Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?
For purposes of setting capital adequacy requirements, section 70 of the Banks Act distinguishes between:
- banks of which the business does not include trading in financial instruments;
- banks of which the business consists solely of trading in financial instruments; and
- banks of which the business includes trading in financial instruments.
A bank is required to manage its affairs to maintain a prescribed minimum sum of share capital and unimpaired reserve funds (comprising the bank’s common equity tier 1 capital, additional tier 1 capital and tier 2 capital, and its common equity tier 1 unimpaired reserve funds, additional tier 1 unimpaired reserve funds and tier 2 unimpaired reserve funds). For most banks, the prescribed amount of such funds may not fall below the greater of 250 million rand and a prescribed percentage (minimum percentage) of the sum of amounts relating to the different categories of assets and other risk exposures (namely, credit risk, counterparty credit risk, market risk, operational risk) and calculated in such a manner as may be prescribed. Regulation 38 of the Banks Act Regulations sets out directives and interpretations concerning capital adequacy and leverage for banks as contemplated in the Banks Act, and presently sets the applicable Minimum Percentage of assets and other risk exposures required to be maintained by a bank at 8 per cent.
Currently, under the Banks Act Regulations, banks are also required to maintain, among others, the following current minimum capital and reserve funds:
- the common equity tier 1 capital adequacy ratio (ie, the ratio of qualifying common equity tier 1 capital and reserve funds to risk-weighted exposure) must at all times be a minimum of 6.5 per cent;
- the tier 1 capital adequacy ratio (ie, the ratio of qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds to risk-weighted exposure) must at all times be a minimum of 8 per cent;
- the total capital adequacy ratio (ie, the ratio of qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds and tier 2 capital and reserve funds to risk-weighted exposure) must at all times be a minimum of 10 per cent;
- the minimum required percentage of capital and reserve funds specified from time to time for systemic risk must be maintained;
- the minimum required percentage of capital and reserve funds specified from time to time for idiosyncratic risk must be maintained;
- a capital conservation buffer must be maintained, ranging between zero and 2.5 per cent of a bank’s relevant amount of risk-weighted exposure;
- a countercyclical capital buffer must be maintained, ranging between zero and 2.5 per cent of a bank’s relevant amount of risk-weighted exposure;
- the additional minimum required percentage specified by the Prudential Authority from time to time must be maintained by systemically important banks or controlling companies;
- from 1 January 2016, capital constraints, including capital distribution constraints, must be imposed on a bank if its capital adequacy ratios are reduced owing to write-offs against the capital conservation buffer until the bank’s conservation buffer is restored;
- after 1 January 2015 no amount obtained from the issue of any hybrid-debt instrument may form part of the total amount of qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds of the bank.
In terms of the Banks Act, banks are also required to hold level one high-quality liquid assets to a value not less than the sum of amounts calculated as percentages not exceeding 20 per cent of different categories of its liabilities. A bank is not entitled to pledge or encumber such liquid assets.
Banks are not required to make contingent capital arrangements.
The FSR Act allows the SARB to direct the Prudential Authority to impose (through appropriate standards or directives) requirements that would apply generally or specifically to systemically important financial institutions concerning any of the following matters:
- solvency measures and capital requirements, which may include requirements in relation to countercyclical capital buffers;
- leverage ratios;
- organisational structures;
- risk management arrangements, including guarantee arrangements;
- sectoral and geographical exposures;
- required statistical returns;
- recovery and resolution planning; and
- any other matter in respect of which a prudential standard or regulator’s directive may be made that is prescribed by regulations made for this section on the recommendation of the Governor.
How are the capital adequacy guidelines enforced?
Failure to comply with the prudential requirements set out in the Banks Act constitutes an offence that is punishable by a fine or imprisonment for a period not exceeding five years. Regardless of pending or contemplated criminal proceedings, the Prudential Authority is entitled to impose a fine upon the relevant bank or controlling company limited to:
- one-tenth of 1 per cent of the amount of the shortfall for each day on which the failure or inability to comply with the minimum capital and reserve funds requirements continues; or
- 3 per cent of the amount of the shortfall arising from the failure or inability to comply with the minimum liquid assets’ requirements. A bank’s failure to pay such fine may be enforced by civil court proceedings.
What happens in the event that a bank becomes undercapitalised?
If a bank, its controlling company or its branch fails or is unable to comply with the prudential requirements under the Banks Act and the Banks Act Regulations concerning the minimum capital and reserve funds and minimum liquid assets to be maintained, such institution must report its failure or inability to comply with reasons to the Prudential Authority. The Prudential Authority may choose to immediately take enforcement action against such institution or set any conditions and afford it the opportunity to comply within a specified period.Insolvency
What are the legal and regulatory processes in the event that a bank becomes insolvent?
Under the Banks Act, the Minister of Finance may place a bank under curatorship if:
- the Prudential Authority is of the opinion that the bank will be unable to repay deposits made with it when legally obliged to do so or will probably be unable to meet any other of its obligations; and
- the Minister of Finance deems it desirable in the public interest.
The Minister of Finance must notify the chief executive officer or the chairperson of the board of directors of the bank in writing of the appointment of the curator. The Prudential Authority may appoint an assistant to the curator who, in the opinion of the Prudential Authority, has wide experience of and is knowledgeable about the specific field of activities in which the bank under curatorship is predominantly engaged.
