(8) Minimum required capital and reserve funds
| (a) | For the purposes of determining in form BA 700 the minimum amount of— |
| (i) | allocated qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds required to support risks other than market risk and required to be maintained by a bank in terms of section 70 of the Act, a bank shall calculate the said minimum amount, amongst others, in accordance with the relevant provisions specified in subregulation (3)(a) read with the provisions of subregulations (2)(a), (2)(b), (2)(d) and (2)(e) above; |
| (ii) | allocated qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds required to support market risk and required to be maintained by a bank in terms of section 70 of the Act, a bank shall calculate the said minimum amount, amongst others, in accordance with the relevant provisions specified in subregulation (3)(b) read with subregulation (2)(c) above. |
| (b) | The percentage, contemplated in section 70 of the Act, of the amount of a bank's assets and other risk exposures, as adjusted through the application of the relevant specified risk weights, proxies or factors, and which is to be used, as contemplated in the said section of the Act, to calculate the minimum amount of allocated qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds that the bank is required to maintain in terms of that section shall be a minimum of 8 per cent, or such a higher percentage as may be determined in accordance with the relevant requirements specified in this subregulation (8) read with the relevant requirements specified in subregulation (9) below, and determined in relevant cases by the Registrar in consultation with the Governor of the Reserve Bank, which percentage or any relevant component thereof, amongst others, shall be inserted in the relevant items specified in the form BA 700. |
| (c) | The Registrar may with the consent of the Governor of the Reserve Bank determine or amend risk-weight percentages or risk components in respect of assets and other risk exposures, including assets and other risk exposures identified to exist in a country other than the Republic, which assets or risk exposures may or may not specifically be specified or referred to in these Regulations. |
| (d) | A bank shall maintain the minimum aggregate amount of— |
| (i) | allocated qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds, relating to risks other than market risk; and |
| (ii) | allocated qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds, relating to market risk, |
during the period from the twentieth business day of the month following the month or calendar quarter to which a particular return relates up to and including the nineteenth business day of the month following the month or calendar quarter in respect of which the next monthly or quarterly return, as the case may be, is to be furnished by the reporting bank.
| (e) | Notwithstanding and without derogating from the provisions of paragraphs (a) to (d) of this subregulation (8), in accordance with, inter alia, the relevant requirements specified in the form BA 700, regulations 39(1) to 39(6), and regulation 39(16) of these Regulations, a bank shall have in place robust policies, processes and procedures to ensure that the bank continuously maintains— |
[Words preceding regulation 38(8)(e)(i) substituted by regulation 22(z) of Notice No. 297, GG 40002, dated 20 May 2016]
| (i) | the relevant minimum required specified percentage of eight per cent of qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds to risk weighted exposure, provided that— |
| (A) | the relevant minimum required percentage of qualifying common equity tier 1 capital and reserve funds to risk weighted exposure shall be specified in writing by the Registrar from time to time, but the said specified minimum required percentage shall at no time be less than 4,5 per cent; |
[Regulation 38(8)(e)(i)(A) substituted by regulation 22(aa) of Notice No. 297, GG 40002, dated 20 May 2016]
| (B) | the relevant minimum required percentage of qualifying tier 1 capital and reserve funds, that is, the sum of common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, to risk weighted exposure shall be specified in writing by the Registrar from time to time, but the said specified minimum required percentage shall at no time be less than 6 per cent; and |
[Regulation 38(8)(e)(i)(B) substituted by regulation 22(bb) of Notice No. 297, GG 40002, dated 20 May 2016]
| (ii) | the relevant additional minimum required percentage specified in writing by the Registrar from time to time for systemic risk 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; and |
[Regulation 38(8)(e)(ii) substituted by regulation 22(cc) of Notice No. 297, GG 40002, dated 20 May 2016]
| (iii) | the relevant additional bank specific minimum required percentage specified in writing by the Registrar from time to time for idiosyncratic risk 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; and |
