## Summary Compliance with the Basel Core Principles––Report on Standards and Codes (_cr13213)

## Source details

**Canonical URL:** [Summary Compliance with the Basel Core Principles––Report on Standards and Codes (_cr13213)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13213.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13213.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13213.pdf.json)

---

### Introduction and Methodology
- Assessment conducted by a mission to Saudi Arabia during April 9–20, 2011 as part of an IMF–World Bank FSAP Update.
- Assessors: Peter Hayward (IMF consultant) and Cédric Mousset (World Bank).
- Assessment used only the essential criteria in the 2006 Basel Committee methodology.
- Basis: review of laws, regulations, policies and practices in place at the time; legal/regulatory sources included the 1966 Banking Control Law (BCL), the 1957 SAMA Charter, SAMA circulars, and the Code of Corporate Governance issued by the Capital Markets Authority (CMA).
- Other inputs: self-assessment, interviews with SAMA staff, internal reports, meetings with banks, external audit firms and a lawyer; material in English included, reports in Arabic unavailable to non-Arabic speakers were not.

### Institutional, Macroeconomic Setting and Market Structure — Key Facts
- Banking system and market structure:
  - 23 licensed banks, but only 20 are “active” (as of December 2010).
  - 12 Saudi incorporated banks whose assets account for 98 percent of the banking system assets.
  - Banking assets represent more than half of total financial system assets and 85 percent of GDP.
  - Loans are the largest bank asset class: 54 percent of banks’ aggregate balance sheet at end-2010.
  - Seven largest banks combined share of assets: 85 percent.
  - Three largest banks combined share: about 45 percent.
  - Two new domestic banks (licensed in mid-2000s) account for 3 percent of banking assets.
  - Foreign branches account for a 2 percent market share.
- Ownership:
  - Dominant shareholders of the three largest banks are government entities; fourth largest linked to a family business group; next three have ties to major international banks.
  - All banks with government participations appear to be run on a commercial basis; all banks but the largest (state-owned) are listed.
- Financial infrastructure and standards:
  - Saudi Credit Bureau (SIMAH) modernized credit reporting.
  - Saudi Arabia implements IFRS for banks and insurance companies; listed companies apply local GAAP and auditing standards set by Saudi Organization for Certified Public Accountants.
  - No formal deposit insurance scheme in Saudi Arabia.
  - No Emergency Liquidity Assistance (ELA) needed recently; ELA conditions would be determined on a case-by-case basis.

### Banking System Performance and Soundness Indicators (selected)
- Solvency and capital:
  - Solvency ratio for the sector as a whole: above 17 percent in December 2010 (down from about 21 percent in December 2007).
  - Tier 1 capital ratio: about 15 percent (end-2010).
  - Decline in capital adequacy ratios between 2007 and 2008: 16 percent (noted), driven by new operational risk charge from Basel 2, rapid asset growth coupled with slower growth of own funds.
- Credit growth and asset quality:
  - Credit declined by 1 percent over the 12 months to December 2009.
  - Credit increased by 5 percent in the following 12 months (to December 2010).
  - Nonperforming loan (NPL) ratio: broadly at 3 percent.
  - Provisions covering NPLs: 116 percent in December 2010; raw data from SAMA shows a provisioning ratio of 90 percent.
- Profitability and liquidity:
  - Return on assets: nearly 2 percent in December 2010 (compared with 2.8 percent in December 2007).
  - Return on equity: 13.6 percent in December 2010 (compared with 22.3 percent in December 2007).
  - Liquidity appears to be adequate.

### Preconditions for Effective Supervision — Observations
- System simplicity aids supervision but growth in sophisticated products will require more elaborate supervisory approaches.
- Collateral regime improving, especially for real estate; enforcement remains difficult and lengthy, worse for movables.
- Package of five draft laws approved by the Shura Council and submitted to the Council of Ministers includes an Enforcement Law expected to improve enforcement procedures for all types of collateral.
- No formal deposit insurance; SAMA has not needed to provide ELA recently.

### Main Findings — Progress and Structural Issues
- Improvements since 2004 FSAP:
  - Introduction of Basel II and use of Pillar 2 for risk management and capital planning improvements.
  - Adoption of risk-based approaches (RBAs) in supervision; overall SAMA staffing around 200 (a doubling over the past five years).
  - Initiation of Basel III requirements.
- Core Principle thematic summary (selected):
  - CP1 (Objectives, independence, powers, transparency, cooperation):
    - Legal framework is old; BCL hardly changed since 1966.
    - BCL provides less formal independence and authority for SAMA than is exercised in practice.
    - Recommendations include updated law to remove need for government approval for licensing, sanctions, regulations, inspections, and to put SAMA’s autonomy on a statutory basis; add legal protection for supervisors; require SAMA approval for transfers of significant ownership; create a bank resolution framework; mandate consolidated supervision and information sharing.
  - CPs 2–5 (Licensing and structure):
    - Prudent licensing approach; core licensing criteria not public; requirement that new banks “add value” should be withdrawn; publish detailed criteria; remove ex ante approval requirements for outlets to allow risk-based ex post coverage; strengthen legal basis to control ownership changes.
  - CPs 6–18 (Prudential regulation and requirements):
    - Substantial Basel II implementation; need improved large exposures and related-party regime; issue framework circular consolidating risk management guidance and update market risk and internal control requirements.
    - Attention to individual large exposures should be intensified; remove ability to allow large exposures up to 50 percent of capital (recommend cap at, for example, 25 percent).
    - Broaden definition of related parties to capture close family relationships.
  - CPs 19–21 (Ongoing supervision methods):
    - Progress on RBA but transition incomplete; supervisory regime still contains many ex ante approval requirements.
    - On-site process relies primarily on full-scope examinations; schedule should be better defined to avoid crowding effects and focus more on actual risks and branches of foreign banks; verify prudential reporting more systematically.
  - CP22 (Accounting and disclosure):
    - IFRS and ISA introduced for banks and auditors; Pillar 3 disclosure introduced in 2008.
    - Capital buffers defined in ICAAP; provisioning buffers set pragmatically and would benefit from formalization.
  - CP23 (Corrective and remedial powers):
    - Proactive supervision means formal enforcement rarely needed; remove statutory need for government approval to exercise SAMA’s powers; establish specific bankruptcy and resolution regimes for banks.
  - CPs 24–25 (Consolidated and cross-border supervision):
    - Consolidated supervision exercised effectively in practice; expansion across borders could challenge management and supervisors.
    - Finalize MOU with CMA and consider written agreements with foreign supervisors for cooperation in emergencies.

