## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2024/english/1sauea2024002-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1sauea2024002-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1sauea2024002-print-pdf.pdf.json) --- ### Background and institutional framework - Financial sector regulatory architecture is well structured with coordination arrangements in place to support financial stability. - Rapid credit growth and soaring real estate activity supported by government incentives and driven by state-led transformation under Vision 2030. - Key institutions and coordination mechanisms: - Saudi Central Bank (SAMA): prudent oversight of the banking sector. - Capital Market Authority (CMA): leading initiatives to further capital market development. - Ministry of Finance (MoF), SAMA, and CMA: collaborate on the National Financial Stability Committee (NFSC) and coordinate the transformation agenda through the Financial Sector Development Program. - National Development Fund (NDF): championing ongoing reforms; NDF is not currently subject to independent prudential supervision. ### Macrofinancial risks and monitoring - Current assessment: financial sector risks from rapid economic transformation appear contained. - Risks warranting vigilance: - Continued implementation of the National Investment Strategy (NIS) and further rapid credit growth could build up macrofinancial risks and vulnerabilities. - Exposure to global spillovers, commodity price volatility, and geopolitical uncertainties. - Recommendations to strengthen monitoring and data: - Improve systemic risk monitoring to facilitate timely detection and understanding of emerging risks. - Close data gaps identified by the G20 Data Gaps Initiative (DGI). - Expedite overhaul of the official real estate price index methodology, including construction and publication of affordability indicators (e.g., price to income, price to rent ratios). - Conduct regular interconnectedness analysis and assess distributional information on households and NFCs. - Improve arrangements for information exchange among agencies that collect useful data. ### Banking sector resilience and stress testing - Banks are well-capitalized, profitable, and appear resilient to severe macroeconomic shocks. - Solvency stress tests and sensitivity analysis indicate resilience to: - A severe adverse economic scenario. - Additional shocks to real estate prices and sectoral loan portfolio default rates. - Key findings and operational suggestions: - Increased cost of funding (e.g., shift from nonremunerated to remunerated deposits) on top of the adverse scenario would lead three non-systemic banks to fall below the hurdle rate (aggregate shortfall of 0.15 percent of GDP). - Significant funding concentration requires attention despite adequate counterbalancing capacity to manage liquidity shocks. - SAMA is updating its stress testing approach and should: - Complement updates with improved data collection and monitoring of large funding and credit exposures, including exposures to large construction and infrastructure (mega/giga) projects. - Consider incorporating micro data for households and nonfinancial corporates (NFCs) into credit risk modelling to help assess default rates during rapid economic transformation. ### Macroprudential policy - Saudi Arabia has a comprehensive suite of macroprudential tools. - Policy recommendations: - Considering banks’ current strong capital and profitability, establish a releasable capital buffer by changing the Countercyclical Capital Buffers (CCyB) framework from “0-neutral” to “positive-neutral.” - Re-evaluate prudential lending standards, including DSTI and LTV limits, to safeguard household resilience if credit growth picks up. ### Financial supervision, regulation, and Sharī`ah governance - Recent legal and regulatory updates: - Saudi Central Bank Law (SCBL), the Anti-Money Laundering Law (AMLL), and regulations on Basel III capital and liquidity calculations. - Measures addressing financial fraud and cyber risks. - A new draft Banking Control Law (BCL) presents an opportunity to further align the framework with international standards. - Areas for enhancement: - Enhance SAMA’s independence, operational independence, accountability framework, transparency, and legal protection. - Extend SAMA’s powers to initiate corrective and sanctioning actions at an early stage, based on supervisory judgement. - Revise supervision policy and procedures to ensure comprehensive licensing processes and more active bilateral engagement with banks’ board members, external auditors, and other domestic and foreign regulators. - Review the scope of the risk-based supervisory approach to ensure adequate supervision of banking groups on a solo and consolidated basis and move to more qualitative onsite assessments. - Sharī`ah governance: - FSAP found SAMA’s regulation and supervision of Sharī`ah governance to be consistent with the Core Principles for Islamic Financial Regulations (CPIFR). - Sharī`ah Compliance ensured by a governance framework based on a decentralized Sharī`ah Committee model. - SAMA has updated its regulatory framework for Islamic banking and should continue efforts to ensure effective implementation. ### Systemic liquidity risk management and emergency liquidity - Advances made: - Stronger fiscal discipline has weakened the link between excess liquidity and oil prices. - Improved regulatory framework for capital markets has broadened banks’ funding options. - Basel III LCR/NSFR regulations are implemented. - SAMA’s liquidity management instruments and forecasting framework have been improved. - Further enhancement recommended: - Focus on liquidity forecasting and the collateral framework for open market operations (OMO). - SAMA should adopt and publish an emergency liquidity assistance (ELA) regulation outlining all requirements and parameters of ELA and prepare internal ELA procedures covering collateral policies and internal organization. ### Financial safety net, resolution, and deposit insurance - Legal framework progress: - The 2020 Law on Systemically Important Financial Institutions (SIFIL) introduces a resolution framework with most elements of an effective resolution regime. - Further reforms needed for effective implementation: - Establish a bank-specific liquidation framework. - Provide forward-looking resolution triggers. - Empower SAMA to order banks to remove barriers to resolvability. - Amend the law to explicitly cover all banks and provide sound legal basis for the Deposit Protection Fund (DPF). ### AML/CFT supervision - SAMA’s AML/CFT supervision is risk sensitive. - Recommendations: - Continue efforts to develop the assessment of ML/TF risks. - Conduct thematic inspections on key due diligence measures. - Levy sanctions for non-compliance to increase the effectiveness of AML/CFT supervision. ### Financial sector development (World Bank module) - World Bank developmental FSAP module included six workstreams: - (i) the Role of the State, - (ii) Micro, Small and Medium Size Enterprise (MSME) Finance, - (iii) Long Term Finance, - (iv) Housing Finance, - (v) Payment Systems, and - (vi) Climate and Environmental Risk and Opportunities (CERO). ### Selected FSAP Key Recommendations (agency and timing preserved) - Systemic Risk Analysis and Monitoring (selection): 1. Continue efforts to close G-20 DGI-2 data gaps, including on sectoral accounts; International Investment Position; and international banking statistics (DGI-2 recommendations 8–10). — SAMA, CMA, MoF, GASTAT — ST 2. Strengthen data collection and reinforce data sharing among agencies for the household and corporate sector; consider incorporating a structural “micro-to-macro approach” into the stress testing framework, particularly for credit risk modeling. — SAMA, CMA, MoF, GASTAT — ST 3. Establish a monitoring framework for the financial system’s exposures to large construction and infrastructure (e.g., mega/giga) projects. — SAMA, Gov I – ST 4. Incorporate contagion/interconnectedness analysis and micro data into the stress testing and risk monitoring frameworks; publish key results in the FSR. — SAMA — ST 5. Improve the scope and quality of publicly available data for real estate market, and real estate prices, and publish affordability indicators (e.g., price to income, price to rent ratios). — SAMA, CMA, MoF, GASTAT — ST 6. Regularly collect and monitor household debt statistics (e.g., DSTI, debt-to-disposable income, debt to GDP) and monitor household characteristics and debt distribution. — SAMA, GASTAT — ST - Macroprudential Policy: 7. Consider establishing independent prudential supervision for NDF funds. — Gov — ST 8. Implement a releasable capital buffer in the form of a positive neutral CCyB. — SAMA — ST 9. Re-evaluate the DSTI and LTV limits. — SAMA — ST - Financial Supervision and Regulation—BCP Assessment: 10. Amend the BCL and SCBL reflecting FSAP advice (e.g., SAMA independence and accountability; legal protection for SAMA staff, former staff, and agents’; SAMA’s powers to conduct effective banking supervision). — MoF, SAMA — ST 11. Revise prudential regulations, and supervisory approach, techniques, tools, and reporting to address observed gaps, and to effectively conduct regulation and supervision at the levels of the solo bank, the consolidated bank, and each bank within groups. — SAMA — ST 12. Establish or revise supervision policy, manuals, and procedures to make comprehensive the process of licensing and other applications from banks seeking SAMA approval, and to ensure that supervisors engage bilaterally and more actively with banks’ board members, external auditors, and other relevant domestic and foreign regulators, supervisors, and resolution authorities. — SAMA — ST - Financial Regulation and Supervision—CPIFR Assessment: 13. Ensure effective implementation of recently issued regulations from the perspectives of both SAMA and Islamic banks. — SAMA — ST 14. Implement guidance for managing liquidity risk separately for Islamic Windows. — SAMA — ST 15. Enhance Pillar 3 disclosures by implementing IFSB-22 for Islamic banking and Islamic Windows. — SAMA — MT - Financial Safety Nets and Crisis Management: 16. Amend the Law on SIFIs reflecting FSAP advice (e.g., scope, triggers, resolvability); establish a bank-specific liquidation framework and a legal framework for deposit insurance. — SAMA, Gov — ST 17. Finalize and enact implementing regulations, reflecting FSAP advice (including to allow for ex-post designation of SIFIs). — SAMA, MoF — I *Source: EXECUTIVE SUMMARY, 1sauea2024002-print-pdf* --- ### 18. Ensure adequate resources and independence of SAMA’s resolution ### Systemic liquidity management and emergency liquidity assistance (ELA) - Recommendations (implementation horizons preserved): - Ensure adequate resources and independence of SAMA’s resolution function. (SAMA; I) - Continue to strengthen liquidity management and forecasting framework. (SAMA; ST) - Enhance the collateral framework by: - introducing maturity-based haircuts (I); - gradually transitioning to market valuation (ST); - considering making high-quality private debt securities eligible for OMO in crisis times (MT). - (SAMA; I-MT) - Adopt, and publish an ELA regulation outlining all requirements and parameters of ELA and prepare internal ELA procedures. (SAMA; I) - Operationalize the ELA framework through regular ELA simulations and collateral mobilization testing and pre-positioning and adopt an MoU between SAMA and MoF on the use of government guarantees. (SAMA; ST) ### Financial integrity - Recommendation: Conduct thematic inspections of key AML/CFT requirements and levy sanctions in case of non-compliance. (SAMA; MT) ### Role of state, long-term, green and MSME finance, payments, and digital financial services - Recommendations: - NDF to expand its performance monitoring framework; ringfence funds performing quasi-government functions. (NDF and Fund Boards; ST) - Develop a market for qualified professional investors and allow unrestricted trading of private-placement bonds in the market. (CMA; I) - Review the current MSME definitions; and regularly collect and publish MSME financing data using standard definitions with relevant breakdowns (e.g., firm size, funding source, women-owned enterprises). (Gov, SAMA, and CMA; ST) - Update and publish the Oversight Framework document for Payments and Digital Financial Services. (SAMA; ST) - Conduct a climate risk assessment to inform evidence-based supervisory approach; publish the results to raise awareness. (SAMA; ST) ### Key operational and policy priorities (summary) - Strengthen SAMA’s capacity, resources, and operational independence for resolution and ELA functions to manage systemic liquidity events. - Improve collateral and market valuation practices to enhance central bank operations across short-, medium-, and long-term horizons. - Formalize and test ELA procedures, and secure coordination with the Ministry of Finance through an MoU on guarantees. - Reinforce AML/CFT supervision through targeted inspections and sanctions. - Enhance performance monitoring and governance of development funds (NDF), and improve data and market