The International Monetary Fund (IMF) has urged Saudi Arabia to “complement recent strides in banks' risk management by an improved (regulatory and supervisory) regime for large exposures of banks to connected parties.” In its latest report on the Kingdom titled “Saudi Arabia: Financial System Stability Assessment—Update” which was published Wednesday, the IMF urges the Saudi Arabian Monetary Agency (SAMA) to pay far more attention to individual large exposures of Saudi banks to major corporates especially during onsite inspections in a system what the Fund says is characterized by high single-name concentration. “The possibility for SAMA to allow large exposures of as much as 50 percent of capital, which was recently used (one large exposure stands at 38 percent of capital), should also be removed,” said the IFM. It recommended a range of actions to be taken by SAMA. These include: i) capping large exposures of Saudi banks at 25 percent of capital; ii) strengthening the definition of related parties needs to ensure that close family relationships are taken into account; iii) the issuing by SAMA of a framework circular aimed at bringing all aspects of risk management into one document; iv) and updating requirements on market risk and internal controls to reflect developments in the last decade. The recommendations effectively have arisen from an IMF study conducted in 2011 and are based largely on the issues relating to the widespread bank losses caused by the 2009 failure of two large well-established family groups in the Kingdom. This suggests that there may have been weaknesses in the credit risk management of the banks and hence SAMA's supervisory regime. The report in general is positive about the Saudi Government's and SAMA's management of the Kingdom's economy and financial sector. “SAMA proactively responded to the (above) defaults, including by ensuring that losses were fully provisioned and by spearheading dialogue with the banking industry to identify relevant lessons.” In February during a visit to Saudi Arabia, Christine Lagarde, Managing Director of the IMF, was full of praises of Riyadh's stewardship of the economy and banking sector. “The Saudi economy,” she said in a statement, “has navigated the global financial crisis well. Strong economic policies in the preceding years, together with prudent supervision of the financial sector, allowed the government to boost expenditure to support demand during the crisis, and to limit the direct impact on the financial system. Saudi Arabia's policies had an important positive impact on the region and the global economy. Saudi Arabia has made significant progress in social development and is now close to the G20 average for most indicators.” The IMF sentiments have been echoed by several other agencies and institutions. In April, international rating agency, Fitch Ratings, affirmed Saudi Arabia's investment grade rating of Long-Term Local and Foreign Currency Issuer Default Ratings (IDR) at ‘AA-'; its Short-Term Foreign Currency IDR at ‘F1+'; and its Country Ceiling at ‘AA'. The outlook for the Kingdom, according to Fitch, is stable. “Soaring oil revenues are enabling Saudi Arabia to invest and reform to address structural challenges while continuing to build up savings. The government is investing in infrastructure, education and housing. A labour market reform to bring down unemployment,” stressed Fitch in its rating rationale. Similarly, report after report by institutions such as Standard Chartered Bank, National Commercial Bank, Al-Rajhi Capital and others are singing the plaudits of the Saudi economy and its management by Minister of Finance Ibrahim Al-Assaf, Minister of Economy and Planning Muhammed Al-Jasser and the Governor of the Saudi Arabian Monetary Agency (SAMA) Fahad Abdullah Al-Mubarak respectively. However, the IMF implies caution for any euphoria to set in about the regulatory and supervisory regime of the Kingdom's banking sector. Following the 2012 Saudi budget, a fiscal euphoria has evolved even amongst the international agencies and institutions based on the record oil revenues which if sustained at even lower than current levels is bound to lead to an actual budget surplus for 2012. The total 2012 Budget amounts to SR1.392 trillion ($371.2 billion) of which total expenditure is projected at SR690 billion ($184 billion) and total revenues are projected at SR702 billion ($187.2 billion). This is based on an oil price of U$74 per barrel. But as the IMF Report stresses there remains much to be done. SAMA, acknowledges the report has “introduced Basel II, and used the Pillar 2 requirements to foster improvements in banks' risk management and capital planning.” SAMA has also actively initiated the introduction of Basel III requirements. The IMF strongly urges the formalization of the independence of SAMA as a regulatory authority through the urgent updating of the legal framework which governs the incorporation and operations of the Agency. In particular, the law, says the report, would need to be revised to remove the requirement for government approval to license banks and impose sanctions, issue regulations, and conduct inspections. “Provisions could also be added to provide legal protection to supervisors, require SAMA's approval in case of transfer of significant ownership, create a bank resolution framework, provide a clear mandate to exercise consolidated supervision, and lift confidentiality requirements when necessary (for example, to share information for supervisory purposes),” says the report. However, in practice, according to the IMF, the existing law has not been an impediment to effective supervision. “The authorities considered that in their institutional context, amending the law would be difficult, and they might prefer to issue new regulations to clarify and further solidify the independent exercise of regulatory and supervisory powers by SAMA,” says the report. On the licensing of banks in the Kingdom, the IMF urges the adoption of a legal definition of as to the objectives and improved disclosure of its expectations for new banks; and recommends that SAMA should publish its 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.” __