### Detailed Core Principle Assessments — Selected Gradings and Comments
- 1.1 Responsibilities and objectives — LC: SAMA’s objectives are not defined.
- 1.2 Independence, accountability and transparency — LC: Key regulatory/supervisory actions need MOF or Council of Ministers approval in law.
- 1.3 Legal framework — LC: BCL not updated; circulars not easily/publicly available.
- 1.4 Legal powers — LC: Key powers subject to external approval in law.
- 1.5 Legal protection — NC: Supervisors do not benefit from clear legal protection.
- 1.6 Cooperation — C: Draft MOU between CMA and SAMA being finalized.
- 3. Licensing criteria — LC: Core criteria not public; “add value” requirement unrelated to safety and soundness.
- 4. Transfer of significant ownership — MNC: No legal provisions on transfer of significant ownership.
- 6. Capital adequacy — C: Minimum capital ratios well exceed Basel requirements; banks observe minimum ratio of 12 percent and individual target ratios (average target ratio currently about 14 percent).
- 7. Risk management process — LC: Key requirements can be only indirectly imposed on banks and branches of foreign banks.
- 8. Credit risk — LC: Recent large corporate failures suggest need to strengthen credit risk regulation.
- 10. Large exposure limits — MNC: Large exposure limit can be raised to 50 percent (possibility sometimes used by SAMA); supervision not implemented systematically during full-scope inspections (definition of connected parties).
- 11. Exposure to related parties — MNC: Definition of related parties not comprehensive; supervision not systematic.
- 13. Market risks — LC: Guidance does not cover all derivative activities; some core requirements not binding.
- 17. Internal control and audit — LC: Framework comprehensive but could be updated.
- 19–21 Supervisory approach/techniques/reporting — LC: Supervisory risk ratings not differentiated; on-site program generates crowding effects; full-scope inspections do not always assess ERMS reliability or provisioning of individual exposures.
- Aggregate grading counts: (aggregate counts in source presented as placeholders; specific totals not provided in supplied excerpt).

### Selected Quantitative and Regulatory Details (preserve exact figures)
- Banking assets: 85 percent of GDP (system-wide, end-2010 context).
- Bank assets composition: Loans 54 percent of aggregate balance sheet (end-2010).
- Solvency ratio: above 17 percent (December 2010); about 21 percent (December 2007).
- Tier 1 capital ratio: about 15 percent (end-2010).
- Decline in capital adequacy ratios between 2007 and 2008: 16 percent.
- Credit flows: −1 percent over the 12 months to December 2009; +5 percent in the 12 months to December 2010.
- NPL ratio: broadly at 3 percent.
- Provisions covering NPLs: 116 percent (December 2010); SAMA raw data shows 90 percent.
- Return on assets: nearly 2 percent (December 2010); 2.8 percent (December 2007).
- Return on equity: 13.6 percent (December 2010); 22.3 percent (December 2007).
- System liquidity and statutory ratios:
  - Minimum liquid assets ratio: statutory 15 percent of deposit liabilities; has been increased to 20 percent; actual ratio about 34 percent for the system as a whole.
  - Statutory deposit requirement: no less than 15 percent of deposits with SAMA; ratio can be varied between 10 percent and 17.5 percent.
  - Guideline maximum loans as proportion of deposits: 85 percent (raised from 60 percent in 2006 to 85 percent in circular 392 of July 2008).
  - BCL Article 6 leverage provision: deposit liabilities shall not exceed 15 times capital and reserves.
- Large exposures and reporting:
  - Non-financial counterparty individual exposure limit: cannot exceed 25 percent of paid up capital and reserves; SAMA does not expect such exposures to exceed 15 percent; SAMA can authorize raising limit to 50 percent (case-by-case).
  - For banks/financial institutions: limits set at 50 percent of paid up capital for adequately capitalized banks (defined as capital adequacy ratio above 8 percent and Tier 1 ratio above 4 percent) and at 25 percent for other banks.
  - All exposures exceeding 10 percent of a bank paid up capital and reserves must be reported to SAMA monthly.
  - Sum of non-bank exposures exceeding 10 percent threshold cannot exceed 8 times a bank’s paid up capital and reserves.
  - April 2011 example: a large bank held a large exposure exceeding 35 percent of its capital and reserves, with SAMA authorization.
- SAMA resourcing (selected):
  - Banking Inspection Department (BID): 156 employees (30 studying abroad); examination division 50 people.
  - Banking Supervision Department (BSD): 71 employees (12 studying abroad).
  - Overall SAMA supervision staffing around 200 people (doubling over five years).

### Recommended Action Plan (selected, by principle)
- Principle 1: Define SAMA’s objectives (public statements short term, revised law medium term); remove requirement for MOF/Council approval for key powers; codify circulars and publish prudential circulars online; introduce legal protection for supervisors.
- Principle 3: Publish SAMA core licensing criteria; remove “add value” requirement.
- Principle 4: Introduce legal provisions on transfer of significant ownership; implement methodology for beneficial ownership.
- Principle 7: Issue circular consolidating key risk management requirements and covering branches of foreign banks.
- Principle 8: Strengthen credit risk regulation; issue guidelines for large non-listed private groups; intensify verification of large exposures on-site.
- Principle 10: Remove authority to raise non-financial counterparty limit to 50 percent; cap exposures (for example, 25 percent); revise procedures for aggregation of related parties and ERMS risk assessment.
- Principle 11: Broaden definition of related parties to include close family members and key staff; implement systematic supervision of related-party risks; prepare beneficial ownership methodology.
- Principle 13: Update market risk framework to cover all derivative activities, incorporate recent best practices, and make core requirements binding.
- Principle 17: Update internal control requirements; consider meetings with full boards as supervisory practice.
- Principle 18: Implement FATF recommendations: set ongoing due diligence requirements in legislation and improve beneficial owner identification; better organize on-site AML/CFT program to avoid uneven cycles.
- Principle 19: Differentiate bank risk ratings more granularly; update risk profiles at least annually including branches of foreign banks.
- Principle 20: Better define full-scope examination schedule to avoid crowding effects; devote more resources to loan-by-loan reviews of large exposures and problem assets; refocus limited-scope examinations on actual risks and banks’ capacity to manage them.
- Principle 21: Systematically assess reliability of ERMS returns on-site and reflect in mission scope and reports.
- Principle 22: Formalize process for setting provisioning buffers; communicate supervisory expectations earlier relative to auditors’ timelines.
- Principle 23: Remove requirement for approval outside SAMA to exercise formal supervisory action (e.g., MOF); establish a specific bankruptcy and special resolution regime for banks.
- Principle 24: Revise legal requirements to strengthen SAMA’s legal basis for consolidated supervision; systematically review group internal control/risk management frameworks during on-site inspections.
- Principle 25: Update BCL confidentiality provisions to permit information sharing for supervisory purposes; establish MOUs with relevant foreign supervisors.

