Freeze dividends and exec bonuses, Sarb tells bankers

The South African Reserve Bank (Sarb) is offering more Covid-19 relief to the country’s banking sector. However, it has asked commercial banks to put a freeze on paying out ordinary dividends or bonuses to executives this year.

The move, announced by the Prudential Authority (PA) of the Sarb on Monday night, comes amid the worsening economic fallout from the global Covid-19 pandemic.

“With the high probability that the impact of Covid-19 will result in heightened stress in the banking system, the PA is issuing a guidance note advising banks not to distribute discretionary ordinary dividends during this period. Similarly, bonuses for senior executives should also be put on hold during this period,” the regulatory authority of the central bank said in a statement.

“The Basel framework, which provides clear rules on when discretionary dividend and bonus payments can be limited, is likely to be impacted. These constraints generally kick in when a bank breaches or is about to breach its capital buffer, which could become progressively tighter, leading it to dip into its capital buffers,” it added.

The PA welcomed measures already taken by banks to support customers during what it described as a “period of economic turmoil and uncertainty”.

It noted that in addition to the actions already taken by the Sarb in deploying monetary policy tools to mitigate the impact of Covid-19, it had also decided to support the banking system as a response to the needs of banking customers.

“The PA will provide for regulatory relief measures as well as guidance to banks in managing the crisis. The regulatory relief measures are provided for in three areas, namely capital relief on restructured loans that were in good standing before the Covid-19 crisis, a lower liquidity coverage ratio (LCR) and lower capital requirements,” it said.

“South Africa has a strong and resilient banking system with adequate levels of capital and significant liquidity buffers to manage this stress. The Basel framework, around which bank regulations are structured, has built-in buffers on both the capital and liquidity elements of the regulation for banks to draw on during times of financial stress,” it noted.

The PA noted that the impact of the Covid-19 coronavirus is likely to have a lasting and detrimental effect on the economy.

“While the depth and length of the economic downturn remain uncertain, there is already evidence of stress at both the household and business levels, with small businesses of particular concern,” it said.

The PA’s three areas of relief offered to the banking sector are explained below:

• Capital relief on restructured loans: The PA has temporarily amended Directive 7 of 2015 on Restructured Exposures for the duration of the crisis, which means loans restructured as a result of the impact of Covid-19 will not attract a higher capital charge. This amendment covers loans to households, small- and medium-sized businesses and corporates, as well as for “specialised lending”.
• Lower LCR: For the duration of the Covid-19 crisis the ratio setting out the liquid assets a bank must maintain in relation to its anticipated outflows, is being lowered from 100% to 80%.
• Lower capital requirements: The capital buffer for commercial banks, which is set at 1% of risk-weighted assets, is now set at zero. The PA has also given clear criteria that provides for a bank to dip into its capital conservation buffer, which is set at 2.5% of risk-weighted assets.

The regulatory authority said that it plans to announce a timetable according to which banks can restore these buffers once the Covid-19 crisis has abated. “This timetable will be sensitive to the needs to balance the rebuilding of buffers to ensure a resilient banking system, with the negative effect that such measures could have on credit extension and economic growth,” it noted.

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