infrastructure for MSME, payments, digital financial services, and qualified investor markets. - Incorporate climate risk into supervisory frameworks and publish assessments to raise awareness. ### Selected macrofinancial context and risks (preserved figures) - PIF’s assets under management amounted to US$750 billion (70 percent of GDP) at end-2023, of which 79 percent invested domestically. - FSAP baseline follows IMF’s January 2024 WEO; IMF’s July 2024 WEO referenced for context. - Real estate and household: - Objective: expand home ownership from 47 to 70 percent during 2016–2030. - At end-2023, homeownership already above 60 percent, with over 70 percent of outstanding mortgages subsidized. - Around 15 percent of mortgages have loan-to-value (LTV) above the 90 percent limit set by SAMA in November 2018. - Household average DSTI at origination around 40 percent (banks’ data). - Over 95 percent of new bank mortgages have maturities of 25 years or shorter. - 97 percent of mortgages are at fixed rates. - Corporate and NFCs: - Around 20 percent of the listed NFCs and 30 percent of NFCs in the extended sample displayed ICR below 1. - Debt-at-risk (share of total debt owed by firms with ICR below 1) was 10 percent in both samples. - Financial system structure and balance-sheet metrics: - Financial system size: 143 percent of GDP in 2022; commercial banks accounted for 87 percent of GDP. - Banks’ capital adequacy: 19.5 percent of risk-weighted assets at 2023Q3. - Outstanding mortgages: 15 percent of GDP (25 percent of non-oil GDP). - Murābahah/Commodity Murābahah contracts account for 89 percent of Sharī`ah-compliant (SC) assets. - Ijārah/Ijārah Muntahia Bittamlīk contracts account for 9 percent of SC assets. - Profit-sharing investment accounts (PSIAs) comprise less than 5 percent of banking sector’s sources of funding. - Liquidity and funding: - NSFR shows a downward trend but remains above the 100 percent regulatory minimum in all banks. - Unweighted credit-to-deposit ratio is trending upwards. - Deposits from government entities have increased as a share of total deposits. - Illiquidity of secondary sovereign bond markets poses a liquidity risk not well-captured by LCR and NSFR. - Development finance and contingent liabilities: - NDF funds are not subject to independent prudential supervision and have not published financial accounts since 2020. - SRC refinanced 3.5 percent of total mortgages in 2022 and aims to refinance 20 percent by 2026–27. - NDF aims to transform into a full-fledged development financial institution and seek market funding, creating potential contingent liabilities for the sovereign. - Data and supervisory information gaps: - Official real estate price indices have limitations (outdated stratification, misclassification, time-lags). - Authorities urged to expedite addressing remaining data gaps vis-à-vis the G-20 DGI’s second phase (DGI-2) on Vulnerabilities, Interconnections, and Spillovers. - NFSC should have access to timely and good-quality data given the central role of government-affiliated players in major projects. *Source: 1sauea2024002-print-pdf - 18. Ensure adequate resources and independence of SAMA’s resolution* --- ### Stress testing framework, liquidity, interconnectedness, and supervisory recommendations ### Stress testing framework and scenarios - Solvency stress test centered on the IMF January 2024 World Economic Outlook (WEO) baseline. - Adverse scenario derived from IMF’s Global Macro-financial Model, features: - a global recession leading to a sharp drop in oil prices (described as 50 percent below baseline in Figure 8). - contraction in fiscal oil revenues, slowdown in NIS implementation, and sharp contraction in Saudi non-oil GDP. - lower inflation and policy rates. - higher risk premium inducing a significant drop in equity and real estate prices. - “Add-on” scenario: coincides with the adverse scenario except the policy rate sharply increases in 2024. - Liquidity risks gauged via cash flow analysis and assessment of LCR and NSFR under scenarios more severe than regulatory tests. - Stress tests complemented with sensitivity analysis, including concentration risk; publicly listed NFCs analyzed for adverse earnings and borrowing cost developments. ### Data and methodological challenges - Time-series for NPL ratios and default rates highly volatile and do not cover large recessions. - Micro data for households and NFCs unavailable. - Institution-level exposures between banks, state-owned financial institutions and NBFIs, intersectoral data, and banks’ exposures to mega/giga projects unavailable, limiting contagion and concentration risk assessment. - Team used sensitivity exercises with portfolio-specific default rates on top of the adverse scenario to address data limitations. ### Solvency stress test findings (bank-level) - Tests on the 11 Saudi banks as of June 2023. - Hurdle rate: regulatory minimum capital (8 percent total capital ratio; 4.5 percent CET1), plus DSIB surcharge, plus Pillar II add-on. - Baseline: confirmed banks’ strong initial capital positions and high profitability. - Adverse scenario: capital ratio declines by 2.6 percentage points relative to baseline—mainly due to higher credit losses—with all banks remaining above the hurdle rate. - Extreme add-on exercise with higher interest rates: only one non-DSIB falls marginally below its hurdle rate. - Reverse stress test: a persistent additional 5–9 pp increase in default rates for the whole credit portfolio would create solvency pressures in the aggregate banking system. - Sensitivity: banks resilient to lower house prices, sectoral corporate shocks, and marking-to-market the whole securities portfolio. - Funding-cost sensitivity: increase in cost of funding (on top of the adverse scenario with higher interest rates) would lead three non-DSIBs to fall below their hurdle rates (aggregate shortfall of 0.15 percent of GDP) while the aggregate banking system remains above the hurdle. ### Liquidity stress test findings - Tests covered same 11 domestic banks using regulatory hurdle of 100 percent for LCR and NSFR. - Most severe cases with deposit runoffs and haircuts to sovereign bonds: - Aggregate LCR declined from 189 to 108 percent — three banks fell below the 100 percent hurdle. - Aggregate NSFR declined from 115 to 99 percent — seven banks fell below the 100 percent hurdle. - Aggregate liquidity shortfalls in the most severe scenario: 0.8 and 1.2 percent of GDP for LCR and SFR, respectively. - Large deposit runoffs reveal significant funding concentration; some banks would face liquidity pressures in extreme scenarios. ### Interconnectedness and contagion - Aggregate exposures between domestic banks are small relative to bank capital: 3.6 percent of capital. - Cross-border contagion risks assessed using Espinosa Vega and Sole (2010) methodology at aggregate banking-sector level: cross-border contagion risks appear low (no single failure of a foreign banking system would lead to failure of the Saudi banking system). - Limitations: lack of institution-level exposures data between banks, state-owned financial institutions (including NDF) and NBFIs, and limited intersectoral exposure data restricts contagion assessment. ### Corporate sector stress testing - Publicly listed NFCs on average resilient to earnings and borrowing cost shocks. - Under severe combined shocks to earnings and interest rates, median ICR drops sharply but remains above 1. - Debt-at-risk increases substantially in consumer, real estate, and industrial sectors. ### Macroprudential policy recommendations and observations - Institutional framework: - SAMA is the macroprudential authority with control over banks and finance companies. - NFSC comprises SAMA, CMA, MoF, Insurance Authority (as of May 2024) and the National Debt Management Center; extends financial stability perimeter to institutions supervised by CMA and Insurance Authority. - NDF and its funds are not subject to prudential supervision and data sharing is limited; consideration recommended to place NDF and its funds under an independent supervisory authority given NDF’s transition. - Authorities should guarantee regular and timely access to NDF data. - Publish a macroprudential strategy to foster public awareness, counter inaction bias, and map intermediate objectives to tools. - Strengthen systemic risk monitoring and close data gaps: - Regularly assess interconnectedness and distributional information about households and NFCs. - Collect distributional mortgage data including DSTI, debt-to-disposable income, debt-to-GDP, borrower characteristics (first vs. second time buyer, age). - Expedite real estate price index overhaul and publish affordability indicators (price-to-income, price-to-rent). - Tightening macroprudential tools would improve resilience: - Consider introducing a releasable capital buffer by changing CCyB framework to a “positive neutral” CcyB; jurisdictions adopting Positive-Neutral CCyBs have set the rate between 0.5 to 2 percent. - Re-evaluate prudential lending standards: maximum DSTI at 65 percent of income with mortgage subsidies is high; significant share of borrowers have DSTIs above 50 and 60 percent. - LTV limit relatively high at 90 percent for first home buyers (95 percent under the Dhamanat guarantee program); tighter limits recommended, phased in gradually to avoid unintended housing market disruption. - Rationale: Non-oil credit-to-GDP has climbed to nearly 90 percent; credit growth remains strong and may increase with lower interest rates; housing transactions and double-digit annualized house price growth noted. Three largest banks provide around 80 percent of new mortgages. ### Financial supervision and regulatory recommendations - SAMA’s regulatory and supervisory framework aligns with Basel Core Principles and embeds IFSB CPIFR elements; FSAP assessed against BCPs and conducted focused review against CPIFR. - Progress made (SBCL 2020, AMLL 2017, new regulations on financial fraud and cyber risks); draft BCL under consideration. - Gaps in SAMA’s powers and governance: - Lacks some powers such as calibrating prudential requirements proportionate to risk, reviewing/rejecting proposals to transfer significant ownership, taking timely corrective actions ahead of legal/regulatory breach, accessing boards/management/records, and reviewing parent/affiliated company activities. - Operational independence, accountability, transparency, and legal protection could be strengthened: set qualifying criteria for Governor and Vice Governors, establish grounds for removal, increase transparency of appointment/removal processes, and strengthen legal protection for SAMA staff (including retired staff and agents). - Strengthen licensing, transfer-of-ownership, and major acquisition processes by obtaining additional powers and formalizing assessment criteria and internal guidelines. Key elements to include: identification and due diligence on ultimate beneficial owners, assessment of risks to bank and banking group, SAMA’s ability to supervise and take corrective actions, and resolvability of bank and banking group. *Source: FSAP chapter on banking sector stress testing, solvency and liquidity results, macroprudential framework, and supervisory recommendations from the provided IMF PDF content.