it. Facilities that allow prepayments and subsequent redraws of those prepayments are considered as revolving.
⁵⁹ The intention is to include both parties of a transaction meeting these conditions where neither of the parties is systematically under- collateralized.