Interest Rate Risk

The government category will include all forms of government 54 paper including bonds, treasury bills and other short-term instruments, but SAMA will reserve the right to apply a specific risk capital requirement to securities issued by certain foreign governments, especially to securities denominated in a currency other than that of the issuing government. 14.8 When the government paper is denominated in the domestic currency and funded by the bank in the same currency, at SAMA later stage discretion a lower specific risk capital requirement may be applied. 14.9 The qualifying category includes securities issued by public sector entities and multilateral development banks, plus other securities that are: (1) rated investment grade (IG) 55 by at least two credit rating agencies specified by SAMA; or (2) rated IG by one rating agency and not less than IG by any other rating agency specified by SAMA (subject to SAMA and Capital Market Authority “CMA”); or (3) subject to SAMA approval, unrated, but deemed to be of comparable investment quality by the reporting bank, and the issuer has securities listed on a recognised stock exchange. 14.10 SAMA will be responsible for monitoring the application of these qualifying criteria, particularly in relation to the last criterion where the initial classification is essentially left to the reporting banks. SAMA will also have discretion to include within the qualifying category debt securities issued by banks in countries which have implemented this framework, subject to the express understanding that SAMA undertake prompt remedial action if a bank fails to meet the capital standards set forth in this framework. Similarly, SAMA will have discretion to include within the qualifying category debt securities issued by securities firms that are subject to equivalent rules. 14.11 Furthermore, the qualifying category shall include securities issued by institutions that are deemed to be equivalent to IG quality and subject to SAMA regulatory arrangements comparable to those under this framework. 14.12 Unrated securities may be included in the qualifying category when they are subject to SAMA approval, unrated, but deemed to be of comparable investment quality by the reporting bank, and the issuer has securities listed on a recognised stock exchange. This will remain unchanged for banks using the simplified standardised approach. For banks using the internal ratings-based (IRB) approach for a portfolio, unrated securities can be included in the qualifying category if both of the following conditions are met: (1) the securities are rated equivalent 56 to IG under the reporting bank’s internal rating system, which SAMA has confirmed complies with the requirements for an IRB approach; and (2) the issuer has securities listed on a recognised stock exchange. 14.13 However, since this may in certain cases considerably underestimate the specific risk for debt instruments which have a high yield to redemption relative to government debt securities, SAMA will have the discretion: (1) to apply a higher specific risk charge to such instruments; and/or (2) to disallow offsetting for the purposes of defining the extent of general market risk between such instruments and any other debt instruments. 14.14 The specific risk capital requirement of securitisation positions as defined in a 18.1 to 18.6 of SAMA Minimum Capital Requirements for Credit Risk that are held in the trading book is to be calculated according to the revised method for such positions in the banking book as set out in revisions to the securitisation framework. A bank shall calculate the specific risk capital requirement applicable to each net securitisation position by dividing the risk weight calculated as if it were held in the banking book by [12.5] .