South Africa is revamping its processes for placing troubled financial institutions under administration, with the central bank playing a pivotal role.

Under an amendment to financial sector legislation, which was signed into law in January, the South African Reserve Bank assumes overarching authority over failing financial institutions, and has the power to transfer their assets and liabilities, assume control of their management and restructure banks.

In the event of an institution being wound up, the central bank can also apply for its assets to be liquidated.

“There won’t be a situation where the Reserve Bank can take certain resolution actions and if those actions aren’t successful,” businesses are then placed into curatorship, because “resolution is a much broader process.”

The new law also entitles the central bank to force creditors of failing financial entities to convert their debt into equity, a process it describes as a “bail-in mechanism,” which will enable them to be recapitalised and return to viability.

Deposit insurance
“Bail-in is based on the principle that a failed or failing designated institution should not be bailed out by using public funding,” the review states. “Instead, the losses of the designated institution should be absorbed by the shareholders and creditors of the institution.”

“The coverage limit has been set at R100 000 per depositor per bank, and this covers more than 90% of depositors,” said Herco Steyn, one of the authors of the report.

The Reserve Bank will fund the start-up costs for the new corporation and its assets will be built up over five years. South Africa is currently the only country not to offer deposit insurance, according to the Sarb.