SARB Issues Directive on Prudential Valuation Adjustment Framework
SARB published the directive D5/2020 that addresses issues related to the prudential valuation adjustment framework in South Africa. Directive 1 of 2019 of the Prudential Authority, or PA, requires banks to annually disclose in Template PV1 the prudential valuation adjustments for unearned credit spreads, closeout costs, operational risks, early termination, investing and funding costs, future administrative costs, and model risk. The new directive D5/2020 is intended to ensure banks’ continued compliance with the requirements set out in Directive 1 of 2019 and to provide clarity on the provisions of Directive 4 of 2015 and the implementation of the “Pillar 3 disclosure requirements—consolidated and enhanced framework” standard in so far as it relates to Template PV1.
The directive D5/2020 specifies that banks must consider all prudential valuation adjustments individually—that is, regardless of the ability to associate them with a single prudential valuation adjustment group or category. Nevertheless, banks may estimate prudential valuation adjustments in line with the internal governance models. The directive specifies, at a minimum, what banks must consider for the prudential valuation adjustments with respect to investing and funding costs, close-out uncertainty (mid-market value, close-out cost, and concentration), unearned credit spreads, early termination, model risk, operational risk, and future administrative costs. Banks must also consider other prudential valuation adjustments that are required to take into account factors that will influence the exit price, but which do not fall in any of the categories mentioned above. These have to be described by banks in the narrative commentary that supports the disclosure. Debit Valuation Adjustments, however, are excluded from the individual prudential valuation adjustments that the banks are required to consider.
Banks must calculate the individual prudential valuation adjustments in accordance with the methods specified in Annexure A to the directive D5/2020. With respect to reporting and disclosure, the directive D5/2020 states that the aggregate prudential valuation adjustment must be reported in line item 203 of the form BA 700. Banks must estimate their prudential valuation adjustments at least on a quarterly basis. The prudential valuation adjustment must be disclosed annually, in accordance with Directive 1 of 2019. Rows that are not applicable to the reporting bank must be completed as zero (“0”) and the reason why they are not applicable must be explained in the accompanying narrative. The prudential valuation adjustments must be estimated for bank solo, bank consolidated, controlling company consolidated, and branches as well as subsidiaries of local banks. The rationale behind estimating at consolidated level is to minimize any arbitrage of the framework through the use of complex organization structures, which could be cross-jurisdictional. The directive D5/2020 is applicable to all banks, branches of foreign institutions, controlling companies, eligible institutions, and auditors of banks or controlling companies.
Related Link: D5/2020
Keywords: Middle East and Africa, South Africa, Banking, Prudential Valuation Adjustment, Market Risk, Reporting, Regulatory Capital, Disclosures, 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
PRA Proposes Simplified Obligations for Recovery PlanningRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.