South Africa Financial Sector Assessment Program Technical Note On Banking Regulation And Supervision

The implementation of a twin peaks model represents a significant change to the South African financial supervisory architecture. The Prudential Authority (PA), operating within the administration of the South African Reserve Bank (SARB), is responsible for promoting and enhancing the safety and soundness of financial institutions that provide financial products and securities services. A separate authority, the Financial Sector Conduct Authority2 (FSCA), is responsible for market conduct regulation and supervision. The introduction of the twin peaks architecture was motivated by a need to increase the robustness of the financial sector regulatory and supervisory system, reinforce financial stability, improve protection of customers, and enhance cooperation among the regulators.

South Africa has made significant progress in strengthening its macroprudential policy framework and foundations since the 2014 FSAP. Institutional arrangements were overhauled by the 2017 Financial Sector Regulations Act that, among others, introduced the current ‘Twin Peaks’ structure, provided SARB with a strong financial stability mandate, and sought to foster interagency coordination and collaboration (including via the establishment of the Financial System Council of Regulators. As a result, South Africa has a hybrid macroprudential policy framework that combines a ‘strong’ decision maker in the SARB Governor, but that is importantly supported by an advisory committee structure, fostering effective cooperation and coordination. Systemic risk monitoring has also been enhanced and some macroprudential policy tools phased-in.

The South African insurance sector is large, complex, internationally active, and competitive. Supported by high penetration and density of insurance products, the insurance sector has grown to account for 18 percent of the financial sector in South Africa. The industry hosts an unusually diverse range of business models, including traditional participation focused models, bank-led conglomerates, asset management focused groups, and technology driven new entrants. Even among large insurers, risk profiles vary significantly, which is unique relative to other major insurance markets. Most large insurance groups are actively expanding their business both regionally and globally.

This Technical Note discusses recommendations made during the Financial Sector Assessment Program (FSAP) for South Africa in the areas of contingency planning, crisis management, and bank resolution. The proposed scope of the new resolution regime and of the South African Reserve Bank’s (SARB) jurisdiction as the resolution authority remains unclear. It is suggested that authorities should consider focusing on all deposit-taking institutions and only those other financial institutions that are currently deemed systemic. Non-deposit-taking financial institutions that are not found to be systemic should be resolved by the Prudential Authority or the Market Conduct Authority, whichever is the lead regulator.

This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program (FSAP) for Finland in the area of banking supervision. The regulatory and supervisory framework for liquidity and funding risk has improved since the last FSAP, but certain vulnerabilities persist and require greater attention. Finnish banks continue to rely extensively on wholesale funding, as noted in the 2010 FSAP. Although supervisory action has managed to mitigate the problem, many banks remain heavily exposed to the risk of a dry-up of unsecured wholesale funding. Also, banks hold covered bonds issued by other banks as part of their liquidity buffer.

This technical note leverages on the 2015 FSAP which concluded that the United States (U.S.) had a high degree of compliance with the Basel Core Principles (BCPs). The FSAP reviewed the progress achieved in addressing the main weaknesses previously identified and the main supervisory and regulatory developments since then. The key focus are the steps taken by the U.S. authorities in recent years to recalibrate and further tailor the banking regulatory and supervisory framework and the role of stress tests in the supervision process. The FSAP team has not covered the impact of COVID-19 outbreak on banks supervision and has not discussed with authorities the related policy response. The FSAP recommendations are meant to be considered once the impact of the pandemic on the economy and the banking sector becomes clearer.

This Technical Note evaluates banking regulation and supervision in Sweden. The Finansinspektionen (Financial Supervisory Authority, FI) has made considerable progress developing supervisory approaches and techniques, particularly structured risk assessments for the four large banking groups. Concerns raised in the 2011 Financial Stability Assessment Program regarding insufficient granularity and frequency of reporting by supervised institutions has been addressed, starting in the third quarter of 2014. The FI has also implemented a new system for management of banking and insurance supervisory data. The IMF staff expressed satisfaction with the system’s functionality and flexibility to produce custom reports. The work to put in place a standardized set of internal screening and analytical reports, however, is ongoing.

This Technical Note discusses stress testing (ST) results for the financial system of South Africa. The bank STs suggest that banks have adequate capital to withstand severe shocks, but need larger liquidity capacity to meet regulatory requirements. Even in the severe scenario in which GDP falls for three consecutive years, banks’ capital buffers seem sufficient, although the impact of a large default could be significant. Banks also appear resilient to market risks in both the trading and banking books. Some banks, however, would have difficulty meeting the Liquidity Coverage Ratio without the Committed Liquidity Facility of the South African Reserve Bank.