### Authorities’ Response (summary)
- Saudi authorities broadly agree with findings, support FSAP, but have reservations on certain gradings and note that the assessment did not fully reflect actions taken; they stress qualitative aspects given local and regional context.
- Authorities contest certain gradings (CP 1(3), 1(4), 1(5), 4, 10, 11) and note existing legal protections and the BCL have functioned to implement international standards including Basel-II / Basel-III.
- Authorities will review FSAP recommendations and take appropriate actions within the existing legal and regulatory framework.

*Source: IMF–World Bank FSAP Update mission report: "Summary Compliance with the Basel Core Principles––Report on Standards and Codes" (assessment based on laws, regulations, policies and practices as of mission April 9–20, 2011).*

### 1. Summary Compliance with the Basel Core Principles––Report on Standards and Codes ....9

### 1. Summary Compliance with the Basel Core Principles––Report on Standards and Codes ....9

### Introduction
- Assessment of Saudi Arabian Monetary Agency’s (SAMA) compliance with the Basel Committee’s Core Principles for Effective Banking Supervision conducted by a mission to Saudi Arabia during April 9–20, 2011.
- Assessment part of a Financial Sector Assessment Program (FSAP) Update undertaken by the IMF and the World Bank at the request of the Saudi authorities.
- Authorities requested assessment using only the essential criteria in the methodology.
- Assessment conducted by Peter Hayward (IMF consultant) and Cédric Mousset (World Bank).

### Information and Methodology Used for Assessment
- Based on review of laws, regulations, policies and practices in place at the time.
- Legal and regulatory sources: 1966 Banking Control Law (BCL) and its implementing ministerial decision, the 1957 SAMA Charter, circulars issued by SAMA, Code of Corporate Governance issued by the Capital Markets Authority (CMA).
- Other sources: a self-assessment, detailed interviews with SAMA staff, internal reports, external meetings with banks, external audit firms and a lawyer.
- Material included reports and assessments prepared in English (e.g., full-scope examinations) but not reports prepared in Arabic and unavailable to non-Arabic speakers.
- Assessment conducted using the 2006 methodology published by the Basel Committee for Banking Supervision.

### Institutional and Macroeconomic Setting and Market Structure—Overview
- Saudi Arabia confronted the global financial crisis from a position of strength; authorities strengthened the government balance sheet and enhanced the financial sector’s resilience.
- As of December 2010:
  - 23 licensed banks, but only 20 are “active.”
  - 12 are Saudi incorporated banks, whose assets account for 98 percent of the banking system assets.
  - Banking assets represent more than half of total financial system assets and 85 percent of GDP.
- Bank assets and credit as a percentage of GDP are comparable to those in other countries with similar characteristics.
- Loan portfolios are concentrated with limited lending to SMEs and housing; credit concentration risk mitigated by high capital requirements.
- Sharia-compliant products offered by commercial banks based on a single license; products mainly “plain vanilla” (for example installment sales) and primarily involve credit risk.
- Market concentration:
  - Seven largest banks combined share of assets: 85 percent.
  - Three largest banks combined share: about 45 percent.
  - Next four each have market shares exceeding 5 percent.
  - Two new domestic banks (licensed in mid-2000s) account for 3 percent of banking assets.
  - Foreign branches account for a 2 percent market share.
- Ownership:
  - Dominant shareholders of the three largest banks are government entities.
  - Fourth largest linked to a family business group.
  - Next three have ties to major international banks.
  - All banks with government participations appear to be run on a commercial basis; all banks but the largest (state-owned) are listed.

### Banking System Performance and Soundness Indicators
- Solvency and capital:
  - Solvency ratio for the sector as a whole: above 17 percent in December 2010 (down from about 21 percent in December 2007).
  - Tier 1 capital ratio: about 15 percent (end-2010).
- Causes of decline in capital adequacy ratios between 2007 and 2008:
  - New operational risk charge due to implementation of Basel 2.
  - Rapid asset growth coupled with slower growth of own funds.
  - Decline noted as 16 percent between 2007 and 2008.
- Credit growth:
  - Credit declined by 1 percent over the 12 months to December 2009.
  - Credit increased by 5 percent in the following 12 months (to December 2010).
- Asset quality and provisioning:
  - Nonperforming loan (NPL) ratio: broadly at 3 percent.
  - Provisions covering NPLs: 116 percent in December 2010.
  - Raw data received from SAMA shows a provisioning ratio of 90 percent.
- Asset composition:
  - Loans are the largest bank asset class: 54 percent of banks’ aggregate balance sheet at end-2010.
- Liquidity and profitability:
  - Liquidity appears to be adequate.
  - Return on assets: nearly 2 percent in December 2010 (compared with 2.8 percent in December 2007).
  - Return on equity: 13.6 percent in December 2010 (compared with 22.3 percent in December 2007).

### Preconditions for Effective Banking Supervision
- Financial system risks reflect openness of the economy, dependence on the hydrocarbon sector, and market size.
- Relatively simple banking system centered on core banking activities makes supervision relatively straightforward; growth in sophisticated products will require more elaborate supervisory approaches.
- Financial infrastructure improvements:
  - Collateral regime progressively being improved, especially for real estate; enforcement of real estate collateral remains difficult and lengthy; situation worse for movables.
  - A package of five draft laws recently approved by the Shura Council and submitted to the Council of Ministers includes an Enforcement Law expected to improve enforcement procedures for all types of collateral.
  - Saudi Credit Bureau (SIMAH) has modernized the credit reporting system.
- Accounting and auditing:
  - Saudi Arabia implements International Financial Reporting Standards (IFRS) for banks and insurance companies.
  - Listed companies apply local generally accepted accounting principles and auditing standards set by Saudi Organization for Certified Public Accountants, which are not as comprehensive and detailed as IFRS and International Standards of Auditing (ISA).
- No formal deposit insurance scheme in Saudi Arabia.
- No need for Emergency Liquidity Assistance (ELA) to any bank in recent years; conditions under which SAMA would provide ELA would be determined on a case-by-case basis.

