## cr17318

## Source details

**Canonical URL:** [cr17318](https://www.imf.org/-/media/files/publications/cr/2017/cr17318.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr17318.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr17318.pdf.json)

---

### EXECUTIVE SUMMARY — BACKGROUND
- FSAP took place during the aftermath of a major shock for the Saudi economy and financial system; repercussions were still being felt in 2015–16.
- Key macro-financial facts and policy actions:
  - Current account swung from a surplus of about 10 percent of GDP in 2014 to a deficit of 8 percent of GDP in 2015.
  - Government fiscal deficit rose from 3.4 percent in 2014 to almost 16 percent of GDP in 2015.
  - Government financing actions: a US$10 billion international syndicated loan in April 2016; US$17.5 billion in international bonds in October 2016; and US$9 billion of Islamic bonds (sukuk) in April 2017.
  - SAMA net foreign assets of around US$529 billion, or 30 months of imports at end-2016.
  - The authorities maintain a pegged exchange rate to the U.S. dollar; SAMA links its key policy interest rate to U.S. interest rates.
- Structural reform agenda:
  - Implementation of Basel III in 2013.
  - Publication of Financial Stability Reports by SAMA.
  - Introduction of deposit insurance.
  - Formation of the National Financial Stability Committee (NFSC).
  - Preparation of a draft resolution law broadly corresponding to the Financial Stability Board’s Key Attributes.
  - Government initiatives: “Vision 2030” and a five-year National Transformation Program (NTP) to reduce reliance on oil, consolidate public finances, develop the domestic capital market, and promote the non-oil private sector and SMEs.

### FINANCIAL SYSTEM STRUCTURE AND BANKS
- System size and composition (end-2016):
  - Total financial sector assets of about US$1.2 trillion (186 percent of GDP).
  - Sector composition: commercial banks 51 percent of total assets; pension funds 26 percent; five specialized (not deposit-taking) credit institutions 19 percent; investment funds 2 percent; other financial institutions (including insurance) 2 percent.
  - The 12 domestic banks represent 97 percent of banking system assets; 12 foreign banks comprise the remainder.
- Bank business model and exposures:
  - Deposits intermediate private sector funding: deposits are 73 percent of total liabilities (system overview) and deposits 76 percent in liability composition (bank metrics).
  - Asset composition (end-2016 or latest available; in percent): Household loans 19 percent; Other corporate loans 18 percent; Commercial loans 16 percent; Foreign assets 14 percent; Manufacturing loans 9 percent; Cash and Reserves 7 percent; SAMA bills 6 percent; Government 6 percent; Other assets 5 percent.
  - Liability composition (in percent): Deposits 76 percent; Equity 15 percent; Interbank 4 percent; Other 3 percent; Debt Issuance 2 percent.
  - Deposit structure (in percent): Demand, private 56 percent; Time, private 17 percent; Time, public 12 percent; FX 9 percent; Demand, public 4 percent; Other 2 percent.
  - Mortgage loans comprise about one-fourth of household lending; the remainder is consumer and credit card loans.
  - Direct exposure to the government is limited at 6 percent of assets.
  - Bank cross-border exposures represent less than 15 percent of system assets.
- Capital market size:
  - Stock market capitalization a little over 54 percent of GDP.
  - Bond market about one percent of GDP.

### RISKS, RESILIENCE, AND BANKING PERFORMANCE
- Macro-financial outlook:
  - Downside risks remain elevated; futures markets and consensus forecasts suggest oil prices will remain near current levels.
  - Barring a sharp increase in global oil prices, ongoing fiscal consolidation and reforms will likely dampen domestic non-oil growth over the medium term.
- Banking system performance during the shock:
  - NPLs increased from 1.1 percent at end-2014 to 1.4 percent in 2016:Q4.
  - Bank net income fell owing to higher provisioning costs, but banks remained profitable due to continuing high net interest margins (NIM) and relatively stable fee income.
  - Reported solvency indicators and provisions buffers remained strong during 2015-16.
- Banking sector metrics and asset quality:
  - Regulatory capital ratio reported at 19.5 percent, with little variation across banks, and the (unreported) CET1 ratio was estimated at 17.5 percent.
  - Provisions coverage of NPLs rose to 177 percent by end-2016.
  - Historical NPLs: 1.4 percent at end-2016 (baseline observed level).
- Key vulnerabilities:
  - Volatility of the oil price is the primary vulnerability.
  - Prolonged oil-price slowdown could pressure public finances, balance sheets of corporates and households, and banks' funding, asset quality, and profitability.
  - Heightened geopolitical risks or regional security dislocations could prompt deposit withdrawals and tight liquidity.
  - Long-term risk: capacity to implement the government reform agenda to reduce dependence on oil and boost non-oil growth.

### LIQUIDITY CONDITIONS, SAMA ACTIONS, AND REFORMS
- 2015–16 liquidity developments:
  - Decline in oil revenues, cuts in government spending, delayed payments to suppliers, and sharply increased domestic government borrowing contributed to tightening in banking system liquidity.
  - From late 2014, corporates, households, and government entities drew down deposits to cover cash flow needs and buy government securities financing the fiscal deficit.
  - Mid- to late-2016: bank deposits fell sharply while credit continued to expand, producing nearly two-thirds drop in banks’ excess liquidity with the central bank and a pickup in interbank interest rates as reflected by the 3-month SAIBOR.
- Authorities’ immediate measures in 2016:
  - Relaxed regulatory loan-to-deposit ratio (LDR) limit from 85 to 90 percent.
  - Transferred funds and deposits of government entities, a total of SAR 32 billion (about 1½ percent of GDP), to commercial banks in June and September 2016.
  - Extended tenor of SAMA’s repo facility from overnight to three months.
  - Issued guidance to banks for rescheduling consumer and mortgage loans after the government cut allowances to some civil servants.
  - Outcome: As the government began to pay arrears to suppliers in October 2016, liquidity conditions normalized and interest rates declined; by end-2016, bank deposits had stabilized.
- Structural change and recommended liquidity framework reforms:
  - The longstanding model—banks relying almost exclusively on domestic deposits and SAMA draining chronic excess liquidity—came under pressure in 2015–16; SAMA is re-assessing its liquidity management framework.
  - Recommended reforms:
    - Establish a framework that supports the pegged exchange rate and helps SAMA align market interest rates with its policy objectives.
    - Develop liquidity forecasting models.
    - Focus money market interventions on regular, short-term liquidity operations and move away from non-competitive ways of allocating liquidity.
    - Limit standing facilities to overnight maturity.
    - Require collateral for all lending to commercial banks.
    - Formalize an Emergency Liquidity Assistance (ELA) framework as a complement to liquidity management reforms.
  - SAMA has started development of a liquidity forecasting framework with IMF technical assistance.

