Minimum Capital Requirements for Credit Risk

At a minimum, if any of the following triggers is breached, a bank must classify the exposure into Grade C: 1. The counterparty bank does not meet the criteria for being classified as Grade B with respect to its published minimum regulatory requirements, asset out in paragraphs 7.21 and 7.22 or 2. Where audited financial statements are required, the external auditor has issued an adverse audit opinion or has expressed substantial doubt about the counterparty bank’s ability to continue as a going concern in its financial statements or audited reports within the previous 12 months. 7.26 Even if the triggers set out in paragraph 7.25 are not breached, a bank may assess that the counterparty bank meets the definition in paragraph 7.24. In that case, the exposure to such counterparty bank must be classified into Grade C. 7.27 Exposures to banks with an original maturity of three months or less, as well as exposures to banks that arise from the movement of goods across national borders with an original maturity of six months or less, 9 can be assigned a risk weight that correspond to the risk weights for short term exposures in Table 5. 7.28 To reflect transfer and convertibility risk under the SCRA, a risk-weight floor based on the risk weight applicable to exposures to the sovereign of the country where the bank counterparty is incorporated will be applied to the risk weight assigned to bank exposures. The sovereign floor applies when: i. The exposure is not in the local currency of the jurisdiction of incorporation of the debtor bank; and ii. For a borrowing booked in a branch of the debtor bank in a foreign jurisdiction, when the exposure is not in the local currency of the jurisdiction in which the branch operates. The sovereign floor will not apply to short-term (i.e. with a maturity below one year) self-liquidating, trade-related contingent items that arise from the movement of goods. 5 For internationally active banks, appropriate prudential standards (e.g. capital and liquidity requirements) and level of supervision should be in accordance with the Basel framework. 6 An exposure is rated from the perspective of a bank if the exposure is rated by a recognized “eligible credit assessment institution” (ECAI) which has been nominated by the bank (i.e. the bank has informed SAMA of its intention to use the ratings of such ECAI for regulatory purposes in a consistent manner paragraph 8.8 In other words, if an external rating exists but the credit rating agency is not a recognized ECAI by SAMA, or the rating has been issued by an ECAI which has not been nominated by the bank, the exposure would be considered as being unrated from the perspective of the bank 7 Implicit government support refers to the notion that the government would act to prevent bank creditors from incurring losses in the event of a bank default or bank distress. 8 This may include on-balance sheet exposures such as loans and off- balance sheet exposures such as self-liquidating trade-related contingent items. 9 This may include on-balance sheet exposures such as loans and off-balance sheet exposures such as self-liquidating trade-related contingent items. Exposures to Covered Bonds 7.29 Covered bonds are bonds issued by a bank or mortgage institution that are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest. Eligible assets