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
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.
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