Financial institutions are regarded as too big to fail (TBTF) if they are so systemically important that, if they fail, they cannot be closed or liquidated without severe detrimental impact on the financial system, consumers and the real economy. 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 Financial Sector Laws Amendment Act, No 23 of 2021 , known as the Resolution Bill, has been signed into law by the President on 25 January 2022. The Minister must determine a date of commencement.
The Act, through consequential amendments to the FSR Act and a number of other Acts, provides for the establishment of a framework for the resolution of designated institutions to ensure that the impact or potential impact of a failure of a designated institution on financial stability is managed appropriately and designates the Reserve Bank as the resolution authority.
It also establishes a deposit insurance scheme, including a Corporation for Deposit Insurance and a Deposit Insurance Fund.
A number of consequential and technical amendments are made to other Acts, the FI Act and the FMA to exclude designated FIs.
In terms of s29A the following institutions are designated institutions:
(a) A bank;
(b) a systemically important financial institution;
(c) the payment system operator and participants of a systemically important payment system;
(d) a company that is a holding company of a bank, a systemically important financial institution, or a payment system operator of a systemically important payment system; and
(e) subject to any determination in terms of subsection (2), if a bank or a systemically important financial institution is a member of a financial conglomerate in terms of section 160, each of the other members of the financial conglomerate.
For more insights on how the current changes impact on your organisation, kindly contact:
Zama Nkubungu Shangisa (Law Partner: Financial Services)
zama@znsincorporated.com
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