Appendix I. Early Intervention Powers of the Banking Registrar
The Banking Registrar (RB) may:
a) Issue written directives to a bank or a bank controlling company to take specified action to remedy a situation or to refrain from engaging in any action or conduct;53
b) Increase a bank’s capital requirements or require the bank to strengthen its risk management and internal controls;54
c) Restrict the activities of a bank as it deems fit and subject to conditions it may specify;
d) Approve a transaction relating to a merger or transfer of assets and liabilities involving a bank;55
e) Take action in court against bank directors or management for breach of their duties under the Companies Act (CA)56 and use any amounts recovered to repay the Registrar, a deposit insurance scheme, or government body, as part or full compensation for any losses suffered by depositors as a result of the bank being unable to repay their deposits;
f) Object to the continued employment of a director, CEO, or executive officer of the bank, branch, or controlling company if the Registrar reasonably believes that such person is no longer fit and proper or that is not in the public interest to keep such person in office;57
g) Remove an external auditor of a bank and replace such auditor;58
h) Impose administrative fines on a bank or controlling company for failure or inability to meet prudential requirements (minimum share capital or unimpaired reserved fund, or minimum liquid assets ratio) or for non-compliance with the Banks Act;
i) Cancel or suspend a banking license -
i. In the case of a foreign branch authorized to operate in South Africa, for noncompliance with the conditions of its authorization, or in the event its home license is revoked;59 and
ii. In the case of other banks, if it has ceased to conduct banking business or is no longer in operation.
j) Recommend to the minister that the bank be placed under curatorship.
Appendix II. Resolution Legislation for Different Types of Financial Entity
The current framework for dealing with failing nonbank financial institutions (NBFI) is being reviewed in order to identify shortfalls and strengthen the framework where needed. KA1 requires that any financial institution that could be systemically significant or critical if it fails should be subject to a resolution regime that complies with the KAs. The current regimes vary but can be collectively described as modified insolvency regimes:
Securities firms and intermediaries: Under section 38B of the Financial Advisory and Intermediary Services Act of 2002 (Act 37), the Registrar (FSB) may apply to court for a liquidation order against a financial intermediary if it is satisfied that it is necessary to protect the interest of the clients of the institution whether or not the institution is insolvent under the Companies Act (CA) or the Insolvency Act (IA). On agreement with the firm (only), the RB may also appoint a statutory manager in respect of a financial institution regulated by the FSB (Financial Institutions (Protection of Funds) Act 2001, section 5A).60 The Registrar may apply to court for the appointment of a curator for the business of a financial institution (FMA section 96 (b) and section 5 of the Financial Institutions (Protection of Funds) Act).
Insurance firms: The Insurance Acts provide for the winding up of an insurer by Court order. The provisions of the CA and the IA, apply in respect of winding-up processes and procedures. The latter Act specifies when winding-up may take place (including the actions that are regarded as an “act of insolvency”). (LTIA s42, s13; STIA s41, s13). Under s. 42 (2) of the Long-Term Insurers Act (Act 52 of 1998) as amended, the Registrar may, with the written approval of the minister, apply to court for winding up of a long-term insurer if it is satisfied that it is in the interest of policy makers to do so.
Financial market infrastructures: The Registrar has power under section 60 of the FMA to suspend or revoke the license of an FMI (CSD, clearing house, exchange, trade repository) and immediately transfer its business to a similar FMI, or apply to court for a winding up order against it, in the interests of clearing members, authorized uses or participants’ members, or clients.
This note was prepared by Elsie P. Addo Awadzi and Marc Dobler. The section on systemic liquidity benefited from contributions from K. Eckhold, D. Murphy, and D. King.
Which would minimize the potential costs of the scheme and facilitate the use of the new resolution powers.
The current provisioning coverage ratio (specific loan loss provisions as a percentage of impaired loans) is relatively low at approximately 45 percent.
The top four banks—ABSA Bank, FirstRand Bank, Nedbank, and Standard Bank—account for almost 85 percent of total assets, and, exceed 90 percent with the fifth largest bank (Investec Bank).
In that regard, Moody’s removal of the systemic support uplift factored into its South African bank ratings, following the 10 percent haircut announced on African Bank’s wholesale creditors, was a positive development.
Jurisdictions should have in place privately financed deposit insurance or resolution funds, or a funding mechanism for “ex post recovery from the industry of the costs of providing temporary financing to facilitate the resolution of the firm” (KA 6.3).
The NCR currently shares concurrent jurisdiction over consumer credit regulation with various provincial government credit regulators who are required to share information on their registrations and supervisory activities with the NCR (Sections 37 and 38 of NCA).
Under the Multilateral MOU for the FSCF, members have agreed in principle to cooperate in the processes, initiatives, strategies and activities of the FSCF and its constituents and to exchange information and execute agreed-upon actions in the broad interest of the financial system as a whole.
The proposed CFR will be made up of financial sector regulatory agencies and will act as a consultative and coordinating forum for matters of common interest, including joint enforcement, legislation and standard-setting, and the analysis of financial sector outcomes.
Section 224 (1) of the Constitution and section 3 of the South African Reserve Bank (SARB) Act assign price stability as the SARB’s primary objective.
For example, arrangements for on-site supervision, acceptance of approval and supervisory methods/processes and information sharing between the Registrar and a host supervisor relating to the financial condition performance of, adverse assessments, and significant problems experienced by a bank or its foreign branch, subsidiary, holding company, or other affiliates.
Section 22 (2) (dd) (ee) (B), (C), (D).
Authorization for branches of foreign banks seeking to operate in South Africa, and registration for subsidiaries of foreign banks and other domestic banks.