### Main Findings
- Improvements since the 2004 FSAP:
  - SAMA introduced Basel II and used Pillar 2 requirements to foster improvements in banks’ risk management and capital planning.
  - Risk-based approaches (RBAs) introduced in supervision; overall staffing around 200 people (a doubling over the past five years).
  - SAMA initiated the introduction of Basel III requirements.
- Summary assessment by thematic area:
  - Objectives, independence, powers, transparency, and cooperation (CP1):
    - Legal framework is old; BCL hardly changed since 1966.
    - BCL provides less formal independence and authority for SAMA than is exercised in practice.
    - Planned codification of circulars and other communications with banks will help.
    - BCL could be updated to remove need for government approval to license banks and impose sanctions, issue regulations, conduct inspections, and put SAMA’s present autonomy on a statutory basis.
    - Provisions could be added for legal protection to supervisors, require SAMA’s approval for transfer of significant ownership, create a bank resolution framework, and provide a clear mandate to exercise consolidated supervision and share information for supervisory purposes.
  - Licensing and structure (CPs 2–5):
    - Prudent licensing approach could benefit from a legal definition of SAMA’s objectives and improved disclosure of expectations for new banks.
    - No published objectives for supervision; omission should be addressed in the law.
    - SAMA should publish detailed criteria for licensing new banks, fully align them with objectives focused on safety and soundness, and withdraw the requirement that new licensees should “add value.”
    - Legal requirements for SAMA to approve any new bank outlet (branch or automated teller machine) could be removed so risks can be covered within the risk-based process (ex post rather than ex ante).
    - Legal basis for SAMA to control changes in ownership is not robust and should be remedied.
  - Prudential regulation and requirements (CPs 6–18):
    - SAMA has made substantial efforts to introduce Basel II.
    - Should complement improvements in banks’ risk management with an improved regime for large exposures and connected parties.
    - Risk management guidance appears in various Basel II documents (which do not apply to foreign branches).
    - A framework circular should be issued bringing all aspects of risk management into one document, and updating requirements on market risk and internal controls to reflect developments in the last decade.
    - Widespread bank losses caused by the 2009 failure of Al-Gossaibi & Bros. Co. and the Saad Group suggest possible weaknesses in credit risk management.
    - In a system with high single-name concentration, attention to individual large exposures should be intensified, particularly during on-site inspections.
    - The possibility for SAMA to allow large exposures of as much as 50 percent of capital, which was recently used, should be removed (with the maximum exposure capped at, for example, 25 percent of capital).
    - Definition of related parties needs strengthening to ensure close family relationships are taken into account.
  - Methods of ongoing banking supervision (CPs 19–21):
    - SAMA has progressed in implementing RBA and should complete the transition.
    - Supervisory regime still includes broad requirements for banks to obtain SAMA’s ex ante approval (e.g., before opening branches, before lending to a nonresident, before releasing financial statements, before launching new products).
    - Introduction of the RBA triggered intensification of contacts with banks as part of off-site supervision.
    - SAMA maintains an intrusive on-site process relying primarily on full-scope examinations and increasingly on focused ones.
    - Schedule for full-scope examinations should be better defined to avoid crowding effects (most banks covered in 2007 and 2008, only one in 2009 and 2010).
    - Examinations should focus more on actual risks and banks’ ability to manage them; increased attention needed to branches of foreign banks.
    - More systematic on-site verification of prudential reporting may be needed.
  - Accounting and disclosure (CP 22):
    - SAMA has encouraged banks to build prudent capital and provisioning buffers based on reliable financial statements.
    - Capital buffers now defined as part of the Internal Capital Adequacy Assessment Process (ICAAP); provisioning buffers result from pragmatic decisions from SAMA’s senior management and would benefit from formalization.
    - SAMA successfully introduced IFRS and ISA for banks and auditors.
    - Pillar 3 disclosure requirements introduced in 2008 as part of Basel II implementation.
  - Corrective and remedial powers of supervisors (CP 23):
    - SAMA’s proactive supervision means formal enforcement action has rarely been needed.
    - Removal of statutory need for government approval of exercise of SAMA’s powers would safeguard independence.
    - SAMA should establish a specific bankruptcy regime for banks and ideally a specific resolution regime.
  - Consolidated and cross-border banking supervision (CPs 24–25):
    - SAMA’s exercise of consolidated supervision authority has been effective.
    - Some banks are beginning to expand across borders aggressively, which could challenge group managements, boards, and supervisors.
    - SAMA has good contacts with the CMA and with foreign supervisors.
    - Draft memorandum of understanding (MOU) with the CMA should be finalized and exchange of inspection reports and common on-site work initiated.
    - SAMA should consider written agreements with foreign supervisors to ensure effective cooperation in unforeseen emergencies.

### Table 1 — Selected Summary Issues (as presented)
- Core Principle 1.1 Responsibilities and objectives: SAMA’s objectives are not defined.
- Core Principle 1.2 Independence, accountability and transparency:
  - The approval/action of the Ministry of Finance (MOF) or Council of Ministers is needed for key regulatory and supervisory actions.
- Core Principle 1.3 Legal framework:
  - The BCL has not been updated, nor are all circulars easily and publicly available.
- Core Principle 1.4 Legal powers:
  - The approval/action of the MOF or Council of Ministers is needed for key regulatory and supervisory actions.
- Core Principle 1.5 Legal protection:
  - Supervisors (agency and staff) do not benefit from clear legal protection.

*Source: IMF–World Bank FSAP Update mission report: "Summary Compliance with the Basel Core Principles––Report on Standards and Codes" (assessment based on laws, regulations, policies and practices as of mission April 9–20, 2011).*

### 1.6 Cooperation A draft MOU between the CMA and SAMA is being finalized.

### _cr13213 - 1.6 Cooperation A draft MOU between the CMA and SAMA is being finalized.

### Summary findings (selected Core Principle comments)
- 1.6 Cooperation: A draft MOU between the CMA and SAMA is being finalized.
- 2. Permissible activities: Activities effectively controlled and term ‘bank’ protected.
- 3. Licensing criteria: Core criteria used by SAMA to review licensing applications are not made public. Core licensing criteria include a need for a new bank to “add value,” which is unrelated to safety and soundness.
- 4. Transfer of significant ownership: There are no legal provisions on the transfer of significant ownership.
- 5. Major acquisitions: Limits on investments are applied and acquisitions subjected to supervisory approval.
- 6. Capital adequacy: Minimum capital ratios well exceed Basel requirements.
- 7. Risk management process: Key risk management requirements can be only indirectly imposed on banks and branches of foreign banks.
- 8. Credit risk: Recent large corporate failures may require some strengthening of credit risk regulation.
- 9. Problem assets, provisions, and reserves: Portfolio approach may need to be supplemented by more on-site assessment of individual risks.
- 10. Large exposure limits: The large exposure limit can be raised to 50 percent (a possibility sometimes used by SAMA). Supervision is not implemented systematically during full scope on-site inspections (definition of connected parties).
- 11. Exposure to related parties: The definition of related parties is not comprehensive (for example, senior management, close family members). Supervision is not implemented systematically during full scope on-site inspections (definition of related parties).
- 12. Country and transfer risks: Risks are extensively reported and are low.
- 13. Market risks: Existing guidance does not cover all derivative activities, nor incorporate recent best practices. Some core requirements are not binding.
- 14. Liquidity risk: Basel III approach is to be implemented.
- 15. Operational risk: A capital charge is applied and operational risk management policies are discussed with supervisors.
- 16. Interest rate risk in the banking book: Risk levels are low but are considered in the internal capital adequacy assessment process.
- 17. Internal control and audit: Framework is comprehensive but could be updated.
- 18. Abuse of financial services: On-site inspection plan generates concentration on a few years (see CP 20).
- 19. Supervisory approach: Supervisory risk ratings are not differentiated. Risk profiles are sometimes not updated at least annually.
- 20. Supervisory techniques: The on-site full scope examination plan generates a concentration on a few years (and a lack of such examinations during others). Limited scope examinations remain primarily compliance oriented. Full-scope examinations do not always pay attention to assessing adequacy of provisioning of individual exposures. Meetings with the full Board are not organized.
- 21. Supervisory reporting: Full-scope on-site inspections do not always assess the reliability of electronic return management system (ERMS) returns.
- 22. Accounting and disclosure: The process followed to set provisioning buffers which banks should hold is not formalized.
- 23. Corrective and remedial powers of supervisors: The exercise of formal supervisory action requires an approval outside SAMA (for example, MOF). There is no specific bankruptcy regime for banks.
- 24. Consolidated supervision: SAMA does not have a clearly defined power to conduct consolidated supervision. Banks’ group internal control/risk management frameworks are not always assessed during full-scope on-site inspections.
- 25. Home-host relationships: The BCL does not contemplate a lifting of its confidentiality requirements when necessary. There are no MOU with foreign supervisors.

