Minimum Capital Requirements for Credit Risk

This policy document also covers the treatment in banking book of the following exposures: 1. Securitization exposures (chapters 18 to 23 ); 2. Equity investments in funds ( chapter 24 ); and 3. Exposures arising from unsettled transactions and failed trades ( chapter 25 ). 1 The notations in chapters 7 to 9 follow the methodology used by one institution, Standard and Poor’s (S&P). The use of S&P credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions. 6. Due Diligence Requirements 6.1 Banks must perform due diligence to ensure that they have an adequate understanding, at origination and thereafter on a regular basis (at least annually), of the risk profile and characteristics of their counterparties. In cases where ratings are used, due diligence is necessary to assess the risk of the exposure for risk management purposes and whether the risk weight applied is appropriate and prudent. The sophistication of the due diligence should be appropriate to the size and complexity of banks’ activities. Banks must take reasonable and adequate steps to assess the operating and financial performance levels and trends through internal credit analysis and/or other analytics outsourced to a third party, as appropriate for each counterparty. Banks must be able to access information about their counterparties on a regular basis to complete due diligence analyses. 6.2 For exposures to entities belonging to consolidated groups, due diligence should, to the extent possible, be performed at the solo entity level to which there is a credit exposure. In evaluating the repayment capacity of the solo entity, banks are expected to take into account the support of the group and the potential for it to be adversely impacted by problems in the group. 6.3 Banks should have in place effective internal policies, processes, systems and controls to ensure that the appropriate risk weights are assigned to counterparties. Banks must be able to demonstrate to SAMA that their due diligence analyses are appropriate. 7. Standardized Approach: Individual Exposures Exposures to Sovereigns 7.1 Exposures to sovereigns and their central banks will be risk-weighted based on the external rating of the sovereign as follows: Risk weight table for sovereigns and central banks Table 1 External rating AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated Risk weight 0% 20% 50% 100% 150% 100% 7.2 A 0% risk weight can be applied to banks’ exposures to Saudi sovereign (or SAMA) of incorporation denominated in Saudi Riyal and funded 2 in Saudi Riyal (SAR). 3 Exposures to Saudi sovereign of incorporation denominated in foreign currencies should be treated according to the Saudi sovereign external rating. 7.3 Sovereign exposures to the member countries of Gulf Cooperation Council (GCC) will also be risk-weighted based on the external rating of the respective country as per Table 1. 7.4 Exposures to the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Union, the European Stability Mechanism and the European Financial Stability Facility may receive a 0% risk weight. 2 This is to say that the bank would also have corresponding liabilities denominated in the domestic currency. 3 This lower risk weight may be extended to the risk-weighting of collateral and guarantees under the CRM framework ( chapter 9 ) Exposures to Public Sector Entities (PSEs) 7.5 For the purposes of RWA treatment, domestic PSEs in general include government authorities, administrative and/or statutory bodies responsible to the government, which may be owned, controlled, and/or mostly funded by the government and not involved in any commercial undertakings.