Liquidity issues of local banks to be addressed
Reserve Bank to provide liquidity facility to assist in meeting Basel III provisions
BASEL III is being introduced following the global financial crisis and a longer-term ongoing commitment from the regulatory authorities to ensure greater prudential management and risk identification and control within the financial sector. While Basel III has been implemented with effect from this year, certain components of it will be phased in over the next few years.
An aspect of Basel III that has attracted attention in the South African markets is its liquidity framework. This requires banks to adhere to certain minimum liquidity requirements to ensure that they are able to withstand periods of up to a month of severe liquidity demands, such as panic withdrawals or loss of interbank lending.
Accordingly, the Basel III liquidity framework includes the concept of a liquidity coverage ratio which stipulates liquidity requirements with which banks need to comply.
South African banks have historically held low levels of liquidity compared to many of their international counterparts. The low levels of liquid assets held by some banks have been the result of an over-reliance on shortterm funding.
The liquidity coverage ratio requires banks to hold sufficient highquality liquid assets which can easily be converted into cash to cover periods of outflow during a financial crisis. The liquid assets that can be treated as highquality for these purposes must be unencumbered and are split into two different categories: Level 1 assets, which must account for at least 60% of the total, and Level 2 assets which account for the balance, at no more than 40%.
Level 1 assets include cash, qualifying marketable securities and central bank reserves, central bank or sovereign debt in local currency. Level 2 assets include corporate bonds with a minimum credit rating from an approved rating agency.
In order to assist local banks meet the new Basel III liquidity requirements, the South African Reserve Bank has made some initial proposals offering a committed liquidity facility to banks which will assist them in meeting Level 2 liquidity requirements.
In terms of the current proposals, the Reserve Bank has indicated that the following types of collateral will be acceptable: a) Marketable securities; b) JSE listed equities included in the Top 40 index; and
This committed liquidity facility will be made available from the Reserve Bank during the course of this year
c) Self-securitised pools of high-quality loans.
In terms of c) above, the notes issued from vehicles consisting of selfsecuritised assets will be used as collateral for the committed liquidity facility provided by the Reserve Bank. This option entails the securitisation of assets by the bank and purchase by the bank itself of the notes that are issued. The notes issued by the securitisation vehicle will be backed by the high-quality loans, and the notes must have a minimum rating of A- provided by an external credit rating agency using the domestic rating criteria.
As some banks may currently experience difficulty complying with the Basel III liquidity requirements, the committed liquidity facility may prove popular. In particular, the self-securitised collateral option is a way for banks to convert existing non-liquid assets into assets that could, after having been sold into the securitisation vehicle, effectively be used to generate Level 2 liquidity coverage ratio assets and result in compliance with this aspect of Basel III requirements.
The reason these assets can be used to secure such a facility is that the assets are of a sufficiently high quality, given the minimum credit rating required for the rated notes supported by these assets, and are ring-fenced from the books of the bank in terms of securitisation regulations.
In accordance with the securitisation regulations, the collateral must also be unencumbered (ie not ceded to any other party or subject to any security arrangement or support) and furthermore should have a maturity in excess of a year. Although in terms of this arrangement the notes are held by the bank, these self-securitised assets must be administered in the same manner as a normal securitisation.
In terms of the current proposal, this committed liquidity facility will be made available from the Reserve Bank during the course of this year.
The specific details on the framework of this facility and its operation and processes are still being considered by the Bank.
BANK LIQUIDITY REQUIREMENTS The liquidity coverage ratio requires banks to hold sufficient highquality liquid assets which can easily be converted into cash to cover periods of outflow during a financial crisis