South Africa strips Land Bank debt of high quality asset status

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South Africa’s central bank will no longer allow commercial lenders to use debt issued by state-owned Land Bank to meet their capital adequacy requirements as they are no longer considered a “high quality liquid asset”.

Land Bank, the country’s largest agricultural focussed lender, was downgraded by Moody’s in January and defaulted on loans totalling R50 billion ($2.74 billion) in April, triggering fears about its ability to stay afloat.

That forced the South African Reserve Bank (SARB) last week to prohibit the use by banks and investment houses of Land Bank debt as collateral to access short-term funds at the central bank’s repo auctions, a key source of market liquidity.

In a circular on Tuesday the SARB said the temporary suspension of the Land Bank’s bills mean that its debt could no longer be considered “High Quality Liquid Assets” (HQLA).

“Banks are prohibited from including Land Bank bills as part of level 2 HQLA for purposes of LCR (Liquidity Coverage Ratio) calculations,” the SARB said.

“In this regard, a period of 30 calendar days is provided for banks to adjust their portfolios of qualifying HQLA following the publication of this circular.”