The Reserve Bank just freed up half a trillion rand as Covid-19 relief loans

• South African banks now have around R540 billion extra in theoretical leeway to grant loans during the Covid-19 crisis, thanks to rule changes by the Reserve Bank’s Prudential Authority.
• The Prudential Authority on Monday announced relaxed rules on liquidity requirements and capital buffers intended to protect the banking system from shocks.
• Those safety margins were created to deal with a crisis, the authority says – now the time has come to spend the money.
• For more stories go to the Business Insider South Africa homepage.

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On Monday the Prudential Authority, a regulator administered by the SA Reserve Bank, announced its recommendation that banks hold off on paying bonuses and dividends to shareholders during the Covid-19 crisis.

It also announced changes to two technical calculations it demands of South African banks.

To ensure that they have enough money on hand, banks are required to sit on large reserves. The Reserve Bank just relaxed two of these rules, freeing up the banks to use more of these reserves.

“For the duration of the crisis, the LCR [Liquidity Coverage Ratio], a ratio setting out the liquid assets a bank has to maintain in relation to its anticipated outflows, is being lowered from 100{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to 80{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2},” the Authority said.

“In relation to capital relief, the Pillar 2A capital buffer, which is set at 1{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of risk-weighted assets, is now set at zero.”

Translation: banks have been handed more than half a trillion rand, around R540 billion, in extra money to work with.

There are many caveats to that number, says Unathi Kamlana, the head of department for prudential policy, stats & support. Leakages in the system, the length of the crisis, and the state of individual banks’ underlying books will all help to determine exactly how much money will become available to consumers and businesses.

But by the Authority’s calculation, relaxing the Pillar 2A requirement will allow a theoretical R300 billion extra to be used in lending, and lowering the liquidity requirement will be worth another R240 billion.

“Pillar 2A and the capital conservation buffers are exactly that, they are buffers that you build in good times so that you can dip into them and utilise them when you have a crisis,” Kamlana told Business Insider South Africa.

“The situation that we are in is not peacetime, this is wartime policy making.”

South Africa is known for the tight and conservative regulation of its banking system, which has stood it in good stead during events such as the 2008 financial crisis.

Reserves will be rebuilt again – carefully – once the crisis is over, Kamlana says. 

“We think this is a finite crisis, in our view it is being managed well.”

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