Fitch Ratings-Dubai/London - Saudi Arabia's Draft Law on the Resolution of Financial Institutions, currently under review, is unlikely, at least in the foreseeable future, to change our view that there is an extremely high probability of the government supporting its banking system, says Fitch Ratings. The Saudi Arabian Monetary Agency (SAMA), which supervises the banks, has a strong tradition of supporting the banking sector and, to date, no depositors or creditors of banks have lost money. We believe it will take time to implement a culture change, but that the enactment of a resolution framework will introduce more transparency.
The Financial Stability Board's (FSB) regional consultative group for the Middle East and North Africa (MENA) announced on 25 April that, at a recent meeting in Riyadh, it had discussed regional approaches to bank resolution, too-big-to-fail issues and bail-in. Among MENA countries, only Saudi Arabia is a member of the G-20 and, as such, it is committed to implementing resolution legislation.
According to the FSB, Saudi Arabia plans to introduce a resolution regime covering all of its Key Attributes of Effective Resolution Regimes for Financial Institutions. Saudi's draft bank resolution law was submitted to the council of ministers in 2H15 and is currently being reviewed by the Bureau of Experts. Feedback has been received and the next step is the submission of a revised draft to the Council of Ministers, but there is no clear timeframe for when the legislation might be finalised.
SAMA has broad powers to intervene in failing or weak banks. The FSB says that SAMA believes these powers are sufficiently broad to enable it to effectively implement most resolution measures outlined in the Key Attributes. But existing Saudi laws do not spell out the circumstances under which shareholder and creditor rights can be over-ridden, and this could result in court action in the event that bail-ins were imposed in connection with a bank resolution, according to the FSB.
The introduction of a formal resolution framework will add transparency for market participants and clarify when SAMA can intervene and under what circumstances losses might be imposed on bank shareholders and creditors. Saudi law does not currently establish a hierarchy for creditor claims, and this will have to be clarified if bank creditors are to be able to adequately measure risk and estimate their potential losses in the event of resolution.
For resolution legislation to be effective, we expect there to be an update in Saudi Arabia's bankruptcy laws. We also expect resolution legislation to bring greater clarity regarding the conditions for entry into resolution and procedures surrounding bail-in. We believe that further clarity in these two areas will enhance creditor confidence.
Contact:
Redmond Ramsdale
Senior Director, Banks
+971 4424 1202
Fitch Dubai
Al Thuraya Tower 1
Office 1805 & 1806
Dubai
© Press Release 2016
