Saudi will continue to support banks despite new law – Fitch

Saudi Arabia’s new draft law on the resolution of financial institutions – currently under review – is unlikely to curb government support of banks in the country, ratings agency Fitch has said in a new report.

“The Saudi Arabian Monetary Agency, 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,” Fitch said.

“We believe it will take time to implement a culture change, but that the enactment of a resolution framework will introduce more transparency.”

Saudi’s draft bank resolution law was submitted to the council of ministers in the second half of 2015 and is currently being reviewed by a 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.

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Currently, SAMA has broad powers to intervene in failing or weak banks. However, 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 international body Financial Stability Board.

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, Fitch said.

Saudi law also 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,” the Fitch report said.

“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,” it added.