### Detailed assessments — Core Principle gradings and comments (selected entries)
- 1.1 Responsibilities and objectives — LC  
  - SAMA’s objectives are not defined.
- 1.2 Independence, accountability and transparency — LC  
  - The approval/action of the MOF or Council of Ministers is needed for key regulatory and supervisory actions.
- 1.3 Legal framework — LC  
  - The BCL is not updated, nor are all circulars easily and publicly available.
- 1.4 Legal powers — LC  
  - The approval/action of the MOF or Council of Ministers is needed for key regulatory and supervisory actions.
- 1.5 Legal protection — NC  
  - Supervisors (agency and staff) do not benefit from clear legal protection.
- 1.6 Cooperation — C  
  - A draft MOU between the CMA and SAMA is being finalized.
- 2. Permissible activities — C
- 3. Licensing criteria — LC  
  - Core criteria used by SAMA to review licensing applications are not made public. Core licensing criteria include a need for a new bank to “add value,” which is unrelated to safety and soundness.
- 4. Transfer of significant ownership — MNC  
  - There are no legal provisions on the transfer of significant ownership.
- 5. Major acquisitions — C
- 6. Capital adequacy — C
- 7. Risk management process — LC  
  - Key risk management requirements can be only indirectly imposed on banks and branches of foreign banks.
- 8. Credit risk — LC  
  - Credit risk regulation should be strengthened building on the lessons of recent large corporate failure
- 9. Problem assets, provisions, and reserves — C
- 10. Large exposure limits — MNC  
  - The large exposure limit can be raised to 50 percent (a possibility sometimes used by SAMA). Supervision is not implemented systematically during full scope on-site inspections (definition of connected parties).
- 11. Exposure to related parties — MNC  
  - The definition of related parties is not comprehensive (e.g., senior management, close family members). Supervision is not implemented systematically during full scope on-site inspections (e.g., definition of related parties)
- 12. Country and transfer risks — C
- 13. Market risks — LC  
  - Existing guidance does not cover all derivative activities, nor incorporate recent best practices. Some core requirements are not binding.
- 14. Liquidity risk — C
- 15. Operational risk — C
- 16. Interest rate risk in the banking book — C
- 17. Internal control and audit — LC  
  - Some internal control requirements are too old.
- 18. Abuse of financial services — LC  
  - On-site inspection plan generates concentration on a few years (see CP 20).
- 19. Supervisory approach — LC  
  - Supervisory risk ratings are not differentiated Risk profiles are sometimes not updated at least annually.
- 20. Supervisory techniques — LC  
  - The on-site full scope examination plan generates a concentration on a few years (and a lack of such examinations during others). Limited scope examinations remain primarily compliance oriented. Full-scope examinations do not always pay attention to assessing adequacy of provisioning of individual exposures. Meetings with the full Board are not organized.
- 21. Supervisory reporting — LC  
  - Full-scope on-site inspections do not always assess the reliability of ERMS returns.
- 22. Accounting and disclosure — LC  
  - The process followed to set provisioning buffers which banks should hold is not formalized.
- 23. Corrective and remedial powers of supervisors — LC  
  - The exercise of formal supervisory action requires an approval outside SAMA (e.g., MOF). There is no specific bankruptcy regime for banks.
- 24. Consolidated supervision — LC  
  - SAMA does not have a clearly defined power to conduct consolidated supervision. Banks’ group internal control /risk management frameworks are not always assessed during full-scope on-site inspections.
- 25. Home-host relationships — C  
  - The BCL does not contemplate a lifting of its confidentiality requirements when necessary. There are no MOU with foreign supervisors.
- Aggregate: Compliant (C) – #; Largely compliant (LC) – #; Materially noncompliant (MNC) – #; Noncompliant (NC) – #; Not applicable (N/A) – #

### Recommended Action Plan (selected recommended actions by principle)
- 1.1 Responsibilities and objectives: Introduce better definition of SAMA’s objectives (public statements in the short term, revised law in the medium term).
- 1.2 Independence, accountability and transparency: Revise legal requirements to remove the need that the MOF or Council of Ministers approve or take action to exercise key regulatory and supervisory powers.
- 1.3 Legal framework: Update the BCL (see details under other CPs), codify all circulars and make them publicly available.
- 1.4 Legal powers: Revise legal requirements to remove the need that the MOF or Council of Ministers approve or take action to exercise key regulatory and supervisory powers.
- 1.5 Legal protection: Introduce clear legal protection for supervisors.
- 1.6 Cooperation: Finalize the draft MOU between the CMA and SAMA.
- 3. Licensing criteria: Make SAMA core criteria for reviewing license applications public and remove the need for a new bank to “add value.”
- 4. Transfer of significant ownership: Introduce legal provisions on the transfer of significant ownership.
- 7. Risk management process: Issue circular covering key risk management requirements.
- 8. Credit risk: Strengthen further credit risk regulation.
- 10. Large exposure limits: Update the large exposure regulation (for example, remove possibility to raise limit to 50 percent, derivatives risk weighting). Implement supervision more systematically (for example, definition of connected parties).
- 11. Exposure to related parties: Broaden the definition of related parties to include close family members and key staff. Implement supervision more systematically (for example, definition of related parties).
- 13. Market risks: Update requirements to cover all derivative activities, incorporate recent best practices, and make core requirements binding.
- 17. Internal control and audit: Internal control requirement should be updated.
- 18. Abuse of financial services: Better define the examination program to avoid crowding effects.
- 19. Supervisory approach: Differentiate banks’ risk ratings more and update risk profiles at least annually.
- 20. Supervisory techniques: Better define the full-scope examination program to avoid crowding effects. Focus limited scope examinations more on actual risks and banks’ ability to manage them. Pay more attention on-site to assessing large exposures and the adequacy of provisioning of individual exposures. Consider introducing meetings with the full Board as part of the off-site process.
- 21. Supervisory reporting: Ensure that the reliability of ERMS returns is systematically assessed on-site.
- 22. Accounting and disclosure: Formalize the process followed to set provisioning buffers which banks should hold.
- 23. Corrective and remedial powers of supervisors: Remove the need for any approval/action outside SAMA to exercise formal supervisory action (for example, MOF). Establish a specific bankruptcy regime for banks, and consider introducing a special resolution regime.
- 24. Consolidated supervision: Revise legal requirements to give SAMA a stronger legal basis to conduct consolidated supervision. Review more systematically banks’ group internal control/risk management frameworks during on-site inspections.
- 25. Home-host relationships: Update the BCL to lift confidentiality requirements when necessary (for example, to share information for supervisory purposes). Establish MOUs with relevant foreign supervisors.

