Standard Bank sells Africa’s first safety-buffer bonds designed for bank crises

Standard Bank Group has raised 2 billion rand ($123.76 million), it said on Thursday, through the continent’s first issuance of a type of bond designed to act as a buffer in banking crises, known as Flac notes. Short for financial loss-absorbing capacity, Flac notes give authorities a tool to protect banks in turmoil that avoids the need for taxpayer bailouts. These instruments can be written down or converted into equity during a resolution process, stabilising lenders while shielding public finances.

Standard Bank’s debut issuance was divided into four tranches and attracted bids exceeding 10 billion rand, from more than 30 institutional investors, the bank said in a statement. The transaction “is the culmination of many years of legal and regulatory work, as well as extensive institutional investor engagement,” said Paul Burgoyne, Head of Treasury & Money Market at Standard Bank. rules that mandate shareholders and investors – not taxpayers – take the first hit if a bank stumbles.

Internationally, the Financial Stability Board introduced the Total Loss-Absorbing Capacity standard for major banks to ensure financial crashes can be contained without public money. South Africa’s banking sector has largely relied on private-sector solutions and central bank measures to handle financial pressures in modern times. However, the country’s history includes state-supported rescues, most notably the Bankorp lifeboat of the apartheid era, which critics said disproportionately benefited some of the bank’s shareholders.

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Moody’s said in a report this month that the country’s resolution framework, which underpins the Flac issuance and came into effect in 2023, is credit positive for senior creditors and depositors. “South African authorities are likely to remain unwilling to bail out bank creditors, considering the government’s limited fiscal capacity,” Moody’s added. “However, the framework protects senior creditors from losses by relying on junior creditors and Flac instruments during a bank failure.”

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