The Minister of Finance must, in the curator’s letter of appointment, direct, among others, the curator’s management of the bank under curatorship and incidental matters, including in respect of raising money by that bank, as the Minister of Finance may deem necessary. Once appointed, the curator is responsible for managing the bank with the supervision of the Prudential Authority and in the manner that the Prudential Authority deems to best promote the interests of the creditors of the bank, the interests of the banking sector as a whole and the rights of employees in accordance with relevant labour legislation. The bank’s management shall be divested of such power. The curator must recover and take possession of all the bank’s assets. The curator’s appointment and powers must be announced in the Government Gazette.
The curator is also required to, among others:
- keep the required accounting records and prepare the required annual financial statements, interim reports and provisional annual financial statements in respect of the bank;
- convene the meetings of the members of the bank and comply with the company laws applicable to directors; and
- apply any money of the bank towards:
- paying the costs of the curatorship;
- conducting the bank’s business in accordance with the requirements of the curatorship; and
- as far as the circumstances permit, paying the claims of creditors that arose before the date of the curatorship.
The curator is entitled to:
- exercise the power to bring or defend legal proceedings on behalf of the bank; and
- dispose of any of the bank’s assets or transfer any of its liabilities in the ordinary course of the bank’s business or by following the procedure for amalgamations, mergers and arrangements set out in the Banks Act.
The provisions of the Insolvency Act, 1936 concerning circumstances in which dispositions of property may be set aside are applicable to a bank under curatorship. All legal proceedings and legal process against a bank while it is under curatorship are stayed unless the court grants leave to continue with such processes.
The curator must inform the Prudential Authority if it is in the opinion that there is no reasonable probability that the continuation of the curatorship will enable the bank to pay its debts or meet its obligations and become a successful concern. The Prudential Authority may apply to a court for the winding up of any bank in accordance with the Companies Act. Pursuant to the Companies Act, the previous Companies Act, 1973 continues to apply with respect to the winding up of insolvent companies as follows:
- In the winding up of a company unable to pay its debts the provisions of the Insolvency Act, 1936 must, in so far as they are applicable, be applied, with the necessary changes, in respect of any matter not specially provided for by the Companies Act, 1973.
- A company is deemed to be unable to pay its debts if:
- a creditor, by cession or otherwise, to whom the company is indebted in a sum not less than 100 rand then due has served on the company a demand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
- any process issued on a judgment of any court in favour of a creditor of the company is returned by the sheriff or the messenger with an endorsement that he has not found sufficient disposable property to satisfy the judgment or that any disposable property found did not upon sale satisfy such process; or
- it is proved to the satisfaction of the court that the company is unable to pay its debts.
- Every disposition of property made by a company of its property that, if made by an individual, could, for any reason, be set aside in the event of the individual’s insolvency, may, if made by a company, be set aside in the event of the company being wound up and unable to pay all its debts, and the provisions of the law relating to insolvency shall be applied to such disposition.
- Every disposition of property (including rights of action) made after the commencement of winding-up proceedings by a company that is unable to pay its debts, shall be void unless the court otherwise orders.
In terms of the Banks Act, the following additional requirements apply to the winding up of a bank:
- The Master of the High Court may only appoint a liquidator who is recommended by the Prudential Authority and an assistant to the liquidator who, in the opinion of the Prudential Authority, has wide experience of, and is knowledgeable about the latest developments in, the banking industry.
- The Master and the Prudential Authority must receive:
- copy of any resolution or application for winding up; and
- the accompanying documentation including every affidavit confirming the facts stated in the application.
- A copy of every special resolution for the voluntary winding up of a bank and of every court order amending or setting aside the proceedings in relation to the winding up must be delivered to the liquidator, Master and Prudential Authority by the bank within 14 days after registration of the resolutions with the Companies and Intellectual Property Commission or the making of an order.
The approval of the SARB is required under the FSR Act in order to take any of the following steps in relation to a systemically important financial institution or a systemically important financial institution within a financial conglomerate:
- suspending, varying, amending or cancelling a licence issued to that financial institution;
- adopting a special resolution to wind up the financial institution voluntarily;
- applying to a court for an order that the financial institution be wound up;
- appointing an administrator, trustee or curator for the financial institution;
- placing the financial institution under business rescue or adopting a business rescue plan for the financial institution;
- entering into an agreement for amalgamation or merger of the financial institution with a company; and
- entering into a compromise arrangement with creditors of the financial institution.
Further, the Financial Sector Laws Amendment Bill, 2018 restricts insolvency procedures applicable to banks in resolution. Under the Bill, the SARB must agree to certain actions being taken in relation to a designated institution in resolution, including the suspension or cancellation of a licence issued to it, its winding up and the commencement of business rescue proceedings. The SARB may apply to a court for the winding up of a designated institution on the grounds that the institution has been placed in resolution and there are no reasonable prospects that the institution will cease to be in resolution. No person other than a person recommended by the SARB may be appointed as liquidator of a designated institution.Recent and future changes
Have capital adequacy guidelines changed, or are they expected to change in the near future?
The Banks Act Regulations have been amended over recent years to include the requirements developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector, including most recently the requirements of the Basel III framework and revisions to such requirements, including in respect of:
- capital disclosure requirements;
- revisions to the liquidity coverage ratio;
- requirements related to a restricted committed liquidity facility;
- liquidity disclosure requirements;
- requirements related to intraday liquidity management; and
- public disclosure requirements related to the leverage ratio.
The FSR Act allows the Prudential Authority to make prudential standards for or in respect of, among others, a bank and key persons of such financial institutions, including concerning requirements relating to financial soundness such as capital adequacy, minimum liquidity and minimum asset quality.