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South Africa’s systemically important banks (D-SIBs) are set to enhance their loss-absorbing capacity starting in 2026 by issuing new loss-absorbing debt (FLAC), according to a recent report by Fitch Ratings.
This follows the finalization of a prudential standard by the South African Reserve Bank (SARB), introducing a new class of loss-absorbing debt as part of the broader financial institution resolution framework adopted in 2023.
FLAC is specifically designed for loss absorption and conversion into regulatory capital during bank resolution processes. It ranks above shareholder equity and other regulatory capital instruments but remains subordinate to all unsecured liabilities.
Gradual Implementation Over Six Years
The phased introduction of FLAC requirements will commence on January 1, 2026, extending over six years—postponed from the initial target of January 2025. This delay allows banks additional time to prepare, ensuring a smoother transition to a more resilient financial system.
Industry analysts believe this regulatory move will reinforce the ability of systemic financial institutions to withstand unexpected losses while maintaining operational stability. Fitch Ratings also emphasized that FLAC buffers form a crucial component of South Africa’s bank resolution framework, strengthening the sector’s overall resilience.
Impact on Capital Planning and Market Response
The SARB estimates that, once fully implemented, FLAC resolution buffer requirements will nearly double the total loss-absorbing capacity of D-SIBs, reaching 17.6% of their combined risk-weighted assets (RWAs).
Fitch projects that FLAC issuance will partly replace maturing senior unsecured debt at both the D-SIB and holding company levels. While domestic investors in local currency are expected to be the primary target, foreign-currency placements may also be explored if there is sufficient demand.
At the end of the first half of 2024, Fitch-rated D-SIB groups had qualifying junior debt buffers of about 3% of their consolidated RWAs, while the total buffer, including senior debt, ranged between 4% and 8% of each D-SIB’s standalone RWAs—well below the 10% threshold required for potential ratings uplift.
Ratings Implications
Given the extended transition timeline, Fitch does not foresee FLAC issuance contributing to a ratings upgrade for any of South Africa’s major banks before at least 2028. Even then, an upgrade would only be considered if junior debt buffers were deemed sufficient to prevent default on senior debt in the event of a sovereign default. Currently, South African banks’ ratings remain aligned with the country’s sovereign rating of BB-/Stable.
This regulatory shift marks a significant step toward a more robust and efficient bank resolution regime in South Africa, reinforcing the financial system’s ability to withstand economic shocks.
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