The South African Reserve Bank (SARB) has published for public comment another discussion document as it develops a regulatory framework for winding down a failed or failing financial institution.
The “Proposed valuation requirements for resolution-planning purposes” document expands on the proposals set out in section 3.9 of the SARB’s 2019 discussion paper “Ending too big to fail: South Africa’s intended approach to bank resolution”.
The SARB says 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 economy.
“To avoid this outcome, governments have previously been obliged to support failing financial institutions using taxpayers’ funds. This led to a 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 2007/8 global financial crisis was a typical example.”
To address the risk presented by TBTF institutions, the international Financial Stability Board published the Key Attributes of Effective Resolution Regimes for Financial Institutions, which all G20 countries are committed to implement, the SARB says.
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 (FSLAB).
The FSLAB contains proposed amendments to the Financial Sector Regulation Act, including a chapter providing for the orderly resolution of designated institutions (DIs). These are defined as all banks, as well as systemically important non-bank financial institutions and their holding companies.
The promulgation of the FSLAB will establish and empower the SARB as a resolution authority (RA) to achieve the orderly resolution or winding down of a failed or failing DI.
According to the discussion document, the FSLAB requires certain valuations to be done by an independent valuator to inform the SARB of the assets that would be realised, or the amount that, in the valuator’s opinion, would be the amount payable on the liability, in a winding up of the DI.
“The RA also requires DIs to provide it with valuation results so that it can adequately perform its role of protecting and enhancing financial stability by developing resolution plans. Valuation will be a key part of the resolution process, as it will help with developing the DI’s resolution plan, identifying the resolution trigger and implementing the appropriate resolution option.”
DIs will be responsible for providing the valuator and/or the RA with the required information and for having the necessary valuation model capabilities to enable the DI, valuator and RA to fulfil its responsibilities.
The “Proposed valuation requirements for resolution-planning purposes” discussion document sets out the proposed requirements to be complied with by DIs, including elements that will have to be complied with by the independent valuator and the RA.
The SARB said it will publish a series of discussion papers focusing on the key aspects that will affect and facilitate the implementation of a resolution framework in South Africa. These discussion documents will be adapted into a regulatory instrument upon the conclusion of the consultative process and after the promulgation of the FSLAB.
Comments on the discussion paper should be addressed to: Head: Financial Stability Department South African Reserve Bank, PO Box 427, Pretoria 0001 or email FST-RPD@resbank.co.za. (Please state your affiliation or whether you are commenting in your personal capacity.) The closing date for comments is 31 October 2021.