The document provides an overview of recent and upcoming work by the Basel Committee on Banking Supervision (BCBS). Key points include: - The BCBS work program is structured around policy development, ensuring balance in regulations, monitoring implementation, and supervision effectiveness. - Upcoming BCBS papers and guidance will address topics like Pillar 3 disclosures, expected credit losses, derivatives margin requirements, and corporate governance. - The BCBS ensures harmonization and consistency of Basel standards through the Regulatory Consistency Assessment Program. - Major upcoming revisions include the capital standards (Basel IV expected by 2019), credit risk weighting approaches, market risk framework, and interest rate risk in the banking book.

1. Recent Basel papers and
update on upcoming
developments
By: Qaiser Noor

2. Table of contents
Section Pages
1 Basel Committee – upcoming papers 3 – 6
2 Approach followed by Basel team 7 – 9
3 Latest developments by BCBS – 2016-17 10 – 26
4 Basel IV 27
2

3. Basel III – Phase in arrangements3
2015 2016 2017 2018 2019
Capital
Leverage ratio Disclosure 1 January (Pillar 1)
Minimum CET1 ratio
Capital conservation buffer 0.625% 1.25% 1.875% 2.50%
G-SIB buffer 0.25 - 0.875% 0.5 - 1.75% 0.75 - 2.625% 1 - 3.5%
Countercyclical capital buffer Full reciprocity
Phase-in deductions from CET1 40% 60% 80% 100% 100%
Minimum T1 ratio 5.50%
Minimum total capital ratio
Capital instruments that no longer qualify
Liquidity
Liquidity coverage ratio (LCR) 60% 70% 80% 90% 100%
Net stable funding ratio (NSFR) 1 January
Large exposures 1 January
Risk-weighted framework
Capital requirements for equity investments in funds 1 January
Standardised approach for counterparty credit risk (SA-CCR) 1 January
Securitisation framework 1 January
Interim capital requirements for CCP exposures
Final capital requirements for CCP exposures 1 January
Margin requirements for OTC derivatives
Margin requirements for OTC derivatives: IM
Margin requirements for OTC derivatives: VM
Pillar 3 revisions Year-end
Phased in from 1 September 2016 - 1 March 2017
6%
8%
Effective
Phased out by 2022
4.50%
Reciprocity provisions phased in between Jan 2016 and end-2018
Phased in from 1 September 2016 - 1 September 2020

4.  Work programme is structured around 4 themes:
Policy development
Ensuring an adequate balance between simplicity,
comparability and risk sensitivity
Monitoring and assessing implementation of the Basel
framework and
Improving the effectiveness of supervision
4 Basel committee work programme – 2016-17

5.  Pillar 3 disclosure
 Expected credit losses and Prudential treatment of problem assets
 Margin requirements, CVA framework, haircut floors for non-centrally
cleared Securities Financing Transactions, counterparty credit risk
 FAQs on the Basel III leverage ratio
 Corporate Governance principles
 Guidelines for identifying and dealing with weak banks
 Simple, Transparent and Comparable (STC) securitisation
 FAQs on the Basel III countercyclical capital buffer
5 Basel committee work programme – 2016-17

6.  Total Loss Absorption Capacity
 Domestic Systemically Important Banks (DSIBs)
 Standardised Approach for credit risk
 Task Force on Sovereign Exposures (TFSE)
 Step-in-risk
 Market risk
 Operational risk
 Internal model approach for credit risk
 Interest Rate Risk in the Banking Book
6 Basel committee work programme – 2016-17

7. Approach by Basel Team

8. Process followed by Basel Team
8
Basel rules
too detailed
to provide
relevant
guidance to
local banks
a. SAMA issues
detailed papers,
circulars and specific
guidance (returns)
b. Surveys for bilateral
dialogue, scoping and
planning
Consultation
process through
various working
groups, QISs i.e.
Capital, Liquidity,
Leverage, Risk etc.
(over 100
meetings held on
Basel 2/3 project)
Parallel run
and finally
adopt
through final
circular

9.  The Regulatory Consistency Assessment Program (RCAP) process
ensures
Harmonisation and
Consistency of Basel standards across the member countries.
 Consistency assessments carried out on a jurisdictional and thematic
basis:
Extent to which domestic regulations are aligned with the minimum
Basel requirements - level 2 review. Saudi Arabia has been
assessment as compliant for capital and largely compliant for LCR in
2015.
Thematic assessments examine bank implementation of the Basel
requirements to ensure that consistent calculation of prudential
ratios – level 3 review (not yet started)
9 Implementation of Basel standards - RCAP
http://www.bis.org/bcbs/
publ/d335.pdf

