SARB Publishes Directive on Capital Framework and Update on JIBAR
SARB published Directive 5/2021 that sets out the updated capital framework requirements for banks in South Africa. This directive addresses aspects of the prescribed minimum required capital ratios as well as 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. A table in the Annexure A of the directive specifies the Basel III-based minimum capital requirements for a bank, while Annexure B presents phase-in arrangements for the minimum capital requirements. This directive replaces Directive 2/2020 and Directive 4/2020, which were issued in April 2020 and August 2020, respectively.
As part of the current update, the Pillar 2A capital requirement, which had been temporarily reduced to 0% of the risk-weighted exposures for all banks at a total capital level since April 2020, will be reinstated, as set out in Annexure B. To assist banks in appropriately managing their capital plans, the Prudential Authority 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 a bank’s risk-weighted exposure. The aggregate requirement will not exceed 2% for common equity tier 1 (CET 1) capital and 2.5% for tier 1 capital. Furthermore, excluding both bank-specific individual capital requirement and the countercyclical buffer requirement, the highest minimum total capital adequacy requirement to be met by any bank or banking group conducting business within 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 and this requirement can vary for different D-SIBs.
The Prudential Authority has decided to apply a “bucketing approach” when assigning the relevant HLA requirement for D-SIBs. The first 1% of the specified D-SIB capital requirement, up to a maximum of 1% of a bank’s risk-weighted exposures, must be fully met by CET 1 capital and reserve funds. Any additional requirement, up to the first 1.5% of risk-weighted exposures may be met by tier 1 capital and reserve funds. Any additional requirement to the aforementioned, up to 2.5% of risk-weighted exposures, may be met with total capital and reserve funds. In the event that a bank’s required capital adequacy ratios fall below the levels set out in Annexures A and B, and in the absence of other remedial actions acceptable to the Prudential Authority to improve the bank’s capital adequacy ratios, the capital conservation ratios will be imposed to limit discretionary payments such as dividend distributions. 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 avoid confusion in the market, a bank is required to refrain from disclosing to the public its individual capital requirement that is based on a combination of various qualitative and quantitative factors, which are not directly comparable across banks. Banks are required to publicly disclose their D-SIB capital add-ons as part of the composition of regulatory capital disclosures.
In a separate statement, SARB also announced that it has commenced publishing Johannesburg Interbank Average Rate (JIBAR)-related post-trade disclosures on a daily basis, as required by the revised JIBAR Code of Conduct and Operating Rules (Code), which came into effect on April 12, 2021. Strate (Pty) Ltd, as the publishing agent, is responsible for the collation and publication of JIBAR-related market activity and for providing SARB with such data for the purposes of publication and surveillance.
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Keywords: Middle East and Africa, South Africa, Banking, Basel, Regulatory Capital, Systemic Risk, D-SIB, Pillar 2, JIBAR, Interest Rate Benchmark, Disclosures, HLA Requirement, SARB
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