The Technical Amendments to the Basel III Reforms

P.O Box 2992 Riyadh 11169 Kingdom of Saudi Arabia Tel: +966 11 463 3000

General Circular No. 4404714 dated 6/4/1444 AH regarding the Technical Amendments to the Basel III Reforms.

Based on the authorities granted to the Saudi Central Bank (SAMA) under its system issued by Royal Decree No. (M/36) dated 11/4/1442 AH, and the Banking Control System issued by Royal Decree No. (5) dated 2/22/1386 AH, and Circular No. 4404714 dated 6/4/1444 AH regarding the Technical Amendments to the Basel III Reforms.

We hereby inform you of the approval of the Technical Amendments to the Basel III Reforms, which shall take effect according to the attached format; covering:

1. The Credit Risk Capital Requirements Framework.
2. The Operational Risk Capital Requirements Framework.
3. The Pillar 3 Disclosure Requirements Framework.

You may review the amendments via SAMA’s official website starting from 6/4/1444 AH. Please proceed accordingly.

Yours sincerely, Yazed bin Ahmed Al-Sheikh Deputy Governor for Supervision

Distribution Scope: All local and foreign banks operating in the Kingdom.

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1. Credit Risk Framework

Specialized lending: Rephrase paragraph (7.41) for the purpose of alignment with the definitions in the standardised approach (SA) and the internal ratings-based approach (IRB), to be as follow: “A corporate exposure will be treated as a specialized lending exposure if such lending possesses all of the following characteristics, either in legal form or economic substance.”

2. Operational Risk Framework

Disclosure: Rephrase the disclosure section to be aligned with the operational risk disclosure template from pillar III disclosure framework to be as follow: “In addition to the disclosure requirements under Pillar 3, all banks with a BI greater than SAR 4.46 billion, or which use internal loss data in the calculation of Operational Risk Capital (ORC), are required to disclose their annual loss data for each of the ten years in the ILM calculation window. Loss data is required to be reported net of recoveries, both before and after loss exclusions. All banks are required to disclose each of the BI sub-items for each of the three years of the BI component calculation window.”

Policy Requirements: Rephrase paragraph (7.3.3) to be as follow: “The calculation of average losses in the Loss Component must be based on (10) years of high-quality annual loss data. When banks first become subject to calculation of the ILM, banks that do not have (10) years of high-quality loss data may use a minimum of (5) years of data to calculate the LC. Banks that do not have five years of high-quality loss data must calculate the capital requirement based solely on the BI component. Further, those Banks that do not have high-quality annual loss data for (5) years are required to approach SAMA to seek approval either to use loss data for the period less than (5) years or use ILM greater than (1) or as advised by SAMA.”

Specific criteria on loss data identification, collection and treatment: Rephrase paragraph (9.2.2) (e) of the items must be included in the gross loss computation of the loss data set to be as follow: “Negative economic impacts booked in a financial accounting period, due to operational risk events impacting the cash flows or financial statements of previous financial accounting periods (timing losses). Material “timing losses” should be included in the loss data set when they are due to operational risk events that span more than one financial accounting period.”

Rephrase paragraph (9.2.4) to be as follow: “Banks must use the date of accounting for building the loss data set. This includes using the date of accounting for including losses related to legal events in the loss dataset.”

3. Pillar 3 Disclosure Requirements Framework

Various amendments of the CVA disclosure requirements include a new discount scalar DSBA-CVA for banks using the Basic Approach CVA. In addition, replace the term “RWA” with “Capital Requirements” in all places where it appears within the following Templates and table:

• Template CVA1: The reduced basic approach for CVA (BA-CVA)
• Template CVA2: The full basic approach for CVA (BA-CVA)
• Template CVA3: The standardised approach for CVA (SA-CVA)
• Table CVAB: Qualitative disclosures for banks using the SA-CVA.

Amendments on Template GSIB1 - Disclosure of G-SIB indicators included the followings:

• Clarify the calculation of the Trading Volume Indicator (TVI) in the content and individual indicator sections of the template.
• Clarify that leverage ratio exposure used for the G-SIB assessment must also include insurance subsidiaries in the scope of application section of the template.
• Extend the scope of consolidation in level 3 assets in the individual indicator section of the template to include insurance subsidiaries.
• Clarify that the total exposures in the individual indicator section of the template, which are included in the calculation of leverage, must comply with the definition used in the leverage framework issued by SAMA.

Amendments on the definitions and instructions section of the CCyB1-Geographical distribution of credit exposures used in the calculation of the bank-specific countercyclical capital buffer requirement template to be as follow:

• “unless otherwise provided for in the domestic implementation of the countercyclical capital buffer framework, private sector credit exposures relevant for the calculation of the countercyclical capital buffer (relevant private sector credit exposures) refer to exposures to private sector counterparties which attract a credit risk capital charge, or a risk-weighted equivalent market risk capital charge for banks’ exposures in the trading book for specific risk or, default risk as defined in SAMA’s capital requirements.”