IMF published its staff report and selected issues report under the 2018 Article IV consultation with Saudi Arabia. Directors agreed that increasing small and medium enterprise finance, improving financial sector access, and developing the debt market are priorities. They welcomed the efforts of Saudi Arabian Monetary Authority (SAMA) to strengthen liquidity management and encouraged the authorities to continue to strengthen the effectiveness of their Anti-Money Laundering/Countering the Financing of Terrorism framework.
The staff report states that increasing financial development and inclusion while maintaining financial stability are key policy priorities. Reforms to strengthen liquidity management should continue, while macro-prudential policies can be used countercyclically within a well-defined framework. Moreover, legal reforms have advanced considerably over the past year. The new insolvency law is expected to go into effect in August. The authorities explained that all government licensing and regulatory requirements are being reviewed, streamlined, and automated, including enabling online, rather than in person, applications. Staff welcomed the authorities’ focus on financial development and inclusion as set out in the recent Financial Sector Development Program. Significant equity market reforms have been implemented by the Capital Market Authority (CMA) and the authorities are now working to develop the domestic debt market. SAMA noted the progress made in implementing the recommendations from the 2017 financial system stability assessment (FSSA). Additionally, Appendix V to the report summarizes the progress in implementing the key 2017 Financial Sector Assessment Program (FSAP) recommendations.
Staff agreed with SAMA that banks are well-positioned to weather negative asset quality and liquidity shocks. Reported nonperforming loans increased only modestly during 2017 to reach 1.6% of loans (1.4% at end-2016), the risk-weighted capital ratio increased to over 20%, and returns on assets and equity increased as interest margins rose. The introduction of IFRS 9 will result in a manageable increase in provisions for banks and SAMA will need to continue to carefully monitor banks’ approach to loan classification. SAMA has actively employed macro-prudential tools. SAMA explained that it has used the loan-to-deposit ratio, the loan-to-value (LTV) ratio and the risk-weight on mortgage loans to avoid what it viewed as an unnecessary tightening of credit conditions. Staff agreed that macro-prudential instruments should be used countercyclically within a clear framework, but raised some questions about the recent increase in the LTV ratio for first-time home owners to 90% (from 85%), which is quite high by international standards, at a time when retail mortgage lending is growing strongly. SAMA responded that the risks to financial stability from this change are extremely limited given the low average LTV ratio, the small share of mortgage lending in banks’ portfolios, and very low mortgage default rates.
The selected Issues report highlights that the banking sector dominates the financial system. The commercial banks include 12 domestic banks (four of which have large public-sector ownership) and 12 foreign banks (1% of total assets), with the four largest banks representing 55% of banking system assets. SAMA has developed guidelines for mapping the risk profile of Islamic products to the Basel framework and the guidelines are being consulted upon with banks. Bank cross-border exposures in funding and lending are limited and regionally diversified. The report also goes on to discuss the capital market reforms and fintech initiatives in Saudi Arabia.
Keywords: Middle East and Africa, Saudi Arabia, Banking, Securities, Article IV, FSAP, FSSA, IMF
Previous ArticleFSB Launches Review on Implementation of the Legal Entity Identifier
EIOPA submitted—to the European Parliament, the Council of the European Union, and EC—its 2020, fifth, and last annual report on long-term guarantee measures and measures on equity risk.
The BIS Innovation Hub Swiss Centre, SNB, and the financial infrastructure operator SIX announced the successful completion of a joint proof-of-concept (PoC) experiment as part of the Project Helvetia.
EBA published the final draft regulatory technical standards for calculation of own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework.
EIOPA published discussion paper on a methodology for the potential inclusion of climate change in the Solvency II (sometimes also written as SII) standard formula when calculating natural catastrophe underwriting risk.
EU published, in the Official Journal of the European Union, corrigenda to the Directive and the Regulation on the prudential requirements and supervision of investment firms.
MAS proposed amendments to certain regulations, notices, and guidelines arising from the Banking (Amendment) Act 2020.
PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.
RBNZ launched consultations on the scope of the Insurance Prudential Supervision Act (IPSA) 2010 and on the associated Insurance Solvency Standards.
SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.
EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.