Three steps to bolster banks
Regulator will allow them to dip into reserves to help customers in distress
● As SA entered its second day of lockdown on Saturday last week, the banking regulator released three proposals designed to free up banks’ balance sheets and enable them to assist the rapidly growing numbers of distressed businesses and households.
It was a move that in many ways vindicated the aggressive steps banking regulators have taken in the decade since the global financial crisis to make banks stronger and better able to withstand crises.
There have been cries of “over-regulation” as regulators globally and at home ratcheted up the requirements for banks to boost the capital and liquidity they hold to buffer them against stress and disaster. Compliance with the tougher requirements imposed sizeable costs on the banks and it came at some cost to the economy too: banks had to put aside more of what they took in deposits to build these buffers, which meant they had less to lend.
But now, amid a health crisis that is expected to take a far higher toll on businesses, households and economies than the financial crisis ever did, those buffers are coming into their own. And SA’s banking sector is particularly well placed.
Over the past couple of weeks most of the big banks have announced plans to provide payment holidays or debt restructuring to individuals and smaller businesses in distress, and all are looking at measures to help their larger customers stay in business through the economic shutdown of the next few weeks or months.
What SA’s banking regulator proposes is to let them dip into their own regulatory capital and liquidity reserves to assist customers in good standing, without penalising them for breaching regulatory requirements.
And SA’s banking sector has the space to do that, for the moment. Total capital adequacy is 16.28%, up from 13% before the crisis in 2008 and well above the global average of about 12%, or European banks’ 8%-10%.
“We are much better off on average than we were before the global financial crisis and relative to the rest of the world,” says Prudential Authority CEO Kuben Naidoo, who regulates the soundness of SA’s banks and other financial services companies.
That is partly because the regulatory requirements for South African banks were tighter before the crisis — and still are now, reflecting the high level of risk as well as the high levels of concentration in the banking sector.
“The way we put our capital stack together is slightly higher than in the rest of the world,” says Naidoo.
He sees the stress for the banking sector coming in three waves.
The first came from the market turmoil during the past few weeks that led to customers and investors rushing into cash and to liquidity drying up in the markets, particularly the bond market, impacting on the banks’ liquidity coverage ratios.
The market risk seems to have stabilised, following Reserve Bank intervention last week.
The second wave of stress is in the banks’ non-interest revenue. SA’s banks rely on fees and charges for 40%-50% of their revenue. They are already seeing falls in the volumes of ATM, and credit and debit card transactions. Figures from BankservAfrica this week showed that ATM and point-ofsale transactions in the first three days of the lockdown — to Sunday March 29 — were just 31% of the normal average for those three days in March.
“It seems economic activity came to a standstill all over SA,” says Mike Schussler, chief economist at economists.co.za.
Credit risk is the third wave of stress. This is where customers in good standing don’t earn any revenue in the shutdown and can’t afford to make the interest and capital payments on their bank loans, or indeed on many of their other obligations to suppliers and others.
The banks are naturally keen not to see their good customers — individuals or businesses — go under because of the economic shutdown. The Reserve Bank and the government support that, as long as the banks’ financial soundness is maintained. Hence the proposals the Reserve Bank announced last week on Saturday. The proposals are designed to lighten the regulatory load in the short term precisely to enable the banks to help the economy through that credit stress.
Investec CEO Fani Titi emphasises, however, that everyone must play their part and that if banks and their regulators assist large customers in distress, those customers must in turn ensure that they assist those who depend on them for business and livelihoods, including their own employees.
“As banks, we will support our corporate clients, but we expect those clients to ensure their value chains will be supported,” says Titi.
He says, too, that this is just phase one of an unprecedented crisis. How far and how long banks will be able to support their customers will depend on how long the economic shutdown remains in place and how deep the damage to the economy will be.
Bankers and the regulator have emphasised, too, that assistance applies only to customers in good standing and those who can be expected to be viable after the shutdown. More vulnerable people and businesses will require other support, from the government and other funders.
The banks will reserve the right to decline applications for help and though their profits will be hit hard, they don’t plan to lend in ways that puts at risk their financial stability, or that of the banking system.
Standard Bank CEO Sim Tshabalala told investors this week that in interactions with industry bodies and the government, the banks “are insisting on playing in our lane and not doing things that are outside what can reasonably be expected from a bank”.
The three new sets of measures from the regulator will free up an estimated R320bn in banks’ capital and seek, temporarily, to address the strains on capital and liquidity that the banks will face assuming they will have to assist distressed customers on a large scale.
One measure amends the liquidity coverage ratio to allow banks to provide only 80% of the previous cover that was required to ensure banks had enough to meet any payouts they expect over the next 30 days.
The other two proposals relate to banks’ capital requirements, allowing them to draw down on specific parts of their capital “stacks” if they need to, as well as giving them balance-sheet space to give payment holidays and restructure customers’ loans.
It will give the banks the space they need to help their customers and the economy for now. If the depression carries on for longer and deeper, more radical measures may be needed.