That is, the foreign court had jurisdiction over the defendant; that the foreign judgment is final and conclusive; does not involve the enforcement of a penal or revenue law of a foreign country; or is not contrary to public policy.
The KAs (7.5) require jurisdictions to provide for transparent and expedited processes to give effect to foreign resolution measures. Also see KA 2.1 and 5.4.
See for example, the Nordic-Baltic Stability Group MoU which allocates public costs on the basis of the share of the bank’s asset in each country and supervisory responsibility and recognizes other factors—such as the share of problem assets, excessive fiscal consequences and proven early action—that may be taken into account.
Some jurisdictions already require, or are in the process of adopting measures to require, firms to include contractual provisions in instruments governed by a foreign law to facilitate the cross-border enforceability of bail-in.
These will likely involve amendments to legislation and/or changes to existing contractual provisions.
Under section 6 (5) of the Banks Act, the Registrar may issue a Guidance Note from time to time furnishing regulated entities with information in respect of market practices or market/industry developments within or outside the republic. These are unlike directives (section 6 (6)) which have the force of binding rules.
The Registrar of Banks is mandated to regulate and supervise banks under sections 3 and 6 of the Banks Act 1990 amended as of 2013.
Section 18B of the Banks Act.
Section 23 (3) of the Banks Act.
Section 54 (1); (1A) of the Banks Act.
Under the auspices of the Arbitration Foundation of South Africa or other body designated by the Registrar.
Sections 23 (2); 24; 91A. In the case of action to remove a director or officer, the notice and waiting period is reduced to 14 days, although the Registrar must therefore submit the matter to arbitration if, within the 14-day period, the affected person makes representations against the intended action or makes no representations at all.
Section 33 (1) and (2) of the Constitution provides that every person has a right to administrative action that is lawful, reasonable, and procedurally fair and that every person whose rights have been adversely affected by administrative action has the right to be given written reasons. More specifically, section 3 of the Promotion of Administrative Justice Act of 2000 requires, among other things, that an administrative agency provide adequate prior notice of the nature and purpose of an administrative action that could materially and adversely affect the legitimate rights or legitimate expectations of any person, and a reasonable opportunity to make representations.
Key Attribute 5.4 provides that the resolution authority should have the capacity to exercise the resolution powers with the necessary speed and flexibility, subject to constitutionally protected legal remedies and due process.
This is distinct from the 2.5 percent reserve requirement and the 5 percent liquid asset requirement set by the RB.
SARB, Operational Notice, Financial Markets Department, Money Market Operations, February 2012.
FX swaps in which the spot leg settles tomorrow and the forward leg settles the day after.
The SARB is discussing with market participants options for a new overnight interest rate benchmark.
A higher run-off rate also applies to retail deposits as they are not covered by deposit insurance in South Africa.
By the Financial Services Laws General Amendment Act, 2013 (section 53).
See Table 1 in the European Central Bank’s Collateral Eligibility Requirements, A Comparative Study Across Specific Frameworks (July 2013).
RMBS issued into the market have standardized clauses, waterfall structures and contingency arrangements (e.g., back-up servicers, swap providers, etc.). In the case of self-retained deals, the originator may structure these features to its own interests, which could limit their potential future marketability.
This includes a 5 percent add-on for theoretical valuation.
By section 37 of the Financial Services Laws General Amendment Act, 2013.
There appears to be a view held by some commentators that depositors could be preferred in a resolution using these powers. However, it is unclear to staff whether preferential treatment in favor of depositors in derogation from the pari passu principle would be legally enforceable under these provisions. Depositor preference is best made explicit in the appropriate legal framework (e.g., banking law, resolution law) to remove any doubt as to its legality.
Also known as a “purchase and assumption” or P&A.
These are a chairperson knowledgeable in law, a person with wide experience in the banking industry, and a registered accountant/auditor.
These include at least two advocates or attorneys, judges, and at least four persons with knowledge and expertise in the financial services industry.
Section 26 of the FSB Act.
It would appear that the minister may enjoy immunity from personal liability for any good faith action pursuant to the Banks Act, which liability may be borne instead by the State under the State Liability Act and Treasury Regulation 12 under the Public Finance Management Act of 1999. This could, however, be made more explicit under the Banking Act.
We assume below that a curator may still be appointed under the new regime, e.g., with respect to the KA powers that authorize the “administrator to take control of and manage the affected firm.”
Under the International Association of Deposit Insurers (IADI) core principle 8, membership should be compulsory for all financial institutions that accept retail deposits. The other publically owned bank, the Land and Agricultural Development bank, does not take retail deposits.
See page 14 of the “The Design and Implementation of Deposit Insurance Systems” (Hoelscher et al, 2006).
The Draft Deposit Guarantee Scheme Directive (DGSD), which the European Parliament adopted in March, will require exante funding for European deposit insurance schemes.
These are in order of preference - (i) costs of liquidation; (ii) salaries and wages of employees; and (iii) statutory obligations (workman’s compensation and taxation).
By increasing the recoveries of the DIS, following a pay-out of the deposits and liquidation of the assets of a bank.
See KA 7.4.
Section 6(6). Non-compliance with such directive is deemed an offence under section 6(6)(e).
Regulation 38(4) of the Regulations relating to Banks.
Section 54(8A) of the Banks Act.
CA section 77 or 424.
Section 60 (6).
Section 61 (3) (b) and section 62 (1).
Section 18B of the Banks Act.
A statutory manager may be appointed in the event of material non-compliance with the law, or in the case of an unsound financial position or mismanagement, or otherwise if the Registrar finds it to be in the interest of the clients of the financial institution, the safety and soundness of financial institutions in general, or for the stability, fairness, efficiency, and orderliness of the financial system.