[Regulation 38(8)(e)(iii) substituted by regulation 22(dd) of Notice No. 297, GG 40002, dated 20 May 2016]
| (iv) | a capital conservation buffer, which capital conservation buffer— |
| (A) | shall be phased in between 1 January 2016 and 1 January 2019 in accordance with the relevant requirements specified in paragraph (f) below; |
| (B) | shall be fully met with qualifying common equity tier 1 capital and reserve funds, that is, the relevant required capital conservation buffer specified in this subregulation (8)(e) shall be in addition to any relevant required common equity tier 1 capital adequacy ratio, tier 1 capital adequacy ratio and total capital adequacy ratio specified from time to time; |
| (C) | shall range between zero and 2,5 per cent of a bank's relevant amount of risk-weighted exposure; |
| (D) | is intended to ensure that banks build up capital buffers outside periods of stress identified in writing by the Registrar, which capital buffers may be drawn down as losses are incurred during the subsequent periods of stress, that is, a bank that writes off losses against its capital conservation buffer during a period of stress will be able to continue to conduct business with constraints being imposed in respect of specified potential distributions of available capital and reserve funds; |
| (E) | shall in all relevant cases be applied at a solo and consolidated level; |
| (F) | shall comply with the requirements specified in paragraph (f) below; and |
| (v) | a countercyclical capital buffer, which countercyclical buffer— |
| (A) | aims to ensure that the specified minimum capital requirement for banks take into account the macro-financial environment in which the banks operate; |
| (B) | shall be an extension of the conservation buffer when implemented,that is— |
| (i) | when implemented, the countercyclical buffer shall be phased in between 1 January 2016 and 1 January 2019 in a manner similar to the conservation buffer specified in paragraph (f) below, provided that in the case of excessive credit growth during the specified transition period, the Governor and the Registrar may decide to accelerate the build-up of the capital conservation buffer and the countercyclical buffer or implement a larger countercyclical buffer requirement; |
[Regulation 38(8)(e)(v)(B)(i) substituted by regulation 22(ee) of Notice No. 297, GG 40002, dated 20 May 2016]
| (ii) | a bank shall, for example, be subject to restrictions on distributions when the bank does not meet the relevant specified aggregate capital requirement; |
| (C) | when implemented, shall be fully met with qualifying common equity tier 1 capital and reserve funds; |
| (D) | shall in all relevant cases be applied at a solo and consolidated level; |
| (E) | shall comply with the requirements specified in paragraph (g) below; and |
| (vi) | the relevant additional minimum required percentage or loss absorbency requirement specified in writing by the Registrar from time to time for systemically important banks and/or controlling companies identified and specified in writing by the Registrar of qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds to risk weighted exposure, |
[Regulation 38(8)(e)(vi) substituted by regulation 22(ff) of Notice No. 297, GG 40002, dated 20 May 2016]
| (A) | which systemically important banks and/or controlling companies, and the related additional minimum required percentage, as a minimum, shall be based on factors such as; |
| (i) | size, which shall be based on the aggregate amount of exposures specified in regulation 23 read with the relevant requirements specified in subregulation (17); |
| (iii) | substitutability and financial institution infrastructure; and |
which factors may be assigned equal weights;
| (B) | which additional loss-absorbency requirements— |
| (i) | shall be phased-in in parallel with the aforesaid capital conservation buffer and countercyclical buffer, that is, between 1 January 2016 and 31 December 2018; |
| (ii) | and any subsequent amendments thereto shall become a minimum standard with effect from 1 January 2019; and |
| (vii) | such minimum TLAC requirement as may be specified in writing by the Authority or Reserve Bank of TLAC instruments or liabilities held in addition to the aggregate amount of qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds to risk weighted exposure envisaged hereinbefore. |
Regulation 38(8)(e)(vii) substituted by section 9(r) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (viii) | based on, among other things, the bank's — |
| (A) | board-approved risk appetite or tolerance for risk; |
| (B) | board-approved business strategy; |
| (C) | risk profile and control environment; |
| (E) | desired level of capital; |
| (F) | stress-testing results, |
such additional buffer of qualifying common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds to risk weighted exposure, and such level of TLAC instruments or liabilities, as the board of directors and the senior management of that bank may determine.
