Implicit rating support disallowed in capital calculations by 2030
The Prudential Authority of South Africa has set a June 30, 2030 deadline for banks to phase out implicit government support assumptions in external ratings under the standardised approach. The decision enforces strict due diligence and bans implicit support in internal credit models.
Five years to adjust standardised models
South Africa implemented amendments to the Regulations relating to Banks incorporating Basel III post-crisis reforms on July 1, 2025.
Under the standardised approach for credit risk, banks relying on external credit assessment institutions may continue using external ratings that incorporate implicit government support assumptions for bank exposures until June 30, 2030.
This five-year transition aligns with international Basel framework standards under paragraph CRE 20.18. However, institutions must perform rigorous due diligence under Regulation 39(5) to assess whether applied risk weights remain appropriate and sufficiently prudent.
The new instruction officially replaces Circular 5 of 2015 at the end of the transition period.
Zero tolerance for internal risk ratings
For institutions using internal ratings-based approaches, the Prudential Authority maintains a strict prohibition against incorporating implicit support assumptions.
Banks cannot alter risk parameters or lower regulatory minimum capital requirements based on uncommitted or undocumented expectations of third-party backing.
The regulator observed ongoing non-compliance in internal credit risk-rating assignment processes.
All credit risk calculations under the internal approach must rely strictly on explicitly documented commitments or formal guarantees.
Closing the unbacked capital loophole
The directive closes a long-standing loophole where banks reduced capital buffers using unbacked support assumptions.
Granting a five-year transition for external ratings provides practical breathing room but delays vital discipline.
Supervisors must scrutinize bank due diligence now to stop hidden capital shortfalls.