Minimum Capital Requirements for Credit Risk

IPRE lending refers to a method of providing funding to real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, or hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The borrower may be, but is not required to be, an SPV, an operating company focused on real estate construction or holdings, or an operating company with sources of revenue other than real estate. The distinguishing characteristic of IPRE versus other corporate exposures that are collateralized by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property. High-Volatility Commercial Real Estate Lending 10.15 HVCRE lending is the financing of commercial real estate that exhibits higher loss rate volatility (i.e. higher asset correlation) compared to other types of SL. HVCRE includes: (1) Commercial real estate exposures secured by properties of types that are categorized by SAMA as sharing higher volatilities in portfolio default rates; (2) Loans financing any of the land acquisition, development and construction (ADC) phases for properties of those types in such jurisdictions; and (3) Loans financing ADC of any other properties where the source of repayment at origination of the exposure is either the future uncertain sale of the property or cash flows whose source of repayment is substantially uncertain (e.g. the property has not yet been leased to the occupancy rate prevailing in that geographic market for that type of commercial real estate), unless the borrower has substantial equity at risk. Commercial ADC loans exempted from treatment as HVCRE loans on the basis of certainty of repayment or borrower equity are, however, ineligible for the additional reductions for SL exposures described in paragraph 13.4 . Definition of Sovereign Exposures 10.16 This asset class covers all exposures to counterparties treated as sovereigns under the standardized approach. This includes sovereigns (and their central banks), certain public sector entities (PSEs) identified as sovereigns in the standardized approach, multilateral development banks (MDBs) that meet the criteria for a 0% risk weight and referred to in the first footnote in paragraph 7.9 , and the entities referred to in paragraph 7.4 . Definition of Bank Exposures 10.17 This asset class covers exposures to banks as defined in paragraph 7.12 and those securities firms and other financial institutions set out in paragraph 7.36 that are treated as exposures to banks. Bank exposures also include covered bonds as defined in paragraph 7.29 as well as claims on all domestic PSEs that are not treated as exposures to sovereigns under the standardized approach, and MDBs that do not meet the criteria for a 0% risk weight under the standardized approach (i.e. MDBs that are not listed in paragraph 7.10 ). This asset class also includes exposures to the entities listed in this paragraph that are in the form of subordinated debt or regulatory capital instruments (which form their own asset class within the standardized approach), provided that such instruments: (i) do not fall within the scope of equity exposures as defined in paragraph 10.24 ; (ii) are not deducted from regulatory capital or risk-weighted at 250% according to Article 4.4 – Section A of SAMA Guidance Document Concerning the Implementation of Basel III (Circular No. 341000015689, Date: 19 December 2012) ; and (iii) are not risk weighted at 1250% according to paragraph 7.54 . Definition of Retail Exposures 10.18 An exposure is categorized as a retail exposure if it meets all of the criteria set out in paragraph