South Africa Introduces Sweeping Reforms to Strengthen Financial Sector
In a bid to bolster financial stability and protect depositors, the government of South Africa has unveiled significant reforms aimed at regulating the country’s non-banking financial services industry. The overhaul includes the introduction of a deposit insurance scheme and enhanced resolution mechanisms for failing banks.
Key Reforms
- Deposit Insurance Scheme: An industry-funded deposit insurance scheme will be established to provide protection for qualifying depositors’ funds up to R100,000 per depositor.
- Resolution Mechanisms: A comprehensive framework will be established to resolve all banks and non-bank systemically important financial institutions.
- Modified Creditor Hierarchy: A modified creditor hierarchy for financial institutions prioritizes covered depositors as preferred creditors.
Aligning with International Best Practices
The reforms are designed to align with international best practices, including the Key Attributes of Effective Resolution Regimes for Financial Institutions set out by the Financial Stability Board. The bill aims to reduce reliance on public funds in resolving failed banks and ensure that losses incurred as a result of such failures are borne by shareholders and creditors who had benefited from profits gained by the institution.
SARB’s New Powers
The South African Reserve Bank (SARB) will gain additional legal tools to ensure that critical services continue and stability is maintained in the event of a material failure.
Transactions between Affiliates
The Banks Act regulates transactions between banks and their affiliates, imposing limitations on investments, advances, and guarantees. An affiliate refers to any subsidiary or holding company of the bank, as well as any juristic person controlled or administered by the bank.
Key Restrictions
- Investments: Banks are prohibited from investing more than 10% of their aggregate deposits, current accounts, and other creditors in debentures or preference shares of their associates.
- Advances: Advances to associates cannot exceed 10% of the bank’s aggregate deposits, current accounts, and other creditors.
- Subsidiaries: The Prudential Authority must approve any transaction by a bank or its associate involving the establishment or acquisition of a subsidiary within or outside South Africa.
By implementing these reforms, South Africa aims to reduce reliance on public funds and ensure that taxpayers are not left with the burden of bailing out failed institutions. The protection of vulnerable depositors is an essential element of the financial safety net in any country, contributing to financial stability.