The designation and stringent prudential regulation of systemically important banks in South Africa

Abstract

The designation and regulation of systemically important banks is a recent subject of ongoing global research dedicated to analyse measures designed to address the “Too-Big-To-Fail” conundrum of systemically important financial institutions associated with systemic risk and moral hazard. This approach is incorporated in the Financial Stability Board SIFI Framework, which is well-recognised as part of financial stability reforms by the G-20 after the 2008 Global Financial Crisis. To implement the SIFI Framework in the context of banking regulation, the Basel Committee on Banking Supervision issued the G-SIB Framework in 2011, updated it in 2013 and 2018, thereby establishing an assessment methodology for identification of banks that are systemically relevant at a global level and imposing an additional loss absorbency requirement. In 2012, the Basel Committee extended this Framework to a domestic financial system by issuing the Basel D-SIB Framework. An overhaul of legislative frameworks for the implementation of the Basel D-SIB Framework is in progress in G-20 jurisdictions. In South Africa, it was implemented in 2013 through the amendment of the Banks Act of 1990 and revised in 2019 to give effect to the relevant provisions of the Financial Sector Regulation Act 9 of 2017. Accordingly, this research reviews the consistent implementation of the Basel D-SIB Framework assessment methodology and the Higher Loss Absorbency requirement, as well as other appropriate prudential requirements, within South Africa’s financial sector specificities. Insights are drawn from the United States and also from the Netherlands as an EU Member State. Recommendations are accordingly made for South Africa in view of the guidance taken from best international practices and standards. The research further interrogates the available legal remedies for challenging SIFI-bank designation and prudential regulation.