* --- ### Liquidity policy, market infrastructure, resolution, and financial sector development ### Liquidity market observations and eligible collateral (preserved technical details) - FSAP survey: only three banks indicated active use of the reserve averaging framework. - Current eligible collateral assets for OMOs are priced at face value with uniform haircuts applied across residual maturities. - Eligible Securities — Original Maturities — Haircuts: - SAMA Bills — All (1/4/13/26/52 weeks) — 2% on face value - Government Sukuks — All (5-30 years) — 2% on face value - Government development bonds — All (2/3/5/7/10 years) — 2% on face value - Murabaha — All — 2% on face value - Government-guaranteed bonds — All — 10% on face value - Observations: - Two episodes of liquidity squeezes in 2022 were eased through SAMA’s ad hoc operations. - Liquidity volatility is primarily driven by changes in the net government position. - Sizable volume of gross reverse repo vs. gross repo on the same day indicates interbank market inefficiency and the need to further promote interbank repo trading. - SC interbank repo market exists but has technical impediments (e.g., align cut-off time on delivery vs. payment platform; reduce fees); market has potential to grow as liquidity shock absorber. - In the medium term, authorities could consider eligibility of high-quality private debt securities in OMO to support long-term funding development. ### Financial safety net: resolution, deposit insurance, and ELA - Resolution and deposit insurance: - SIFIL adopted in 2020 covers systemic financial institutions under SAMA and CMA supervision and introduces a resolution framework with most elements of an effective resolution regime. - Effectiveness depends on establishing a bank specific liquidation framework, providing forward-looking resolution triggers, and empowering SAMA to order banks to remove barriers to resolvability. - Recommendation: Amend law to explicitly cover all banks (systemic and non-systemic). - Recommendation: Amend law to bring insurance sector back under purview following creation of new insurance authority in late 2023. - SAMA has drafted legal provisions on hierarchy of claims in bank liquidation. - SAMA is establishing a Crisis Management Framework Development and Implementation Project (CMFDIP) aiming at aligning its safety net function with international best practice within three years. - Draft Implementing Regulations prepared by SAMA should be finalized and adopted; a methodology should be prepared for designation of SIFIs in resolution. - Draft regulations generally in line with best practice but could be strengthened on depositor preference, repayment of resolution funding ahead of shareholders, and allowing broader ownership of bridge banks (beside SAMA). - Interim recommendation: Adopt methodology for designation of SIFIs at the time of resolution until SIFIL is revised to explicitly cover all banks. - Institutional arrangements and independence: - SAMA currently hosts supervision, resolution, deposit insurance, and future resolution fund functions—creating synergies but also potential conflicts of interest. - Medium-term recommendation: Ensure operational independence for each function; different reporting lines for resolution and supervision authorities; deposit insurance function should have operational and budgetary independence. - Recommendation: NFSC should be provided a clear mandate related to crisis prevention and management. - Capacity building and planning: - SAMA should finish structuring and staffing the SIFI Resolution Division and commence resolution planning, including resolution manuals and playbooks, resolvability assessments, and resolution planning. - Supervisory function should be mandated to review recovery plans submitted by all DSIBs in 2023. - Deposit Protection Fund (DPF): - Deposit insurance has been collecting premiums since 2016 but remains to be operationalized. - A new DPF framework is envisaged under CMFDIP. - Emergency Liquidity Assistance (ELA): - SCBL provides a very general legal basis for ELA; SAMA has significant leeway to design ELA framework. - Recommendation: Publish ELA regulation once ready, outlining requirements (solvency, discretionary nature, use only as last resort, full collateralization, conditionality) and parameters (high interest rate, short maturity). - Recommendation: Develop internal ELA procedures covering collateral policies and internal organization; operationalize framework through internal simulations and exercises involving banks and prepositioning of collateral. - Recommendation: SAMA and the Ministry of Finance should establish an MoU defining information exchanges and use of government guarantees for ELA in resolution and other critical scenarios; MoU should establish conditions requiring government guarantees (e.g., uncertain solvency, insufficient collateral capacity, ongoing resolution with prospect of a viable bank) and may require legal adjustments. ### Financial sector development and access to finance - Recommendation: Undertake a strategic review of the role of development finance to support efficiency and effectiveness of the government’s large footprint in the economy and financial sector. - Objectives: Identify market and financing gaps; articulate overall vision for role of the state in the financial sector to achieve Vision 2030 development objectives. - Recommendation: Incorporate PIF in the strategic review given its significant footprint in the financial sector. - NDF needs to enhance transparency and performance monitoring to move towards ambitions of achieving a credit rating and issuing securities. - Opportunities exist to streamline mandates and align functions among market-facing funds to reduce overlaps and enhance efficiency. - Recommendation: NDF to treat separately funds that perform quasi-government functions related to social mandates. - Access to finance for firms: - Banks are main source of credit; micro and small enterprises (MSEs) account for only 0.7 and 2.5 percent of banks’ total credit portfolio, respectively. - Recommendation: Systematically collect and report data on MSMEs and explicitly target MSEs, including women-owned or led businesses. - Recommendation: Review current MSME definitions which include relatively large enterprises. - Recommendation: Enhance design of Kafalah loan guarantee program and relevant NDF funds (e.g., portfolio guarantees, shifting to wholesale model) and improve targeting to serve MSMEs that don’t already have access to finance; better crowd-in banks and NBFIs. ### Development of the corporate debt market (measures) - Create a market for qualified professional investors where private placement bonds can be freely traded. - Enhance the clearance and settlement system to support negotiated OTC trades. - Mandate a trade repository to collect all OTC transaction information in a timely manner to enhance transparency. - Trade repository could offer pricing services for thinly traded bonds based on a model approved by CMA. - Ongoing NDF reforms will eventually allow the NDF to tap the markets and gradually reduce reliance on public funding. - Opportunities to introduce covered bonds or MBS to diversify funding sources of banks and improving their liquidity position. *Source: Excerpt from IMF staff assessment and recommendations contained in the referenced IMF chapter.* --- ### Payments infrastructure, climate risk, and authorities’ views ### Payments infrastructure and oversight - Saudi Payments operates: - the mada card switch (domestic debit scheme and international card scheme transactions); - the sarie Instant Payments System (IPS); - the SADAD bill payment system. - All systems settle in SAMA’s Real Time Gross Settlement (RTGS) System. - Law of Payments and Payment Services of 2021 and implementing regulations of June 2023 expanded SAMA’s oversight to all payment systems and operators, and all payment services and providers. - Recommendation: Revise Payments Oversight Framework to reflect legal developments, incorporate specific standards, and establish schedule for overseer and independent assessments. - SAMA and CMA should ensure all Financial Market Infrastructure (FMI) entities publish disclosures in observance of IOSCO principles for FMIs. ### Climate risk and supervisory approach - SAMA and CMA have initiated climate risk management efforts and preparing an institutional strategy on climate risk and sustainability. - Recommendations: - SAMA should prioritize assessing the financial impact of climate risk on the banking sector to inform an evidence-based supervisory approach. - Authorities should disclose their strategy to mobilize the financial sector once finalized. - Supervisory guidelines under development should fully align with the Basel principles on climate-related financial risks and explore integrating a prudential approach to transition plans. ### Authorities’ views on the FSAP and supervisory reforms - Authorities welcomed FSAP recognition of meaningful progress since 2017 and agreed with systemic risk assessment that banks are resilient to a wide range of severe solvency and liquidity shocks. - Authorities emphasized closing material data gaps to ensure tools’ effectiveness. - Authorities noted NDF’s ongoing progress, argued that its activities do not at present create financial stability risks, and suggested independent prudential supervision could be considered once reforms are completed. - Funds are adopting international accounting standards and preparing to resume regular reporting. - Authorities stated draft BCL expected to be submitted for legislative approval in 2024 and to further align framework with best international standards. *Source: 1sauea2024002-print-pdf - sections on payments, climate risk, and authorities’ views* --- *Source: 1sauea2024002-print-pdf (IMF).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### Background and institutional framework - The financial sector regulatory architecture is well structured with coordination arrangements in place to support financial stability. - Rapid credit growth and soaring real estate activity have been supported by government incentives and driven by state-led transformation under Vision 2030. - Key institutions and coordination mechanisms: - Saudi Central Bank (SAMA): prudent oversight of the banking sector. - Capital Market Authority (CMA): leading initiatives to further capital market development. - Ministry of Finance (MoF), SAMA, and CMA: collaborate on the National Financial Stability Committee (NFSC) and coordinate the transformation agenda through the Financial Sector Development Program. - National Development Fund (NDF): championing ongoing reforms; NDF is not currently subject to independent prudential supervision. ### Macrofinancial risks and monitoring - Current assessment: financial sector risks from rapid economic transformation appear contained. - Risks that warrant vigilance: - Continued implementation of the National Investment Strategy (NIS) and further rapid credit growth could build up macrofinancial risks and vulnerabilities. - Exposure to global spillovers, commodity price volatility, and geopolitical uncertainties. - Recommendations to strengthen monitoring and data: - Improve systemic risk monitoring to facilitate timely detection and understanding of emerging risks. - Close data gaps identified by the G20 Data Gaps Initiative (DGI). - Expedite overhaul of the official real estate price index methodology, including construction and publication of affordability indicators (e.g., price to income, price to rent ratios). - Conduct regular interconnectedness analysis and assess distributional information on households and NFCs. - Improve arrangements for information exchange among agencies that collect useful data. ### Banking sector resilience and stress testing - Banks are well-capitalized, profitable, and appear resilient to severe macroeconomic shocks. - Solvency stress tests and sensitivity analysis indicate resilience to: - A severe adverse economic scenario. - Additional shocks to real estate prices and sectoral loan portfolio default rates. - Key vulnerabilities and operational suggestions: - Increased cost of funding—for example, due to a continued shift from nonremunerated to remunerated deposits—on top of the adverse scenario would lead three non-systemic banks to fall below the hurdle rate (by only 0.15 percent of GDP on aggregate). - Significant funding concentration requires attention despite adequate counterbalancing capacity to manage liquidity shocks. - SAMA is updating its stress testing approach and should: - Complement updates with improved data collection and monitoring of large funding and credit exposures, including exposures to large construction and infrastructure (mega/giga) projects. - Consider incorporating micro data for households and nonfinancial corporates (NFCs) into credit risk modelling to help assess default rates during rapid economic transformation. ### Macroprudential policy - Saudi Arabia has a comprehensive suite of macroprudential tools. - Policy recommendations: - Considering banks’ current strong capital and profitability, establish a releasable capital buffer by changing the Countercyclical Capital Buffers (CCyB) framework from “0-neutral” to “positive-neutral.” - Re-evaluate prudential lending standards, including DSTI and LTV limits, to safeguard household resilience if credit growth picks up. ### Financial supervision, regulation, and Sharī`ah governance - Recent legal and regulatory updates: - Saudi Central Bank Law (SCBL), the Anti-Money Laundering Law (AMLL), and regulations on Basel III capital and liquidity calculations. - Measures addressing financial fraud and cyber risks. - A new draft Banking Control Law (BCL) presents an opportunity to further align the framework with international standards. - Areas for enhancement: - Enhance SAMA’s independence, operational independence, accountability framework, transparency, and legal protection. - Extend SAMA’s powers to initiate corrective and sanctioning actions at an early stage, based on supervisory judgement. - Revise supervision policy and procedures to ensure comprehensive licensing processes and more active bilateral engagement with banks’ board members, external auditors, and other domestic and foreign regulators. - Review the scope of the risk-based supervisory approach to ensure adequate supervision of banking groups on a solo and consolidated basis and move to more qualitative onsite assessments. - Sharī`ah governance: - FSAP found SAMA’s regulation and supervision of Sharī`ah governance to be consistent with the Core Principles for Islamic Financial Regulations (CPIFR). - Sharī`ah Compliance is ensured by a governance framework based on a decentralized Sharī`ah Committee model. - SAMA has updated its regulatory framework for Islamic banking and should continue efforts to ensure effective implementation. ### Systemic liquidity risk management and emergency liquidity - Advances made: - Stronger fiscal discipline has weakened the link