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SA mulls introducing covered bonds within three years

The securities were previously banned by Sarb on concerns they may undermine the interests of depositors.
South African regulators are considering allowing banks to issue covered bonds within two to three years, according to minutes of a meeting published on the South African Reserve Bank’s website.
The introduction of the securities – previously banned by the central bank because of concerns they may undermine the interests of depositors – were discussed at a meeting of Financial Markets Liaison Group, which includes representatives of the central bank, the National Treasury and commercial lenders, according to the document. The Reserve Bank“is not in a position to comment on this matter,” it said in an e-mailed response to questions on Wednesday.

Covered bonds typically get higher credit ratings and pay less interest than unsecured debt because they’re backed by assets such as mortgages or public sector loans that stay on the lender’s balance sheet and that can be sold in the event of a default. The securities would have priority for payment over senior unsecured debt, which South African banks use to raise most of their liquid regulatory capital.

“It was envisaged that the introduction of covered bonds in South Africa could take place in about two to three years’ time from now,” the minutes of the October 28 meeting, held at the SARB headquarters in Pretoria, state. “It was stressed that opportunities to shorten this envisaged time line be explored.”

Funding sources

A working group was in discussions with the Association for Savings and Investment South Africa (Asisa), which represents investors, the minutes state, while other teams were assessing different covered-bond models and the impact the introduction of the securities would have on banks’ net stable funding ratios, a Basel liquidity rule aimed at ensuring banks obtain more stable funding sources.

The National Treasury and Asisa didn’t immediately respond to e-mailed requests for comment.

Some investors, including Cape Town-based Futuregrowth Asset Management, oppose the introduction of the instruments, arguing they would subordinate existing bank debt.

‘Messing Up’
The SARB “see themselves in a role to protect the economy as they should, and protect and make sure the banking sector is profitable and sustainable, and that’s good,” Andrew Canter, chief investment officer at Futuregrowth, said by phone. “I think in this case what’s happening is they’re trying to solve one set of problems by basically messing up everyone else, even you as a depositor. They are not thinking about it in the broadest possible sense.”

Covered bonds would provide a valuable source of long-term funding for banks bringing their regulatory capital into line with Basel III requirements, said Megan Mconald, head of debt primary markets at Standard bank Group, South Africa’s biggest lender by assets. Properly managed, they wouldn’t have significant effects for depositors or other investors, she said.

“It’s not a foreign concept for banks to raise funding on a secured basis,” McDonald told reporters in Cape Town before the start of the annual Africa Debt Capital Markets Conference. “As long as it’s done responsibly, those dangers, those risks are very adequately and appropriately managed and they should pose no real risk to depositors.”

©2015 Bloomberg News

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