### STRESS TEST FRAMEWORK, SCENARIOS, AND RESULTS
- Coverage and methodology:
  - Balance sheet data as of December 2016 for all 12 domestic banks, representing 97 percent of system assets.
  - Solvency tests use the Basel standardized approach and fully phased-in Basel III minimum capital requirements as hurdle rates.
  - Two macroeconomic scenarios:
    - Baseline: oil prices and GDP growth follow IMF’s April 2017 WEO projections.
    - Adverse: oil prices fall below WEO projections by two standard deviation forecast errors, with attendant impact on GDP and asset quality.
  - Adverse scenario severe assumption: discontinuation of rapid bad loan writeoffs; NPLs projected on a pre-writeoff basis, rising from 1.4 percent at end-2016 to 12 percent at end-2019.
  - Single-factor sensitivity analyses include zero-recovery default of each bank’s three largest (non-sovereign) borrowers and interest-rate shocks.
  - Liquidity tests: Basel III 30-day Liquidity Coverage Ratio (LCR) with augmented runoff rates and a six-month maturity-mismatch test.
- Solvency stress test results:
  - Baseline: All banks’ capital adequacy ratios (CARs) exceed minimum requirements through the projection period.
  - Adverse: Aggregate CAR declines by about 2 percentage points; 10 of 12 banks, including all six systemically important banks, still meet minimum requirements; total capital shortfall for the two non-systemic banks that do not pass is about 0.03 percent of 2016 GDP, appearing only in 2019.
  - Single-factor credit concentration: Zero-recovery default of each bank’s three largest borrowers would cause the aggregate CAR to decline by 7 percentage points, driving nine banks below minimum requirements and resulting in an aggregate capital shortfall of 1.8 percent of GDP; assuming recovery rates close to the historical average in Saudi Arabia would limit the decline in aggregate CAR to 2 percentage points and eliminate the capital shortfall.
- Liquidity stress test results:
  - At end-2016, all banks meet the standard Basel III LCR requirement and pass the maturity-mismatch test, owing to large holdings of liquid assets.
  - Two banks registered cash flow surpluses and did not run down asset holdings.
  - All banks pass a more severe LCR test with runoff rates 20 percent higher than those postulated in the Basel III formula (augmented runoff rates capped at 100 percent).

### FINANCIAL STABILITY POLICY FRAMEWORK, SUPERVISION, AND AML/CFT
- Macroprudential policy and institutional arrangements:
  - Significant progress made: NFSC for coordination; SAMA central role; Financial Stability Committee (FSC) within SAMA; Financial Stability Division (FSD); Early Warning System (EWS); annual Financial Stability Report (FSR); initiation of regular stress-testing.
  - Further work needed to close data gaps and fine-tune the macroprudential toolkit, including strengthening data collection and integrating real estate price indices into EWS.
- Banking supervision and regulation — findings and recommended actions:
  - Legal framework founded on the 1957 Charter and 1966 Banking Control Law (BCL) described as adequate but outdated and partly contradictory; some provisions limit de jure independence of SAMA.
  - Recommendations (selected):
    - Modernize and eliminate inconsistencies in foundational legislation governing banking supervision to align fully with international standards.
    - Consolidate and publish all SAMA circulars.
    - Develop and publish bank licensing criteria and a licensing manual; publish guiding principles for bank licensing.
    - Provide guidance for prudential reporting of Islamic products and map Islamic-product risk profiles to the Basel framework.
    - Strengthen the supervisory approach (refine risk ratings, align supervisory planning with banks’ risk profiles, and enhance loan examination documentation).
    - Strengthen oversight and classification of rescheduled and refinanced loans; adopt draft regulation on loan classification and require prudential returns on rescheduled/refinanced loans.
    - Improve cross-border cooperation arrangements; enter into MoUs with foreign regulators and participate in supervisory colleges.
- AML/CFT:
  - Legal framework broadly aligned with the FATF standard; progress on deficiencies identified in 2010.
  - Saudi Arabia scheduled to be assessed against the FATF standard in 2017.
  - Recommendations: continue refining legal framework, complete national risk assessment, improve data collection (money laundering convictions, assets confiscated), ensure effective CDD and identification of beneficial owners, and continue financial inclusion efforts including simplified CDD for lower-income individuals.

### FINANCIAL SAFETY NETS AND RESOLUTION
- Draft Resolution Law (DRL):
  - DRL is a major step toward a modern resolution framework broadly in line with the FSB’s Key Attributes.
  - Areas for improvement:
    - Extend the draft law to all banks in the system (not only systemic banks).
    - Expand and specify early intervention arrangements and arrangements for funding in resolution.
    - Introduce a formal ELA framework.
    - Over the medium term, the Deposit Protection Fund (DPF) could play an enhanced role in bank resolution.
- Deposit Protection Fund (DPF):
  - Operational since January 2016 with full banking sector membership; coverage up to SAR 200,000 per depositor per bank (about USD 50,000), covering about 97 percent of the number of deposits.
  - Funding: quarterly contributions from member banks to build the fund to SAMA’s target size of three percent of the total amount of insured deposits over the next ten years; DPF can obtain loans and grants but has no explicit back-up financing arrangements.
  - Recommendations:
    - Establish a timeframe for DPF deposit payouts and ensure a back-up funding line. [MoF; SAMA] (ST)
    - Strengthen funding and consider an explicit backup credit line from the government or SAMA (with a government guarantee).
    - Consider charging banks premia in accordance with their risk profile and, once established, using the DPF to facilitate deposit transfers in resolution.
- Emergency Liquidity Assistance (ELA):
  - No formal ELA framework exists; SAMA has provided liquidity as needed and banks expect such support.
  - Recommendation: formalize ELA arrangements in revamp of liquidity management framework; ELA access should be temporary, to solvent banks, collateralized, and at a penalty rate when other liquidity sources are exhausted; consider creating a collateral registry defining a broad range of assets for ELA.
- Crisis coordination:
  - Need for a high-level inter-agency coordinating body for system-wide contingency planning; NFSC is a natural platform.

### DEVELOPMENTAL ISSUES AND MARKET DEEPENING
- SME finance and development:
  - SMEs estimated to account for about 90 percent of registered businesses and provide 25 percent of total employment, but account for only about two percent of bank lending.
  - Authorities’ actions:
    - Created a Small and Medium Enterprise Authority (SMEA).
    - Established a “fund of funds" with initial capital of SAR 4 billion to provide start up and equity financing.
    - Kafalah government scheme has issued credit guarantees of SAR 26.5 billion on banks’ loans to SMEs.
  - Recommended next steps:
    - Develop a comprehensive strategy for SMEs; strengthen data collection; increase banks’ product and service offerings; expand non-bank and capital markets financing options.
- Specialized Credit Institutions (SCIs):
  - Financial condition and performance of SCIs are not very transparent; three of the five SCIs (REDF, ADF, and SDB) reportedly face significant cost pressures.
  - Recommendations: tighten oversight, adopt IFRS accounting, ensure regular reporting, build capacity within SCIs.
- Legal and market infrastructure reforms:
  - Recommended: unified legal framework for secured transactions; centralized registry for collateral; expedited out-of-court insolvency procedures; national debt management law; government debt management strategy; strengthen cash and liability management operations; streamline domestic issuance of corporate debt; develop collateral framework and standard repo contract.
- Consumer protection:
  - Consumer Protection Department (CPD) established within SAMA.
  - Recommended: strengthen disclosure, prohibit unfair contractual terms, transfer supervision of consumer protection to CPD, finalize national financial literacy strategy initiated in 2013.

