The Prudential Authority (PA) welcomes the measures taken by banks to support their customers during this period of economic turmoil and uncertainty and notes that a “safe, sound and robust banking system is a key part of South Africa’s shock absorbers during these times”. 

This is especially the case when taking into account that the impact of Covid-19 is likely to have a lasting and detrimental effect on the economy, considering that there is already evidence of stress at both household and business levels, while the depth and length of the economic downturn is uncertain.

Despite this, South Africa has a strong and resilient banking system with adequate levels of capital and significant liquidity buffers to assist in managing this stress. The PA notes that the Basel framework, around which bank regulations are structured, has built-in buffers on both the capital and liquidity elements of the regulation for banks to draw on during times of financial stress.

In addition to the actions taken by the South African Reserve Bank (SARB) on deploying monetary policy tools to mitigate the impact of Covid-19, the PA has decided to support the banking system in response to the needs of banking customers.

The PA will also provide for regulatory relief measures, as well as guidance to banks, in managing the crisis. The regulatory relief measures are provided for in three areas, namely capital relief on restructured loans that were in good standing before the Covid-19 crisis, a lower liquidity coverage ratio (LCR) and lower capital requirements.

As such, the PA is temporarily amending Directive 7 of 2015 on Restructured Exposures, which means that, for the duration of the crisis, loans restructured as a result of the impact of Covid-19 will not attract a higher capital charge.

This amendment covers loans to households, small and medium-sized businesses and corporates, and for specialised lending, the PA notes.

For the duration of the crisis, the LCR, a ratio setting out the liquid assets a bank has to maintain in relation to its anticipated outflows, is being lowered from 100% to 80%.

In relation to capital relief, the Pillar 2A capital buffer, which is set at 1% of risk-weighted assets, is now set at zero, and the PA has also provided clear criteria that provide for banks to dip into their capital conservation buffer, which is set at 2.5% of risk-weighted assets.

The PA plans to announce a timetable according to which banks can restore these buffers once the Covid-19 crisis has abated.

This timetable will be sensitive to the need to balance the rebuilding of buffers to ensure a resilient banking system, with the negative effect that such measures could have on credit extension and economic growth.

While the PA is not the accounting standards regulator, it has provided guidance to the banking industry on how International Financial Reporting Standard (IFRS) 9 can be implemented during this period of volatility and stress.

The Basel framework, which provides clear rules on when discretionary dividend and bonus payments can be limited, is also likely to be impacted.

The PA explains that these constraints generally kick in when a bank breaches or is about to breach its capital buffer, which could become progressively tighter, leading it to dip into its capital buffers.

With the high probability that the impact of Covid-19 will result in heightened stress in the banking system, the PA is issuing a guidance note advising banks not to distribute discretionary ordinary dividends during this period.

Similarly, bonuses for senior executives were advised to be put on hold during this period.