A. Introduction

B. National countercyclical buffer requirements

Each Basel Committee member jurisdiction will identify an authority with the responsibility to make decisions on the size of the countercyclical capital buffer. Consequently, if SAMA judges a period of excess credit growth leading to the build up of system-wide risk, it will consider, together with any other macroprudential tools at its disposal by putting in place a countercyclical buffer requirement. This will vary between zero and 2.5% of risk weighted assets, depending on its judgment as to the extent of the build up of systemwide risk.¹

The document entitled Guidance for national authorities operating the countercyclical capital buffer, sets out the principles that national authorities have agreed to follow in making buffer decisions. This document provides information that should help banks to understand and anticipate the buffer decisions made by national authorities in the jurisdictions to which they have credit exposures.

To give banks time to adjust to a buffer level, a jurisdiction will pre-announce its decision to raise the level of the countercyclical buffer by up to 12 months.² Decisions by a jurisdiction to decrease the level of the countercyclical buffer will take effect immediately. The pre-announced buffer decisions and the actual buffers in place for all Committee member jurisdictions will be published on the BIS website.

C. Bank specific countercyclical buffer

Banks will be subject to a countercyclical buffer that varies between zero and 2.5% to total risk weighted assets.³ The buffer that will apply to each bank will reflect the geographic composition of its portfolio of credit exposures. Banks must meet this buffer with Common Equity Tier 1 or other fully loss absorbing capital⁴ or be subject to the restrictions on distributions set out in the next Section.

Internationally active banks will look at the geographic location of their private sector credit exposures (including non-bank financial sector exposures) and calculate their countercyclical capital buffer requirement as a weighted average of the buffers that are being applied in jurisdictions to which they have an exposure. Credit exposures in this case include all private sector credit exposures that attract a credit risk capital charge or the risk weighted equivalent trading book capital charges for specific risk, IRC and securitization.

The weighting applied to the buffer in place in each jurisdiction will be the bank’s total credit risk charge that relates to private sector credit exposures in that jurisdiction⁵, divided by the bank’s total credit risk charge that relates to private sector credit exposures across all jurisdictions.

For the VaR for specific risk, the incremental risk charge and the comprehensive risk measurement charge, banks should work with their supervisors to develop an approach that would translate these charges into individual instrument risk weights that would then be allocated to the geographic location of the specific counterparties that make up the charge. However, it may not always be possible to break down the charges in this way due to the charges being calculated on a portfolio by portfolio basis. In such cases, the charge for the relevant portfolio should be allocated to the geographic regions of the constituents of the portfolio by calculating the proportion of the portfolio’s total exposure at default (EAD) that is due to the EAD resulting from counterparties in each geographic region.

D. Extension of the capital conservation buffer

E. Frequency of calculation and disclosure

Banks must ensure that their countercyclical buffer requirements are calculated and publically disclosed with at least the same frequency as their minimum capital requirements. The buffer should be based on the latest relevant jurisdictional countercyclical buffers that are available at the date that they calculate their minimum capital requirement. In addition, when disclosing their buffer requirement, banks must also disclose the geographic breakdown of their private sector credit exposures used in the calculation of the buffer requirement.

F. Transitional arrangements

The countercyclical buffer regime will be phased-in in parallel with the capital conservation buffer between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019. This means that the maximum countercyclical buffer requirement will begin at 0.625% of RWAs on 1 January 2016 and increase each subsequent year by an additional 0.625 percentage points, to reach its final maximum of 2.5% of RWAs on 1 January 2019. Countries that experience excessive credit growth during this transition period will consider accelerating the build up of the capital conservation buffer and the countercyclical buffer. In addition, jurisdictions may choose to implement larger countercyclical buffer requirements. In such cases the reciprocity provisions of the regime will not apply to the additional amounts or earlier time-frames.

¹ SAMA can implement a range of additional macroprudential tools, including a buffer in excess of 2.5% for banks in Saudi Arabia, if this is deemed appropriate in Saudi Arabia. However, the international reciprocity provisions set out in this regime treat the maximum countercyclical buffer as 2.5%.
² Banks outside of Saudi Arabia with credit exposures to counterparties in Saudi Arabia will also be subject to the increased buffer level after the pre-announcement period in respect of these exposures. However, in cases where the pre-announcement period of a jurisdiction is shorter than 12 months, the home authority of such banks should seek to match the preannouncement period where practical, or as soon as possible (subject to a maximum preannouncement period of 12 months), before the new buffer level comes into effect.
³ As with the capital conservation buffer, the framework will be applied at the consolidated level. In addition, SAMA may apply the regime at the solo level to conserve resources in specific parts of the group.
⁴ The Committee is still reviewing the question of permitting other fully loss absorbing capital beyond Common Equity Tier 1 and what form it would take. Until the Committee has issued further guidance, the countercyclical buffer is to be met with Common Equity Tier 1 only.
⁵ When considering the jurisdiction to which a private sector credit exposure relates, banks should use, where possible, an ultimate risk basis; i.e. it should use the country where the guarantor of the exposure resides, not where the exposure has been booked.
⁶ Consistent with the conservation buffer, the Common Equity Tier 1 ratio in this context includes amounts used to meet the 4.5% minimum Common Equity Tier 1 requirement, but excludes any additional Common Equity Tier 1 needed to meet the 6% Tier 1 and 8% Total Capital requirements.
⁷ Refer to minimum required ratios contingent on the phase-in requirements (Annex 1)
⁸ SAMA to provide Nil for now.
⁹ D-SIB not relevant to Saudi banks at the present.
¹⁰ For DSIBs and countercyclical buffer, SAMA has nil for each.
¹¹ Capital Conservation buffers are nil until 2016.
¹² All reference to Rows are to the attached Prudential Returns (P15-P17).