Banks and financial systems in the current environment

By Nedgroup Investments

We’re fortunate to have a banking system that works well, has been tested and has performed better than many of its global counterparts in other crises.

We have a system that is well regulated; has been able to earn reasonable returns in a vanilla banking environment; the Rand based funding pool is a stable, closed system, which is balanced daily by the clearing banks and the Reserve Bank; and the Banking Association of South Africa (BASA) is very effective. In the current environment, National Treasury, the SARB, the financial services conduct authority and BASA meet weekly. The SARB also meets weekly with the treasurers of the big five clearing banks.

The SARB has been very proactive on the regulatory front with a reduction in the liquidity coverage ratios from 100% to 80%. This enables banks to support the real economy and not have to put any excess deposits they receive into high-quality liquid assets. There has been a reduction in required capital buffers enabling banks to use that capital in these difficult times, and the guidance note on dividends, which preserves capital. There has also been a directive on the restructuring of problem accounts where Covid19 matters have resulted in cash flow challenges. This is an attempt to reduce pro-cyclicality across both our retail and corporate portfolios. This week saw the launch of the R200 billion SME Scheme, the first R100 billion of which was announced yesterday. This was essentially the National Treasury acting through the SARB and using commercial banks as a distribution mechanism to try and increase the velocity of money supply across the system. All of the loans made by the banks will be 100% funded through a special repo with the loss sharing arrangement agreed at 94% to National Treasury and 6% to banks.

We’ve seen significant changes to the repo system. On 20 March, the SARB introduced two daily supplementary repos at 10am and 1pm, affirming their willingness to inject liquidity into the system on an overnight basis. They also agreed to maintain their usual 7-day repo. They further encouraged banks to share more amongst each other by reducing the rate that banks earn when they deposit money back with the SARB to repo minus 200bps. From 25 March, they added a longer dated weekly repo with up to three months and the ability to extend that to twelve months. The SARB recently removed the 10am supplementary repo as a sign of some normality returning.

The banks entered this crisis in much better shape than the GFC. South African banks went into this crisis with capital levels 40% higher than for the GFC. While no one knows the shape and depth of this crisis, with the GFC, the banks were the cause of the crisis, whereas now health is the cause that impacts the economy, which then impacts banks. Governments and regulators know that banks are part of the solution in helping customers and clients with cash flow shortfalls through this crisis. Nedbank entered the Covid-19 crisis with a set 1 capital level of 11.5%, liquidity coverage catio of 125%, a net stable funding ratio of 113% and sources of quick liquidity across the Nedbank balance sheet in excess of R225 billion. We know that there are challenging times ahead for our economy, but the banking sector, working alongside our regulators, is well prepared to play it part in managing through this crisis.

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