SARB Issues Directive to Amend Capital Framework Under Basel III

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