### Authorities’ response (summary)
- Saudi Arabia supports the FSAP and appreciates the assessment, broadly agrees with findings, but has reservations on certain aspects.
- Authorities state the assessment did not fully reflect actions taken to strengthen the supervisory framework and suggest greater focus on qualitative aspects given local and regional context.
- Authorities contest certain gradings (CP 1(3), 1(4), 1(5), 4, 10, 11) and note legal protections and the existing BCL have functioned to implement international standards including Basel-II / Basel-III.
- Authorities will review FSAP recommendations and take appropriate actions in line with the existing legal and regulatory framework.

*Source: _cr13213 - 1.6 Cooperation A draft MOU between the CMA and SAMA is being finalized.*

### 15.      The assessment of compliance of each principle should be made based on the

### _cr13213 - 15.      The assessment of compliance of each principle should be made based on the

### Assessment grading scale
- Four-grade scale: compliant, largely compliant, materially noncompliant, and noncompliant.  
- A “not applicable” grading can be used under certain circumstances.
- Definitions (verbatim highlights):
  - Compliant – A country will be considered compliant with a Principle when all essential criteria applicable for this country are met without any significant deficiencies.
  - Largely compliant – A country will be considered largely compliant with a Principle whenever only minor shortcomings are observed which do not raise any concerns about the authority’s ability and clear intent to achieve full compliance with the Principle within a prescribed period of time.
  - Materially noncompliant – A country will be considered materially non-compliant with a Principle whenever there are severe shortcomings, despite the existence of formal rules, regulations and procedures, and there is evidence that supervision has clearly not been effective, that practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance.
  - Noncompliant – A country will be considered non-compliant with a Principle whenever there has been no substantive implementation of the Principle, several essential criteria are not complied with or supervision is manifestly ineffective.

### Principle 1 — Objectives, autonomy, powers, and resources (detailed assessment)
- Overall theme: clear responsibilities and objectives for the supervisor (SAMA) and need for formalization of powers, objectives, and legal protections.
- Individual sub-assessments and key observations:
  - Principle 1(1) Responsibilities and objectives
    - Assessment: LC
    - Key facts:
      - SAMA’s Charter issued by Royal Decree in 1957.
      - BCL of 1966 contains prudential requirements including leverage requirement (Article 6: deposit liabilities shall not exceed 15 times capital and reserves), liquid asset requirement (Article 7), large exposures limit (Article 8: 25 percent of capital and reserves), limitations on investments (Article 10).
    - Recommendations/comments:
      - SAMA’s objectives should be better defined by amendment to the Charter or the BCL.
      - Until formal amendment, SAMA should publish objectives for supervision (e.g., in its annual report) and report on extent to which it meets those objectives.
      - SAMA is considering preparing a periodic financial stability report.
  - Principle 1(2) Independence, accountability, and transparency
    - Assessment: LC
    - Key facts:
      - Board members and governor appointed by Council of Ministers for fixed five-year terms.
      - Board approves SAMA budget which is not subject to government approval.
      - No specific fees levied on banks; costs defrayed from SAMA’s own resources (including employment of banks’ cash reserves required under Article 7 of BCL).
    - Recommendations/comments:
      - Remove provisions subjecting exercise of key regulatory and supervisory powers to approval of the Minister or Council of Ministers to prevent potential difficulty.
  - Principle 1(3) Legal framework
    - Assessment: LC
    - Key facts:
      - BCL Article 3 identifies SAMA as sole supervisory authority for licensing.
      - Article 7 of the Charter appears to give SAMA rulemaking authority but with residual government involvement (“Board of Directors shall recommend them to the government through the minister of finance”).
      - BCL Article 17 empowers SAMA to obtain any information from banks.
    - Recommendations/comments:
      - Initiate a banking law reform project to formalize SAMA’s powers and modernize the law.
      - Codification project of SAMA circulars and guidelines; publish prudential circulars online.
  - Principle 1(4) Legal powers
    - Assessment: LC
    - Key facts:
      - BCL Article 22 empowers SAMA to enforce provisions and take enforcement action where there is a threat to solvency or liquidity.
      - Article 18 authorizes on-site examinations with Minister approval in law, but Minister has given authority in practice.
    - Recommendation: Remove need for Ministerial approval for routine exercise of key supervisory powers.
  - Principle 1(5) Legal protection
    - Assessment: NC
    - Key facts:
      - No specific protection for SAMA or its staff from legal action; SAMA legal view: public employees cannot be held responsible in application of general principles, but no explicit protection for SAMA itself.
      - Board of Grievances can hear complaints against SAMA.
    - Recommendation/comments:
      - Banking law reform should include a specific provision granting legal protection to SAMA and its staff.
  - Principle 1(6) Cooperation
    - Assessment: C
    - Key facts:
      - An MOU between SAMA and the CMA is under preparation; cooperation with foreign supervisors done largely informally.
      - BCL confidentiality provisions (art. 19) cited; recommendation to clarify to explicitly authorize sharing of information for supervisory purposes.
    - Recommendations/comments:
      - Complete MOU with CMA rapidly, consider detailed exchange of information after on-site examinations and make joint inspections possible.
      - Consider codifying written agreements with other supervisors where beneficial.

### Selected cross-principle findings, assessments, and policy recommendations (Principles 2–25)
- Principles, notable assessments and concise recommendations:

- Principle 2 Permissible activities
  - Assessment: C
  - Key facts:
    - BCL Article 1 defines “bank” as any person practicing “banking business” (taking deposits and performing some services, including foreign exchange transactions, but not lending of money).
    - BCL Article 5 prohibits any person not licensed as a bank from using the word “bank”.
  - Comment: Perimeter policing effective; SCSB allowed by specific law to use term bank and collect deposits and supervised by SAMA once active.