### SELECTED MACROECONOMIC INDICATORS (HIGHLIGHTS FROM TABLE 2)
- Crude oil production (million of barrels per day) 1/: 9.6 9.7 10.2 10.5 10.0 10.1 (2013–2018)
- Average oil export price (U.S. dollars per barrel) 2/: 105.4 95.7 50.4 41.5 50.3 50.4 (2013–2018)
- Nominal GDP (SAR billions): 2,800 2,836 2,454 2,424 2,596 2,713 (2013–2018)
- Nominal GDP (US$ billions): 747 756 654 646 692 723 (2013–2018)
- Real GDP (percent change): 2.7 3.7 4.1 1.7 0.1 1.1 (2013–2018)
  - Oil: -1.6 2.1 5.3 3.8 -1.9 0.9
  - Non-oil: 6.4 4.9 3.2 0.2 1.7 1.3
- Consumer price index (avg): 3.5 2.7 2.2 3.5 1.7 5.0 (2013–2018)
- Current account balance (percent of GDP): 18.1 9.8 -8.7 -3.9 0.2 0.5 (2013–2018)
- SAMA's total net foreign assets (US$ billions): 716.7 724.3 608.9 528.6 472.6 442.0 (2013–2018)
- In months of imports of goods and services 3/: 33.2 35.1 37.5 31.7 28.2 26.1 (2013–2018)
- Average exchange rate Saudi riyal/U.S. dollar 4/: 3.75 3.75 3.75 3.75 3.75 3.75 (2013–2018)

### KEY RECOMMENDATIONS (SELECTED)
- Banking oversight:
  - Update the Banking Charter and Banking Control Law to delete contradictory and redundant provisions and revoke Article 21. [Government; SAMA] MT
  - Codify and publish all bank legislative circulars, and eliminate those superseded. [SAMA] ST
  - Strengthen the supervisory approach by refining determination of banks’ risk and control ratings, aligning supervisory planning with banks’ risk profiles, and enhancing loan examination documentation. [SAMA] ST
  - Develop a licensing manual for banks and publish guiding principles for bank licensing. [SAMA] ST
  - Provide guidance to banks on mapping the risk profiles of Islamic products to the Basel framework. [SAMA] ST
  - Adopt the draft regulation on loan classification and ensure regular, comprehensive reporting on rescheduled and restructured loans. [SAMA] ST
  - Require banks to establish formal policies for loan rescheduling, refinancing, and restructuring and to submit prudential returns on such loans. [SAMA] ST
  - Strengthen cross-border cooperation by entering into MoUs with foreign regulators. [SAMA] ST
- Liquidity management:
  - Establish a liquidity forecasting framework to guide money market operations. [SAMA] MT
  - Focus main operations to be weekly and conducted at a fixed maturity; standing facilities limited to overnight; phase out non-competitive liquidity allocation; require collateral for central bank lending.
- Financial safety nets:
  - Adopt and implement the Draft Resolution Law (DRL). [Government; SAMA] ST
  - Establish an Emergency Liquidity Assistance (ELA) framework. [SAMA] ST
  - Establish a timeframe for DPF deposit payouts and ensure a back-up funding line. [MoF; SAMA] ST
- Macroprudential policy and data:
  - Broaden the definition of debt service to income in regulations to include all types of debt and income, as currently under consideration by SAMA. [SAMA] ST
  - Strengthen data collection and use for the household, corporate, and real estate sectors. [Government; SAMA] MT

*Source: IMF Financial System Stability Assessment (FSAP) — Executive Summary and chapter excerpts (cr17318).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### BACKGROUND
- The FSAP took place during the aftermath of a major shock for the Saudi economy and financial system; repercussions were still being felt in 2015–16.  
- Key macro-financial facts and policy actions:
  - Current account swung from a surplus of about 10 percent of GDP in 2014 to a deficit of 8 percent of GDP in 2015.
  - Government fiscal deficit rose from 3.4 percent in 2014 to almost 16 percent of GDP in 2015.
  - Government financing actions: a US$10 billion international syndicated loan in April 2016; US$17.5 billion in international bonds in October 2016; and US$9 billion of Islamic bonds (sukuk) in April 2017.
  - SAMA net foreign assets of around US$529 billion, or 30 months of imports at end-2016.
  - The authorities maintain a pegged exchange rate to the U.S. dollar; SAMA links its key policy interest rate to U.S. interest rates.
- Structural reform agenda:
  - Implementation of Basel III in 2013.
  - Publication of Financial Stability Reports by SAMA.
  - Introduction of deposit insurance.
  - Formation of the National Financial Stability Committee (NFSC).
  - Preparation of a draft resolution law broadly corresponding to the Financial Stability Board’s Key Attributes.
  - Government initiatives: “Vision 2030” and a five-year National Transformation Program (NTP) to reduce reliance on oil, consolidate public finances, develop the domestic capital market, and promote the non-oil private sector and SMEs.

### FINANCIAL SYSTEM STRUCTURE AND BANKS
- System size and composition:
  - Total financial sector assets of about US$1.2 trillion (186 percent of GDP) at end-2016.
  - Sector composition (end-2016): commercial banks 51 percent of total assets; pension funds 26 percent; five specialized (not deposit-taking) credit institutions 19 percent; investment funds 2 percent; other financial institutions (including insurance) 2 percent.
  - The 12 domestic banks represent 97 percent of banking system assets; 12 foreign banks comprise the remainder.
- Bank business model and exposures:
  - Banks intermediate private sector deposits (73 percent of total liabilities).
  - Assets: lending to corporates 43 percent of total assets; lending to households 19 percent of total assets.
  - Mortgage loans comprise about one-fourth of household lending; the remainder is consumer and credit card loans.
  - Direct exposure to the government is limited at 6 percent of assets.
  - Bank cross-border exposures represent less than 15 percent of system assets.
- Capital market size:
  - Stock market capitalization is a little over 54 percent of GDP.
  - Bond market about one percent of GDP.

### RISKS AND RESILIENCE
- Macro-financial context and outlook:
  - Downside risks remain elevated; futures markets and consensus forecasts suggest oil prices will remain near current levels.
  - Barring a sharp increase in global oil prices, ongoing fiscal consolidation and reforms will likely dampen domestic non-oil growth over the medium term.
- Banking system performance during the shock:
  - NPLs increased from 1.1 percent at end-2014 to 1.4 percent in 2016:Q4.
  - Bank net income fell owing to higher provisioning costs, but banks remained profitable due to continuing high net interest margins (NIM) and relatively stable fee income.
  - Reported solvency indicators and provisions buffers remained strong during 2015-16.
- Stress test findings:
  - Stress tests show that most banks, including all systemically important banks, would be able to continue operating and meeting regulatory capital requirements under additional severe economic shocks characterized by oil prices falling substantially below current levels.
  - All banks would be able to cope with additional adverse liquidity shocks according to the stress tests presented.

