A perspective on capital rules and market impact
Hello and welcome,
I’ll be sharing regular views on credit portfolio management in South Africa—focusing on commercial and economic impact rather than regulatory or accounting detail.
On 1 July 2025, the South African Reserve Bank introduced new capital rules, phasing out Internal Ratings Based (IRB) models in favour of the Standardised Approach (STA). Central to this is the ‘output floor’: portfolio risk weights must be the higher of IRB or a percentage of STA.
The floor is 65% today, rising to 72.5% by 1 January 2028. The impact is material. An unrated BBB corporate may shift from a 27% IRB risk weight to 65% under STA—more than doubling capital.
Portfolio averaging softens this, but not by much. The unintended consequence? Banks may be incentivised to originate higher-risk assets to offset the floor. In other words, better credits now drive higher capital—and potentially worse behaviour.
Banks will also need to recover this cost, likely pushing up borrowing costs in an already low-growth, high-unemployment economy. Post Covid, Europe took a deliberate step to stimulate real economy growth; one of the mechanisms was to incentivise the use of securitisation.
Lending to externally rated counterparties offers limited relief. A BBB rating still carries a 75% STA risk weight (48.75% post-floor), while South Africa’s sovereign rating of BB effectively caps anything stronger. This also undermines risk hedging.
Even strong local counterparties or structured vehicles attract high risk weights because the sovereign cap influence, making hedges far less effective for high-quality portfolios.
Markets adapt.
One response has been the rise of private credit—capital flowing outside of regulated banks.
Globally, banks are also turning to innovative (primarily synthetic) securitisation to manage capital. South Africa, however, is behind. The South African securitisation market volume stands at ZAR45bn.
This is all traditional/cash/true sale securitisation and used as a funding mechanism. Issuers retain the economic risk. A synthetic securitisation manages the economic credit risk, so whilst still securitisations, traditional and synthetic exist for fundamentally different reasons.
Synthetic securitisation has been absent in South Africa since before the GFC, and the traditional market remains a steady, funding-focused AAA space. But banks don’t need funding—they need capital relief.
Elsewhere, synthetic securitisation is now mainstream—over 120 deals were executed in Europe in 2025 alone representing over ZAR5tr in nominal portfolio risk. South Africa (and Australia) stands out for its absence.
Next time, I’ll explore how private markets and synthetic solutions could start closing this gap.
Take care.