D1/2020 Temporary Measures to Aid Compliance with the LCR During the COVID-19 Pandemic Stress Period

PO Box 8432 Pretoria 0001  370 Helen Joseph Street Pretoria 0002  South Africa  Tel +27 12 313 3911 / 0861 12 7272  Fax +27 12 313 3758  www.resbank.co.za Ref.: 15/8/1/3 D1/2020 To: All banks, controlling companies, branches of foreign institutions, eligible institutions and auditors of banks or controlling companies Directive D1/2020 issued in terms of section 6(6) of the Banks Act 94 of 1990 Temporary measures to aid compliance with the liquidity coverage ratio during the Coronavirus (Covid-19) pandemic stress period Executive summary The spread of Covid-19 is having an increasingly significant impact on global economic activity and has placed the local economy under immense strain. As
part of the measures employed to address the impact of Covid-19, government,
as well as business, have called upon the banking industry to continue to extend credit to sectors in need, particularly households and small businesses, and to provide relief measures to reduce the liquidity strain on these sectors in an effort to sustain the local economy and maintain financial stability. The financial market volatility, together with the reaction of other financial institutions, have placed pressure on market liquidity and the supply of term funding. The Prudential Authority (PA) has therefore decided to amend the minimum requirements relating to the liquidity coverage ratio (LCR) to provide temporary liquidity relief to banks, branches of foreign institutions and controlling companies (hereinafter collectively referred to as ‘banks’) during this time, in line with the intention of the Basel III LCR framework.

1. Introduction
   1.1 The LCR represents one of the key regulatory reforms by the Basel
   Committee on Bank Supervision to develop a more resilient banking sector. The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted into cash easily and immediately in private markets to meet banks’ liquidity needs during a 30 calendar day liquidity stress scenario. The LCR is intended to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial industry to the real economy.

2
1.2 Due to the current financial market turmoil, market liquidity has
decreased, and banks have been under increased pressure to comply with the currently prescribed LCR requirements. This has primarily been driven by risk-averse depositors moving out of term funding and into short-term funding.
1.3 Large portions of the HQLA have also decreased in value due to negative
mark-to-market adjustments caused by increases in the yields of the underlying instruments.
1.4 As contemplated in regulation 26(12)(f)(iii)(A) of the Regulations relating
to Banks, the PA views the current financial market turmoil as a period of financial stress. Accordingly, the PA has deemed it appropriate to temporarily amend the required level specified for banks’ compliance with the LCR.
2. Directive
2.1 Based on the aforesaid, and in accordance with the provisions of section 6(6)
of the Banks Act 94 of 1990, banks are hereby directed to comply with a revised minimum LCR requirement of 80 per cent, with effect from 1 April 2020 until such time as the PA directs in writing that it is of the view that financial markets have normalised.
2.2 The PA will continue to monitor the evolving market developments and may
amend the minimum LCR 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 per cent.
2.3 Should a bank be unable to comply with this Directive, the bank shall, in
accordance with the provisions of regulation 5 of the Regulations, report its inability to comply in writing to the PA, stating the reasons for such failure or inability to comply.
3. Acknowledgement of Receipt
Kindly ensure that a copy of this Directive is made available to your institution’s external auditors. The attached acknowledgement of receipt duly completed and signed by both the chief executive officer of the institution and the said auditors should be returned to the PA at the earliest convenience of the aforementioned signatories. Kuben Naidoo Deputy Governor and CEO: Prudential Authority Date:
Encl. 1
The previous directive issued was Directive 2/2019 dated 10 September 2019. 31 March 2020