- Principle 3 Licensing criteria
  - Assessment: LC
  - Key facts:
    - Relevant: BCL Article 3, Article 12, Circular April 2005 (fit and proper criteria); SAMA list of minimum requirements (2005).
    - Article 3 specifies minimum capital of SR 2.5 million (in practice acceptable minimum much higher).
  - Recommendations:
    - Publish detailed licensing criteria, fully align with safety and soundness objectives, withdraw requirement that new licensees should “add value”.
    - Develop methodology to assess beneficial ownership.

- Principle 4 Transfer of significant ownership
  - Assessment: MNC
  - Key facts:
    - No legal definition of “significant” or “controlling” shareholder in BCL or regulation.
    - Companies must notify CMA for transfers > 5 percent (CMA approval required for listed company control changes).
  - Recommendations:
    - Obtain legal authority to review and reject transfers of significant ownership; implement methodology to regularly collect beneficial ownership information.

- Principle 5 Major acquisitions
  - Assessment: C
  - Key facts:
    - BCL Article 10 limits investments in any company incorporated in Saudi Arabia to 10 percent of its capital subject to total of all such investments not exceeding 20 percent of the bank’s paid-up capital and statutory reserves.
    - Article 10(3) subjects purchases of shares in another Saudi bank to SAMA approval.
  - Comment: No challenging acquisitions to date given simple bank structures.

- Principle 6 Capital adequacy
  - Assessment: C
  - Key facts:
    - Minimum capital requirement imposed in 1990 of 8 percent of risk-weighted assets.
    - Since January 2008 banks required to observe Basel II; in practice banks observe a minimum ratio of 12 percent and have individual target ratios (average target ratio currently about 14 percent).
    - BCL Article 6: deposit liabilities shall not exceed 15 times capital and reserves.
  - Comments/recommendations:
    - SAMA introduced ICAAP (Basel II Pillar 2); revisit 100 percent risk weight for mortgages under standardized approach where appropriate.
    - One application for IRB advanced approaches received but not yet approved.

- Principle 7 Risk management process
  - Assessment: LC
  - Key facts:
    - ICAAP required annually, approved by Board, submitted by end-January; two-hour meeting with bank senior management during first semester to review ICAAP.
    - Branches of foreign banks not covered by ICAAP process.
  - Recommendation:
    - Consider introducing key risk management requirements in a specific circular to complement existing guidance and cover branches of foreign banks.

- Principle 8 Credit risk
  - Assessment: LC
  - Key facts:
    - Relevant circulars and guidance include internal control guidelines, ICAAP, credit bureau SIMAH (2009).
    - SAMA requires banks to consult SIMAH before extending new loans.
  - Recommendations/comments:
    - Post-2009 large group default, SAMA should revisit making key requirements compulsory (e.g., lending at arm’s length), prepare guidelines for large non-listed private groups, and step up verification of large exposures during on-site inspections.

- Principle 9 Problem assets, provisions and reserves
  - Assessment: C
  - Key facts:
    - 2003 classification and provisioning rules with supervisory provisioning requirements:
      - Standard and special mention loans: 1 percent general provision,
      - Substandard (including loans with arrears > 90 days): 25 percent provisioning,
      - Doubtful (including loans with arrears > 180 days): 50 percent provisioning,
      - Loss (including loans with arrears > 360 days): 100 percent provisioning.
    - IFRS applied for financial statements; differences between supervisory and accounting provisions deducted from accumulated retained earnings for regulatory capital calculation.
  - Recommendation:
    - Devote greater on-site examination resources to detailed inspection of large exposures and problem assets.

- Principle 10 Large exposure limits
  - Assessment: MNC
  - Key facts and limits:
    - Non-financial counterparties: individual exposures cannot exceed 25 percent of paid up capital and reserves; SAMA does not expect such exposures to exceed 15 percent; SAMA authorized raising limit to 50 percent on case-by-case basis and grants exceptions.
    - For banks and other financial institutions: limits set at 50 percent of paid up capital for adequately capitalized banks (defined as capital adequacy ratio above 8 percent and Tier 1 ratio above 4 percent) and at 25 percent for other banks and financial institutions.
    - All exposures exceeding 10 percent of a bank paid up capital and reserves must be reported to SAMA monthly.
    - Sum of non-bank exposures exceeding 10 percent threshold cannot exceed 8 times a bank’s paid up capital and reserves.
    - April 2011 example: a large bank held a large exposure exceeding 35 percent of its capital and reserves, with SAMA authorization.
  - Recommendations:
    - Remove authority to raise non-financial counterparty limit to 50 percent; stop granting such exceptions.
    - Revise outdated 25 percent limit for undercapitalized banks and strengthen systematic review procedures for large exposures, including aggregation of related parties and risk assessment in ERMS.

- Principle 11 Exposures to related parties
  - Assessment: MNC
  - Key facts:
    - 1994 Circular defines related parties (directors, external auditors, principal owners controlling over 10 percent, affiliated companies). Close family members and senior management/key staff not covered.
    - 2008 circular: lending to related parties on preferential terms is prohibited; Board-level approval required for such transactions and write-offs (with conflicted members excluded).
    - Collateral cannot be deducted from related party exposures; they have to be fully secured.
  - Recommendations:
    - Broaden definition of related parties to include close family members and senior management/key staff and their related interests.
    - Implement systematic review of related-party risks during on-site inspections and off-site risk profiling.
    - Prepare methodology to identify beneficial owners (see CP 4).

- Principle 12 Country and transfer risks
  - Assessment: C
  - Key facts:
    - 2008 circular requires policies, identification and monitoring of exposures on an individual country basis, BIS template quarterly reporting, and appropriate provisioning where applicable.

- Principle 13 Market risk
  - Assessment: LC
  - Key facts:
    - Internal control guidelines cover securities and foreign exchange activities; other derivative activities not explicitly covered.
    - No requirement to establish valuation adjustments/reserves for illiquid or stale positions.
  - Recommendations:
    - Update framework to cover all derivative activities, incorporate best practices (e.g., reserves for illiquid positions), and make core requirements binding.

