Capitec, Absa and Nedbank on Reserve Bank’s new ’emergency bail-in’ plan
South Africa’s biggest banks must start issuing billions of rand next year for a new loss-absorbing class of debt and will partly get there by rolling unsecured liabilities into the proposed instrument, Moody’s Ratings said.
The South African Reserve Bank (SARB) estimates South Africa’s six largest lenders will need to raise as much as R360 billion by 2030 in the new tool, which is designed to allow the orderly resolution of a big bank that runs into trouble.
They need to start raising the funds in January. Moody’s welcomed the central bank’s plan and sees it as credit positive.
“If one of the big South African banks is in trouble and its capital is wiped out, authorities have the power to bail-in creditors,” Moody’s Ratings Senior Vice President Constantinos Kypreos said in an interview on Tuesday.
That would “avoid a government bailout using taxpayer money, or a liquidation that would be extremely disruptive.”
What is happening?
Called financial loss absorbing capacity – or flac – instruments, they will be convertible into equity in a so-called “bail-in” exercise that avoids the need for a taxpayer bailout if a big bank suffers heavy losses that threaten its ability to stay open.
According to law firm ENS, banks designated as systemically important financial institutions by the SARB—and their holding companies—will be required to meet minimum flac requirements.
It is expected that the rules will become effective from 1 January 2025.
The SARB designated six South African banks as Systemically Important Financial Institutions (“SIFIs”), all of which have accepted their designations. The banks in question are:
- Absa Bank Limited,
- Capitec Bank Limited,
- FirstRand Bank Limited,
- Investec Bank Limited,
- Nedbank Limited; and
- The Standard Bank of South Africa Limited
“Flac instruments are unsecured, subordinated debt instruments, issued internally by the bank to its holding company and issued externally to third parties by the holding company, each meeting the requirements set out by the Prudential Authority,” ENS said.
“The bail-in powers the Reserve Bank has for designated institutions in resolution—as set out in the Financial Sector Regulation Act—include writing down shareholders’ equity and unsecured subordinated debt instruments or converting all or part thereof into shareholders’ equity.
“This new requirement is thus aimed at ensuring that designated institutions have sufficient loss-absorbing and recapitalisation capacity for orderly resolution,” it said.
What the banks are planning
The plan is to roll over maturing senior unsecured notes into new loss-absorbing flac instruments, Moody’s said.
Absa Group and Nedbank Group confirmed they plan to meet the new regulatory proposal in this manner.
“At Absa, the intention is that, in time, the domestic market will absorb the full flac amount within the portfolios currently holding the bank’s senior debt,” a spokesperson said in response to a Bloomberg question.
Capitec Bank Holdings Ltd., in contrast, said that it is primarily funded by retail deposits, rather than unsecured debt.
“We will issue separate flac instruments to meet the prudential requirement within the established timelines. There is sufficient market appetite to meet this requirement,” it said.
Officials at Investec Ltd. said they were consulting with South Africa’s Prudential Authority on an implementation plan, without providing details. Standard Bank Group Ltd. said it was in the final stages of formulating its issuance strategy. FirstRand Ltd. didn’t immediately respond to a request for comment.
The central bank’s draft plan also allows part of a bank’s excess regulatory capital to count toward the flac requirement, which lenders are supposed to have 60% filled by the end of 2027.
Kypreos said this will limit how much banks have to issue of the new layer of debt, which will be senior to equity and other forms of regulatory capital but subordinated to other unsecured liabilities.
(With Bloomberg)
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