Minimum Capital Requirements for Credit Risk

Banks using the standardized approach for a portion of their credit risk exposures (see paragraphs 10.43 to 10.48 ), must determine the portion of general provisions attributed to the standardized or IRB treatment of provisions according to the methods outlined in paragraphs 15.6 and 15.7 below. 15.6 Banks should generally attribute total general provisions on a pro rata basis according to the proportion of credit risk-weighted assets subject to the standardized and IRB approaches. However, when one approach to determining credit risk-weighted assets (i.e. standardized or IRB approach) is used exclusively within an entity, general provisions booked within the entity using the standardized approach may be attributed to the standardized treatment. Similarly, general provisions booked within entities using the IRB approach may be attributed to the total eligible provisions as defined in paragraph 15.4. 15.7 At SAMA’s discretion, banks using both the standardized and IRB approaches may rely on their internal methods for allocating general provisions for recognition in capital under either the standardized or IRB approach, subject to the following conditions. Where the internal allocation method is made available, the national supervisor will establish the standards surrounding their use. Banks will need to obtain prior approval from their SAMA to use an internal allocation method for this purpose. Treatment of EL and Provisions 15.8 As specified in 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) , Banks using the IRB approach must compare the total amount of total eligible provisions (as defined in paragraph 15.4 ) with the total EL amount as calculated within the IRB approach (as defined in paragraph 15.2 ). In addition, article 2.2.3 in the aforementioned rules outlines the treatment for that portion of a bank that is subject to the standardized approach for credit risk when the bank uses both the standardized and IRB approaches. 15.9 Where the calculated EL amount is lower than the total eligible provisions of the bank, SAMA will consider whether the EL fully reflects the conditions in the market in which it operates before allowing the difference to be included in Tier 2 capital. If specific provisions exceed the EL amount on defaulted assets this assessment also needs to be made before using the difference to offset the EL amount on non-defaulted assets. 16. IRB Approach: Minimum Requirements to Use IRB Approach 16.1 This chapter presents the minimum requirements for entry and on-going use of the internal ratings-based (IRB) approach. The minimum requirements are set out in the following 11 sections: (1) Composition of minimum requirements (2) Compliance with minimum requirements (3) Rating system design (4) Risk rating system operations (5) Corporate governance and oversight (6) Use of internal ratings (7) Risk quantification (8) Validation of internal estimates (9) Supervisory loss-given-default (LGD) and exposure at default (EAD) estimates (10) Requirements for recognition of leasing (11) Disclosure requirements 16.2 The minimum requirements in the sections that follow cut across asset classes. Therefore, more than one asset class may be discussed within the context of a given minimum requirement. Section 1: Composition of Minimum Requirements 16.3 To be eligible for the IRB approach a bank must demonstrate to SAMA that it meets certain minimum requirements at the outset and on an ongoing basis. Many of these requirements are in the form of objectives that a qualifying bank’s risk rating systems must fulfil. The focus is on banks’ abilities to rank order and quantify risk in a consistent, reliable and valid fashion.