10. Latest developments by
BCBS – 2016-17

11. • These includes disclosures on
LCR, NSFR, Leverage ratio,
GSIBs, Composition of Capital
and Remuneration.
• Disclosure requirements which
are dependent upon other
working groups or require
development based on new
rules and regulations
• Already work in progress
11 Basel 3 – Pillar 3 disclosure

12. • Refining definitions of non-performing loans,
exposures, provisions, impairments, forbearance
• This will ensure consistency across the member
jurisdictions
• Finalised standard expected later this year
• We will incorporate these requirements into SAMA
guidance on provisioning issued in 2004.
• Planning to reduce LGD from 60% to 50%
12 Expected credit losses and definition of non-performing
exposures

13. • Derivatives - derives its value from the
changes in the underlying instruments.
• This includes Interest Rate SWAPs, Currency
SWAPs, Options, forwards etc.
• These instruments are used to hedge
against price fluctuations, transfer of risk or
arbitrage purposes.
• CVA is a market risk on derivatives
• All these rules applicable from 2017
• Derivatives in Saudi Arabia less than 0.1% of
global volume
13 Margin requirements for non-centrally cleared
derivatives and CVA framework, FAQs, haircuts

14. 14 Margin requirement for non-centrally cleared derivatives
Exposure is calculated as a combination of:
• Daily Mark to Market value and
• Potential Future Exposure (PFE) which is a
certain percentage based on notional value of
the derivative.
Counterparty credit risk is only relevant for derivatives, repos and forwards
RWA Exposure as calculated below x RW %age (20%, 50%, 100%)
2 models are applicable:
a. Standardised (All banks in Saudi
Arabia follow standardised
approach)
b. Advanced
New standardised approach which takes into account
netting and apply certain alpha factors of 1.4 and certain
haircuts. The rules are applicable from 1 Jan 2017

15. Leverage ratio – FAQs and framework15
May be
revised in
future
Exposure consists of:
a. All on balance sheet assets as per accounting balance sheet except derivatives and
securities financing transactions
b. Derivatives exposure as per regulatory calculations
c. Securities Financing Transactions as per regulatory calculations
d. Other Off balance sheet items
Already implemented in KSA from 1 Jan 2015. Leverage ratio of our banking sector is
around 12%

16. • Expand the guidance on the role of the board of
directors in effective risk management systems
• Strengthen the guidance on risk governance (the three
lines of defence),
• Recognise that compensation systems form a key
component of the governance and incentive structure
• Board and senior management of a bank convey
acceptable risk-taking behaviour and reinforce the
bank's operating and risk culture.
• SAMA issued corporate governance rules in 2014
which will be revised in line of these changes
16 Corporate Governance principles for banks

17. 17
Seller SPV Investor
Assets Securities
Securitisation, Simple Transparent and Comparable, capital
treatment, step in risk
Securitisation is the process of taking an illiquid asset, or group of assets, and transforming
them into a security. A typical example of securitization is a mortgage-backed security (MBS),
which is a type of asset-backed security that is secured by a collection of mortgages. The risk
weightings will be reduced for STC securitisations
Paper already issued with requirements applicable from 2017. Minimal impact - currently only
NCB has few securitisation positions

18. The countercyclical buffer was introduced as part of Basel III
with aim to:
• Ensure that banking sector capital requirements take
account of the macro-financial environment.
• Promote the buildup of capital buffers in good times that
can be drawn upon in periods of stress
SAMA has announced a buffer rate of 0% for 2016
18 FAQs – countercyclical capital buffer

19. TLAC holding
• These instruments will have
certain criteria for Global
Systemically Important Banks
required as part of resolution
mechanism
• Final paper will be published
by the end of this year
SAMA will apply these rules to
DSIBs in Saudi Arabia in future.
Date not announced by BCBS
yet
19

20. Domestic Systemically Important Banks (DSIBs)
There are many banks that are not significant from an international
perspective, but nevertheless could have an important impact on domestic
financial system and economy.
The BCBS proposed 12 principles for the D-SIBs and SAMA has already
issued list of DSIBs earlier this year.
20

