Finalized Guidance Document Concerning the Implementation of Basel III

Basel II.5 – Enhancing Risk Coverage (Pillar 1) SAMA implemented Basel II.5 through its Guidance Document and Prudential Return. These introduced further refinements to its Basel II reforms related to capital requirements relating to securitized and resecuritized assets or Risk Weighted Assets for Pillar 1 risks i.e. for Credit and Market risks. Basel II.5 components of Pillar 1, Pillar 2 and Pillar 3 enhancements have been implemented on the basis of the following BCBS documents. • Enhancement to the Basel II Framework – July 2009 • Revisions to the Basel II Market Risk Framework – December 2010 In specific, these refinements are concerning Securitization and Resecuritization activities in the Banking book and Trading book. These reforms will raise capital requirements for the trading book and complex securitization exposures, which were a major source of losses for many internationally active banks. The enhanced treatment also introduced a stressed value-at- risk (VaR) capital requirement based on a continuous 12-month period of significant financial stress. In addition, the Committee set higher capital requirements for so-called resecuritizations in both the banking and the trading book. Basel III also raised the standard of the Pillar 2 supervisory review process and strengthened Pillar 3 disclosures. The Committee is also conducting a fundamental review of the trading book. The work on the fundamental review of the trading book currently is incomplete ( BCBS document of May 2012 ). Consequently, with regard to Market Risk, SAMA will not implement the option to use models for both Basel II.5 or Basel III for the Trading book.