A deposit guarantee framework for South Africa : a comparative appraisal

Abstract

This thesis appraises the features of the new South African explicit deposit insurance system (EDIS) as set out in the Financial Sector Laws Amendment Act 23 of 2021 which introduces a comprehensive deposit insurance framework into Chapter 12A of the Financial Sector Regulation Act 9 of 2017 (being the framework Act that introduced South Africa’s new Twin Peaks model of financial regulation in 2017). Notably, the Financial Sector Laws Amendment Act also introduced a comprehensive new bank resolution regime for South Africa, which, like the new EDIS, is captured in Chapter 12A of the Financial Sector Regulation Act. These two new frameworks will operate in tandem to ensure that depositors’ interests are protected during bank resolution - whether through pay-outs to depositors if a bank is liquidated or through funding for other resolution measures obtained from the Corporation for Deposit Insurance. The new EDIS will also in the first instance seek to contribute to financial system stability by imposing levies and premiums on banks in an effort to instil greater market discipline and minimize the risk of bank failure. While the world’s first explicit deposit insurance system was pioneered in the United States of America in 1933, the 2008 Global Financial Crisis (GFC) highlighted the very important role of deposit insurance in protecting depositors and contributing to financial system stability. Not only did the GFC emphasize the need for a clear depositor protection framework in the form of an EDIS, but it also tested the effectiveness of the design features for the then existing EDIS frameworks globally. In response to the GFC, the International Association for Deposit Insurers (IADI), together with the Basel Committee on Banking Supervision (BCBS), issued the first set of internationally agreed principles, the IADI Core Principles for Effective Deposit Insurance Systems in 2009, which were later revised in 2014. These principles were established to serve as good practice benchmark for countries wishing to establish EDIS and those wishing to reform their existing systems. South Africa has, over the years, always had a robust approach to banking regulation, which is well-aligned with various international standards introduced by the Basel Committee such as the Basel Core Principles for Effective Banking Supervision and the various Basel Accords. However, it was one of only a few G-20 members at the time of the GFC that had always been operating on the ambiguous basis of implicit deposit insurance in the event of bank failure –thus taking a reactive rather than a pro-active approach in this regard. The debate on introducing a legal framework for a South African EDIS commenced approximately a decade ago, soon after the GFC. However, it was only in 2018 that the Financial Sector Laws Amendment Bill 2018, incorporating provisions on a comprehensive EDIS framework, was eventually tabled in Parliament. Subsequently, an updated version of the aforesaid Bill was issued in 2020 and signed into law in 2021 as the Financial Sector Laws Amendment Act 23 of 2021, introducing, as mentioned above, a comprehensive EDIS for South Africa that has yet to be implemented. This thesis interrogates the features of this new South African EDIS, examining in particular, the extent to which the main features of the South African EDIS are aligned with the IADI Core Principles for Effective Deposit Insurance Systems as an international good practice benchmark. Considering the design features of an effective EDIS as captured in the IADI Core Principles together with a comparative study of the United States of America (US) and the Australian EDIS frameworks, the South African EDIS framework is critically analysed and recommendations are eventually made for strengthening the South African EDIS framework to ensure its optimal alignment with international good practice.