### LIQUIDITY CONDITIONS AND SAMA'S ROLE
- 2015–16 developments:
  - Decline in oil revenues, cuts in government spending, delayed payments to suppliers, and sharply increased domestic government borrowing contributed to tightening in banking system liquidity.
  - SAMA injected liquidity and relaxed the prudential ratio on banks’ lending to deposits; by end-2016, as government arrears were being repaid, banking system conditions began to normalize.
- Structural change in liquidity dynamics:
  - The model in place for over a decade—banks relying almost exclusively on domestic deposits for funding and SAMA draining chronic excess liquidity—came under pressure in 2015–16.
  - SAMA is re-assessing its liquidity management framework.
- Recommended liquidity framework reforms:
  - Establish a framework that supports the pegged exchange rate and helps SAMA align market interest rates with its policy objectives.
  - Develop liquidity forecasting models.
  - Focus money market interventions on regular, short-term liquidity operations and move away from non-competitive ways of allocating liquidity.
  - Limit standing facilities to overnight maturity.
  - Require collateral for all lending to commercial banks.
  - Formalize an Emergency Liquidity Assistance (ELA) framework as a complement to liquidity management reforms.

### FINANCIAL STABILITY POLICY FRAMEWORK
- Macroprudential policy:
  - Significant progress made in establishing a modern macroprudential policy framework with the NFSC as a coordinating body and SAMA having a central role.
  - Further work needed to close data gaps and fine-tune the macroprudential toolkit.
- Banking supervision and regulation:
  - SAMA has taken major steps to enhance prudential oversight consistent with best practice.
  - Further recommended steps:
    - Modernize and eliminate inconsistencies in foundational legislation governing banking supervision to align fully with international standards.
    - Consolidate and publish all SAMA circulars.
    - Develop and publish bank licensing criteria.
    - Provide guidance for prudential reporting of Islamic products.
    - Strengthen the supervisory approach (refine risk ratings, align supervisory planning with banks’ risk profiles, and enhance loan examination documentation).
    - Strengthen oversight and classification of rescheduled and refinanced loans.
    - Improve cross-border cooperation arrangements.

### FINANCIAL SAFETY NETS AND RESOLUTION
- Draft Resolution Law (DRL):
  - The DRL is a major step toward introducing a modern resolution framework broadly in line with the FSB’s Key Attributes.
  - Areas for improvement:
    - Extend the draft law to all banks in the system.
    - Expand and specify early intervention arrangements and arrangements for funding in resolution.
    - Introduce a formal ELA framework.
    - Over the medium term, the Deposit Protection Fund (DPF) could play an enhanced role in bank resolution.
- Deposit Protection Fund:
  - Establish a timeframe for DPF deposit payouts and ensure a back-up funding line. [MoF; SAMA] (ST)

### DEVELOPMENTAL ISSUES
- Priorities to enhance financial intermediation and support Vision 2030 objectives (World Bank team recommendations):
  - Improve access to finance for the Small and Medium-size Enterprise (SME) sector through a comprehensive growth strategy by the Small and Medium-Size Enterprise Authority (SMEA); expand data collection; widen financing options from banks and non-banks.
  - Strengthen governance and performance of specialized credit institutions (SCIs) through tighter oversight, the adoption of International Financial Reporting Standards (IFRS) accounting, and regular reporting.
  - Further develop domestic capital markets via a modern legal framework for debt management; streamline public issuance and listing of bonds and Sukuk; strengthen the collateral framework for secured transactions; improve creditor and debtor rights and dispute resolution; ensure coordination of housing finance initiatives.

### KEY RECOMMENDATIONS (SELECTED FROM TABLE 1)
- Banking oversight:
  - Update the Banking Charter and Banking Control Law to delete contradictory and redundant provisions and revoke Article 21. [Government; SAMA] MT
  - Codify and publish all bank legislative circulars, and eliminate those superseded. [SAMA] ST
  - Strengthen the supervisory approach by refining determination of banks’ risk and control ratings, aligning supervisory planning with banks’ risk profiles, and enhancing loan examination documentation. [SAMA] ST
  - Develop a licensing manual for banks and publish guiding principles for bank licensing. [SAMA] ST
  - Provide guidance to banks on mapping the risk profiles of Islamic products to the Basel framework. [SAMA] ST
  - Adopt the draft regulation on loan classification and ensure regular, comprehensive reporting on rescheduled and restructured loans. [SAMA] ST
  - Require banks to establish formal policies for loan rescheduling, refinancing, and restructuring and to submit prudential returns on such loans. [SAMA] ST
  - Strengthen cross-border cooperation by entering into MoUs with foreign regulators. [SAMA] ST
- Liquidity management:
  - Establish a liquidity forecasting framework to guide money market operations. [SAMA] MT
- Financial safety nets:
  - Adopt and implement the Draft Resolution Law (DRL). [Government; SAMA] ST
  - Establish an Emergency Liquidity Assistance (ELA) framework. [SAMA] ST
  - Establish a timeframe for DPF deposit payouts and ensure a back-up funding line. [MoF; SAMA] ST
- Macroprudential policy and data:
  - Broaden the definition of debt service to income in regulations to include all types of debt and income, as currently under consideration by SAMA. [SAMA] ST
  - Strengthen data collection and use for the household, corporate, and real estate sectors. [Government; SAMA] MT

*Source: IMF Financial System Stability Assessment (FSAP) — Executive Summary (cr17318).*

### 19.5 percent, with little variation across banks, and the (unreported) CET1 ratio was

### cr17318 - 19.5 percent, with little variation across banks, and the (unreported) CET1 ratio was

### Banking sector metrics and asset quality
- Regulatory capital ratio reported at 19.5 percent, with little variation across banks, and the (unreported) CET1 ratio was estimated at 17.5 percent (Table 4).
- Provisions coverage of NPLs rose to 177 percent by end-2016.
- Historical NPLs: 1.4 percent at end-2016 (baseline observed level).
- Asset composition highlights (end-2016 or latest available; in percent):
  - Household loans: 19 percent
  - Other corporate loans: 18 percent
  - Commercial loans: 16 percent
  - Foreign assets: 14 percent
  - Manufacturing loans: 9 percent
  - Cash and Reserves: 7 percent
  - SAMA bills: 6 percent
  - Government: 6 percent
  - Other assets: 5 percent
- Liability composition (in percent):
  - Deposits: 76 percent
  - Equity: 15 percent
  - Interbank: 4 percent
  - Other: 3 percent
  - Debt Issuance: 2 percent
- Deposit structure (in percent):
  - Demand, private: 56 percent
  - Time, private: 17 percent
  - Time, public: 12 percent
  - FX: 9 percent
  - Demand, public: 4 percent
  - Other: 2 percent

### Funding, liquidity developments, and indicators
- From late 2014, corporates, households, and government entities drew down deposits to cover cash flow needs and buy government securities financing the fiscal deficit.
- Mid- to late-2016: bank deposits fell sharply while credit continued to expand.
- Consequences:
  - Nearly two-thirds drop in banks’ excess liquidity with the central bank.
  - Increase in banks’ loan-to-deposit ratios.
  - Pickup in interbank interest rates as reflected by the 3-month SAIBOR.
- Banks’ holdings of government bonds and trends in liquidity are documented across Figures 2–5 (end-2016 or latest available).