between excess liquidity and oil prices. - Improved regulatory framework for capital markets has broadened banks’ funding options. - Basel III LCR/NSFR regulations are implemented. - SAMA’s liquidity management instruments and forecasting framework have been improved. - Further enhancement recommended: - Focus on liquidity forecasting and the collateral framework for open market operations (OMO). - SAMA should adopt and publish an emergency liquidity assistance (ELA) regulation outlining all requirements and parameters of ELA and prepare internal ELA procedures covering collateral policies and internal organization. ### Financial safety net, resolution, and deposit insurance - Legal framework progress: - The 2020 Law on Systemically Important Financial Institutions (SIFIL) introduces a resolution framework with most elements of an effective resolution regime. - Further reforms needed for effective implementation: - Establish a bank-specific liquidation framework. - Provide forward-looking resolution triggers. - Empower SAMA to order banks to remove barriers to resolvability. - Amend the law to explicitly cover all banks and provide sound legal basis for the Deposit Protection Fund (DPF). ### AML/CFT supervision - SAMA’s AML/CFT supervision is risk sensitive. - Recommendations: - Continue efforts to develop the assessment of ML/TF risks. - Conduct thematic inspections on key due diligence measures. - Levy sanctions for non-compliance to increase the effectiveness of AML/CFT supervision. ### Financial sector development (World Bank module) - The World Bank’s developmental FSAP module included six workstreams: - (i) the Role of the State, - (ii) Micro, Small and Medium Size Enterprise (MSME) Finance, - (iii) Long Term Finance, - (iv) Housing Finance, - (v) Payment Systems, and - (vi) Climate and Environmental Risk and Opportunities (CERO). ### Selected FSAP Key Recommendations (from Table 1) - Systemic Risk Analysis and Monitoring (agency and timing indicated in Table 1): 1. Continue efforts to close G-20 DGI-2 data gaps, including on sectoral accounts; International Investment Position; and international banking statistics (DGI-2 recommendations 8–10). — SAMA, CMA, MoF, GASTAT — ST 2. Strengthen data collection and reinforce data sharing among agencies for the household and corporate sector; consider incorporating a structural “micro-to-macro approach” into the stress testing framework, particularly for credit risk modeling. — SAMA, CMA, MoF, GASTAT — ST 3. Establish a monitoring framework for the financial system’s exposures to large construction and infrastructure (e.g., mega/giga) projects. — SAMA, Gov I – ST 4. Incorporate contagion/interconnectedness analysis and micro data into the stress testing and risk monitoring frameworks; publish key results in the FSR. — SAMA — ST 5. Improve the scope and quality of publicly available data for real estate market, and real estate prices, and publish affordability indicators (e.g., price to income, price to rent ratios). — SAMA, CMA, MoF, GASTAT — ST 6. Regularly collect and monitor household debt statistics (e.g., DSTI, debt-to-disposable income, debt to GDP) and monitor household characteristics and debt distribution. — SAMA, GASTAT — ST - Macroprudential Policy: 7. Consider establishing independent prudential supervision for NDF funds. — Gov — ST 8. Implement a releasable capital buffer in the form of a positive neutral CCyB. — SAMA — ST 9. Re-evaluate the DSTI and LTV limits. — SAMA — ST - Financial Supervision and Regulation—BCP Assessment: 10. Amend the BCL and SCBL reflecting FSAP advice (e.g., SAMA independence and accountability; legal protection for SAMA staff, former staff, and agents’; SAMA’s powers to conduct effective banking supervision). — MoF, SAMA — ST 11. Revise prudential regulations, and supervisory approach, techniques, tools, and reporting to address observed gaps, and to effectively conduct regulation and supervision at the levels of the solo bank, the consolidated bank, and each bank within groups. — SAMA — ST 12. Establish or revise supervision policy, manuals, and procedures to make comprehensive the process of licensing and other applications from banks seeking SAMA approval, and to ensure that supervisors engage bilaterally and more actively with banks’ board members, external auditors, and other relevant domestic and foreign regulators, supervisors, and resolution authorities. — SAMA — ST - Financial Regulation and Supervision—CPIFR Assessment: 13. Ensure effective implementation of recently issued regulations from the perspectives of both SAMA and Islamic banks. — SAMA — ST 14. Implement guidance for managing liquidity risk separately for Islamic Windows. — SAMA — ST 15. Enhance Pillar 3 disclosures by implementing IFSB-22 for Islamic banking and Islamic Windows. — SAMA — MT - Financial Safety Nets and Crisis Management: 16. Amend the Law on SIFIs reflecting FSAP advice (e.g., scope, triggers, resolvability); establish a bank-specific liquidation framework and a legal framework for deposit insurance. — SAMA, Gov — ST 17. Finalize and enact implementing regulations, reflecting FSAP advice (including to allow for ex-post designation of SIFIs). — SAMA, MoF — I *Source: EXECUTIVE SUMMARY, 1sauea2024002-print-pdf* ### 18. Ensure adequate resources and independence of SAMA’s resolution ### 18. Ensure adequate resources and independence of SAMA’s resolution function. ### Systemic liquidity management and emergency liquidity assistance (ELA) - Recommendation: Ensure adequate resources and independence of SAMA’s resolution function. (SAMA; implementation horizon: I) - Recommendation: Continue to strengthen liquidity management and forecasting framework. (SAMA; implementation horizon: ST) - Recommendation: Enhance the collateral framework by: - introducing maturity-based haircuts (I); - gradually transitioning to market valuation (ST); - considering making high-quality private debt securities eligible for OMO in crisis times (MT). - (SAMA; implementation horizon: I-MT) - Recommendation: Adopt, and publish an ELA regulation outlining all requirements and parameters of ELA and prepare internal ELA procedures. (SAMA; implementation horizon: I) - Recommendation: Operationalize the ELA framework through regular ELA simulations and collateral mobilization testing and pre-positioning and adopt an MoU between SAMA and MoF on the use of government guarantees. (SAMA; implementation horizon: ST) ### Financial integrity - Recommendation: Conduct thematic inspections of key AML/CFT requirements and levy sanctions in case of non-compliance. (SAMA; implementation horizon: MT) ### Role of state, long-term, green and MSME finance, payments, and digital financial services - Recommendation: NDF to expand its performance monitoring framework; ringfence funds performing quasi-government functions. (NDF and Fund Boards; implementation horizon: ST) - Recommendation: Develop a market for qualified professional investors and allow unrestricted trading of private-placement bonds in the market. (CMA; implementation horizon: I) - Recommendation: Review the current MSME definitions; and regularly collect and publish MSME financing data using standard definitions with relevant breakdowns (e.g., firm size, funding source, women-owned enterprises). (Gov, SAMA, and CMA; implementation horizon: ST) - Recommendation: Update and publish the Oversight Framework document for Payments and Digital Financial Services. (SAMA; implementation horizon: ST) - Recommendation: Conduct a climate risk assessment to inform evidence-based supervisory approach; publish the results to raise awareness. (SAMA; implementation horizon: ST) ### Key operational and policy priorities (summary) - Strengthen SAMA’s capacity, resources, and operational independence for resolution and ELA functions to manage systemic liquidity events. - Improve collateral and market valuation practices to enhance central bank operations across short-, medium-, and long-term horizons. - Formalize and test ELA procedures, and secure coordination with the Ministry of Finance through an MoU on guarantees. - Reinforce AML/CFT supervision through targeted inspections and sanctions. - Enhance performance monitoring and governance of development funds (NDF), and improve data and market infrastructure for MSME, payments, digital financial services, and qualified investor markets. - Incorporate climate risk into supervisory frameworks and publish assessments to raise awareness. ### Selected macrofinancial context and risks related to liquidity, real estate, and financial sector structure - Macro context and reforms: - PIF’s assets under management amounted to US$750 billion (70 percent of GDP) at end-2023, of which 79 percent invested domestically. - The FSAP baseline follows the IMF’s January 2024 WEO; IMF’s July 2024 WEO referenced for context. - Real estate and household vulnerabilities: - Objective: expand home ownership from 47 to 70 percent during 2016–2030. - At end-2023, homeownership already above 60 percent, with over 70 percent of outstanding mortgages subsidized. - Around 15 percent of mortgages have loan-to-value (LTV) above the 90 percent limit set by SAMA in November 2018. - Household average DSTI at origination around 40 percent (banks’ data). - Over 95 percent of new bank mortgages have maturities of 25 years or shorter. - 97 percent of mortgages are at fixed rates. - Corporate and nonfinancial corporations (NFCs): - Around 20 percent of the listed NFCs and 30 percent of NFCs in the extended sample displayed ICR below 1. - Debt-at-risk (share of total debt owed by firms with ICR below 1) was 10 percent in both samples. - Financial system structure and balance-sheet metrics: - Financial system size: 143 percent of GDP in 2022; commercial banks accounted for 87 percent of GDP. - Banks’ capital adequacy: 19.5 percent of risk-weighted assets at 2023Q3. - Outstanding mortgages: 15 percent of GDP (25 percent of non-oil GDP). - Murābahah/Commodity Murābahah contracts account for 89 percent of Sharī`ah-compliant (SC) assets. - Ijārah/Ijārah Muntahia Bittamlīk contracts account for 9 percent of SC assets. - Profit-sharing investment accounts (PSIAs) comprise less than 5 percent of banking sector’s sources of funding. - Liquidity and funding trends and risks: - Net Stable Funding Ratio (NSFR) shows a downward trend but remains above the 100 percent regulatory minimum in all banks. - Unweighted credit-to-deposit ratio is trending upwards. - Deposits from government entities have increased as a share of total deposits. - The illiquidity of secondary sovereign bond markets poses a liquidity risk not well-captured by LCR and NSFR. - Development finance and contingent liabilities: - NDF funds are not subject to independent prudential supervision and have not published financial accounts since 2020. - SRC refinanced 3.5 percent of total mortgages in 2022 and aims to refinance 20 percent by 2026–27. - The NDF aims to transform into a full-fledged development financial institution and seek market funding, creating potential contingent liabilities for the sovereign. - Data and supervisory information gaps: - Official real estate price indices have limitations (outdated stratification, misclassification, time-lags). - Authorities urged to expedite addressing remaining data gaps vis-à-vis the G-20 DGI’s second phase (DGI-2) on Vulnerabilities, Interconnections, and Spillovers. - NFSC should have access to timely and good-quality data given the central role of government-affiliated players in major projects. *Source: 1sauea2024002-print-pdf - 18. Ensure adequate resources and independence of SAMA’s resolution* ### 15. The FSAP deployed various analytical tools to gauge the banking sector’s susceptibility ### The FSAP deployed various analytical tools to gauge the banking sector’s susceptibility to shocks ### Stress testing framework and scenarios - Solvency stress test centered on the IMF January 2024 World Economic Outlook (WEO) baseline. - Adverse scenario covers global and domestic risk and was derived from IMF’s Global Macro-financial Model. - Adverse scenario features: - a global recession which leads to a sharp drop in oil prices (noted as 50 percent below baseline in description of Figure 8). - contraction in fiscal oil revenues, slowdown in NIS implementation, and sharp contraction in Saudi non-oil GDP. - lower inflation and policy rates. - higher risk premium inducing a significant drop in equity and real estate prices. - “Add-on” scenario: coincides with the adverse scenario in all variables except the policy rate, which sharply increases in 2024. - Liquidity risks gauged via cash flow analysis and assessment of LCR and NSFR under scenarios more severe than regulatory tests. - Stress tests complemented with sensitivity analysis, including concentration risk; publicly listed NFCs analyzed for adverse earnings and borrowing cost developments. ### Data and methodological challenges - Time-series for NPL ratios and default rates highly volatile and do not cover large recessions. - Micro data for households and NFCs unavailable. - Institution-level exposures between banks, state-owned financial institutions and NBFIs, intersectoral data, and