Minimum Capital Requirements for Credit Risk

In cases of a system-wide failure of a settlement, clearing system or central counterparty, SAMA may waive capital requirements until the situation is rectified. 25.8 Failure of a counterparty to settle a trade in itself will not be deemed a default for purposes of credit risk under the Basel Framework. Capital Requirements for DvP Transactions 25.9 For DvP transactions, if the payments have not yet taken place five business days after the settlement date, firms must calculate a capital requirement by multiplying the positive current exposure of the transaction by the appropriate factor, according to the Table 34 below. Table 34 Number of business days after the agreed settlement date Corresponding risk multiplier From 5 to 15 8% From 16 to 30 50% From 31 to 45 75% 46 or more 100% Capital Requirements for Non-DvP Transactions (Free Deliveries) 25.10 For non-DvP transactions (i.e. free deliveries), after the first contractual payment/delivery leg, the bank that has made the payment will treat its exposure as a loan if the second leg has not been received by the end of the business day. 125 This means that: (1) For counterparties to which the bank applies the standardized approach to credit risk, the bank will use the risk weight applicable to the counterparty set out in chapter 7 . (2) For counterparties to which the bank applies the internal ratings-based (IRB) approach to credit risk, the bank will apply the appropriate IRB formula (set out in chapter 11 ) applicable to the counterparty (set out in chapter 10 ). When applying this requirement, if the bank has no other banking book exposures to the counterparty (that are subject to the IRB approach), the bank may assign a probability of default to the counterparty on the basis of its external rating. Banks using the Advanced IRB approach may use a 45% loss-given- default (LGD) in lieu of estimating LGDs so long as they apply it to all failed trade exposures. Alternatively, banks using the IRB approach may opt to apply the standardized approach risk weights applicable to the counterparty set out in chapter 7 . 25.11 As an alternative to 25.10 (1) and 25.10 (2) above, when exposures are not material, banks may choose to apply a uniform 100% risk-weight to these exposures, in order to avoid the burden of a full credit assessment. 25.12 If five business days after the second contractual payment/delivery date the second leg has not yet effectively taken place, the bank that has made the first payment leg will risk weight the full amount of the value transferred plus replacement cost, if any, at 1250%. This treatment will apply until the second payment/delivery leg is effectively made. 125 If the dates when two payment legs are made are the same according to the time zones where each payment is made, it is deemed that they are settled on the same day. For example, if a bank in Tokyo transfers Yen on day X (Japan Standard Time) and receives corresponding US Dollar via the Clearing House Interbank Payments System on day X (US Eastern Standard Time), the settlement is deemed to take place on the same value date. 26. Illustrative Risk Weights Calculated Under the Internal Ratings-Based (IRB) Approach to Credit Risk 26.1 Table 1 provides illustrative risk weights calculated for four exposure types under the IRB approach to credit risk. Each set of risk weights for unexpected loss (UL) was produced using the appropriate risk-weight function of the risk-weight functions set out in Chapter 11 of Minimum Capital Requirements for Credit Risk. The inputs used to calculate the illustrative risk weights include measures of the probability of default (PD), loss-given-default (LGD), and an assumed effective maturity (M) of 2.5 years, where applicable.