### Authorities’ immediate measures to alleviate banking pressures
- SAMA liquidity management tools: repos, reverse repos, and SAMA bills.
- Measures taken in 2016:
  - Relaxed regulatory loan-to-deposit ratio (LDR) limit from 85 to 90 percent.
  - Transferred funds and deposits of government entities, a total of SAR 32 billion (about 1½ percent of GDP), to commercial banks in June and September 2016.
  - Extended tenor of SAMA’s repo facility from overnight to three months.
  - Issued guidance to banks for rescheduling consumer and mortgage loans after the government cut allowances to some civil servants.
- Outcome:
  - As the government began to pay arrears to suppliers in October 2016, liquidity conditions normalized and interest rates declined.
  - By end-2016, bank deposits had stabilized.

### Financial sector reforms and supervision
- Post-2011 FSAP reforms implemented:
  - Basel III framework for capital and liquidity.
  - Strengthened stress testing framework (supported by IMF technical assistance).
  - Implemented an Early Warning System.
  - Set limits on banks’ large exposures.
  - Introduced a payment system law.
  - Created a high-level Financial Stability Committee in SAMA for macroprudential analysis and support to the National Financial Stability Committee.
- 2015: gradual opening of the stock market to foreign investment by allowing large financial institutions to buy non-controlling shares in listed Saudi companies.
- Islamic banking: Islamic products represent about half of banking system assets; SAMA applies the same Basel prudential standards to all banks, not distinguishing by institution type.

### Risks and resilience: overview
- Key vulnerabilities:
  - Volatility of the oil price is the primary vulnerability to the Saudi economy and financial sector.
  - Prolonged oil-price slowdown could pressure public finances, balance sheets of corporates and households, and banks' funding, asset quality, and profitability.
  - Heightened geopolitical risks or regional security dislocations could prompt deposit withdrawals and tight liquidity, as in the 1990 Gulf War.
  - Long-term risk: capacity to implement the government reform agenda to reduce dependence on oil and boost non-oil growth.

### Stress testing framework and scenarios
- Coverage: balance sheet data as of December 2016 for all 12 domestic banks, representing 97 percent of system assets.
- Solvency tests:
  - Based on Basel standardized approach and fully phased-in Basel III minimum capital requirements as hurdle rates.
  - Two macroeconomic scenarios:
    - Baseline: oil prices and GDP growth follow IMF’s April 2017 WEO projections.
    - Adverse: oil prices fall below WEO projections by two standard deviation forecast errors, with attendant impact on GDP and asset quality.
  - Adverse scenario further severe assumption: discontinuation of rapid bad loan writeoffs; NPLs projected on a pre-writeoff basis, rising from 1.4 percent at end-2016 to 12 percent at end-2019.
- Single-factor sensitivity analyses:
  - Credit concentration: default of each bank’s three largest (non-sovereign) borrowers with zero recovery.
  - Interest-rate shocks.
  - No distinction drawn between hybrid and exclusively Islamic banks in tests.
- Liquidity tests:
  - Basel III 30-day Liquidity Coverage Ratio (LCR) with augmented runoff rates.
  - Six-month maturity-mismatch test to identify funding gaps beyond the LCR horizon.

### Stress test results — solvency
- Baseline scenario:
  - All banks’ capital adequacy ratios (CARs) exceed minimum requirements through the projection period.
- Adverse scenario:
  - Aggregate CAR declines by about 2 percentage points.
  - 10 of 12 banks, including all six systemically important banks, still meet minimum requirements.
  - Total capital shortfall for the two non-systemic banks that do not pass is about 0.03 percent of 2016 GDP, appearing only in 2019.
- Single-factor credit concentration sensitivity:
  - Zero-recovery default of each bank’s three largest borrowers would cause the aggregate CAR to decline by 7 percentage points, driving nine banks below minimum requirements and resulting in an aggregate capital shortfall of 1.8 percent of GDP.
  - Assuming recovery rates close to the historical average in Saudi Arabia would limit the decline in aggregate CAR to 2 percentage points and eliminate the capital shortfall.

### Stress test results — liquidity
- At end-2016, all banks meet the standard Basel III LCR requirement and pass the maturity-mismatch test, owing to large holdings of liquid assets.
- Two banks registered cash flow surpluses and did not run down asset holdings.
- All banks pass a more severe LCR liquidity test with runoff rates 20 percent higher than those postulated in the Basel III formula (augmented runoff rates capped at 100 percent).

### Systemic liquidity and money-market functioning
- Efficient money market functioning is crucial for systemic resilience: allocation of liquidity, market information, market-sensitive yield curve, and monetary policy transmission.
- Weaknesses revealed in 2015–16:
  - SAMA historically geared to absorb surplus liquidity; market-based instruments for injecting or reallocating liquidity not fully developed.
  - Underdeveloped interbank market: interbank liabilities are less than 4 percent of banks’ total liabilities.
  - Interbank rates do not fully reflect actual liquidity conditions.
  - Reliance on domestic deposits for funding; limited foreign deposits and wholesale funding; underdeveloped domestic capital and secondary markets.
  - Result: higher volatility in interbank market liquidity during 2015–16.
- SAMA’s enhancements to liquidity management (ongoing):
  - Objective: limit interest rate volatility and support the exchange rate peg by improving stability of money market interest rates.
  - Two key priorities:
    - A toolkit for market-based interventions focused on a regular, fixed maturity:
      - Main operations should be weekly and conducted at a fixed maturity to stabilize money market interest rates.
      - Short-term fine-tuning and medium-term structural operations conducted as needed.
      - Standing facilities should be limited to overnight maturities once the new framework is in place.
      - Phase out non-competitive liquidity allocation (e.g., deposit placements); allocate resources via open tender against collateral.
    - A liquidity forecasting framework:
      - Formal liquidity forecasting would play a critical role in supporting SAMA operations.
      - Interim: continue monitoring a range of indicators while forecasting capacity is developed.
      - Note: SAMA has started development of a liquidity forecasting framework with IMF technical assistance.

### Financial stability policy framework and macroprudential policy
- Ongoing reforms are modernizing the institutional architecture for macroprudential policy and microprudential oversight, aligned with international best practice and Vision 2030 objectives.
- Macroprudential tools historically applied by SAMA (without a formal framework) include:
  - Limits on debt service-to-income (DSTI) and loan-to-value (LTV) ratios for borrowers.
  - Requirements on loan-to-deposit ratios (LDR).
  - Limits on counterparty exposure.
  - Capital buffers and dynamic provisions.
  - Counter-cyclical reserves for banks.
- Past reviews (2011 FSAP and 2015 FSB peer review) highlighted the need for a more formalized and transparent institutional and operational macroprudential framework.

