South African financial authorities and banking industry representatives have discussed the potential introduction of covered bonds in the country within three years, a move that would represent a U-turn on the part of the South African Reserve Bank, which in 2011 prohibited their use.

Minutes from a 28 October meeting of the Financial Markets Liaison Group (FMLG) – whose members include representatives of the South African Reserve Bank (SARB), the National Treasury and commercial banks – record that a presentation was held on the possible introduction of covered bonds and the implications of such a move in the South African context.

“The Funding Model Workgroup was in discussions with Association for Savings & Investment South Africa (ASISA) on the pricing of covered bonds while legal and quantitative modelling teams were assessing the different covered bond models and the impact on the Net Stable Funding Ratio (NSFR),” read the minutes.

“It was envisaged that the introduction of covered bonds in South Africa could take place in about two to three years’ time from now. It was stressed that opportunities to shorten this envisaged timeline be explored.”

The Reserve Bank in 2011 prohibited the issuance of covered bonds by South African banks. The central bank said at the time that a subordination of the interests of depositors to the interests of covered bondholders was “materially inconsistent” with the duties of its bank supervision department.

The Reserve Bank did not respond to enquiries before The CBR went to press.

Market participants have cited covered bonds’ treatment under Basel III as well as needs for housing finance as increasing interest in the instrument in various countries around the globe, with new markets expected to open in the coming years in jurisdictions such as Brazil and Morocco.