The outcome of the global financial crisis of 2008 – 2010 led regulators and central banks the world over to re-look at the way banks are regulated and governed. So what exactly has changed in the South African context?
Basel III requirements
The Basel Committee on Banking Supervision now imposes the following requirements:
- The Liquidity Coverage Ratio which requires that a bank holds enough liquid assets to cover its outflows during a 90-day liquidity stress scenario (i.e. a run on the bank);
- The Net Stable Funding Ratio which aims to address the term maturity mismatch between assets and liabilities;
- Capital Adequacy Requirements to ensure that there are sufficient levels of loss-absorbing capital to take losses before senior funders and, particularly, depositors take losses; and
- The Leverage Ratio which limits the amount that a bank can gear itself.
National Credit Act
This is aimed at curbing reckless lending. More stringent regulations now govern affordability assessments that must be performed by credit providers and restrict the interest rates and fees that credit providers can charge. Banks and other credit providers are less incentivised to write excessively risky loans if they aren’t able to earn risk-adjusted returns for such business.
Bank Resolution Framework
The South African Reserve Bank is currently in the process of finalising this framework, which is intended to address ways and means to recapitalise or reorganise distressed banks before they reach a point of insolvency. The expectation is that by imposing losses on investors, rather than relying on implicit government support, the Resolution Framework should reduce the moral hazard typically associated with banks and impose discipline on investors.