Minimum Capital Requirements for Credit Risk

As an alternative to the whole loan approach for regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property, banks may apply the “loan splitting” approach. Under the loan splitting approach, the risk weight of 20% is applied to the part of the exposure up to 55% of the property value and the risk weight of the counterparty (as prescribed in paragraph 7.81) is applied to the residual exposure 29 . Where there are liens on the property that are not held by the bank, the treatment is as follows: 1. Where a bank holds the junior lien and there are senior liens not held by the bank, to determine the part of the bank’s exposure that is eligible for the 20% risk weight, the amount of 55% of the property value should be reduced by the amount of the senior liens not held by the bank. For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, where there is also a senior ranking lien of SAR 10,000 held by another institution, the bank will apply a risk weight of 20% to SAR 45,000 (=max (SAR 55,000 – SAR 10,000, 0)) of the exposure and, according to paragraph 7.81 a risk weight of 75% to the residual exposure of SAR 25,000. (this does not take into account the other loan taken by the borrower from the senior lien holder). 2. Where liens not held by the bank rank pari passu with the bank’s lien, to determine the part of the bank’s exposure that is eligible for the 20% risk weight, the amount of 55% of the property value, reduced by the amount of more senior liens not held by the bank (if any), should be reduced by the product of: (i) 55% of the property value, reduced by the amount of any senior liens (if any, both held by the bank and held by other institutions); and (ii) The amount of liens not held by the bank that rank pari passu with the bank’s lien divided by the sum of all pari passu liens. For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, where there is also a pari passu ranking lien of SAR 10,000 held by another institution, the bank will apply a risk weight of 20% to SAR 48,125 (=SAR 55,000 – SAR 55,000 * SAR 10,000/SAR 80,000) of the exposure and, according to CRE20.89(1), a risk weight of 75% to the residual exposure of SAR 21,875. If both the loan and the bank’s lien is only SAR 30,000 and there is additionally a more senior lien of SAR 10,000 not held by the bank, the property value remaining available is SAR 33,750 (= (SAR 55,000 – SAR 10,000) - ((SAR 55,000 – SAR 10,000) * SAR 10,000/(SAR 10,000+ SAR 30,000)), and the bank will apply a risk weight of 20% to SAR 30,000. Risk weights for regulatory residential real estate exposures that are materially dependent on cash flows generated by the property 7.76 For regulatory residential real estate exposures that are materially dependent on cash flows generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV ratio in Table10 below. Risk weights for regulatory residential real estate exposures that are materially dependent on cash flows generated by the property Table 10 Risk weight LTV ≤ 50% 50% < LTV ≤ 60% 60% < LTV ≤ 80% 80% < LTV ≤ 90% 90% < LTV ≤ 100% LTV > 100% 30% 35% 45% 60% 75% 105% Risk weights for regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property