Proposed Directive Pertaining to Loss Absorbency Requirements Published for Comment

On 26 March 2024 the Prudential Authority published, for public comment, the revised proposed directive on loss absorbency requirements for banks, bank controlling companies and branches of foreign institutions under reference 15/8/13 (the "proposed directive") which considers comments raised by market participants on the first iteration of the proposed directive published in the 4th quarter of 2023 following the introduction of South Africa’s resolution framework.

Once finalised, the proposed directive will repeal and replace guidance note 6 of 2017, which is the guidance note that currently addresses the loss absorbency requirements for additional tier 1 and tier 2 capital instruments issued by banks and bank controlling companies.

The proposed directive reaffirms the Prudential Authority’s ability to trigger contractual write-off or conversion of additional tier 1 and tier 2 capital instruments at a point of non-viability of a bank or bank controlling company, outside of resolution. The Prudential Authority’s power in this regard is derived from the provisions of Regulation 38(11)(b)(i) and 38(12)(a)(i), respectively, of the Regulations relating to Banks ("regulatory bail-in").  

The proposed directive also clarifies the position in South Africa that alongside the Prudential Authority’s power to effect regulatory bail-in, the South African Reserve Bank is empowered — as the resolution authority — to invoke in resolution its wide-ranging powers to bail-in most types of debt in line with the creditor hierarchy specified in the Financial Sector Laws Amendment Act, 2021 ("statutory bail-in"). As such, the proposed directive confirms that regulatory bail-in and statutory bail-in will coexist since it is not intended that the statutory requirements relating to the point of resolution will replace regulatory bail-in.

In the aftermath of the decision by the Swiss Financial Market Supervisory Authority to write down 16 billion Swiss Francs (approximately $17.5 billion) of additional tier 1 bonds issued by Credit Suisse, while shareholders retained value, market participants were anticipating that the SARB would allay concerns that a similar scenario could occur in South Africa. These concerns have not, however, been addressed in the proposed directive.

Following the public consultation process, it is anticipated that the Prudential Authority will make the necessary changes to the proposed directive.

The proposed directive is accessible on the Prudential Authority’s webpage.

Comments on the proposed directive must be submitted by email to SRB-PA@resbank.co.za for the attention of Ms S Mbebe, by no later than 29 April 2024.

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