SARB Issues Directive to Amend Capital Framework Under Basel III
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Blake Coules
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
CNB Announces Decisions on CCyB and Systemic Risk BuffersRelated Articles
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.