banks’ exposures to mega/giga projects unavailable, limiting contagion and concentration risk assessment. - Team used sensitivity exercises with portfolio-specific default rates on top of the adverse scenario to address data limitations. ### Solvency stress test findings (bank-level) - Tests conducted on the 11 Saudi banks as of June 2023. - Hurdle rate: regulatory minimum capital (8 percent for the total capital ratio; 4.5 percent for CET1), plus the DSIB surcharge, plus the Pillar II add-on. - Baseline: confirmed banks’ strong initial capital positions and high profitability. - Adverse scenario: capital ratio declines by 2.6 percentage points relative to baseline—mainly due to higher credit losses—with all banks remaining above the hurdle rate. - Extreme add-on exercise with higher interest rates: only one non-DSIB falls marginally below its hurdle rate. - Reverse stress test: a persistent additional 5–9 pp increase in default rates for the whole credit portfolio would create solvency pressures in the aggregate banking system. - Sensitivity exercises: banks resilient to lower house prices, sectoral corporate shocks, and marking-to-market the whole securities portfolio. - Funding-cost sensitivity: an increase in the cost of funding (on top of the adverse scenario with higher interest rates) would lead three non-DSIBs to fall below their hurdle rates (aggregate shortfall of only 0.15 percent of GDP) while the aggregate banking system remains above the hurdle. ### Liquidity stress test findings - Tests covered same 11 domestic banks using regulatory minimum hurdle of 100 percent for LCR and NSFR. - In most severe cases with deposit runoffs and haircuts to sovereign bonds: - Aggregate LCR declined from 189 to 108 percent — three banks fell below the 100 percent hurdle. - Aggregate NSFR declined from 115 to 99 percent — seven banks fell below the 100 percent hurdle. - Aggregate liquidity shortfalls in the most severe scenario: 0.8 and 1.2 percent of GDP for LCR and SFR, respectively. - Analysis of large deposit runoffs reveals significant funding concentration; some banks would face liquidity pressures in extreme scenarios. ### Interconnectedness and contagion - Aggregate exposures between domestic banks are small relative to bank capital: 3.6 percent of capital. - Cross-border contagion risks assessed using Espinosa Vega and Sole (2010) methodology at aggregate banking-sector level: cross-border contagion risks appear low (no single failure of a foreign banking system would lead to failure of the Saudi banking system). - Limitations: lack of institution-level exposures data between banks, state-owned financial institutions (including NDF) and NBFIs, and limited intersectoral exposure data restricts contagion assessment. ### Corporate sector stress testing - Publicly listed NFCs on average resilient to earnings and borrowing cost shocks. - Under severe combined shocks to earnings and interest rates, median ICR drops sharply but remains above 1. - Debt-at-risk increases substantially in consumer, real estate, and industrial sectors. ### Macroprudential policy recommendations and observations - Institutional framework: - SAMA is the macroprudential authority with control over banks and finance companies. - NFSC comprises SAMA, CMA, MoF, Insurance Authority (as of May 2024) and the National Debt Management Center; extends financial stability perimeter to institutions supervised by CMA and Insurance Authority. - NDF and its funds are not subject to prudential supervision and data sharing is limited; consideration recommended to place NDF and its funds under an independent supervisory authority given NDF’s transition. - Authorities should guarantee regular and timely access to NDF data. - Publish a macroprudential strategy to foster public awareness, counter inaction bias, and map intermediate objectives to tools. - Strengthen systemic risk monitoring and close data gaps: - Regularly assess interconnectedness and distributional information about households and NFCs. - Collect distributional mortgage data including DSTI, debt-to-disposable income, debt-to-GDP, borrower characteristics (first vs. second time buyer, age). - Expedite real estate price index overhaul and publish affordability indicators (price-to-income, price-to-rent). - Tightening macroprudential tools would improve resilience: - Consider introducing a releasable capital buffer by changing CCyB framework to a “positive neutral” CcyB to provide baseline resilience and a tool for releasing capital in crises. - Under current “0-neutral” framework, CCyB could be increased from a conjunctural perspective; jurisdictions adopting Positive-Neutral CCyBs have set the rate between 0.5 to 2 percent. - Re-evaluate prudential lending standards: maximum DSTI at 65 percent of income with mortgage subsidies is high; significant share of borrowers have DSTIs above 50 and 60 percent. - LTV limit relatively high at 90 percent for first home buyers (95 percent under the Dhamanat guarantee program); tighter limits recommended, phased in gradually to avoid unintended housing market disruption. - Rationale: Non-oil credit-to-GDP has climbed to nearly 90 percent; credit growth remains strong and may increase with lower interest rates; housing transactions and double-digit annualized house price growth noted. Three largest banks provide around 80 percent of new mortgages. ### Financial supervision and regulatory recommendations - SAMA’s regulatory and supervisory framework aligns with Basel Core Principles and embeds IFSB CPIFR elements; FSAP assessed against BCPs and conducted focused review against CPIFR. - Progress made (SBCL 2020, AMLL 2017, new regulations on financial fraud and cyber risks); draft BCL under consideration. - Gaps in SAMA’s powers and governance: - Lacks some powers such as: calibrating prudential requirements proportionate to risk, reviewing/rejecting proposals to transfer significant ownership, taking timely corrective actions ahead of legal/regulatory breach, accessing boards/management/records, and reviewing parent/affiliated company activities. - Operational independence, accountability, transparency, and legal protection could be strengthened: set qualifying criteria for Governor and Vice Governors, establish grounds for removal, increase transparency of appointment/removal processes, and strengthen legal protection for SAMA staff (including retired staff and agents). - Strengthen licensing, transfer-of-ownership, and major acquisition processes by obtaining additional powers and formalizing assessment criteria and internal guidelines. Key elements to include: identification and due diligence on ultimate beneficial owners, assessment of risks to bank and banking group, SAMA’s ability to supervise and take corrective actions, and resolvability of bank and banking group. *Source: FSAP chapter on banking sector stress testing, solvency and liquidity results, macroprudential framework, and supervisory recommendations from the provided IMF PDF content.* ### 33. Strengthening powers will also help ensure timely corrective and sanctioning actions. ### 33. Strengthening powers will also help ensure timely corrective and sanctioning actions. ### Supervisory powers and risk-based supervision - SAMA, or the Minister, or the Council of Ministers is empowered to take corrective actions when a bank breaches any requirement set in law or regulations, or when a bank adopts a policy that could threaten its solvency or liquidity. - Recommendation: Extend powers to take corrective and sanctioning actions based on supervisory judgment ahead of a regulatory or legal breach or in response to unsound or unsafe practices. - SAMA employs a risk-based approach embedded in supervisory activities; review scope of application is recommended to: - Increase focus on the safety and soundness of the solo bank. - Improve risk assessment of group entities and their impact on the bank or banking group risk profile. - Shift onsite inspections toward assessing qualitative aspects—corporate governance and risk culture. - Systematically engage with each bank’s boards, board committees, and independent board members to challenge board strategy and discuss supervisory examinations, external audits, and risk profiles. ### Regulatory alignment and gaps with international standards - Most SAMA regulations are consistent in substance with Basel standards; some are more conservative (for example, scope of HQLA in the liquidity regime). - Identified regulatory enhancements needed: - Broaden definition of affiliates in related-party rules and introduce related-party limits for banks and for government owned entities related to controlling shareholders. - Update regulations on transfer and country risk, risk management, management of interest rate risk in the banking book, and operational risk. - Increase monitoring of exposures to government and government-owned commercial entities from a concentration risk perspective because these exposures are exempt from large exposure limits, banks have significant exposures to these entities, and these exposures are expected to grow as part of Vision 2030. ### Cross-border cooperation and information sharing - Saudi banking structure: twenty-three foreign banks from eighteen jurisdictions are licensed to have a branch presence (of which sixteen currently operating) and Saudi banks are operating branches or subsidiaries in eight jurisdictions. - Recommendation: Make cooperation arrangements more comprehensive with domestic authorities (including the recently established Insurance Authority) and foreign supervisors; expand to remaining home and host jurisdictions. - Recommendation: Promote proactive periodic sharing and exchange of data and information rather than reactive exchanges. ### Sharī`ah governance and CPIFR assessment - Sharī`ah compliance is ensured by a Sharī`ah Governance Framework (SGF) based on a decentralized Sharī`ah Committee model; individual Islamic banks and Islamic windows have their own Sharī`ah Committees responsible for issuing fatwās and Sharī`ah approvals. - Saudi has adequate human resources, including Sharī`ah scholars, to operate the SGF effectively. - Materiality of some CPIFRs is low given Saudi banks’ relatively simple Islamic products—particularly treatment of PSIAs and equity investment risk. - SAMA’s regulatory framework includes provisions addressing essential criteria related to PSIAs, Islamic window operations and equity investment risk, but these have not yet been fully implemented. - SAMA’s regulation on SGF came into effect on January 1, 2023; SAMA carries out periodic supervisory reviews and uses periodic and thematic inspections driven by its risk-based framework. - Recommendation: Develop supervisory guidance for managing liquidity risk separately for Islamic Windows to preclude perceived risk of contamination and promote consistency in liquidity risk management practices by Islamic windows. - Recommendation: Enhance Pillar 3 disclosures in line with IFSB standards. - Recommendation: Provide supervisory guidance and tools to monitor and confirm effective implementation of recently updated regulations, particularly on: - Management of equity investment risk. - Fiduciary duties to Investment Account Holders. - Capital adequacy calculations for transformation of risk in SC financing. ### AML/CFT supervision - Recommendation: Continue strengthening effectiveness of AML/CFT supervision. - Observations: - Understanding of risks informs SAMA’s allocation of resources for AML/CFT supervision. - Targeted inspections increased in 2023, signaling improved monitoring of data on risks. - Recommendation: Conduct thematic inspections on implementation of key customer due diligence measures (beneficial ownership and politically exposed persons) and reporting of suspicious transactions; levy sanctions for non-compliance. ### Systemic liquidity risk management and market infrastructure - Advances made: - Stronger fiscal discipline has weakened link between excess liquidity and oil prices. - Improved regulatory framework for capital markets has broadened banks’ funding options. - Basel III LCR/NSFR are implemented. - SAMA’s liquidity management instruments and forecasting framework have been improved. - Enhanced SAIBOR methodology reduces the role of expert judgement and provides a more informative market-based benchmark. - A functional SC repo market was established to promote secured interbank lending. - Recommendations to enhance liquidity management: - Improve the reserve requirement framework to encourage banks to utilize it for liquidity management; align maintenance periods with schedules of US FOMC meetings. - Enhance the collateral framework for open market operations (OMO): - Introduce maturity-based haircuts on eligible collateral and gradually transition to a market valuation to account for market risk and support effective market price discovery. - As the market matures, consider including private debt securities (e.g., corporate bonds, MBS, and covered bonds) as eligible collateral in crisis times, subject to strict quality requirements. - Continue use of market-based tools: note that in 2022 liquidity pressures were