*International Monetary Fund staff summary based on the cited chapter.*

### 16.      Since the last FSAP, the authorities have made significant progress in this area. Key

### cr17318 - 16.      Since the last FSAP, the authorities have made significant progress in this area. Key

### Financial stability framework — achievements and next steps
- Key achievements since the last FSAP:
  - Making financial stability an explicit objective and a mandate for SAMA in a SAMA strategy document.
  - Formation of the NFSC comprised of SAMA, CMA and the Ministry of Finance (MoF) to coordinate macroprudential policy decisions.
  - Creation of a Financial Stability Committee (FSC) within SAMA and a supporting Financial Stability Division (FSD) for monitoring systemic risk.
  - Development of an Early Warning System (EWS).
  - Publication of an annual Financial Stability Report (FSR) by SAMA.
  - Initiation of regular stress-testing of banks’ solvency and liquidity.
- Recommended enhancements:
  - Strengthen collection and utilization of data on the corporate, household, and real estate sectors.
    - Enhance collection of statistics—such as the real estate price indices launched in January 2017—and analysis of household and corporate balance sheets and earnings to identify debt service vulnerabilities and aid calibration of measures.
    - Integrate such data into the existing EWS when available.
  - Continue to review definitions of existing measures.
    - Debt service-to-income limits for individual borrowers should include total debt service for credit obtained from different financial institutions and for different types of loans (consumer, mortgage etc.), in line with the debt burden ratio currently under consideration by SAMA.

### Banking supervision — scope, findings, and recommendations
- Focus and methodology:
  - FSAP focused on prudential oversight of banks using the 2012 Basel Core Principles (BCP) as a reference, with emphasis on responsibilities and independence of SAMA; bank licensing; supervisory approach; corrective action; credit risk; consolidated supervision; home/host relationships; corporate governance; risk management; capital; and disclosure.
- Islamic banking considerations:
  - Saudi Arabia operates a mixed system: Islamic banks (exclusively Islamic products) and “hybrid” banks (both Islamic and conventional products).
  - SAMA supervises all banks under the Basel framework with the same reporting requirements and standards.
  - SAMA is working with international partners on a more refined analytical framework, including stress testing tools, for Islamic products and should consider applying the Core Principles for Islamic Finance Regulation by the IFSB once ready.
- Legal framework and transparency issues:
  - The supervisory regime is founded on the 1957 Charter of the Saudi Arabian Monetary Agency ("Charter") and the 1966 Banking Control Law (BCL); the framework is described as adequate but outdated and partly contradictory, with some provisions limiting de jure independence of SAMA.
  - Specific legal inconsistencies cited:
    - Article 3 (d) of the Charter vs Article 17 of the BCL on information disclosure.
    - Some BCL provisions require SAMA to obtain permission from the Minister of Finance and National Economy for supervisory functions; these provisions have been made redundant by later legislation.
    - BCL allows, in exceptional circumstances and with prior Council of Ministers approval, ministerial exemptions from regulation for banks.
    - No specific legal protection or reimbursement provision for supervisor or staff defending actions taken in conduct of duties.
  - Recommendation: update the legal framework to better align with the BCP.
- Rules, licensing, and ownership transparency:
  - SAMA has issued over 1,500 Circulars; consolidation and public availability of Circulars (including notation of superseded ones) is advised.
  - SAMA is preparing more comprehensive bank licensing criteria; recommendation to publish guiding principles at minimum and reconsider the weight of the “value added” criterion; establish a formal procedure for identifying ultimate beneficial owners of banks.
- Loan classification and data:
  - SAMA prepared a draft regulation to prevent banks from basing loan classifications on collateral value or using upgrades as exceptions; implementation urged as soon as possible.
  - SAMA is preparing a regulation requiring banks to submit prudential returns on rescheduled/refinanced/restructured loans to close a substantial data gap.
  - Recommendation: require banks to classify loans restructured because of borrower financial difficulties as substandard or doubtful (in line with international best practice).
- Risk-based supervision improvements:
  - SAMA should refine internal risk ratings by incorporating qualitative elements and use its risk indicator in the EWS.
  - Link on-site inspections, risk profile, and supervisory planning more closely; risk profile should be updated after every on-site inspection (or at least quarterly) rather than only annually.
  - Enhance loan examination documentation to establish an audit trail.
- Islamic product risk mapping:
  - SAMA should issue guidance to banks on mapping the risk profile of Islamic products to the Basel framework to determine prudential reporting and integrate Islamic-product-specific risks into supervision.
- Cross-border cooperation:
  - SAMA participates in only a few supervisory colleges and has no MoUs with foreign regulators.
  - Recommendation: establish greater contact with home supervisors of foreign banks with significant ownership stakes in locally incorporated banks, consider MoUs where necessary, and plan on-site inspections of material foreign operations of locally incorporated banks.
- AML/CFT:
  - Saudi Arabia’s legal framework is broadly aligned with the FATF standard; progress made on deficiencies identified in 2010, including criminalization of terrorist financing, CDD requirements, and AML/CFT supervisory guidance and tools.
  - Saudi Arabia scheduled to be assessed against the FATF standard in 2017.
  - Recommendations to ensure effectiveness:
    - Continue refining the legal framework to meet the revised FATF standard.
    - Complete the national risk assessment.
    - Improve data collection, particularly money laundering convictions or assets confiscated.
    - Ensure financial institutions effectively implement CDD, especially for politically exposed persons and identification of beneficial owners.
    - Continue financial inclusion efforts, including permitting simplified CDD for individuals with lower income.

