SAMA Issues Basel Rules for Credit Risk Capital, Issues Other Updates
The Saudi Central Bank (SAMA), earlier known as the Saudi Arabian Monetary Agency, published the final Basel III reforms and the consultations on "instructions" (or guidelines) for practicing financial aggregator services and on an amendment to article (8) of the Implementing Regulation of the Finance Companies Control Law. The proposed change in Article 8 of the aforementioned regulation is to reduce the minimum paid-up capital requirement for a finance company wishing to carry-on finance business for the small and medium enterprises (SMEs). The proposed amendment comes as an initiative by SAMA to develop the SME sector by attracting a new segment of investors to establish finance companies specialized in financing the SMEs. SAMA also granted a license to Manafa, which is fintech that specializes in debt-based crowdfunding and that completed a successful trial run in the regulatory sandbox of SAMA.
Out of the aforementioned, the key update involves SAMA announcement on the finalization of certain final Basel III reforms and publication of the policy document that covers the revised framework for credit risk and will be applicable to domestic banks as of January 01, 2023. The framework is not applicable to foreign banks’ branches operating in the Kingdom of Saudi Arabia, with the branches expected to comply with the regulatory capital requirements stipulated by their respective home regulators. The Basel Committee on Banking Supervision issued the document Basel III: Finalizing post-crisis reforms in December 2017, which includes among others, the revised framework for credit risk. It covers requirements for both the standardized and internal ratings-based approaches for credit risk and aims to complement the risk-weighted capital ratio with a revised leverage framework and minimum outputs for calculating risk-weighted assets (Output Floors). SAMA also conducted a pilot application of Basel III, which was launched during the second half of 2022, with the participation of all Saudi banks. The pilot application demonstrated the readiness of the banking sector for the official implementation while maintaining stable capital levels, which contributes to achieving SAMA objective to maintain financial stability.
SAMA expects all banks to report their credit risk-weighted assets and capital charge using the Q17 reporting template within 30 days after the end of each quarter. Banks can choose between two broad methodologies for calculating their risk-based capital requirements for credit risk. The first is the standardized approach, which is set out in chapters 6 to 9. The standardized approach assigns standardized risk-weights to exposures as described in chapter 7. Risk-weighted assets are calculated as the product of the standardized risk-weights and the exposure amount. To determine the risk-weights in the standardized approach for certain exposure classes, banks may, as a starting point, use assessments by external credit assessment institutions (ECAIs) that are recognized as eligible for capital purposes by SAMA. The second risk-weighted assets approach is the internal ratings-based (IRB) approach, which allows banks to use their internal rating systems for credit risk. The IRB approach is set out in chapters 10 to 16 of the published policy document. However, banks must seek regulatory approval from SAMA before they can use the internal ratings-based approach for the calculation of capital requirements for credit risk.
Related Links
- Final Basel Reforms
- Circular on Basel Reforms (PDF)
- Consultation on Financial Aggregators
- Proposal on Finance Companies Control Law
- Fintech License
Keywords: Middle East and Africa, Saudi Arabia, Banking, Basel, Reporting, Credit Risk, Standardized Approach, IRB Approach, Crowdfunding Service Providers, Fintech, SAMA, Saudi Central Bank
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