South Africa\u2019s 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\u2019s Ratings said.<\/p>\n\n\n\n
The South African Reserve Bank (SARB) estimates South Africa\u2019s 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<\/strong>. <\/p>\n\n\n\n They need to start raising the funds in January. Moody\u2019s welcomed the central bank’s plan and sees it as credit positive.<\/p>\n\n\n\n \u201cIf one of the big South African banks is in trouble and its capital is wiped out, authorities have the power to bail-in creditors,\u201d Moody\u2019s Ratings Senior Vice President Constantinos Kypreos said in an interview on Tuesday.<\/p>\n\n\n\n That would \u201cavoid a government bailout using taxpayer money, or a liquidation that would be extremely disruptive.\u201d<\/p>\n\n\n\n What is happening?<\/strong><\/p>\n\n\n\n Called financial loss absorbing capacity \u2013 or flac \u2013 instruments, they will be convertible into equity in a so-called \u201cbail-in\u201d exercise that avoids the need for a taxpayer bailout if a big bank suffers heavy losses that threaten its ability to stay open<\/strong>.<\/p>\n\n\n\n According to law firm ENS, banks designated as systemically important financial institutions by the SARB\u2014and their holding companies\u2014will be required to meet minimum flac requirements.<\/p>\n\n\n\n It is expected that the rules will become effective from 1 January 2025. <\/p>\n\n\n\n The SARB designated six South African banks as Systemically Important Financial Institutions (\u201cSIFIs\u201d), all of which have accepted their designations. The banks in question are:<\/p>\n\n\n\n “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.<\/p>\n\n\n\n “The bail-in powers the Reserve Bank has for designated institutions in resolution\u2014as set out in the Financial Sector Regulation Act\u2014include writing down shareholders\u2019 equity and unsecured subordinated debt instruments or converting all or part thereof into shareholders\u2019 equity. <\/p>\n\n\n\n “This new requirement is thus aimed at ensuring that designated institutions have sufficient loss-absorbing and recapitalisation capacity for orderly resolution,” it said.<\/p>\n\n\n\n What the banks are planning<\/strong><\/p>\n\n\n\n The plan is to roll over maturing senior unsecured notes into new loss-absorbing flac instruments, Moody’s said.<\/p>\n\n\n\n Absa Group and Nedbank Group confirmed they plan to meet the new regulatory proposal in this manner.<\/p>\n\n\n\n \u201cAt Absa, the intention is that, in time, the domestic market will absorb the full flac amount within the portfolios currently holding the bank\u2019s senior debt,\u201d a spokesperson said in response to a Bloomberg question.<\/p>\n\n\n\n Capitec Bank Holdings Ltd., in contrast, said that it is primarily funded by retail deposits, rather than unsecured debt.<\/p>\n\n\n\n \u201cWe will issue separate flac instruments to meet the prudential requirement within the established timelines. There is sufficient market appetite to meet this requirement,\u201d it said.<\/p>\n\n\n\n Officials at Investec Ltd. said they were consulting with South Africa\u2019s 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\u2019t immediately respond to a request for comment.<\/p>\n\n\n\n The central bank\u2019s draft plan also allows part of a bank\u2019s excess regulatory capital to count toward the flac requirement, which lenders are supposed to have 60% filled by the end of 2027.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n <\/p>\n\n\n\n (With Bloomberg)<\/p>\n\n\n\n\n
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