South Africa’s banks are warning of a funding shortfall of more than R900-billion if they are forced to adopt the Basel 3 liquidity rules in their existing form, which would cut South Africa’s output by 1,1%, a confidential report commissioned by the banking industry warns.

The new banking rules devised in response to the 2009 financial crisis by the Basel Committee on Banking Supervision require banks to hold higher capital buffers to withstand unexpected financial shocks or losses.

Banks also must hold sufficient liquid assets to cover all net cash outflows under a stress scenario for 30 days in terms of the liquidity coverage ratio, and to fund assets maturing after a year with stable funding sources in terms of the net stable funding ratio. The changes come into effect next year.

The report, titled Macro-economic Consequences of the Implementation of Basel 3, prepared by the Bureau for Economic Research on behalf of the Banking Association of South Africa, says a hypothetical, immediate implementation of the rules in their current form could result in a 75 basis point increase in lending rates and slash economic output by 1,1%.

Implementing the rules over five years could result in a loss of 0,1% -0,7% of baseline gross domestic product. The report says there would be cost implications even if Basel rules are phased in as planned, and these had to be carefully considered for their effect on access to credit.

Nedbank CEO Mike Brown said recently South Africa’s banks would struggle to meet the proposed liquidity ratios because of the current mismatch of their funding cycle, which relies heavily on volatile and short-term funding - as opposed to stable sources such as retail savings - to finance long-term business such as mortgages.

The report quotes figures from the Banking Association of South Africa that the current shortfalls in the banking sector to meet the requirements on the liquidity and stable funding ratios would be R240-billion and R680-billion respectively.

Consultancy PwC separately estimated a net stable funding ratio shortfall of R633-billion.

"I have been through the document (and) it (is) reasonable to make those assumptions," Andries du Toit, group treasurer at FirstRand , said on Monday.

Covering such a shortfall from domestic and offshore markets would be costly, and banks would be forced to pass the cost - estimated to be as high as 30% - to borrowers, denting appetite for credit and affecting growth.

The banking regulator, René van Wyk, has national discretion in applying the Basel 3 rules, details of which are expected to be released by the end of the year.

But the Banking Association of South Africa says the scope for national discretion on the liquidity framework is very limited.

"In aggregate the South African banking sector does not currently comply with the requirements of the liquidity ratios," the report reads. "The balance sheets of South African banks, both the asset and liability side, will require a significant structural adjustment in order to meet the Basel 3 liquidity requirements."

Longer implementation periods would lead to smaller output losses "in the internationally comparable exogenous scenarios".

"The degree to which banks, the economy and capital markets are able to adjust to the proposed regulatory environment without having to restrict the availability of credit is a critical assumption in this process," the report reads.

"In summary, compliance with the Basel 3 proposals will have cost implications for the South African economy in addition to the anticipated benefits in terms of enhanced financial stability."