### Financial safety nets — reforms, gaps, and recommendations
- Recent steps taken:
  - Draft resolution law (DRL) for systemic banks undergoing legislative approval.
  - Commercial bank-funded Deposit Protection Fund (DPF) covering up to SAR 200,000 in deposits per individual household.
  - Establishment of the NFSC to potentially coordinate SAMA and other government agencies in crisis prevention and management.
- Assessment approach:
  - Many reforms were recent or in train at the time of the FSAP; implementation track record was insufficient for assessment, so focus was on current state and unfinished agenda.
- Resolution framework observations:
  - SAMA acts as the de facto resolution authority with broad early intervention powers; the BCL-based framework has not been fully tested (last bank failure over 30 years ago).
  - DRL generally consistent with FSB Key Attributes (KA) and provides SAMA with powers including: establishing a bridge bank; conducting purchase-and-assumption transactions; bailing-in existing debt; transferring problem assets to an asset manager; selling other assets.
  - DRL weaknesses and recommended enhancements:
    - DRL should apply to the entire banking sector, not just systemic banks.
    - To be fully KA-compliant, DRL should inter alia:
      - Spell out a creditor hierarchy to allow clear allocation of losses in resolution.
      - Clarify role of the temporary administrator.
      - Specify triggers and mechanisms for each stage of bank distress from early intervention to resolution to liquidation.
      - Cover gone concern (insolvency) tools to allow banks to use a specific rather than the general insolvency law under consideration.
- Deposit Protection Fund (DPF) details and recommendations:
  - Operational since January 2016 with full banking sector membership; operates on a simple pay-box model.
  - Coverage: household and corporate deposits up to SAR 200,000 (about USD 50,000) per depositor per bank, which is currently about 97 percent of the number of deposits.
  - Deposits in foreign currency and those held in branches of foreign banks are covered; deposits of branches of Saudi banks abroad are not covered.
  - Funding: quarterly contributions from member banks, calculated to build the fund gradually to SAMA’s target size of three percent of the total amount of insured deposits over the next ten years. The DPF can obtain loans and grants but has no explicit back-up financing arrangements.
  - Recommendations:
    - Strengthen funding of the DPF and consider giving it a more active role in bank resolution.
    - Establish an explicit backup credit line from the government or SAMA (with a government guarantee) to complement the build-up period.
    - Consider charging banks premia in accordance with their risk profile.
    - Once well established, consider using the DPF to facilitate deposit transfers from a failing bank to lower resolution costs, rather than simply paying out deposits.
- Crisis coordination and contingency planning:
  - Need for a high-level inter-agency coordinating body with responsibility to assess broader financial sector risks and mandate for system-wide contingency planning.
  - The NFSC is a natural platform for systemic crisis preparedness and management and for coordinating interventions and information-sharing; alternatively, a separate high-level crisis preparedness and management committee could be considered.
  - Such a body would discuss crisis management policies including provision of fiscal resources and government guarantees for solvency support of systemic banks.
- Cross-border resolution coordination:
  - SAMA has no formal agreements with foreign resolution authorities; monitors and regulates branches of foreign banks, holding them to same regulatory requirements as domestic banks since their deposits are covered by the DPF.
  - DRL provides SAMA formal resolution powers over foreign branches.
  - Recommendations:
    - Enter into MoUs with foreign resolution authorities and, where necessary, supervisors and other relevant authorities to establish clear understanding of rights and obligations.
    - Prepare a guidance note for handling potential failures of foreign banks in the medium term.
- Emergency Liquidity Assistance (ELA):
  - No formal ELA framework exists; SAMA has provided liquidity as needed and banks expect such support.
  - Recommendation: formalize ELA arrangements in revamp of liquidity management framework.
    - ELA access should be temporary, to solvent banks, collateralized, and at a penalty rate when other liquidity sources are exhausted.
    - Consider creating a collateral registry defining a broad range of assets for ELA.

### Developmental issues — SME finance focus
- Context and challenges:
  - SME finance is a key developmental focus consistent with “Vision 2030” and the NTP.
  - SMEs estimated to account for about 90 percent of registered businesses and provide 25 percent of total employment, but account for only about two percent of bank lending.
  - SMEs face limited access to financing due to limited data on financial condition and shortage of collateral.
  - SMEs are highly dependent on banks and need additional services including cash management, payments, insurance, and management expertise.
  - Banks expect SAMA to provide uncollateralized liquidity.

*Source: IMF FSAP chapter text provided.*

### 36.      While the authorities have taken several steps to foster SME development and expand

### cr17318 - 36.      While the authorities have taken several steps to foster SME development and expand

### SME development and financing
- Authorities’ actions:
  - Created a Small and Medium Enterprise Authority (SMEA).
  - Established a “fund of funds" with initial capital of SAR 4 billion to provide start up and equity financing for new firms.
  - Kafalah government scheme has issued credit guarantees of SAR 26.5 billion on banks’ loans to SMEs.
- Recommended next steps for SMEA:
  - Develop a comprehensive strategy for SMEs.
  - Strengthen data collection on the sector.
  - Increase banks’ product and service offerings for SMEs.
  - Expand non-bank and capital markets financing options.

### Government-owned Specialized Credit Institutions (SCIs)
- Observations:
  - Financial condition and performance of SCIs are not very transparent.
  - Three of the five SCIs (REDF, ADF, and SDB) reportedly face significant cost pressures.
- Recommendations:
  - Tighten oversight over the SCIs.
  - Adopt IFRS accounting.
  - Ensure regular reporting on results achieved.
  - Build capacity within SCIs.

### Legal framework for creditor and debtor rights
- Current achievements noted:
  - Passage of laws relating to liquidation of companies, judicial enforcement, arbitration.
  - Ongoing work on establishing a specialized commercial court.
- Gaps and recommended reforms:
  - Create a unified legal framework for secured transactions covering fixed (real estate) and movable assets.
  - Establish a centralized registry for collateral.
  - Establish mechanisms for expedited out-of-court insolvency procedures.

### Consumer protection in financial services
- Institutional development:
  - A Consumer Protection Department (CPD) was recently established within SAMA to focus on resolution of financial consumer complaints, development of regulation on market conduct and financial inclusion.
- Recommended actions:
  - Strengthen disclosure of information to potential consumers.
  - Apply a general prohibition against unfair contractual terms in consumer agreements.
  - Ensure supervision of compliance with consumer protection laws is transferred to the CPD from SAMA’s control departments for banking and finance companies.
  - Finalize a national financial literacy strategy initiated by the government in 2013.

### Public and private debt management framework
- Recommended actions:
  - Adopt a national debt management law to strengthen the operational mandate and institutional framework of the government’s debt management office.
  - Define a government debt management strategy to provide clarity to the market and reduce medium-term costs of issuance.
  - Strengthen cash and liability management operations.
  - Streamline the process for domestic issuance of corporate debt.
  - Develop a collateral framework for secured interbank transactions, including a standard repo contract and related accounting regulation.
  - Seek to develop a diversified investor base.

### Selected economic indicators (highlights from Table 2)
- Crude oil production (million of barrels per day) 1/: 9.6 9.7 10.2 10.5 10.0 10.1 (2013–2018)
- Average oil export price (U.S. dollars per barrel) 2/: 105.4 95.7 50.4 41.5 50.3 50.4 (2013–2018)
- Nominal GDP (SAR billions): 2,800 2,836 2,454 2,424 2,596 2,713 (2013–2018)
- Nominal GDP (US$ billions): 747 756 654 646 692 723 (2013–2018)
- Nominal non-oil GDP (SAR billions): 1,488 1,615 1,768 1,797 1,859 1,966 (2013–2018)
- Real GDP (percent change): 2.7 3.7 4.1 1.7 0.1 1.1 (2013–2018)
  - Oil: -1.6 2.1 5.3 3.8 -1.9 0.9
  - Non-oil: 6.4 4.9 3.2 0.2 1.7 1.3
- Consumer price index (avg): 3.5 2.7 2.2 3.5 1.7 5.0 (2013–2018)
- Current account balance (percent of GDP): 18.1 9.8 -8.7 -3.9 0.2 0.5 (2013–2018)
- Net foreign assets: 10.2 1.8 -12.7 -15.2 -10.3 -6.5 (2013–2018)
- Credit to private sector: 12.5 11.8 9.2 2.4 1.4 1.3 (2013–2018)
- Central government finances (Revenue as percent of GDP): 41.3 36.8 25.0 21.4 25.0 27.9 (2013–2018)
  - Of which: oil: 37.0 32.2 18.2 12.7 17.5 16.7
  - Expenditure: 35.5 40.2 40.7 38.6 34.3 34.5
  - Net lending (+)/borrowing (-): 5.8 -3.4 -15.8 -17.2 -9.3 -6.6
- Government deposits at SAMA: 53.0 48.6 41.7 30.1 23.3 20.0 (2013–2018)
- SAMA's total net foreign assets (US$ billions): 716.7 724.3 608.9 528.6 472.6 442.0 (2013–2018)
- In months of imports of goods and services 3/: 33.2 35.1 37.5 31.7 28.2 26.1 (2013–2018)
- Average exchange rate Saudi riyal/U.S. dollar 4/: 3.75 3.75 3.75 3.75 3.75 3.75 (2013–2018)

