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Financial Stability Board (FSB) Peer Review of South Africa’s Bank Resolution Framework

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Overview

The FSB has conducted a peer review of South Africa’s framework for resolution of banks and deposit insurance. The review highlights areas where the framework can be strengthened to enhance financial sector resilience and stability.

Bank Resolution Framework

  • The South African Reserve Bank (SARB) has developed a new bank resolution framework, which includes a roadmap for implementation.
  • The framework aims to strengthen SARB’s resolution function by enhancing resources, promoting cooperation with other internal functions, and building operating structures and processes.
  • Recommendation: The authorities should review and update emergency liquidity assistance (ELA) arrangements to align them with the new resolution framework.

Deposit Insurance Framework

  • The South African Deposit Insurance Company (CoDI) will be established as a separate entity from SARB.
  • CoDI’s funding structure is multi-tiered, including:
    • An equity tranche built up over time through a flat premium assessed at 0.20% of covered deposits per annum.
    • A liquidity tranche built from contractual deposits.
    • Government guarantees.
  • Recommendation: The authorities should strengthen the deposit insurance scheme by enhancing the resolution regime and complementing stress-testing with interconnectedness assessments.

Financial Sector Risks and Vulnerabilities

  • South Africa’s financial sector operates in a challenging economic environment, including:
    • High unemployment rates.
    • Income inequality rates.
    • Slow economic growth.
    • Household indebtedness.
  • Stress Tests: Relatively high capital buffers have helped mitigate risks, but stress tests confirm the capital resiliency of banks and insurance companies to severe shocks.

Implementation of G20 Financial Reforms

  • South Africa has made significant progress in implementing post-crisis G20 financial regulatory reforms, including:
    • Certain Basel III standards.
    • Compensation rules.
  • However, implementation is less advanced for reforms aimed at making derivatives markets safer and ending too-big-to-fail.

Overall, the peer review highlights areas where South Africa’s framework for resolution of banks and deposit insurance can be strengthened to enhance financial sector resilience and stability.