- Principle 14 Liquidity risk
  - Assessment: C
  - Key facts and numerical ratios:
    - BCL Article 7: minimum liquid assets ratio requires banks to hold 15 percent of deposit liabilities; ratio may be increased and has been increased to 20 percent; actual ratio currently about 34 percent for the system as whole.
    - Article 7 requires banks to hold a “statutory deposit” of no less than 15 percent of deposits with SAMA; this ratio can be varied between 10 percent and 17.5 percent.
    - Guideline maximum ratio: 85 percent for loans as proportion of deposits (raised from 60 percent in 2006 to 85 percent in circular 392 of July 2008). This is a guideline (banks not penalized but expected to explain breaches).
    - Article 6: deposits do not exceed 15 times capital and reserves; 50 percent of any excess must be deposited with SAMA.
    - SAMA circular 5944 of 15 February 2011: phase in Liquidity Coverage Ratio (LCR) from 2012 (initially observation basis, mandatory effect from 2015); Net Stable Funding Ratio to be implemented by 2019.
  - Comments:
    - SAMA is implementing Basel III liquidity requirements; loan/deposit ratio constraint emerging as loan demand grows.

- Principle 15 Operational risk
  - Assessment: C
  - Key facts:
    - Circular 1277 of 21/12/2010 references Basel Committee on operational risk.
    - Banks required to have operational risk units, to collect operational loss data; currently use basic indicator or standardized approach.
    - Rules on outsourcing (July 2008); guidance on disaster recovery planning (1994).
  - Comments: Advanced management approach guidance issued (December 2010) but no bank has applied.

- Principle 16 Interest rate risk in the banking book
  - Assessment: C
  - Key facts:
    - ICAAP requires board-approved capital charge for interest rate risk as component of Pillar 2; adequacy assessed in annual supervisory reviews.
    - Consumer lending average maturity about 2 and a half years; corporate lending usually floating repriced once a quarter.

- Principle 17 Internal control and audit
  - Assessment: LC
  - Key facts:
    - Banks (all but NCB listed) expected to comply with CMA Corporate Governance Regulations of 2006.
    - SAMA issued compliance manual (May 2005); internal control framework follows BCBS.
    - Audit committees required; independent internal audit reporting to audit committee; external auditors (two) required by BCL Article 14.
  - Recommendation:
    - SAMA could meet with full boards (in addition to annual meetings with chairmen) and update internal control requirements.

- Principle 18 Abuse of financial services (AML/CFT)
  - Assessment: LC
  - Key facts:
    - Based substantially on MENAFATF / FATF Mutual Evaluation Report (May 2010).
    - Anti-Money Laundering Statute 2003 (AMLS) defines SAMA responsibilities.
    - Combating Financial Crime Division structure: AML/CFT unit 19 staff; Anti-Fraud unit 18 staff; Communication Channel Unit 6 staff.
    - Banks required to inform SAMA of any STRs they file; SAMA analyzes and produces aggregate analyses.
  - Recommendations:
    - Follow up on FATF recommendations, especially to set ongoing due diligence requirements in primary or secondary legislation and improve identification of beneficial owners.
    - Better organize on-site AML/CFT examination plan to avoid uneven inspection cycles.

- Principle 19 Supervisory approach
  - Assessment: LC
  - Key facts:
    - SAMA developed a risk-based approach over last five years replacing CAMELS with risk profiles.
    - ERMS reporting system facilitates peer group analysis.
    - Full scope examinations periodicity varied in practice between 3 to 5 years (policy contemplates 1 to 3 years).
  - Recommendations:
    - Ensure more comprehensive risk profiling (only three rating categories currently), update risk profiles at least annually including branches of foreign banks.

- Principle 20 Supervisory techniques (on-site and off-site)
  - Assessment: LC
  - Key facts and resourcing:
    - Banking Inspection Department (BID) counts 156 employees (30 studying abroad); examination division 50 people.
    - Banking Supervision Department (BSD) counts 71 employees (12 studying abroad).
    - Full-scope examinations involve joint SAMA examiners and Big Four accounting firm staff; frequency of full-scope examinations varied (4 banks inspected in 2007; 6 in 2008; 1 in 2009; 0 in 2010).
    - Increasing share of limited-scope/thematic reviews (2 in 2007; 17 in 2008; 21 in 2009; 34 in 2010).
  - Recommendations/comments:
    - Better define schedule of full-scope examinations to avoid crowding effects and increase frequency in line with risk-based policy.
    - Devote more resources to loan-by-loan reviews of large exposures and problem assets.
    - Limited scope examinations should focus more on actual risks and banks’ ability to manage them; increase attention to branches of foreign banks.

- Principle 21 Supervisory reporting
  - Assessment: LC
  - Key facts:
    - BCL Articles 15 and 17 empower SAMA to collect consolidated monthly balance sheet and other information.
    - ERMS returns and reporting on consolidated basis; external auditors required to bring shortcomings to SAMA’s attention; SAMA has access to auditors’ management letters.
  - Recommendation:
    - Systematically assess reliability of ERMS returns during full-scope on-site visits and reflect this in mission scoping and reports.

- Principle 22 Accounting and disclosure
  - Assessment: LC
  - Key facts:
    - Article 14 BCL requires two external auditors registered with Ministry of Commerce and Industry.
    - Banks expected to prepare public financial statements using IFRS from December 1994 onwards.
    - SAMA requires banks to obtain its letter of no objection before releasing financial statements and can use this window to communicate expectations (e.g., counter-cyclical provisioning, dividend restrictions).
  - Comments/recommendations:
    - Consider communicating supervisory expectations earlier to avoid timing challenges with auditors.
    - Revisit strict confidentiality requirements in BCL to allow disclosure of market-sensitive information (e.g., material default exposures) coordinated with CMA to preserve financial stability.

- Principle 23 Corrective and remedial powers of supervisors
  - Assessment: LC
  - Key facts:
    - Article 22 BCL contemplates graduated process and broad powers; many formal actions require Minister approval in law though not in practice; Article 23 empowers fines.
    - No prompt corrective action framework exists.
  - Recommendations:
    - Introduce bank-specific resolution regime and lift need for Ministerial approval for formal supervisory actions to strengthen framework.

- Principle 24 Consolidated supervision
  - Assessment: LC
  - Key facts:
    - SAMA conducts consolidated supervision in practice; SAMA circular on consolidated supervision (June 2008).
    - Regular contacts with domestic and foreign supervisors; periodic visits to foreign subsidiaries on average every two years.
  - Recommendation:
    - Obtain more specific habilitation and powers for consolidated supervision (as contemplated in a 2008 draft amendment).
    - Pay systematic attention during full-scope visits to head-office oversight of subsidiaries and branches, and linkages between internal control functions.

- Principle 25 Home-host relationships
  - Assessment: C
  - Key facts:
    - Good informal relations with home and host supervisors; no formal MOUs in place; home supervisors must notify SAMA in advance of examinations.
  - Recommendations:
    - Reconsider value of formal written MOUs with other supervisors to pre-identify barriers to information exchange and facilitate cooperation during emergencies.
    - Amend confidentiality exemptions in BCL to explicitly allow exchange of information for supervisory purposes.

*Source: Extracted from the detailed assessment in the provided IMF/SAMA Basel Core Principles assessment document.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13213.pdf_