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Sunday 16, July 2017 by Nabilah Annuar

New frameworks for risk management?

The Banker Middle East Roundtable on challenges in liquidity risk management and interest rate risk in the banking book was held in Riyadh, KSA, on 23 May 2017.

The roundtable, the latest in the Banker Middle East Knowledge Series, held in association with Oracle Financial Services, was an invitation-only, closed-door event allowing senior representatives from the banking industry in Saudi Arabia to discuss the issues surrounding and impact of the proposed new standardised framework on interest rate risk in the banking book (IRRBB) together with its implications for liquidity risk management (LRM). The event took place at the Four Seasons Hotel, Riyadh, KSA.


None of the above it would seem! In 2016, the Central Bank, the Saudi Arabian Monetary Authority (SAMA), intervened with public funds, relaxation of LDR and new repo contracts among other measures. Capital surcharges for Domestic-Systemically Important Banks (D-SIB) were also introduced in 2016. However, the assembled bankers were quick to dismiss the events of the year, which made headlines as a liquidity crunch, as a problem.

One commented that in the context of domestic liquidity there was never a shortage of funding in the market, “It is just that prices increased because we were managing to a very conservative regulatory ratio. There was never a difficulty in getting funding in the market.” What happened, he added, served to illustrate the short-term nature of lending profiles. Another noted that the liquidity position of all the banks in Saudi Arabia at all times was significantly better than almost anywhere else in the world.

What is clear is that among the positive moves from SAMA is the work towards a fundamental change in the creation of a savings culture and the stability of deposits. Banks need to come up with attractive savings products and actively encourage savings. However, this is not simply an issue for banks but also for the asset management and insurance sectors. Lack of instruments remains an issue.

Events last year re-emphasised the government’s position as ‘Saudi Inc.’ with the big issue in the market-place being the way the authorities ‘turned off the tap’. Yet this could also have been a positive step longer term as it may have been the genesis of a realisation among retail customers of the need to consider long-term saving for themselves. As one attendee said, “There is anecdotal evidence of a change in attitude.”


The discussion then turned to the issue of how banks are coping with regulations in the liquidity space given the challenges of complying with the existing and ongoing evolution of these guidelines, including existing LCR guidelines; NSFR to be complied by 2018; and intraday liquidity in the beginning of this year.

One of the most significant lessons learned from the financial crisis that hit a decade ago was that, around the world, banks’ information technology (IT) and data architectures were inadequate to support the broad management of financial risks. Among the responses to this was BCBS 239, the Basel Committee on Banking Supervision's regulation 239, entitled Principles for effective risk data aggregation and risk reporting.

The operational workload is rising and, of course, so is the financial impact. The implementation of IRRBB and FRTB means that banks will need to introduce new internal models, back test, validate, document, etc.

Saudi banks face a stringent regulatory environment and there was a plea for SAMA to prioritise its regulation for the medium and long term. That said, it was also recognised by the bankers that they need to be pro-active rather than reactive and one admitted, “No bank, globally, likes regulators to be over-active!”

Liquidity, especially within the Saudi banking system, ‘per se, a very local concept’ is derived partly from the probability of default and ‘should not be driven by regulation’.


One of the problems identified was the difficulty in pricing long-term products in the Saudi market. “There are not enough data points to price long-term lending,” commented one. Another added, “Basel has given authority to the regulator on liquidity but if you look beyond one year, there is no information to price products.”

The question was posed: What are the initiatives taken or that should be taken in moving from regulatory-driven to best practice-driven liquidity risk management? This was immediately countered by the statement that ‘SAMA is very good at copying, cherry-picking, best practice around the world’.

That said, it was also recognised, perhaps ruefully, that there is ‘a tidal wave of Basel reforms’ that banks need to cope with. At the same time, they are not waiting for SAMA to implement best practice but one banker did note that SAMA’s stipulation of high minimum capital ratios ‘is inefficient’, adding that it smacked of excessive caution.

However, that caution may well be justified with the regulator recognising the high level of concentration risk in the Saudi banking sector, a problem that is not limited to one bank but is ‘systemic’. This issue is among those being addressed by Vision 2030.


So, to the bottom line: are the banks’ internal IT systems up to the mark in handling the new and impending management/regulatory and measurement, frequency and reporting challenges? In terms of data management and modelling the answer was a clear ‘definitely not’.

While there are obviously financial implications, the operational workload in terms of data management and governance will place greater strain on institutions, putting banks in a situation where they need to invest heavily infrastructure—not just in IT but also in human capital for professionals capable of developing and maintaining these new models.

There is a clear shortage of such risk modellers in the Saudi market. Said one participant, ‘they are not there, which means the banks also face potential problems from the Ministry of Labour given Saudisation requirements’.

IRRBB, it was said, will change modelling again. The move from a rules-driven structure based on Basel II to the principles-based Basel III adds a further hurdle to the challenges facing banks infrastructure. Moving from a box-ticking regime to one based on interpretation means that banks ‘need professionals to think more about all dimensions… this is challenging!’

The roundtable concluded with a brief discussion of FRTB. This set of guidelines and requirements issued by the BCBS in 2016 may be viewed as the first semi-formal steps towards a Basel IV. The regulatory environment is only getting more complex and resource intensive. The meeting broadly agreed, again, that investment is required both in infrastructure and in human resources.

The roundtable was attended by:

  • Thamir Al Hashemi, Head of Risk Strategy & Architecture, Banque Saudi Fransi
  • Mathew Pearce, Chief Financial Officer, Saudi British Bank
  • Sanjay Kumar Thakur, Chief Data Officer, Head, Treasury Products Control, Balance Sheet Risk Analytics and FTP Unit, Financial Planning and Control Department, The Saudi Investment Bank
  • Mohammed Al Omran, Supervisor—Market Risk, Market Risk Management Department, Risk Group, The Saudi Investment Bank
  • Rupert Rogers, Head of Enterprise Risk Management & Treasury Risk, Alawwal Bank
  • Adnan Khan, Chief Retail and SME Risk Officer, Al Rajhi Bank
  • Ashish Asthana, Head of Market & Liquidity Risk, Al Rajhi Bank
  • Ahsan Kamal, Senior Vice President, Finance, Riyad Bank
  • Mahesh Narayanan, Senior Sales Manager, Oracle Financial Services
  • Sudheendra Narayanan, Senior Sales Consultant, Oracle Financial Services

Also in attendance as observers were Ghada Al-Sanea and Mohammad Al-Okaili of The Saudi Investment Bank.