The South African Reserve Bank has, in terms of the Financial Sector Regulation Act 9 of 2017, as amended (FSR Act), been designated as the Resolution Authority (RA) for banks and non-bank systemically important financial institutions (SIFIs), collectively referred to as designated institutions, signaling a significant milestone in providing further certainty and confidence in the country’s financial sector.
The RA designation supports the SARB’s mandate of ensuring financial stability, as it strengthens SARB’s ability to deal with the failure of designated institutions.
As the RA, the SARB will manage the resolution procedures of all designated institutions in the public interest, ensuring an orderly resolution process, protecting depositors’ money and minimising the burden on taxpayers.
Why do we need a Resolution Authority?
The resolution framework is a critical element of South Africa’s financial sector safety net. It enables the Resolution Authority to manage the failure of a designated institution in a manner that mitigates the impact on financial stability, protects vulnerable depositors and reduces the need to use taxpayer funds.
The 2007–08 global financial crisis serves as a stark reminder of the consequences of inadequate measures. The 2023 banking turmoil in the United Kingdom (UK), United States (US) and European Union (EU) again highlighted the importance of having a resolution framework that enables the authorities to deal with the failure of financial institutions.
While some designated institutions can be allowed to exit the financial sector through the resolution processes without majorly impacting the financial sector, SIFIs require a resolution strategy for the continuation of critical functions due to the impact the failure of these functions can have on the financial sector and the broader economy.
The law for a Resolution Authority
The designation of the SARB as the RA is provided for in the Financial Sector Laws Amendment Act 23 of 2021 (FSLAA), which was assented to by President Cyril Ramaphosa in January 2022. Subsequently, Finance Minister Enoch Godongwana published the commencement schedule on 24 March 2023, establishing the Corporation for Deposit Insurance (CODI) as a legal entity and the SARB as the RA for designated institutions with effect from 1 June 2023, on which date the resolution framework also became effective. Once operational in April 2024, CODI would be able to compensate qualifying depositors by up to R100 000 in the event of their bank failing.
This legislative framework is part of South Africa's Twin Peaks financial sector regulatory reforms designed to promote and maintain financial stability following the 2008–09 global financial crisis.
Under the Twin Peaks model, the FSR Act also established the Prudential Authority (PA), which is responsible for regulating and supervising financial institutions and financial market infrastructures (FMIs) operating within the financial system.
Financial sector safety net
How it works
The PA is responsible for supervising and monitoring the financial soundness of financial institutions that fall within the scope of the resolution framework. When it detects any distress within these institutions, the PA must inform the SARB and provide it with all the relevant information. The SARB, together with the PA, will then conduct an assessment to determine whether a designated institution has reached a point of resolution (POR). The POR is the point at which the SARB considers a designated institution to be unable, or likely unable, to meet its obligations. If the SARB determines in its assessment that the designated institution has reached a POR, it will make a recommendation to the Minister of Finance to have the institution placed in resolution. The recommendation will include a high-level description of the proposed resolution strategy and actions that the SARB intends to take and an overview on how these actions should result in an orderly resolution.
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
Frequently asked questions
The FSR Act sets out a framework that enables the Governor of the SARB to deem certain financial institutions as SIFIs. These are financial institutions that, due to their size, complexity and/or interconnectivity within the financial sector, require additional supervision and monitoring to mitigate any systemic risk that they may pose to the financial system.
The FSR Act also provides the SARB with the power to set additional requirements for these institutions. SIFIs fall within the scope of the resolution framework that enables the SARB to conduct an orderly resolution in the unlikely event that they may reach a POR.
The FSR Act, as amended by the FSLAA, places an obligation on the SARB to develop resolution plans for all designated institutions and provides the SARB with the legal powers to assess their resolvability and take action to remove barriers to resolvability.
Resolution planning allows the SARB to, during normal times, develop resolution strategies for designated institutions that set out the possible actions that the SARB can take during a resolution. Resolution planning aims to ensure that both the SARB and the designated institution are prepared to deal with a failure, in the unlikely event of it occurring.
The POR set out in the FSR Act is the point at which the SARB considers a designated institution to be unable, or likely unable, to meet its obligation. The SARB will then make a recommendation to the Minister of Finance to have the designated institution in resolution. After the Minister makes the determination, the SARB will conduct the resolution process and take over the control and management of the institution.
Obligations, as provided for in the FSR Act, include regulatory requirements set by the financial sector regulators.
No framework can completely remove the possibility that public funds may be required to stabilise a failing institution, especially if it is a SIFI. However, the provisions in the FSR Act require the SARB to impose losses on the failing institution’s own shareholders and creditors before public funds can be considered. Imposing losses on shareholders and creditors will enable the SARB to recapitalise the designated institution without the need to inject public funds.
The FSR Act also provides the SARB with stabilisation powers, including the power to bail-in shareholders and creditors. The SARB has the power to set additional loss absorbency requirements. The reliance on public funds is thus further reduced when SIFIs are required to issue financial loss-absorbing-capacity (flac) instruments that can be used during a resolution to recapitalise the institution.
Up to 1 June 2023, banks that were failing or likely to fail were placed under curatorship in terms of the Banks Act 94 of 1990 (Banks Act). The curatorship powers vested in the Curator who acted under direction of the PA.
The FSLAA repealed the curatorship provisions in the Banks Act and from
1 June 2023 banks that are likely to fail will be placed in resolution. The framework assigns the resolution powers to the SARB as the RA.
The resolution framework provided for in the FSR Act sets out additional and/or improved actions that the SARB may take to protect financial stability.
The resolution framework requires the SARB to take measures to plan and prepare for the resolution of a designated institution. The curatorship framework did not require authorities to plan or prepare for the failure of a bank and the powers it provided only allowed for action when the PA determined that a bank was failing or likely to fail.
The resolution framework also provides the SARB with the power to set requirements for institutions during normal times that are aimed at improving their loss absorbency and resolvability.