Minimum Capital Requirements for Credit Risk

This chapter sets out the calculation of risk weighted assets and expected losses for specialized lending (SL) exposures subject to the supervisory slotting approach. The method for determining the difference between expected losses and provisions is set out in chapter 15 . Risk Weights for Specialized Lending (PF, OF, CF and IPRE) 13.2 For project finance (PF), object finance (OF), commodities finance (CF) and income producing real estate (IPRE) exposures, banks that do not meet the requirements for the estimation of probability of default (PD) under the corporate internal ratings-based (IRB) approach will be required to map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are provided in paragraph 13.13 for PF exposures, paragraph 13.15 for OF exposures, paragraph 013.6 for CF exposures and paragraph 13.14 for IPRE exposures. The risk weights for unexpected losses (UL) associated with each supervisory category are shown in table 19 below: Supervisory categories and unexpected loss (UL) risk weights for other SL exposures Table 19 Strong Good Satisfactory Weak Default 70% 90% 115% 250% 0% 13.3 Although banks are expected to map their internal ratings to the supervisory categories for specialized lending using the slotting criteria, each supervisory category broadly corresponds to a range of external credit assessments as outlined in table 20 below. Table 20 Strong Good Satisfactory Weak Default BBB- or better BB+ or BB BB- or B+ B to C Not applicable 13.4 SAMA may allow banks to assign preferential risk weights of 50% to “strong” exposures, and 70% to “good” exposures, provided they have a remaining maturity of less than 2.5 years or SAMA determines that banks’ underwriting and other risk characteristics are substantially stronger than specified in the slotting criteria for the relevant supervisory risk category. Risk weights for Specialized Lending (HVCRE) 13.5 For high-volatility commercial real estate (HVCRE) exposures, banks that do not meet the requirements for estimation of PD, or did not obtain SAMA’s approval to implement the foundation or advanced approaches to HVCRE, must map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are the same as those for IPRE, as provided in paragraph 13.14 . The risk weights associated with each supervisory category are shown in table 21 below: Table 21 Supervisory categories and unexpected loss (UL) risk weights for other SL exposures Strong Good Satisfactory Weak Default 95% 120% 140% 250% 0% 13.6 As indicated in paragraph 13.3 , each supervisory category broadly corresponds to a range of external credit assessments. 13.7 SAMA may allow banks to assign preferential risk weights of 70% to “strong” exposures, and 95% to “good” exposures, provided they have a remaining maturity of less than 2.5 years or SAMA determines that banks’ underwriting and other risk characteristics are substantially stronger than specified in the slotting criteria for the relevant supervisory risk category. Expected Loss for Specialized Lending (SL) Exposures Subject to the Supervisory Slotting Criteria 13.8 For SL exposures subject to the supervisory slotting criteria, the expected loss (EL) amount is determined by multiplying 8% by the risk-weighted assets produced from the appropriate risk weights, as specified below, multiplied by exposure at default. 13.9 The risk weights for SL, other than HVCRE, are as shown in table 22 below: Table 22 Strong Good Satisfactory Weak Default 5% 10% 35% 100% 625%