To avoid this outcome, governments have previously been obliged to support failing financial institutions using taxpayers’ funds. This led to moral hazard: shareholders and creditors of financial institutions benefited from profits and excessive risk-taking in good times, but taxpayers carried the cost of failure when risk-taking led to failure. The 2007–08 global financial crisis was a typical example.
To address the risk presented by TBTF institutions, the Financial Stability Board published the Key Attributes of Effective Resolution Regimes for Financial Institutions, which all G20 countries are committed to implement. In South Africa, the first step taken to comply was to publish a discussion paper, titled Strengthening South Africa’s resolution framework for financial institutions, in August 2015. After extensive consultation, the proposals set out in this paper were incorporated into the Financial Sector Laws Amendment Bill of 2018 (FSLAB), which was released for comment in September 2018. The FSLAB contains proposed amendments to the Financial Sector Regulation Act 9 of 2017, including a chapter providing for the orderly resolution of designated institutions. These are defined as all banks, as well as non-bank systemically important financial institutions and their holding companies.
The FSLAB is currently going through the legislative process. Once promulgated, it will designate the SARB as the authority responsible for the resolution of all designated institutions. The Bill will provide the SARB with additional powers to ensure the orderly resolution of any designated institution. In addition, as some of these powers are intrusive, the FSLAB includes certain parameters within which the resolution authority should work, such as ‘no creditor worse-off than in liquidation’. This parameter entails that, after a resolution is executed, no creditor should be left in a worse position than they would have been in if the institution was liquidated.
The SARB cannot publish secondary legislation, in the form of standards, to clarify what will be expected from the financial sector and provide additional requirements before the FSLAB is promulgated. In the interim, the SARB published a discussion paper, titled Ending too big to fail: South Africa’s intended approach to bank resolution, in July 2019. This paper informs the industry how the SARB intends to implement the resolution framework, specifically for banks.
To structure its approach to resolution, the SARB established a Resolution Policy Panel as a permanent subcommittee of the Financial Stability Committee. The panel will develop secondary legislation and internal policies relating to the resolution framework, which the committee will then approve.
The SARB continues working to ensure a sufficient resolution framework and will produce relevant papers for discussion covering topics including group structure requirements, first loss after capital instruments to allow recapitalisation, valuation methodologies, funding requirements to allow operational continuity and bail-in procedures.
The requirements and/or guidelines set out in these discussion papers will eventually become standards and will help the SARB to develop resolution plans, in consultation with the affected institutions.
1. Ending too big to fail: South Africa's intended approach to bank resolution
2. A methodology to determine which insurers are systemically important
3. Group structure reporting requirements for resolution planning
4. Proposed requirements and principles for Flac instruments
5. Operational Continuity in Resolution
6. Proposed valuation requirements for resolution-planning purposes
7. Resolution stays and moratoria