Dubai: Saudi Arabia’s Draft Law on the Resolution of Financial Institutions, currently under review, is unlikely to change the support extended to the domestic banking system, according to banking sector analysts.

According to Fitch Ratings there is an extremely high probability of the government supporting its banking system.

“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,” Redmond Ramsdale, senior director, Banks at Fitch said in a note

The Financial Stability Board’s (FSB) regional consultative group for the Middle East and North Africa (Mena) announced in April at a meeting in Riyadh that 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.

Attempts to introduce a bank resolution framework come at a time when rating agencies have downgraded Saudi Arabia’s sovereign ratings as well as the ratings of a number of banks. The rating downgrades of banks reflect the reduced fiscal capacity of the Saudi government to provide support to the banks in times of stress and an assessment of each bank’s resilience to the weakening domestic operating environments.

According to the FSB, Saudi Arabia had clear plans to introduce a resolution regime.

The kingdom’s draft bank resolution law was submitted to the council of ministers in the second half of 2015 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 are imposed in connection with a bank resolution, according to the FSB.

The introduction of a formal resolution framework will add transparency for market participants as well as 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,” Ramsdale.