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October 05, 2017

IMF published its staff report, selected issues report, and the financial system stability assessment (FSSA) report on Saudi Arabia. These reports are a part of the IMF's financial sector surveillance on Saudi Arabia. The reports, among other issues, examine the recent strengthening of regulatory and supervisory frameworks in Saudi Arabia, discuss the state of Basel III implementation, and look at ways of further improving the resilience of the financial sector.

The staff report reveals that banks are well-regulated and supervised. Directors welcomed the steps taken by SAMA to strengthen its regulatory and supervisory frameworks and to develop the macro-prudential framework and the financial safety net. They saw scope for the Saudi Arabian Monetary Authority (SAMA) to strengthen its liquidity management framework and encouraged the authorities to continue to address data gaps and subscribe to the Special Data Dissemination Standard. Efforts by the Capital Market Authority to develop the local capital markets were also welcomed. The selected Issues report examines the decline in inflation, along with the appropriate scope and pace of fiscal adjustment in Saudi Arabia.

The FSSA report highlights that, since the 2011 Financial Sector Assessment Program (FSAP), the authorities have implemented the Basel III framework (in 2013) for capital and liquidity and made progress with several other recommendations; strengthened the stress testing framework; implemented an early warning system; set limits on banks’ large exposures; prepared a draft resolution law that broadly corresponds to the FSB’s Key Attributes for Effective Bank Resolution; and created a high-level Financial Stability Committee in SAMA, which is charged with macro-prudential analysis and supporting the work of the National Financial Stability Committee. Banks—the core of the Saudi financial system—remain liquid and resilient. In the fourth quarter of 2016, the total regulatory capital ratio for the system was 19.5%, with little variation across banks, and the (unreported) common equity tier 1 ratio was estimated at 17.5%. Banks increased their capital buffers and provisions for coverage of nonperforming loans, the latter rising to 177% by the end of 2016. At the end of 2016, all banks met the standard Basel III liquidity coverage ratio, or LCR, requirement and passed the maturity-mismatch test, owing to their large holdings of liquid assets. Stress tests show that most banks, including all systemically important banks, would be able to continue operating and meeting regulatory capital requirements in the event of additional severe economic shocks.

Additionally, the FSSA report highlights that Saudi Arabia has a mixed system, in which Islamic banks (offering exclusively Islamic products on both sides of the balance sheet) operate alongside “hybrid” banks, which offer both Islamic and conventional products. SAMA supervises all banks under the Basel framework, using the same reporting requirements and standards. This approach has served Saudi Arabia well so far. Nevertheless, given the unique risk profile of Islamic products, SAMA should consider applying the Core Principles for Islamic Finance Regulation, recently established by IFSB, once these are ready for implementation. SAMA should issue guidance to banks on mapping the risk profile of Islamic products to the Basel framework. This will facilitate the determination of prudential reporting for Islamic products.


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Keywords: Middle East and Africa, Saudi Arabia, Banking, Islamic Banking, Article IV, Basel III, FSSA, FSAP, IMF

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