Regulation 38(8)(e)(viii) renumbering by section 9(s) and substitution of section 9(t) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
Provided that, in addition to any other provision contained in the Act or these Regulations, when the bank's additional buffer 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 is significantly reduced or depleted, for example, as a result of unexpected severe financial distress or economic downturn, the Registrar may, after consultation with the relevant bank, in writing impose constraints on the bank, such as capital distribution constraints, until the bank's additional buffer 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 is restored.
| (f) | Matters related to the capital conservation buffer |
Outside periods of stress identified by the Registrar in writing, a bank shall hold a conservation buffer of capital above the other relevant minimum required ratios that may be specified from time to time, provided that—
| (i) | when a bank's capital conservation buffer has been reduced or drawn down, the bank shall rebuild the buffer, for example, by way of— |
| (A) | a reduction in the bank's discretionary distributions of earnings, such as a reduction in dividend payments, share buy-backs or bonus payments; or |
| (B) | the issuance of further capital to shareholders as an alternative to conserving internally generated capital, |
the choice between or balance of which options shall be duly explained to and discussed with the Registrar as part of the bank's ICAAP and capital planning process as envisaged in regulation 39(16);
| (ii) | in the absence of raising capital in order to rebuild its capital buffer, the bank shall increase the share of earnings retained the closer the bank's respective levels of qualifying capital and reserve funds move toward the minimum capital requirement specified from time to time, that is, a bank that is in the process of reducing or depleting its capital buffer— |
| (A) | shall not rely on future predictions of recovery or growth in earnings, for example, to maintain substantial distributions of earnings to shareholders, other capital providers or employees; |
| (B) | shall not distribute available capital to signal financial strength; |
| (iii) | from 1 January 2016, when a bank's specified capital adequacy ratios are reduced due to write-offs against the capital conservation buffer, the Registrar shall impose capital constraints on the bank that shall include capital distribution constraints, in accordance with the provisions of table 1 below, until the bank's conservation buffer is restored: |
Table 1
Common equity tier 1 capital and reserve funds ratio
|
Minimum required capital conservation ratios expressed as a percentage of earnings
|
6.5% to 7.125%
|
100%
|
>7.125% to 7.75%
|
80%
|
>7.75% to 8.375%
|
60%
|
>8.375% to 9.0%
|
40%
|
>9.0%
|
0%
|
For example, a bank with a common equity tier 1 capital and reserve fund ratio of—
| (A) | more than 7.125 per cent but less than or equal to 7.75 per cent shall conserve 80 per cent of its earnings in the subsequent financial year, that is, the bank's discretionary distribution of earnings in the form of dividends, share buybacks and/ or discretionary bonus payments shall not exceed 20 per cent of earnings. |
If the bank wants to make discretionary payments in excess of the specified constraint, the bank has the option of raising capital equal to the amount above the specified constraint that the bank wishes to distribute.
| (B) | 10 per cent, with no additional tier 1 capital and reserve funds and no tier 2 capital and reserve funds would have a zero conservation buffer and therefore be subject to the 100 per cent constraint on capital distributions. |
| (iv) | for purposes of the calculation of the conservation buffer— |
| (A) | items subject to the restriction on distributions shall include share buybacks, dividends or any other discretionary payment on shares or instruments qualifying as common equity tier 1 capital or additional tier 1 capital, and discretionary bonus payments to directors, executive officers and other members of staff, provided that payments that do not result in a reduction of common equity tier 1 capital and reserve funds, such as scrip dividends as may be specified in writing by the Registrar, shall not be considered distributions as envisaged in this subregulation (8); |
[Regulation 8(f)(iv)(A) substituted by regulation 22(gg) of Notice No. 297, GG 40002, dated 20 May 2016]
| (B) | earnings include distributable profits or income calculated prior to the deduction of items subject to the restriction on distributions, which earnings shall be calculated after any relevant amount of tax, that is, any tax impact of making a relevant distribution shall be appropriately reversed, provided that, a bank with no positive earnings and a common equity tier 1 capital and reserve fund ratio of less than 9 per cent shall be restricted from making any positive net distribution; |
| (v) | the bank shall manage its business in such a manner that its capital conservation buffer for the period 1 January 2019 and thereafter shall be equal to 2,50 per cent— |
Regulation 38(8)(f)(v) substituted by section 9(u) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (A) | 1 January 2016 to 31 December 2016 shall be no less than 0,625 per cent; |
| (B) | 1 January 2017 to 31 December 2017 shall be no less than 1,25 per cent; |
| (C) | 1 January 2018 to 31 December 2018 shall be no less than 1,875 per cent; |