eased through injections of unsecured SAMA deposits and recycling of MoF funds; starting in 2023 government deposits are auctioned through variable rate auctions, with SAMA acting as agent of the government. - Enhance liquidity forecasting by improving institutional arrangements with government entities to improve forecast accuracy of government-related flows, which are primary drivers of liquidity volatility. ### Liquidity market observations and eligible collateral (preserved technical details) - FSAP survey: only three banks indicated active use of the reserve averaging framework. - Current eligible collateral assets for OMOs are priced at face value with uniform haircuts applied across residual maturities. - Eligible Securities — Original Maturities — Haircuts: - SAMA Bills — All (1/4/13/26/52 weeks) — 2% on face value - Government Sukuks — All (5-30 years) — 2% on face value - Government development bonds — All (2/3/5/7/10 years) — 2% on face value - Murabaha — All — 2% on face value - Government-guaranteed bonds — All — 10% on face value - Observations from liquidity data and markets: - Two episodes of liquidity squeezes in 2022 were eased through SAMA’s ad hoc operations. - Liquidity volatility is primarily driven by changes in the net government position. - Sizable volume of gross reverse repo vs. gross repo on the same day indicates interbank market inefficiency and the need to further promote interbank repo trading. - SC interbank repo market exists but has technical impediments (e.g., align cut-off time on delivery vs. payment platform; reduce fees); market has potential to grow as liquidity shock absorber. - In the medium term, authorities could consider eligibility of high-quality private debt securities in OMO to support long-term funding development. ### Financial safety net: resolution, deposit insurance, and ELA - Resolution and deposit insurance: - SIFIL adopted in 2020 covers systemic financial institutions under SAMA and CMA supervision and introduces a resolution framework with most elements of an effective resolution regime. - Effectiveness depends on: - Establishing a bank specific liquidation framework. - Providing forward-looking resolution triggers. - Empowering SAMA to order banks to remove barriers to resolvability. - Recommendation: Amend law to explicitly cover all banks (systemic and non-systemic). - Recommendation: Amend law to bring insurance sector back under purview following creation of new insurance authority in late 2023. - SAMA has drafted legal provisions on hierarchy of claims in bank liquidation. - SAMA is establishing a Crisis Management Framework Development and Implementation Project (CMFDIP) which aims at aligning its safety net function with international best practice within three years. - Draft Implementing Regulations prepared by SAMA should be finalized and adopted; a methodology should be prepared for designation of SIFIs in resolution. - Draft regulations generally in line with best practice but could be strengthened on depositor preference, repayment of resolution funding ahead of shareholders, and allowing broader ownership of bridge banks (beside SAMA). - Interim recommendation: Adopt methodology for designation of SIFIs at the time of resolution until SIFIL is revised to explicitly cover all banks. - Institutional arrangements and independence: - SAMA currently hosts supervision, resolution, deposit insurance, and future resolution fund functions—creating synergies but also potential conflicts of interest. - Medium-term recommendation: Ensure operational independence for each function; different reporting lines for resolution and supervision authorities; deposit insurance function should have operational and budgetary independence. - Recommendation: NFSC should be provided a clear mandate related to crisis prevention and management. - Capacity building and planning: - SAMA should finish structuring and staffing the SIFI Resolution Division and commence resolution planning, including resolution manuals and playbooks, resolvability assessments, and resolution planning. - Supervisory function should be mandated to review recovery plans submitted by all DSIBs in 2023. - Deposit Protection Fund (DPF): - Deposit insurance has been collecting premiums since 2016 but remains to be operationalized. - A new DPF framework is envisaged under CMFDIP. - Emergency Liquidity Assistance (ELA): - SCBL provides a very general legal basis for ELA; SAMA has significant leeway to design ELA framework. - SAMA has done exploratory work and assessment of other central banks’ ELA policies. - Recommendation: Publish ELA regulation once ready, outlining requirements (solvency, discretionary nature, use only as last resort, full collateralization, conditionality) and parameters (high interest rate, short maturity). - Recommendation: Develop internal ELA procedures covering collateral policies and internal organization; operationalize framework through internal simulations and exercises involving banks and prepositioning of collateral. - Recommendation: SAMA and the Ministry of Finance should establish an MoU defining information exchanges and use of government guarantees for ELA in resolution and other critical scenarios; MoU should establish conditions requiring government guarantees (e.g., uncertain solvency, insufficient collateral capacity, ongoing resolution with prospect of a viable bank) and may require legal adjustments. ### Financial sector development and access to finance - Recommendation: Undertake a strategic review of the role of development finance to support efficiency and effectiveness of the government’s large footprint in the economy and financial sector. - Objectives: Identify market and financing gaps; articulate overall vision for role of the state in the financial sector to achieve Vision 2030 development objectives. - Recommendation: Incorporate PIF in the strategic review given its significant footprint in the financial sector. - NDF needs to enhance transparency and performance monitoring to move towards ambitions of achieving a credit rating and issuing securities. - Opportunities exist to streamline mandates and align functions among market-facing funds to reduce overlaps and enhance efficiency. - Recommendation: NDF to treat separately funds that perform quasi-government functions related to social mandates. - Access to finance for firms: - Banks are main source of credit; micro and small enterprises (MSEs) account for only 0.7 and 2.5 percent of banks’ total credit portfolio, respectively. - Recommendation: Systematically collect and report data on MSMEs and explicitly target MSEs, including women-owned or led businesses. - Recommendation: Review current MSME definitions which include relatively large enterprises. - Recommendation: Enhance design of Kafalah loan guarantee program and relevant NDF funds (e.g., portfolio guarantees, shifting to wholesale model) and improve targeting to serve MSMEs that don’t already have access to finance; better crowd-in banks and NBFIs. *Source: Excerpt from IMF staff assessment and recommendations contained in the referenced IMF chapter.* ### 54. Development of the corporate debt market will help diversify funding. To support ### Development of the corporate debt market will help diversify funding ### Market development measures and instruments - Create a market for qualified professional investors where private placement bonds can be freely traded. - Enhance the clearance and settlement system to support negotiated over-the-counter (OTC) trades. - Mandate a trade repository to collect all OTC transaction information in a timely manner to enhance transparency. - The trade repository could offer pricing services for thinly traded bonds based on a model approved by CMA. - Ongoing NDF reforms will eventually allow the NDF to tap the markets and gradually reduce reliance on public funding. - Opportunities to introduce covered bonds or MBS to diversify funding sources of banks and improving their liquidity position. ### Key entities and acronyms - CMA (Capital Market Authority) - NDF (National Development Funds) - OTC (over-the-counter) - MBS (mortgage-backed securities) - SAMA (Saudi Central Bank) --- ### Payments infrastructure and oversight ### Current systems and settlement - Saudi Payments operates: - the mada card switch, which supports both the domestic debit scheme and international card scheme transactions; - the sarie Instant Payments System (IPS); - the SADAD bill payment system. - All systems settle in SAMA’s Real Time Gross Settlement (RTGS) System, which is also used for interbank large value and low value payments. ### Legal and regulatory developments - Law of Payments and Payment Services of 2021 and its implementing regulations of June 2023 expanded SAMA’s oversight to all payment systems and their operators, and all payment services and their providers. ### Recommendations for oversight and disclosure - SAMA is advised to revise its Payments Oversight Framework to: - reflect the latest legal and regulatory developments; - incorporate specific standards for various payment systems and services; - establish a schedule for overseer and independent assessments. - SAMA and CMA should ensure that all Financial Market Infrastructure (FMI) entities publish disclosures in observance of the principles set for FMIs by the International Committee of Securities Commission (IOSCO). --- ### Climate risk and supervisory approach ### Current initiatives - SAMA and CMA have initiated climate risk management efforts, facilitating national coordination with the financial sector, and preparing an institutional strategy on climate risk and sustainability. ### Recommendations and alignment - SAMA should prioritize assessing the financial impact of climate risk on the banking sector to inform the development of an evidence-based supervisory approach. - Upon finalization, authorities should disclose their strategy to mobilize the financial sector and provide clarity on the way forward. - The definition of supervisory guidelines, currently under development with SAMA, should: - fully align with the Basel principles on climate-related financial risks; - explore integrating a prudential approach to transition plans to foster management of transition risks while mobilizing financial resources towards the transition to a low-carbon economy, aligning with the Kingdom’s objective to diversify its economy away from oil. --- ### Authorities’ views on the FSAP and supervisory reforms ### Overall stance - Saudi Arabia is strongly committed to the FSAP process and the insights it provides into the Saudi financial sector. ### Specific reactions and positions - The authorities welcomed the FSAP’s recognition of the meaningful progress made since the 2017. - They agreed with the systemic risk assessment, which suggests that banks are resilient to a wide range of severe solvency and liquidity shocks, and noted the FSAP recommendations will be useful as SAMA works to expand their risk assessment toolkit. - The authorities emphasized the importance of closing material data gaps to ensure the tools’ effectiveness. - They welcomed the FSAP’s confirmation of the well-functioning institutional framework for macroprudential policy and the well-developed macroprudential policy toolkit, while arguing that some recommendations could have been better tailored to the current conjuncture and mitigants arising from strong fiscal buffers. - Authorities noted the NDF’s ongoing progress with improving the focus and effectiveness of the development funds, stated that their activities do not at present create financial stability risks, and argued that independent prudential supervision of the NDF could be considered once these reforms are completed. - The funds are adopting international accounting standards and preparing to resume regular reporting of financial results. - The authorities pointed that the BCP assessment should better reflect the strengths and performance of SAMA’s supervisory approach and actual practice, and steps to strengthen SAMA’s operational independence. - The authorities note substantial progress in strengthening the supervisory oversight and performance of SAMA, and the new draft BCL, which is expected to be submitted for legislative authorities’ approval in 2024 and further align the framework with best international standards. - The authorities welcomed the FSAP’s confirmation about the regulatory framework’s broad alignment with the CPIFR. *Source: 1sauea2024002-print-pdf - 54. Development of the corporate debt market will help diversify funding. To support* ### 61. The authorities considered the findings and recommendations on systemic liquidity ### The authorities considered the findings and recommendations on systemic liquidity ### Authorities’ response to FSAP findings - The authorities considered the findings and recommendations on systemic liquidity management, crisis management and safety nets useful. - They welcomed the FSAP’s recognition of significant advances in systemic liquidity management, and progress in developing the legal frameworks for ELA and SIFI resolution. - They noted that SAMA has the authority to designate any