Minimum Capital Requirements for Credit Risk

Credit risk mitigants will be recognized generally using the same type of framework as set forth in paragraphs 12.21 to 12.28 62 .In particular, a guarantee provided by the seller or a third party will be treated using the existing IRB rules for guarantees, regardless of whether the guarantee covers default risk, dilution risk, or both. (1) If the guarantee covers both the pool’s default risk and dilution risk, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool’s total risk weight for default and dilution risk. (2) If the guarantee covers only default risk or dilution risk, but not both, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool’s risk weight for the corresponding risk component (default or dilution). The capital requirement for the other component will then be added. (3) If a guarantee covers only a portion of the default and/or dilution risk, the uncovered portion of the default and/or dilution risk will be treated as per the existing credit risk mitigation rules for proportional or tranched coverage (i.e. the risk weights of the uncovered risk components will be added to the risk weights of the covered risk components) 62 At SAMA’s discretion, banks may recognize guarantors that are internally rated and associated with a PD equivalent to less than A- under the foundation IRB approach for purposes of determining capital requirements for dilution risk. 15. IRB Approach: Treatment of Expected Losses and Provisions 15.1 This chapter discusses the calculation of expected losses (EL) under the internal ratings-based (IRB) approach, and the method by which the difference between provisions (e.g. specific provisions, partial write-offs, portfolio-specific general provisions such as country risk provisions or general provisions) and EL may be included in or must be deducted from regulatory capital, as outlined in the definition of capital rules, articles 2.2.3 and 4.1.4 – Section A of SAMA Guidance Document Concerning the Implementation of Basel III (Circular No. 341000015689, Date: 19 December 2012) . The treatment of EL and provisions related to securitization exposures is outlined in paragraph 18.36 . Calculation of Expected Losses 15.2 A bank must sum the EL amount (defined as EL multiplied by exposure at default)associated with its exposures to which the IRB approach is applied (excluding the EL amount associated with securitization exposures) to obtain a total EL amount. 15.3 Banks must calculate EL as probability of default (PD) x loss-given-default (LGD) for corporate, sovereign, bank, and retail exposures not in default. For corporate, sovereign, bank, and retail exposures that are in default, banks must use their best estimate of expected loss as defined in paragraph 16.85 for exposures subject to the advanced approach and for exposures subject to the foundation approach banks must use the supervisory LGD. For exposures subject to the supervisory slotting criteria EL is calculated as described in the chapter on the supervisory slotting approach ( paragraphs 13.8 to 13.12 ). Securitization exposures do not contribute to the EL amount, as set out in in paragraph 18.36 . Calculation of Provisions Exposures subject to the IRB approach for credit risk 15.4 Total eligible provisions are defined as the sum of all provisions (e.g. specific provisions, partial write-offs, portfolio-specific general provisions such as country risk provisions or general provisions) that are attributed to exposures treated under the IRB approach. In addition, total eligible provisions may include any discounts on defaulted assets. General and specific provisions set aside against securitization exposures must not be included in total eligible provisions. Portion of exposures subject to the standardized approach for credit risk