SARB published a directive (D4/2020) on the capital framework for South Africa, based on the Basel III framework. This directive covers information on the prescribed minimum capital ratio requirements and the application of various components of the said capital requirements such as the systemic risk capital requirement (Pillar 2A), the domestic systemically important bank (D-SIB) capital requirement, the countercyclical buffer range, and the capital conservation buffer range. Annexure A of the directive contains a table that specifies the minimum capital requirement of a bank, based on the Basel III framework, while Annexure B presents phase-in arrangements for the minimum capital requirements.
The Pillar 2A capital requirement is currently 0% of risk-weighted exposures for all banks at a total capital level. To assist banks in appropriately managing their capital plans, the Prudential Authority of SARB is notifying banks that the combined total capital adequacy requirement in respect of the Pillar 2A and the higher loss absorbency (HLA) requirement for D-SIBs will not exceed 3.5% of the risk-weighted exposure of a bank. The aggregate requirement will not exceed 2% for common equity tier 1 (CET 1) and 2.5% for tier 1. Furthermore, excluding both bank-specific individual capital requirement (ICR, also known as Pillar 2B), and the countercyclical buffer requirement, the highest minimum total capital adequacy requirement to be met by any bank or banking group conducting business in South Africa receiving the highest possible HLA requirement for a D-SIB will not exceed 14%.
The Prudential Authority will specify the HLA requirement for each individual bank or banking group identified as a D-SIB. The HLA requirement will accordingly vary between banks identified as D-SIBs. The Prudential Authority has decided to apply a "bucketing approach" when assigning the relevant HLA requirement for D-SIBs. The first 50% of the specified D-SIB capital requirement, up to a maximum of 1% of the risk-weighted exposures of a bank, must be fully met by CET 1 capital and reserve funds while any requirement exceeding the aforementioned requirement may be met by a combination of additional tier 1 and tier 2 capital and reserve funds. Banks should maintain an additional discretionary capital buffer above the specified minimum requirements to ensure that the execution of internal business objectives or the occurrence of adverse external environmental factors do not prevent banks from operating above the relevant minima.
The Prudential Authority will continue to monitor and assess the adequacy of this internal buffer against a bank’s strategy, risk profile, and levels of capital. To ensure that no confusion exists in the market, banks are required to refrain from disclosing to the public their ICR requirement. Banks are required to publicly disclose their D-SIB capital add-on as part of their composition of regulatory capital disclosure. In the event that the capital-adequacy ratios of a bank fall below the levels set out in Annexure A and Annexure B of the Directive, capital conservation ratios will be imposed, which will limit discretionary payments such as dividend distributions. These limits will be increased as capital levels of a bank approach the specified minimum requirements. Once imposed, capital conservation measures will remain in place until such time as minimum required capital-adequacy ratios have been restored. If a bank wants to make payments in excess of distribution limits, sufficient capital will have to be raised to fully compensate for the excess distribution.
Related Link: Directive D4/2020
Keywords: Middle East and Africa, South Africa, Banking, Basel, Regulatory Capital, Systemic Risk, D-SIB, Pillar 2, SARB
Previous ArticleCNB Announces Decisions on CCyB and Systemic Risk Buffers
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA published the annual report on asset encumbrance of banks in EU.
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.