The Banking Association South Africa is in talks with the Reserve Bank of South Africa about introducing covered bonds. However, some market participants are already raising objections to the effect any such move could have on other creditors.

Cas Coovadia, BASA

“Covered bonds are not yet offered in South Africa and we, The Banking Association South Africa, are currently engaging the banking regulator on this aspect,” managing director Cas Coovadia told The Covered Bond Report.

“Covered bonds provide a useful tool to lengthen the term of bank funding whilst at the same time add to the stock of liquid assets in a country that has limited options to meet the new international banking legislation.”

Speculation that South Africa’s central bank might be considering introducing a framework to permit the sale of covered bonds followed publication of an article to that effect on Bloomberg in mid-April.

However, Michael Blackbeard, deputy registrar of banks at the Reserve Bank of South Africa, dampened such speculation.

“The article was somewhat misleading,” he told The Covered Bond Report. “The reality is that this Office does not allow banks to issue covered bonds and we are considering issuing a guidance note to banks in this regard.”

As in some other countries exploring covered bonds, some market participants are concerned about the impact the asset class could have on other bank creditors. Andrew Canter, chief investment officer of Futuregrowth Asset Management, said that covered bonds would prejudice existing creditors.

“The core argument for me, as a large institutional investor in South Africa, is that we do not think covered bonds should be introduced,” he said. “We think it is a serious degradation to existing investors’ and depositors’ rights.

“There is no history of secured debt issuance by South African banks, in fact it was blocked by capital regulations, and all current funders have invested on that basis. The introduction of covered bonds is a flat change of regulation, which has material consequences for depositors.”

He said that although driven by global regulatory changes aimed at stabilising the financial system, the move could have the opposite effect.

“This introduction is putatively driven by Basel liquid-asset requirements. But since bank regulations are being strengthened partially to protect depositors and funders, it is entirely incongruous to subordinate and degrade their position in such a manner.

A phasing-in period would be incredibly important, said Canter, who believes that if a law is introduced, the asset class should be introduced gradually over a five to 10 year period in order not to immediately degrade outstanding instruments.

“Asked today if we would support the idea of covered bonds, the answer is, no, we would not,” he said. “If there is cause to do it, and the Reserve Bank feels there’s good reason, then it must be done over a long period of time, or alongside the introduction of very extensive deposit insurance, so that the current bondholders will not be diminished.”