Reserve Bank weighs dropping liquidity coverage ratio to free up R320bn in lending
It is also considering lowering the specified minimum requirement of capital and reserve funds to be maintained by banks
In a move that could free up at least R320bn in lending, the SA Reserve Bank is considering letting banks dip into their capital buffers to help the economy navigate the effects of nationwide lockdown to contain the spread of the respiratory disease-causing coronavirus.
The Bank said in a statement on Saturday it is considering lowering the liquidity coverage ratio — which requires banks to hold cash, or high-quality liquid assets such as stock, that match or exceed projected cash outflows over a 30-day period — and the specified minimum requirement of capital and reserve funds to be maintained by banks.
The measures, published for comment before they can be implemented, are aimed at making it possible for banks to continue lending through what is expected to be a period of a shortage of liquidity, a rise in defaults and decline in banks’ profitability as the economic crisis precipitated by the Covid-19 outbreak grips SA.
They could unlock as much as R320bn that banks such as Standard Bank, Investec and Absa could lend to distressed businesses and small businesses, the deputy governor and CEO of the central bank’s Prudential Authority (PA) told Business Day.
For at least the past week, SA’s financial markets have been hit by a shortage of liquidity as both 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 government bonds.
Under Basel 3 requirements, banks are required to raise the stock of high-quality assets that can be converted into cash easily and immediately in private markets should the bank come under stress. The Bank proposes that these levels be reduced to 80% of each banks’ requirement under the Basel rules, effective from April 1.
The ratio, which includes potential outflows from clients drawing on lending facilities, for all SA banks was about 148.4%, according to the latest Reserve Bank Financial Stability Review, well above the minimum ratio of 100%.
In a letter to banks published on its website, Naidoo said that “the PA will continue to monitor the evolving market developments and may amend the minimum liquidity coverage ratio requirement specified herein at any time, by providing adequate and timely notice to the banks. Furthermore, once the PA determines that financial markets have normalised, the PA will specify in writing the appropriate phase-in arrangements to restore the minimum LCR requirement to 100%.”
A second proposal will reduce the minimum capital and reserve requirement banks must hold as a proportion of their assets. In particular, reserve requirements — known as Pillar 2A capital requirements — will be temporarily reduced to zero.
“The PA 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,” reads the proposal.
The onus will be on banks to conserve their capital and reserve funds during the Covid-19 stress period and will not be allowed to make large distributions or ordinary share buybacks.