21. • Bank exposures = Risk weightings based on external ratings and qualitative criteria.
[Previously 20% to 150%] RWA lowered for A+/A- bank to 50% to 30%
• Corporate exposures = Risk weightings based on external ratings and qualitative criteria.
[Previously 20% to 150%] BBB reduced to 75% and for SMEs 85%
• Equity and subordinated debts now range from 150% to 400% [Previously 100%]
• Retail loans = Risk weightings as either 75% or 100% for retail loans and other loans except
for transactors which is proposed at 45%. [Previously 75%]
• Residential real estate = Risk weightings based on Loan To Value (LTV) ratio ranging from
40% to 100% [Previously 35%] – SAMA looking to reduce RWA from 100% to 50%
• Commercial real estate = Risk weightings based on Loan To Value (LTV) ratio ranging from
40% to 100% [Previously 100%]
• Off balance sheet exposures = Increase in Credit Conversion Factors CCF (percentages
designed to convert the off-balance sheet items to credit equivalent assets on which risk
weightings will be applied) from 0% to 10% and 40% [Previously 0% to 100%]
• Paper to be finalised towards end of 2016
21 Standardised approach for credit risk

22. 22 Task Force on Sovereign Exposures
Current baseline regulatory treatment of
sovereign exposures – 0%
Positive risk weights for domestic central
government exposures - 0-3%
Risk-weighted treatment for other sovereign
exposures i.e. regional/subnational and local
exposure
Proposed five (5) segments for Definition.
Marginal risk weight add – ons to reflect
liquidity standards and collateral
management – with haircuts
Guidance on: (i) monitoring sovereign risk; (ii)
stress testing for sovereign risk; and (iii)
supervisory responses to sovereign risk
Pillar 3 disclosure of banks' sovereign
exposures and capital requirements by: (i)
country; (ii) currency denomination; and (iii)
accounting classification
• Home host issues
• Indicators of sovereign risks
• Treatment of HQLA
After financial crisis, GHOS has directed the Committee to look at:
(a) Analysis of the sources and channels of sovereign risk in the banking sector
(b) Evaluation of the existing regulatory framework; and
(c) Development and assessment of potential policy options

23. • New approach for market risk based on Expected Shortfall
method rather than VaR
• Expected Shortfall is normally equivalent of 97% VaR
• Although Basel 2.5 revised some rules but not in detail i.e.
not elaborating on liquidity horizons, liquidity period and tail
events
• It will align banking book and trading book classification
• Applicable from 1 Jan 2019
• SAMA has formed a working group to implement
23 Market risk

24. 24
Methods Explanation
Basic indicator
approach
15% of gross income of three year average
Standardised
approach
The Standardised Approach TSA - applying various %ages
(beta factors)
12%, 15%, 18% to various business lines using 3 years
average income
Advanced measurement approach
Operational risk
Basel II/III failed to deliver appropriate Advanced
Measurement Approach (AMA) due to inadequate
calibration resulting in AMA approach being
currently withdrawn.
24
New Standardised
Measurement
approach which is
based on gross
business income
indicator and
individual bank loss
data
The approach will be
finalised by Q1 2017
Most banks in KSA use
either Basic Indicator or
Standardised approach.

25. Reducing variation in credit risk weighted assets
• There are 2 approaches for credit risk under Pillar I framework
of Basel III i.e. Standardised Approach and the Foundation/
Advanced Approach.
• Advanced approaches takes into account internal ratings and
estimates of various other factors (PD, LGD, EAD, CCF - Credit
Conversion Factors, Maturity and Correlation factors) to
determine expected loss and unexpected loss/ risk weightings
(risk weighting range from 0% to 1250%).
• These factors are proposed to be changed based on significant
variations in risk weightings of various exposure classes i.e.
banks, corporates etc.
• Paper will be finalised by end of this year. No bank in KSA
adopts advanced approach
25

26. • Interest rate risk in the banking book (IRRBB) refers to the current/prospective risk to a
bank’s capital arising from adverse movements in interest rates.
• Changes in interest rates can affect the:
• underlying economic value of the bank’s assets and liabilities.
• bank’s earnings by increasing or decreasing its:
I. Net Interest Income (NII) and
II. Other interest rate-sensitive income and expenses
• Effective from 1 Jan 2019
• SAMA has formed a working group to implement this framework as currently IRRBB is
around 30% of total Pillar 2 requirements of the Banking Sector
26 Interest Rate Risk in the Banking Book

27. Basel IV
27
• The existing transitional implementation timeline
for Basel III is 1 Jan 2019
• Almost all the standards on credit risk, market
risk, operational risk, counterparty credit risk are
revisited by Basel
• The revised standards are in the process of
finalisation by the end of this year 2016
• These standards bring fundamental changes in
the approaches and require lot of dedication and
commitment to implement in member countries
• Therefore, by 1 Jan 2019, it is expected that all
the new standards will be applicable
• Analysts and regulators have already started
calling it as Basel IV