Regulatory Alerts2016-06-20
Capital Requirements for Banks' Equity Investments in Funds
The Saudi Arabian Monetary Agency (SAMA) has issued capital regulations for all banks, effective 1 January 2017, to standardize risk-based capital calculations for equity investments in funds. The framework mandates three calculation methods—the Look-Through, Mandate-Based, and Fall-Back Approaches—while incorporating fund leverage and clarifying Internal Ratings-Based credit risk applications. Additionally, the rules impose a 1250% risk weight on investments lacking sufficient transparency regarding underlying fund activities.
# Saudi Arabian Monetary Agency
BANKING CONTROL
9041045212
From : Saudi Arabian Monetary Agency
To : All Banks
Attention : Managing Directors, Chief Executive Officers and General Managers
Subject : Capital requirements for banks’ equity investments in funds
## Background
The Basel document on capital requirements for banks’ equity investments in funds outlines the policy framework for equity investments in funds. This document improves the framework by following a look-through approach to identify the underlying assets whenever investing in funds and introduces three different approaches i.e. Look-Through Approach (LTA), Mandate-Based Approach (MBA) and the Fall-Back Approach (FBA). It further enhances the framework by:
* taking account of a fund’s leverage when determining risk-based capital requirements associated with banks’ investments in a fund;
* clarifying the application of the IRB approaches for credit risk; and
* more appropriately reflecting the risk of a fund’s underlying investments, including the use of a 1250% risk weight for situations in which there is not sufficient transparency regarding a fund’s investment activities.
SAMA has conducted a consultation process with the Saudi Banks in the development of this regulation, which is attached in the annexures containing:
* Annexure 1: Capital requirements for banks’ equity investments in funds (available on BIS website [http://www.bis.org/publ/bcbs266.pdf](http://www.bis.org/publ/bcbs266.pdf)).
* Annexure 2: SAMA’s position on National Discretion
* Annexure 3: Changes in the template Q17 for equities. Please ensure that these templates are cross-validated and reconciled to other Q17 templates.
* Annexure 4: Frequently Asked Questions (FAQs) and answers
## Implementation date
These rules are applicable from 1 January 2017 as specified in the Basel document.
For:
Thamer M. AlEssa
Director General of Banking Control
P.O. Box 2992 - Riyadh-11169, Saudi Arabia - Tel : 011-463 3000 - Telex 404390 SJ - Fax : 011-463 2090
June 2016
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