bank as systemic at any point, including at the point of failure, arguing that this would mitigate one of this and the 2017 FSAP’s key perceived limitation of the SIFI. - They noted the CMFDIP, which aims at full alignment with international best practice within three years. ### Banking sector solvency and asset quality (figures and observations) - Regulatory Capital/ Risk Weighted Assets: time series presented for Saudi Arabia and GCC (percent), with series spanning 2015–2023Q3 in chart form. - Return on Assets and Return on Equity: time series presented for Saudi Arabia and GCC (percent), with series spanning 2015–2023Q3 in chart form. - Non Performing Loans to Total Gross Loans: time series presented for Saudi Arabia and GCC (percent), with series spanning 2015–2023Q3 in chart form. - Source: IMF Financial Soundness Indicators. ### Commercial banks: asset composition (Figure 13) - Bank assets are composed mostly of credit to the private sector and public securities. - Corporate credit is the largest segment of the credit portfolio. - Retail real estate lending was very small until a few years ago, but is now one of the largest segments. - Retail real estate has grown at a very fast pace, particularly in 2020. - With a growing retail real estate portfolio, the average maturity of bank credit has increased in recent years. - Real estate activities (including CRE loans) and construction are among the largest sectors in banks’ corporate portfolio. - Source: Haver. Note: Real estate segment includes commercial real estate loan. ### Commercial banks: liability composition (Figure 14) - Banks are financed mostly with deposits, many of which are not remunerated. - In a context of high interest rates, there has been a shift from demand to time deposits. - Deposits from public entities account for over a quarter of total bank deposits and have been growing at a faster rate than private sector deposits. - Government deposits have historically been highly correlated with oil prices, although the correlation seems to have diminished in recent years. - Sources: Haver and IMF staff calculations. ### Adverse scenario benchmarks (Figure 15) - The two-year cumulative non-oil GDP growth has been highly volatile, with a standard deviation of 5.7 percentage points over the period 1995–2022. - The adverse scenario two-year cumulative growth for non-oil GDP is -3.4 percent, which is 2 standard deviations below baseline and 2.3 standard deviations below mean. - The shock to oil prices represents a 50 percent decline (relative to baseline) in the second year, which is equal to 1 standard deviation. - The non-oil GDP contraction in the adverse scenario is of similar magnitude as during the pandemic, but recovery is slower. The adverse is much milder than the mid-1980s recession. - Sources: Haver and IMF staff calculations. ### Solvency stress test results for the aggregate banking system (Figure 16) - Aggregate CET1 trajectories and capital shortfalls relative to hurdle are presented based on IMF staff calculations. - Note: Due to confidentiality of the Pillar II add-on, the dashed horizontal line corresponding only to the minimum capital requirement plus the average DSIB surcharge is displayed as “chart hurdle.” Any references to the hurdle (and capital shortfalls relative to the hurdle) in the text include the Pillar II add-on. ### Sensitivity analysis with respect to default rates (Figure 17) - Sensitivity exercises apply parallel shifts upwards of portfolio segment-specific PD curves relative to the adverse scenario. - For each shift: CET1 ratio at the trough and capital shortfall relative to the hurdle are displayed. - Four cases considered: PD curve shift in NFC segment only; consumer credit (CC) segment only; mortgage (MORT) segment only; and shift in all segments simultaneously. - Note: Pillar II add-on confidentiality and “chart hurdle” display as in Figure 16. ### Other sensitivity analyses (Figure 18) - With house prices dropping by 40 percent (relative to 2023) at the trough, collateralization of mortgages would deteriorate but the banking system would remain resilient to higher default rates in this portfolio segment. - With a 10 percent of bank liabilities shifting from non-remunerated deposits to earning the current policy rate, the CET1 ratio would drop to 13 and 10 percent for DSIBs and non-DSIBs respectively. - With the whole securities portfolio marked-to-market, the aggregate CET1 ratio would drop by 0.8 percentage points at the starting point due to realization of unrealized losses and would be 12.8percent by 2026. - A one-time default of 10, 20 or 30 percent in individual economic sectors of the NFC portfolio would lead to a drop of at most 2.8 percentage points in the aggregate CET1 ratio. - Banks would broadly remain resilient to top five corporate exposure defaults. - Sources: SAMA and IMF staff calculations. Note: Pillar II add-on confidentiality as above. ### LCR-based liquidity stress test (Figure 19) - The LCR-based liquidity stress test considered regulatory parameters and four scenarios of additional stress on: retail deposits (S1), wholesale deposits (S2), all deposits (S3=S1+S2), plus haircuts on HQLA (S4). - The aggregate LCR remains above the 100 percent hurdle across the stress scenarios. - The withdrawal of top 10 large deposits would have a sizeable impact on the LCR, indicating significant concentration in deposits. - Footnote: LCR after the remainder of the top 10 deposits (after the regulatory runoff rate) are withdrawn by half or fully. Deposits from financial institutions are ignored in this exercise since they are already fully withdrawn in the baseline LCR. - Table of assumed runoffs and HQLA haircuts included in the analysis (selected items preserved): - Insured deposit in trans account with 5% runoff at home: S1 5%, S2 15%, S3 5%, S4 15%, S4 HQLA haircuts 15%. - Uninsured deposit: S1 10%, S2 20%, S3 10%, S4 20%, S4 HQLA haircuts 20%. - Zero risk securities issued by sovereigns: weights 100% across S1–S4, HQLA haircuts 80% in S4. - Sources: SAMA and IMF staff calculations. ### NSFR-based liquidity stress test (Figure 20) - The NSFR-based liquidity stress test considered regulatory parameters and five scenarios of additional stress on: retail deposits (S1), wholesale funding (S2), all funding (S3=S1+S2), plus haircuts on HQLA (S4) and portfolio reallocation towards longer maturities (S5). - The aggregate NSFR remains above the 100 percent hurdle except in the most stringent scenario (S5). - The cashflow analysis is consistent with the LCR- and NSFR-based exercises: banks have enough counterbalancing capacity to face outflows except in the most severe stress scenarios. - Table of RSF/ASF weights by maturity buckets presented (selected items preserved): - Securities eligible as L1 HQLA unencumbered: <6 months 95% (S1), 85% (S2), 95% (S3), 85% (S4), 85% (S5); 6 to 12 months 95%/85%/95%/85%/85%. - Stable demand and/or term deposits from retail and small business customers: ASF weights and other categories shown by maturity buckets and scenarios. - Sources: SAMA and IMF staff calculations. ### Interconnectedness analysis (Figure 21) - The unsecured interbank market in Saudi Arabia is small relative to banks’ capitalization, so one bank’s failure never triggers the failure of any other banks. - The failure of the Saudi banking sector would have a negligible impact on foreign banks. When prioritizing SAMA data, the Saudi banking sector never fails when foreign banking sectors fail. - Contagion analysis metrics (selected cross-border and bank-level results preserved): - Country-level examples (selected): SAU Induced Failures 0, Contagion Rounds 0, Hazard 0, Hazard Rate 0.0, Index of Contagion 0.3, Index of Vulnerability 6.8. - DEU Induced Failures 7, Contagion Rounds 3, Hazard 3, Hazard Rate 27.3, Index of Contagion 43.5, Index of Vulnerability 29.9. - Cross-border charts and contagion tables constructed using Espinosa-Vega and Sole (2010) methodology. - Note: Network chart legend and definitions provided for induced failures, contagion rounds, hazard, hazard rate (percent), index of contagion (percent), index of vulnerability (percent). Cross-border charts prioritize SAMA data when different from BIS locational banking statistics. ### Listed NFCs’ sensitivity to shocks to earnings and borrowing costs (Figure 22) - Three scenarios combining shocks to EBITDA and interest rate: - Scenario 1: EBITDA declines by 15 percent; implied interest rate increases by 100 basis points (bps). - Scenario 2: EBITDA declines by 25 percent; interest rates increase by 150 bp. - Scenario 3 (most adverse): EBITDA declining by 40 percent; interest rates increasing by 300 bp. - ICR defined as ratio of EBITDA to interest expense; debt-at-risk defined as debt of firms with an ICR below 1. - Key findings: - Listed NFCs appear resilient—even severe shocks have the share of companies with ICR<1 increase by only 5pp. - The median ICR dips but still remains above 1 under the adverse scenarios. - Debt-at-risk would increase to 15 percent from a low base of 2 percent under the most adverse scenario. - The most vulnerable listed companies are in consumer discretionary, real estate, energy, and industrial sectors. - Sources: S&P Capital IQ and IMF staff calculations. - Note: 2018 Article IV Staff Report and 2023 Article IV Staff Report analyzed corporate resiliency, with consistent findings. ### Selected economic indicators (Table 5, IMF July 2024 WEO; FSAP baseline follows IMF January 2024 WEO) - Crude oil production (million of barrels per day): 2020 9.2; 2021 9.1; 2022 10.6; 2023 9.6; 2024 9.0; 2025 9.7; 2026 10.2; 2027 10.5; 2028 10.7; 2029 11.0. - Average oil export price (U.S. dollars per barrel): 2020 42.77; 2021 73.21; 2022 102.08; 2023 84.38; 2024 82.57; 2025 77.87; 2026 75.47; 2027 72.97; 2028 71.17; 2029 70.0. - Nominal GDP (SAR billions): 2020 2,754; 2021 3,278; 2022 4,157; 2023 4,003; 2024 4,108; 2025 4,312; 2026 4,538; 2027 4,762; 2028 5,010; 2029 5,290. - Nominal GDP (US$ billions): 2020 734; 2021 874; 2022 1,109; 2023 1,068; 2024 1,096; 2025 1,150; 2026 1,210; 2027 1,270; 2028 1,336; 2029 1,411. - Real GDP (percent change): 2020 -3.6; 2021 5.1; 2022 7.5; 2023 -0.8; 2024 1.7; 2025 4.7; 2026 4.1; 2027 3.6; 2028 3.5; 2029 3.5. - Oil (percent change): 2020 -6.9; 2021 1.2; 2022 15.0; 2023 -9.0; 2024 -4.5; 2025 5.8; 2026 3.8; 2027 2.4; 2028 2.6; 2029 2.6. - Non-oil (percent change): 2020 -2.3; 2021 5.6; 2022 5.3; 2023 3.8; 2024 3.5; 2025 4.4; 2026 4.3; 2027 4.1; 2028 3.9; 2029 3.9. - Consumer price index (avg): 2020 3.4; 2021 3.1; 2022 2.5; 2023 2.3; 2024 1.9; 2025 2.0; 2026 2.0; 2027 2.0; 2028 2.0; 2029 2.0. - Current account balance (percent of GDP): 2020 -3.5; 2021 4.8; 2022 13.7; 2023 3.2; 2024 -0.1; 2025 -1.1; 2026 -1.4; 2027 -2.1; 2028 -2.5; 2029 -2.7. - Central government finances (percent of GDP): - Revenue: 2020 28.4; 2021 29.5; 2022 30.8; 2023 30.3; 2024 29.6; 2025 29.6; 2026 29.4; 2027 28.6; 2028 27.8; 2029 27.1. - Expenditure: 2020 39.1; 2021 31.7; 2022 28.2; 2023 32.3; 2024 32.9; 2025 32.4; 2026 32.2; 2027 31.6; 2028 30.9; 2029 30.1. - Net lending (+)/borrowing (-): 2020 -10.7; 2021 -2.2; 2022 2.5; 2023 -2.0; 2024 -3.3; 2025 -2.9; 2026 -2.9; 2027 -3.0; 2028 -3.1; 2029 -3.0. - Central government deposits at SAMA: 2020 15.9; 2021 11.8; 2022 11.1; 2023 10.9; 2024 10.6; 2025 10.1; 2026 9.6; 2027 9.2; 2028 9.1; 2029 9.2. - Central government gross debt (percent of GDP): 2020 31.0; 2021 28.6; 2022 23.9; 2023 26.2; 2024 28.7; 2025 30.0; 2026 31.0; 2027 32.3; 2028 33.8; 2029 35.3. - Memorandum: SAMA's total net foreign assets (US$ billions): 2020 449.2; 2021 438.2; 2022 440.5; 2023 417.1; 2024 405.2; 2025 403.2; 2026 422.5; 2027 445.4; 2028 465.1; 2029 483.3. - Additional indicators and series presented in Table 5. ### Structure of the financial system (Table 6, 2016 and 2022) - 2016 Adjusted to the 2024 FSAP Presentation (selected aggregates): - Commercial banks: Number 27; Total assets In billions of riyals 3,621; In billions of US dollars 966; In percent of total 61; In percent of GDP 87. - Pension fund (GOSI): Number 1; In billions of riyals 1,278; In billions of US dollars 341; In percent of total 21; In percent of GDP 31. - Public Investment Fund (PIF): Number 1; In billions of riyals 2,910; In billions of US dollars 776; In percent of total 70. - 2022 (selected aggregates): - Commercial banks: Number 24; Total assets In billions of riyals 2,289; In billions of US dollars 610; In percent of total 51; In percent of GDP 92. - Pension funds: Number 5; In billions of riyals 1,169; In billions of US dollars 312; In percent of total 26; In percent of GDP 47. - Public Investment Fund (PIF): In billions of riyals 350; In billions of US dollars 93; In percent of total 8. - Note: Footnotes clarify inclusions/exclusions, PIF assets under management at end-2022 US$596 billion, and reasons for changes in financial sector size relative to GDP. ### Financial Soundness Indicators (Table 7, 2018–2023; selected series) - Banking sector structure: - Number of licensed banks: 2018 29; 2019 25; 2020 25; 2021 26; 2022 27; 2023 28. - Total assets (percent of GDP): 2018 80.1; 2019 81.6; 2020 104.9; 2021 97.2; 2022 84.3; 2023 95.9. - Total