The Reserve Bank of South Africa has prohibited the issuance of covered bonds by banks in the country, saying that they are potentially “materially inconsistent” with the mission of its bank supervision department (BSD).

The Banking Association South Africa had been lobbying for covered bonds, but the RBSA revealed the decision in a guidance note published on Monday, informing banks that it has a “policy not to allow the use of covered bonds and similar structures by banks in South Africa”.

The central bank said that the mission of the BSD is to “promote the soundness of the domestic banking system and to minimise risk through the effective and efficient application of international regulatory and supervisory standards and best practice”.

The guidance note acknowledges the position covered bonds are given under Basel III and their use in other jurisdictions, suggesting that these prompted recent enquiries it has received about their possible use in South Africa.

However, the Reserve Bank said that: “Since a covered bond structure in terms of which covered bonds are issued by a bank will in essence subordinate the interests of depositors to the interests of the covered bond holders, a covered bond structure is regarded by the BSD as possibly being materially inconsistent with the objectives, duties and responsibilities imposed on the BSD in terms of the provisions of the Banks Act, 1990 (Act No. 94 of 1990 – the ‘Banks Act’).”

The central bank added that it would “continue to monitor and appropriately consider all relevant international developments related to covered bonds”.