The resolution of a small, failing South African lender sets a precedent for bank bail-ins, says Fitch Ratings in a new report.
The rating agency reports that the South African Reserve Bank (SARB) is providing support to African Bank Ltd. by paying 7 billion rand (US$655 million) for a bad-loan book with a net book value of 17 billion rand. Also, 10 billion rand in capital is being raised for the bank; and, importantly, a 10% haircut is being imposed on senior debt instruments and wholesale deposits that are to be transferred to the good bank.
“We expect most senior creditors to accept the haircut and move to the good bank, leaving other liabilities such as subordinated debt and shareholders behind to bear losses,” it says.
More significantly, Fitch says that the case sets a precedent for senior bail-ins. “We believe that the authorities may take confidence from their ability to impose losses on senior creditors of a small bank in an orderly fashion should a larger institution get into trouble in the future,” it says.
This comes as banking authorities around the world are still working to introduce new bank resolution measures, including “bail-in” regimes, in response to the financial crisis. Canadian authorities recently proposed details of their own new regime for protecting taxpayers from the potential failure of one of Canada’s domestic systemically-important banks.
Fitch notes that South Africa is executing the bail-in of senior creditors using existing powers because new resolution legislation is still being finalized. “This is striking because a 2013 Financial Stability Board (FSB) peer report identified several gaps in South Africa’s resolution framework, including a lack of bail-in powers,” it says. “The SARB appears to have been guided by the internationally agreed FSB Key Attributes and the principle that no creditor should be worse off than in liquidation.”
The rating agency says that the country’s banking system “is unlikely to be materially affected by African Bank’s problems as the SARB took swift action.” It notes that the five largest banks it rates all have small exposures to the lender, although they are part of the consortium underwriting new capital for the good bank. “But the underwriting exposure is not significant relative to each participant bank’s capital or balance sheet,” it notes.
Additionally, it says that retail depositors, which represent less than 1% of African Bank’s creditors, are protected, “reducing systemic risks in a country without deposit insurance.” And that, “Losses imposed on senior creditors are unlikely to materially disrupt wholesale funding markets because of the size of the bank and strong rand liquidity in the system, but it could have some implications for funding costs.”
“The problems at African Bank highlight the risks in unsecured personal lending, if not appropriately managed,” Fitch adds.