### Financial system structure (selected items from Table 3)
- 2010 totals:
  - Commercial banks: Number 21; total assets 1,411 billion riyals; 376 billions US dollars; 62 percent of total; 71 percent of GDP.
  - Pension funds: 2; 368 billion riyals; 98 billions US dollars; 16 percent of total; 19 percent of GDP.
  - Specialized credit institutions: 5; 381 billion riyals; 101 billions US dollars; 17 percent of total; 19 percent of GDP.
  - Total assets: 306 (number); 2,284 billions riyals; 609 billions US dollars; 100 percent; 116 percent of GDP.
- 2016 totals:
  - Commercial banks: Number 24; total assets 2,280 billion riyals; 608 billions US dollars; 51 percent of total; 95 percent of GDP.
  - Pension funds: 2; 1,169 billion riyals; 312 billions US dollars; 26 percent of total; 49 percent of GDP.
  - Specialized credit institutions: 5; 822 billion riyals; 219 billions US dollars; 18 percent of total; 34 percent of GDP.
  - Total assets: 374 (number); 4,454 billions riyals; 1,188 billions US dollars; 100 percent; 186 percent of GDP.

### Status of key recommendations of the 2011 FSAP (Table 5, selected)
- Update BCL and remove need for ministerial approval for certain SAMA decisions: Not implemented. (Authorities consider existing legal framework adequate.)
- Restrict each single large exposure of a bank to less than 50 percent of its capital: Implemented.
- Strengthen the Capital Market Authority’s (CMA) regulatory transparency: In Progress.
- Introduce a formal liquidity forecasting framework: In Progress.
- Maintain a stable stock of government securities and regular issues to help anchor a robust yield curve: Implemented.
- Introduce a payment system law: Implemented.
- Conduct stress tests with a wide range of shocks, including for liquidity, on a regular basis: Implemented.
- Establish a formal EWS for the banking sector: Implemented.
- Develop a formal and transparent macroprudential policy framework: Partially implemented.
- Strengthen the legal framework for bank resolution: In Progress.

### Financial sector policy advice in recent Article IV missions (Table 6, selected)
- 2012 recommendations include: strengthen macroprudential policies, enhance liquidity management instruments, adopt a comprehensive CFT Law, and make further progress on 2011 FSAP recommendations.
- 2013–2016 recommendations repeatedly emphasize: tightening macroprudential policies, developing a reliable house price index, introducing a formal liquidity forecasting framework, publishing SAMA’s EWS analysis, developing domestic debt capital markets, establishing a macroprudential policy board, broadening coverage of macroprudential policies to nonbanks, and strengthening liquidity forecasting and management at SAMA.

### Risk Assessment Matrix (Table 7, selected threats)
- Threat 1: Persistently low energy prices
  - Overall Level of Concern: Low/Medium
  - Likelihood of Severe Realization in the Next 1–3 Years: Medium/High
  - Expected Impact on Financial Stability if Realized:
    - Sustained fiscal consolidation leading to reduction in household income and government subsidies, increasing NPLs to banks.
    - Liquidity conditions tighten further, reducing bank funding and credit availability, and lifting the cost of capital.
    - Profit margins of companies could get squeezed, weakening debt-servicing ability, and increasing NPLs to banks.
- Threat 2: Tighter and more volatile global or regional financial conditions from a sharp rise in risk premia with flight to safety
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization: Medium/Low
  - Expected Impact: Interbank credit lines reduced or curtailed; tighter liquidity conditions; liquidity squeeze for banks. Mitigating factors include conservative collateral valuation and relatively low LTVs.
- Threat 3: Sustained dollar strength
  - Overall Level of Concern: High
  - Likelihood of Severe Realization: Low
  - Expected Impact: Minimal impact on growth or current account given domestic economy structure; banks largely unaffected due to net open foreign currency positions in dollars and strong capital and provisions buffers.

### Banking sector macroprudential tools (Table 8, selected)
- Broad-based credit risk:
  - Countercyclical and conservation capital buffer: √; 0 percent in 2016. Range is 0-2.5 percent based on credit-to-GDP gap under BCBS methodology.
  - Leverage ratio: √; Deposits/ (capital + reserves) <15 times.
  - Dynamic/general provisioning requirement: √; General: 1 percent of total loans; Specific: Minimum of 100 percent of NPLs.
  - Limit on LTV ratio: √; 70 percent for residential real estate loans (85 percent for first-time home buyers since December 2016).
  - Limit on DSTI ratio: √; Monthly repayments ≤ 33 percent of salary for employed persons, and 25 percent for retirees.
- Counterparty exposure:
  - √; No more than 21 percent of a bank’s eligible capital (for single counterparty or connected group) as of January 2017. To be reduced by 2 percentage points each year from 23 percent in January 2016 to 15 percent by January 2019.
- Liquidity risk tools:
  - LCR: √; 100 percent.
  - NSFR: √; 100 percent.
  - LTD: √; 90 percent.
  - Reserve requirement: √; 7 percent for demand deposits; 4 percent for time and saving deposits.

### Top-Down Stress Test Matrix (STeM) for the Banking Sector: Solvency and Liquidity Risks (Appendix I, selected)
- Solvency risk assumptions:
  - Institutional perimeter: All 12 domestic banks; 97 percent of banking sector assets.
  - Data and baseline date: Supervisory data; Public data; December 2016.
  - Methodology: IMF balance sheet stress test framework (customized); satellite models for macro-financial linkages; stress test horizon 3 years (12 quarters).
  - Tail shocks and scenarios: Macro variables include oil prices, nonoil private sector GDP growth, and equity prices. Two scenarios: baseline (WEO baseline) and downside (two standard deviation shock to oil prices mapped to other variables guided by VAR-based historical relationship).
  - Risks assessed: Credit losses on the loan book; losses on bonds and other debt instruments (interest risk); funding costs; market risk.
  - Behavioral adjustments: Quasi-static allocation balance sheet assumptions; no management actions considered.
  - Reporting format: System-wide CAR, capital shortfall; pass or fail (number of banks); recapitalization needs as percentage of GDP.
- Liquidity risk assumptions:
  - Institutional perimeter: All 12 domestic banks; 97 percent of banking sector assets.
  - Methodology: Basel III LCR-type analyses; maturity mismatch analyses by maturity buckets.
  - Tail shocks size: LCR analyses: Runoff rates were raised by 20 percent. Other parameter values follow Basel III guidelines.
  - Regulatory standards: LCR proxy assessed against 80 percent (effective in January 2017) and 100 percent (effective in January 2019).
  - Reporting format: Pass rate and liquidity shortfall (if applicable).

*Source: IMF staff report (excerpts provided in the content unit).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17318.pdf_