SARB Issues Directive on Prudential Valuation Adjustment Framework

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