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Safety net bill introduced – Provides guidelines on how to deal with a failing bank

Cabinet has approved the tabling of the Financial Sector Laws Amendment Bill, 2020, in Parliament. According to Treasury, the Bill is part of the Twin Peaks reform of the financial regulatory system applicable to the financial sector. “The first part of the Bill introduces a comprehensive framework for resolving all banks as well as non-bank systemically important financial institutions that may be ‘too big to fail’. The second part sets out the provisions to introduce, for the first time, an explicit, industry-funded deposit insurance scheme to protect qualifying depositors’ funds up to a specified limit when a bank fails.”

The ‘resolution and deposit insurance framework’ contained in the Bill has a number of significant policy objectives which include:

Public funds will no longer be the default source of funding used to bail out failing banks and other large financial institutions;
A deposit insurance scheme will be established and managed by the South African Reserve Bank through a newly established Corporation for Deposit Insurance;
Losses incurred due to the failure of a financial institution will in the first instance be borne (through bail-in) by shareholders and creditors who are able to properly assess their investment risks and who had benefited from profits made by the institution as a going concern;
The South African Reserve Bank will get additional legal tools to ensure that critical services continue and that stability is maintained in the financial system in the event of a significant failure;
Following international best practice, a modified creditor hierarchy for financial institutions falling within the scope of the envisaged framework is introduced, in terms of which covered depositors will rank as preferred creditors.

The Bill was previously published for public comment in 2018. The revised Bill will be published shortly after it is tabled in Parliament. National Treasury also published a summary of comments received, and its response to these comments.

Prevention is still better than cure. Hopefully, some of the lessons (if any) learnt from the VBS bank debacle will help to proactively manage the public’s investments.

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