EDITORIAL: Reserve Bank’s proposal could keep credit flowing
Loans to distressed households and businesses on the cards if liquidity ratio rules are relaxed
Just a day-and-a-half into a coronavirus-induced nationwide lockdown that brought whole industries to a grinding halt, and hours after Moody’s Investors Service assigned SA’s sovereign debt junk status, the Reserve Bank came up with another plan to soften the blow on the economy.
The Prudential Authority, a division that regulates banks and is headed by deputy governor Kuben Naidoo, said on Saturday it is weighing whether to give lenders a temporary pass to dip into their cash buffers to support clients hurt by the disruption caused by the pandemic, a global public health emergency that has quickly morphed into economic contagion.
From the beginning of April, lenders — dominated by Standard Bank, FirstRand, Absa, Nedbank, Investec and Capitec — would not be penalised for breaching the Bank’s liquidity coverage ratio (LCR) and holding 20% less than legally required in cash, or easy-to-sell assets such as blue-chip stocks, to cover their theoretical net cash outflows for the next 30 days.
CEO Grant Pattison told suppliers that they wouldn’t be paid as the 21-day lockdown cast a long shadow over the fate of one of the biggest names in retail
The minimum LCR — a rule hatched more than a decade ago by the global banking watchdog, Basel Committee, to protect lenders from a credit crunch similar to that in the 2008 financial crisis — is currently 100% but banks already hold ratios of much more than that.
According to the Reserve Bank’s Financial Stability Review of November 2019, their combined liquidity coverage ratio stood at 148.4%, suggesting that billions of rand are trapped inside the industry with total assets of nearly R6-trillion. The proportion of liquid assets to total assets was 11.2%, or about R661bn vs short-term liabilities of R152bn.
The Bank’s proposal to loosen LCR rules is a laudable effort at keeping credit flowing in the economy, the fragile prospects of which have been undermined by Covid-19 and the Moody’s credit downgrade on Friday.
One would hope the relaxation of the rules would give banks confidence to lend to distressed households and businesses, provided there’s a demonstrable prospect of those clients being able to pay back the money.
The likelihood of scores of people missing work and forfeiting their salaries is frightening for banks, which are probably bracing themselves for defaults on mortgages, vehicles loans, credit cards and unsecured loans.
On Friday, Edcon, the struggling clothing retailer that was already in the middle of a turnaround plan, gave us a glimpse of what banks’ corporate clients might be going through when CEO Grant Pattison told suppliers that they wouldn’t be paid as the 21-day lockdown cast a long shadow over the fate of one of the biggest names in retail.
The Bank’s proposal should, therefore, be comforting to small business owners, hotel groups such Sun International and City Lodge and entertainment companies that include Nu Metro and Ster Kinekor cinemas, which must probably be feeling revenue pressure as governments worldwide roll out restrictions on people’s movement.
It would be morally objectionable if banks were to use the freed-up money to reward shareholders with dividends or buy back shares, and it’s a good thing that the Bank has explicitly ruled this out.
The measures by the Prudential Authority came days after the central bank said it would start buying government bonds in the secondary market as part of measures to ease a liquidity squeeze in parts of the banking system.
Two weeks ago, the Bank increased the number of daily supplementary repo auctions by its domestic market operations desk from one to two, saying that if necessary the size of the weekly main refinancing operations would be increased.
It also adjusted the level of interest rates that applies to its standing facility through which banks square off their position at the end of day by making it more punitive for banks to park cash with it at day’s end.
The Bank’s latest plan to help the country navigate the threat of the coronavirus might not be enough for SA to escape a deep downturn but few can argue that policymakers, who often come under attack for alleged conservatism, have been sitting idle.