SARB Directive Addresses Issuance of Certain AT1 Capital Instruments
SARB published the Directive D2/2021 that explains the stance of the Prudential Authority on the South African banks efforts to seek to include a contingent payment provision in the terms and conditions of their additional tier 1, or AT1, capital instruments. The Prudential Authority is not opposed to banks including the contingent "must-pay" clause in the terms and conditions of both local and foreign currency denominated additional tier 1 instruments. However, banks that elect to utilize the contingent "must-pay" clause as part of the additional tier 1 instruments’ terms and conditions must note that the Prudential Authority will not approve the issuance of additional tier 1 instruments, unless it is also stated in the terms of the instrument that, in the event that the point of non-viability is triggered by the Prudent Authority, such a decision would not constitute a capital disqualification event.
The Directive states that inclusion of the contingent "must-pay" clause shall neither amend nor revise the current terms and conditions of additional tier 1 instruments, in line with the terms of regulation 38(11)(b) of the Regulations or the guidance provided in Guidance Note 6 of 2017, as they relate to additional tier 1 capital. Therefore, the rights of the holders of the additional tier 1 instruments and the powers of the Prudential Authority, should a capital disqualification event occur and the contingent "must-pay" clause is invoked as a result of the occurrence of a capital disqualification event, shall be fully disclosed within the contractual pricing supplement or prospectus of the instrument. The issuance of all additional tier 1 instruments is subject to the prior written approval of the Prudential Authority, as per the terms of regulation 38(11)(b)(ii) of the Regulations. The Directive also sets out the requirements to be met for when the Authority will consider an application for approval for the issuance of additional tier 1 instruments.
- Coupons that are payable under the contingent "must-pay" clause must only be the coupons accruing after the instrument has been disqualified from regulatory capital in its entirety.
- Coupon payment obligation becomes mandatory on each interest payment date once the instrument has been derecognized in full from qualifying capital.
- Total value of additional tier 1 instruments with a contingent "must-pay" clause shall be limited to 25% of the qualifying tier 1 capital and reserve funds; this limit would be assessed and enforced at the time of each application in terms of section 79 of the Banks Act, Act No 94 of 1990.
Related Links
Keywords: Middle East and Africa, Banking, Regulatory Capital, Prudential Authority, Must-Pay Clause, Additional Tier 1 Capital, Basel, SARB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
MFSA on Application of Sustainable Finance Disclosure RegulationNext Article
SARB Updates Requirements for BA Returns for BanksRelated Articles
EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
EBA Updates Lists of Entities for Use in Capital Calculations under SA
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS Amends Notice on Related Party Transactions of Banks
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
ECB Amends Guideline on Euro Short-Term Rate
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA Consults on Standards Related to FRTB-SA
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA Proposes Rules Related to IRB Approach for Credit Risk
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
EU Amends CRR and Securitization Regulation in Response to Pandemic
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).
