Minimum Capital Requirements for Credit Risk

Investments in significant minority- or majority-owned and –controlled commercial entities below the materiality thresholds in paragraph 7.52 must be risk- weighted as specified in paragraphs 7.47 to 7.52. Investments in excess of the materiality thresholds must be risk-weighted at 1250%. 12 Indirect equity interests include holdings of derivative instruments tied to equity interests, and holdings in corporations, partnerships, limited liability companies or other types of enterprises that issue ownership interests and are engaged principally in the business of investing in equity instruments. 13 For certain obligations that require or permit settlement by issuance of a variable number of the issuer’s equity shares, the change in the monetary value of the obligation is equal to the change in the fair value of a fixed number of equity shares multiplied by a specified factor. Those obligations meet the conditions of item (c) if both the factor and the referenced number of shares are fixed. For example, an issuer may be required to settle an obligation by issuing shares with a value equal to three times the appreciation in the fair value of 1,000 equity shares. That obligation is considered to be the same as an obligation that requires settlement by issuance of shares equal to the appreciation in the fair value of 3,000 equity shares. 14 Equities that are recorded as a loan but arise from a debt/equity swap made as part of the orderly realization or restructuring of the debt are included in the definition of equity holdings. However, these instruments may not attract a lower capital charge than would apply if the holdings remained in the debt portfolio. 15 SAMA may decide not to require that such liabilities be included where they are directly hedged by an equity holding, such that the net position does not involve material risk. 16 SAMA may consider to re-characterize debt holdings as equites for regulatory purposes and to otherwise ensure the proper treatment of holdings under the supervisory review process. 17 For example, investments in unlisted equities of corporate clients with which the bank has or intends to establish a long-term business relationship and debt-equity swaps for corporate restructuring purposes would be excluded. Retail Exposure Class 7.55 The retail exposure class excludes exposures within the real estate exposure class. The retail exposure class includes the following types of exposures: 1. Exposures to an individual person or persons; and 2. Exposures to MSMEs (as defined in paragraph 7.40 ) that meet the “regulatory retail” criteria set out in paragraph 7.57 below. Exposures to MSMEs that do not meet these criteria will be treated as corporate MSMEs exposures under paragraph 7.40 .