| (D) | 1 January 2019 and thereafter shall be equal to 2,50 per cent. |
| (vi) | any share otherwise qualifying as common equity tier 1 capital but used to comply with any relevant TLAC requirement specified from time to time shall be excluded from any calculation related to the bank's capital conservation buffer. |
Regulation 38(8)(f)(vi) inserted by section 9(v) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (g) | Matters related to the countercyclical buffer |
As a minimum, the countercyclical capital buffer envisaged in paragraph (e)—
| (i) | shall be based on aggregate credit growth and other relevant indicators that indicate excessive credit growth and a build-up of system-wide risk; |
[Regulation 38(8)(g)(i) substituted by regulation 22(hh) of Notice No. 297, GG 40002, dated 20 May 2016]
| (ii) | when implemented, shall be imposed on all banks when, based on the discretion of the Governor and the Registrar, excess aggregate credit growth is associated with a build-up of system-wide risk, provided that— |
| (A) | in order to give banks time to adjust to a buffer level, the Registrar shall pre-announce the relevant decision to implement or raise the level of the countercyclical buffer by up to 12 months before its effective date; |
| (B) | banks outside the Republic with credit exposures to counterparties in the Republic shall also be subject to the increased buffer level after the pre-announcement period in respect of the said exposures, provided that to facilitate the successful implementation of this requirement, the Registrar shall timeously engage with all relevant consolidating supervisors and host supervisors; |
| (C) | based on factors such as the composition of a bank's portfolio of credit exposure, the buffer that applies to a specific bank may differ from the buffer applied to other banks; |
| (D) | any share otherwise qualifying as common equity tier 1 capital but used to comply with any relevant TLAC requirement specified from time to time shall be excluded from the calculation of the bank's countercyclical capital buffer; |
Regulation 38(8)(g)(ii)(D) inserted by section 9(w) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (iii) | shall be released when, based on the discretion of the Governor and the Registrar, the build-up of system-wide risk has dissipated, provided that a decision to release or decrease the level of the counter-cyclical buffer shall be effective from the date immediately following the date of the announcement; |
| (iv) | may, based on the discretion of the Governor and the Registrar, be used in conjunction with other available macro-prudential tools to appropriately respond to the macro-financial environment prevailing at the time; |
| (v) | shall be a weighted average of the relevant buffers specified from time to time across all relevant jurisdictions to which the bank has credit exposures, provided that— |
| (A) | for purposes of this calculation, credit exposure shall include all relevant private sector credit exposure that attract a credit risk capital requirement or the risk weighted equivalent trading book capital requirement for specific risk, incremental risk, securitisation and resecuritisation exposure; |
| (B) | the weighting applied to the buffer in place in each relevant jurisdiction shall be the bank's total credit risk requirement that relates to private sector credit exposures in that jurisdiction, divided by the bank's total credit risk requirement that relates to private sector credit exposures across all relevant jurisdictions; |
| (C) | when considering the jurisdiction to which a private sector credit exposure relates, the bank shall as far as possible apply an ultimate risk exposure basis, that is, the bank shall, for example, use the country where the guarantor of an exposure resides, and not merely the jurisdiction where the exposure has been booked; |
| (D) | in the case of the bank's value-at-risk (VaR) requirement for specific risk, the incremental risk requirement and the comprehensive risk measurement requirement, the bank shall in writing submit to the Registrar for approval a proposed approach to translate the aforesaid requirements into appropriate risk weights to be allocated to the relevant geographic location of the specific counterparties to which the relevant capital requirements relate, which weights may, for example, be based on the proportion of the relevant portfolio's total exposure at default (EAD) that is due to the EAD resulting from counterparties in each relevant geographic region; |
| (vi) | shall, based on the judgement of the Governor and the Registrar of the extent of the build-up of system-wide risk, range between zero and 2,5 per cent of a bank's relevant amount of risk weighted exposure. |
For example—
| (A) | when the countercyclical capital buffer is zero in all the relevant regions in which the bank has private sector credit exposures, the required capital levels and restrictions shall be the same as specified in table 1 in paragraph (f) above; |
| (B) | when the countercyclical capital buffer is 2.5 per cent, table 2 below sets out the conservation ratios that shall apply at various levels of common equity tier 1 capital and reserve funds: |
Table 2
Common equity tier 1 capital and reserve funds ratio
|
Minimum required capital conservation ratios expressed as a percentage of earnings
|
6.5% to 7.75%
|
100%
|
>7.75% to 9.0%
|
80%
|
>9.0% to 10.25%
|
60%
|
>10.25% to 11.5%
|
40%
|
>11.5%
|
0%
|