loans (percent of GDP): 2018 48.3; 2019 51.8; 2020 67.6; 2021 65.4; 2022 58.5; 2023 66.7. - Credit to private sector (percent of GDP): 2018 46.7; 2019 47.4; 2020 61.9; 2021 60.3; 2022 53.5; 2023 60.9. - Total deposits, excluding interbank (percent of GDP): 2018 56.3; 2019 57.1; 2020 70.6; 2021 64.6; 2022 55.2; 2023 61.8. - Capital adequacy: - Regulatory capital to risk-weighted assets: 2018 20.3; 2019 19.3; 2020 20.3; 2021 19.9; 2022 19.9; 2023 20.1. - Tier-1 capital to risk-weighted assets: 2018 18.5; 2019 18.0; 2020 18.7; 2021 18.2; 2022 18.4; 2023 18.6. - Asset quality: - Net loans to total assets: 2018 62.6; 2019 63.5; 2020 64.4; 2021 67.3; 2022 69.3; 2023 69.5. - Gross NPLs to gross loans: 2018 2.0; 2019 1.9; 2020 2.2; 2021 1.9; 2022 1.8; 2023 1.5. - Total provisions to gross NPLs: 2018 157.2; 2019 148.1; 2020 134.7; 2021 147.7; 2022 124.5; 2023 129.8. - Net NPLs to total capital: 2018 1.1; 2019 1.6; 2020 2.5; 2021 2.5; 2022 2.7; 2023 2.2. - Total provisions for loan losses (as percent of total loans): 2018 3.2; 2019 2.8; 2020 2.9; 2021 2.7; 2022 2.2; 2023 1.9. - Contingent and off-balance sheet accounts to total assets: 2018 71.3; 2019 73.9; 2020 69.0; 2021 63.3; 2022 65.6; 2023 64.5. - Profitability: - Profits (percent change): 2018 9.8; 2019 4.5; 2020 -24.0; 2021 42.9; 2022 28.5; 2023 11.5. - Average pretax return on assets: 2018 2.1; 2019 2.1; 2020 1.5; 2021 1.8; 2022 2.1; 2023 2.2. - Return on equity: 2018 13.8; 2019 12.1; 2020 8.6; 2021 10.8; 2022 12.5; 2023 12.8. - Noninterest expenses to total income: 2018 36.3; 2019 35.9; 2020 36.2; 2021 36.1; 2022 34.0; 2023 32.9. - Average lending spread: 2018 3.9; 2019 3.9; 2020 3.5; 2021 3.2; 2022 3.1; 2023 3.1. - Liquidity: - Liquid assets to total assets: 2018 22.3; 2019 25.4; 2020 26.8; 2021 24.7; 2022 22.8; 2023 21.8. - Liquid assets to short-term liabilities: 2018 35.5; 2019 41.3; 2020 43.8; 2021 41.3; 2022 39.7; 2023 38.9. - Customer deposits to net loans: 2018 115.6; 2019 115.0; 2020 109.6; 2021 102.6; 2022 97.5; 2023 96.1. - Demand deposits to total deposits: 2018 62.2; 2019 61.2; 2020 66.0; 2021 64.6; 2022 57.9; 2023 53.1. - Sensitivity to market risk: - Foreign currency-denominated deposits to total deposits: 2018 8.7; 2019 8.6; 2020 7.4; 2021 9.5; 2022 11.2; 2023 9.8. - Foreign currency-denominated loans to total loans: 2018 8.4; 2019 8.9; 2020 8.6; 2021 7.5; 2022 7.5; 2023 8.1. - Net open foreign currency position to capital: 2018 6.4; 2019 6.7; 2020 7.3; 2021 0.0; 2022 -2.4; 2023 1.2. - Stock market: - Stock market capitalization (percent of GDP): 2018 63.0; 2019 287.0; 2020 330.6; 2021 307.3; 2022 237.7; 2023 281.2. - Overall stock market price index (change in percent): 2018 8.3; 2019 7.2; 2020 3.6; 2021 29.8; 2022 -7.1; 2023 14.2. - Bank stock price index (change in percent): 2018 31.1; 2019 12.4; 2020 -6.4; 2021 61.0; 2022 -5.6; 2023 5.7. - Source: Saudi Central Bank (SAMA). *Source: 1sauea2024002-print-pdf (IMF).* ### Appendix I. Residential and Commercial Real Estate Prices ### Appendix I. Residential and Commercial Real Estate Prices ### Data sources and institutional roles - GASTAT is responsible for the compilation of real estate price indices in Saudi Arabia. - The price indices are based on a dataset of real estate transactions available from the MoJ. - The MoJ’s real estate exchange contains a registry that includes all housing transactions for completed residential and commercial real estate projects. - The Real Estate General Authority publishes house price data based on the MoJ register. ### Composition of the real estate price index - The land weight (plot) for residential real estate, commercial real estate, and agriculture represents over 95 percent of the total weight. ### Identified flaws in index compilation and methodological issues - Stratification and weights were determined in 2014 and miss neighborhoods developed since 2014. - Over half of recent real estate transaction data is misclassified as land. - “Off-plan” transactions—where a property is sold before its completion—are included in the indices upon the completion of the construction project, resulting in a 2–3-year lag. - The commercial real estate price index also needs an update regarding weights and property classifications. ### Ongoing corrections and methodology updates - GASTAT is updating the methodology (weighting and stratification) and correcting the misclassification by leveraging Census 2022 and data from MOMRAH and REGA. - MoJ is exploring how best to include off-plan transactions in the future. ### Data coverage and limitations relevant for monitoring and analysis - MoJ registry covers transactions for completed projects but does not include off-plan transactions. - Many government entities use MoJ exchange data to monitor the housing market. - The registry’s exclusion of off-plan transactions and the 2–3-year inclusion lag in GASTAT’s indices imply potential misalignment between index signals and contemporaneous market developments. *Source: Appendix I. Residential and Commercial Real Estate Prices, IMF staff report (text provided).* ### 4. Risks and buffers Risks/factors assessed • Credit risk. ### 4. Risks and buffers ### Credit and market risk (overview) - Risks/factors assessed: - Credit risk. - Interest rate risk. - Market risk from fixed income securities. - Buffers: - Existing loan loss provisions and capital buffers. - Internal capital generation (i.e., retained earnings). - No new capital injections. ### Reporting and regulatory standards (capital stress testing) - Regulatory/accounting and market-based standards: - National regulatory framework. - Reporting format for results: - Capital ratios for the aggregate banking system and by groups of banks (DSIBs and non-systemic banks). - Contributions of individual risk factors to evolution of capital ratios. - Systemwide capital shortfalls relative to the hurdle rate. ### Liquidity — Banking Sector Stress Testing Matrix (Top-down by FSAP Team) - Institutional perimeter: - Institutions included: All 11 domestic banks. - Market share: The 11 domestic banks account for 98 percent of total assets and deposits of the banking system. - Data source and starting date: - Data source: supervisory reports for Liquidity Coverage Ratio and Net Stable Funding Ratio; special data requests to banks for cashflow data. - Data as of June 2023. - Consolidated at national bank level. - Methodology: - LCR and NSFR statistics, using regulatory parameters and more severe scenarios. - Cashflow-based liquidity stress test. - LCR data available by currency only at a high level (i.e., HQLA and net cash outflows, without detailed breakdown), and only for banks that have sufficiently large liabilities in the corresponding currency. - Large depositor withdrawal tests to address concentration risks. - Stress test horizon: - 30 days for LCR-based tests, one year for NSFR-based tests, and up to six months for cash-flow-based analysis. - Type of analyses: - Scenario analysis: Baseline and various scenarios are considered, with varying intensity of adverse liquidity conditions. - Main risks analyzed: deposit run-offs (including government deposits) and illiquidity of secondary markets for sovereign bonds. - Risks and buffers (assumptions and derivation): - Funding liquidity risk reflected in funding run-off rates in the stress scenario, calibrated to reflect scenarios of system-wide deposit runs. - Run scenario addresses both conventional runs and potential deposit withdrawals if a bank is deemed Sharī`ah non-compliant. - Market liquidity risk reflected in asset haircuts, influenced by market movements, potential fire sales and thin/illiquid secondary markets for securities. - Behavioral adjustments: Liquidity from the central bank is not considered. - Buffers: Capacity of banks to generate liquidity from assets under stress (counter-balancing capacity). - Regulatory standards: - For both LCR and NSFR, the hurdle rate is set at 100 percent at the aggregate currency level (per Basel III and domestic regulation). - Reporting format for results: - Outputs include: (i) changes in the system-wide liquidity position; and (ii) number of institutions with LCR/NSFR below regulatory limits. ### Interbank contagion and network analysis - Institutional perimeter: - Institutions included: - Interbank network: all 11 domestic banks accounting for 98 percent of total banking sector assets; - Aggregate cross-border data: domestic and foreign banking sectors at aggregate level. - Data and starting position: - Data source: special requests to banks for inter-institution exposures; data from SAMA and BIS Locational Banking Statistics for cross-border interconnectedness. - Data as of June 2023. - Methodology: - Overall framework: Contagion analysis based on Espinosa-Vega and Sole (2010). - Descriptive charts to map network structure. - Risks and buffers: - Risks: Credit shock and funding shock bringing capital impairment due to inter-institution exposures. - Buffers: Institution’s own capital buffers. - Reporting format for results: - Network charts mapping inter-institution exposures. - Indices of vulnerability and contagion based on Espinosa-Vega and Sole (2010) contagion analysis. ### Appendix IV — Status of 2017 FSAP Recommendations (selected entries) - Banking Oversight: - Update the Banking Charter and Banking Control Law: Consultation on a new Banking Control Law (BCL) ended in early 2023; authorities considering feedback before finalizing a Bill. - Codify and publish all bank legislative circulars: SAMA launched its Circulars Portal in December 2020; codification and elimination of superseded circulars is work-in-progress. - Strengthen supervisory approach (risk/control ratings, supervisory planning, loan examination documentation): New risk-based supervisory framework rolled out; risk rating now based on inherent risk and control rating; supervisory planning aligned to bank risk profiles; documentation for loan examinations enhanced. - Develop a licensing manual: Revised licensing criteria and guidelines published on SAMA’s website in January 2019; SAMA is yet to develop a licensing manual or internal guidelines. - Guidance on mapping Islamic products to Basel framework: SAMA issued “Additional requirements on capital adequacy for Sharī`ah-compliant banking” in October 2023; came into effect on January 1, 2024. CPIFR assessment in December 2023 observed the regulation has not yet been fully implemented; SAMA is yet to develop reporting requirements and supervisory monitoring/inspection procedures to ensure effective compliance. - Adopt draft regulation on loan classification and reporting on rescheduled/restructured loans: SAMA adopted IFRS9 requirements; banks compliant since 2018. SAMA implemented BCBS Guidelines on non-performing exposures and forbearance. SAMA is issuing prudential requirements for loans classification and provisioning but is yet to obtain regular comprehensive reporting on rescheduled and restructured loans. - Require formal policies/procedures for loan rescheduling/refinancing/restructuring and prudential returns: SAMA issued rules on management of problem loans in January 2020 requiring banks to establish restructuring policies; full prudential reporting or public disclosure on such loans not yet established. - Strengthen cross-border cooperation (MoUs): SAMA has signed an MoU with supervisory authorities in one of the eight host jurisdictions and is yet to sign MoUs with supervisory authorities from sixteen home jurisdictions. - Liquidity Management: - Establish a liquidity-forecasting framework: SAMA’s liquidity forecasting model was developed in 2018. TA delivered in September 2023 provided a liquidity forecasting toolbox, tutorial sections, and recommendations to improve the framework; TA underscored the need for coordination among external stakeholders for exogenous data, such as government plans. - Financial Safety Nets: - Adopt and implement the Draft Resolution Law (DRL): Largely implemented. Law on resolution of systemically important financial institutions issued in December 2020, but does not fully consider 2017 FSAP recommendations to expand scope to all banks and detail powers/tools and bank-specific liquidation framework. Key regulations drafted but yet to be adopted. - Establish an Emergency Liquidity Assistance (ELA) framework: Partially Implemented. SAMA has developed a general ELA framework, which is yet to be adopted. - Establish a timeframe for DPF deposit payouts and ensure a back-up funding line: Draft law under public consultation; draft does not allow for DPF’s independence, places it under SAMA’s “supervision and oversight” and does not clearly define DBF’s mandate. - Macroprudential Policy: - Broaden definition of debt service-to-income to include all types of debt and income: Principles issued in May 2018 and implemented in August 2018. - Strengthen data collection and use for household, corporate, and real estate sectors: Monthly data on new residential mortgages and SMEs finance are now published; work ongoing to further strengthen data collection. *Source: 1sauea2024002-print-pdf — 4. Risks and buffers.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1sauea2024002-print-pdf.pdf_