Minimum Capital Requirements for Credit Risk

If a securitization transaction contains one of the following examples of an early amortization provision and meets the operational requirements set forth in 18.24 or 18.25, an originating bank may exclude the underlying exposures associated with such a transaction from the calculation of risk-weighted assets, but must still hold regulatory capital against any securitization exposures they retain in connection with the transaction: (1) Replenishment structures where the underlying exposures do not revolve and the early amortization ends the ability of the bank to add new exposures; (2) Transactions of revolving credit facilities containing early amortization features that mimic term structures (i.e. where the risk on the underlying revolving credit facilities does not return to the originating bank) and where the early amortization provision in a securitization of revolving credit facilities does not effectively result in subordination of the originator’s interest; (3) Structures where a bank securitizes one or more revolving credit facilities and where investors remain fully exposed to future drawdowns by borrowers even after an early amortization event has occurred; or (4) The early amortization provision is solely triggered by events not related to the performance of the underlying assets or the selling bank, such as material changes in tax laws or regulations. 18.28 For securitization transactions that include a clean-up call, no capital will be required due to the presence of a clean-up call if the following conditions are met: (1) The exercise of the clean-up call must not be mandatory, in form or in substance, but rather must be at the discretion of the originating bank; (2) The clean-up call must not be structured to avoid allocating losses to credit enhancements or positions held by investors or otherwise structured to provide credit enhancement; and (3) The clean-up call must only be exercisable when 10% or less of the original underlying portfolio or securities issued remains, or, for synthetic securitizations, when 10% or less of the original reference portfolio value remains. 18.29 Securitization transactions that include a clean-up call that does not meet all of the criteria stated in 18.28 above result in a capital requirement for the originating bank. For a traditional securitization, the underlying exposures must be treated as if they were not securitized. Additionally, banks must not recognize in regulatory capital any gain on sale, in accordance with SAMA Circular No. 341000015689, Date: 19 December 2012 . For synthetic securitizations, the bank purchasing protection must hold capital against the entire amount of the securitized exposures as if they did not benefit from any credit protection. If a synthetic securitization incorporates a call (other than a clean-up call) that effectively terminates the transaction and the purchased credit protection on a specific date, the bank must treat the transaction in accordance with 18.65 . 18.30 If a clean-up call, when exercised, is found to serve as a credit enhancement, the exercise of the clean-up call must be considered a form of implicit support provided by the bank and must be deducted from regulatory capital. 71 Legal opinion is not limited to legal advice from qualified legal counsel, but allows written advice from in-house lawyers. Due Diligence Requirements 18.31 For a bank to use the risk weight approaches of the securitization framework, it must have the information specified in 18.32 to 18.34. Otherwise, the bank must assign a 1250% risk weight to any securitization exposure for which it cannot perform the required level of due diligence. 18.32 As a general rule, a bank must, on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitization exposures, whether on- or off-balance sheet, as well as the risk characteristics of the pools underlying its securitization exposures.