SPECIAL FOCUS
The presumption that
a bank is ‘too big to fail’
is now being specifically
addressed in additional
legislation.
and above Basel III, which will be applicable to both globally active
and local (big) banks.
Another Basel III document addresses the liquidity of banks. With
the banks committing to long-term lending, such as home loans, it is
not possible for any bank to repay all its depositors on any given day.
The new liquidity proposals address the fundamental characteristic
of the banking franchise, namely ‘maturity transformation’. The
bank will generally fund short with savings repayable in months,
and lend long in, for example, home loans repayable in years. The
ability of the banks to absorb financial shocks will be improved
through two new parameters, the ‘liquidity coverage ratio’ and the
‘net stable funding ratio’.
The liquidity coverage ratio will now require banks to hold
a strategic portfolio of highly liquid assets, such as government
bonds, to meet the net obligations of the bank over a rolling
30-day time horizon. Based on the experiences of the financial
crisis, the behaviour of various international bank customers has
been modelled, and a series of run-off factors developed, to mimic
the behaviour of these customers in times of stress. The net result
is a complex calculation of the likely behaviour of depositors in
a crisis and the amount of deposits that the bank could lose over
a 30-day period.
The intention is for the new liquidity requirements to provide
sufficient time for the bank, the regulator and the government to
determine a course of action during the 30 days’ run on the bank. In
South Africa the average deposits under one month are around 60%
of total deposits. The impact that this new ratio will have on South
African banks is therefore significant. Not only will the increased
requirement for highly liquid assets be acquired by diverting
lending away from the economy, but the strict criteria set for the
type of asset that will qualify means that the government will have
to issue significant debt to meet the demand, thereby affecting its
own financial structures.
The second calculation, the ‘net stable funding ratio’, encourages
banks to fund their long-term lending with deposits longer than
one year. This ratio, designed to increase the component of stable
funding, will also be difficult to achieve in South Africa given the
short-dated nature of bank deposits. One lesson learned from the
financial crisis, however, is that fixed deposits were not withdrawn,
thus reducing the need for liquidity.
For South African banks, increasing long-term deposit interest
rates is not the only option. Banks can obviously also reduce the size
of their balance sheet by reducing long-term lending products, such
as mortgages, to achieve the same result.
Basel III (and the many other pieces of legislation that are being
developed internationally to address the failure of the financial
markets) is likely to make banks more resilient but not necessarily
prevent them from failure in the future. However, the lessons learned
from the international financial crisis are valuable and cannot be
ignored. The new requirements will make South African banks
stronger in the long term, despite the proposals not being tailored to
emerging markets. ■
A FUNDAMENTAL SHIFT
Basel III represents a fundamental shift in how we
will be conducting banking regulation and supervision in the future. It fixes many of the shortcomings
of micro-level supervision. But it also incorporates
the broader system-wide lessons and introduces a
macro-prudential overlay to the existing regulatory
framework. Taken together, these measures should
make the system more stable over the long run,
thus raising economic growth over the cycle.
Edition 1
SA BANKER
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