Bank could ease liquidity rules to free up R320bn
In a move that could free up as much as R320bn in lending, the SA Reserve Bank is considering letting banks dip into their capital buffers to help the economy deal with the effects of the nationwide lockdown to contain the spread of Coronavirus.
The Bank said in a statement on Saturday that it was considering a lower liquidity coverage ratio (LCR) — which requires banks to hold cash, or highquality liquid assets such as stock, that match or exceed projected cash outflows over a 30day period — and the minimum requirement of capital and reserve funds to be maintained by banks.
The measures, published for comment before they are to be implemented, are aimed at making it possible for banks to continue lending through what is expected to be a period of liquidity shortages, a rise in defaults and a decline in banks’ profitability as the economic crisis precipitated by the Covid-19 outbreak grips SA. As much as
R320bn could be what banks could lend to distressed and small businesses, said deputy governor and CEO of the Bank’s Prudential Authority (PA) Kuben Naidoo.
For at least a week now, SA’s financial markets have been hit by a shortage of liquidity as domestic and foreign investors flee to safe havens such as the dollar and US treasuries.
Last week, the Bank took several steps to increase liquidity, particularly in the bond market, saying it would step into the market to buy state bonds.
Under Basel 3 requirements, banks must raise their stock of high-quality assets that can converted easily into cash.
The Bank proposes reducing these levels to 80% of each bank’s requirement under the Basel rules, from April 1.
The LCR, which includes potential outflows from clients drawing on lending facilities, was about 148.4% for all banks, according to the latest Reserve Bank Financial Stability Review. This is well above the minimum ratio of 100%. In a letter to banks published on its website, Naidoo said that the PA would monitor the market developments and might make changes to the LCR rules at any time by providing timely notice to the banks.
A second proposal will reduce the minimum capital and reserve requirement banks have to hold as a proportion of their assets. In particular, reserve requirements — known as Pillar 2A capital requirements — will be temporarily reduced to zero.
“The Prudential Authority considers the Covid-19 pandemic to be a stress event posing risk to the entire financial system, and believes that the temporary relaxation of the Pillar 2A capital requirement would assist the banking sector by reducing the minimum required amount of capital and reserve funds to be maintained by banks to facilitate banks’ continued lending to the real economy,” the Reserve Bank said in its proposal.
The onus will be on banks to conserve their capital and reserve funds during the Covid19 stress period, and they will not be allowed to make large distributions or ordinary share buybacks.