Big changes coming to banks in South Africa

 ·29 Jun 2023

The South African Reserve Bank (SARB) is in the process of drafting new standards for deposit-taking institutions in South Africa with the aim of providing more financial supervision.

As part of its Prudential Authority (PA) Regulatory Strategy 2021-2024, the central bank has taken strides in identifying eight key priorities that require regulatory upgrades and supervisor interventions for mutual banks and cooperative banks.

The PA is a regulatory body that works alongside the Financial Sector Conduct Authority (FSCA) within the SARB, with the primary responsibility of overseeing and ensuring the stability and soundness of financial institutions.

The authority sets applicable standards for banks to best protect depositors (banking clients) and mitigate any risks associated with banks.

In its latest annual report for 2022/23, it said that it is in the process of drafting prudential standards relating to:

  • Governance and risk management
  • Credit risk
  • Operational risk
  • Capital
  • Liquidity risk
  • Interest rate risk in the banking book (IRRBB)
  • Economic returns
  • Financial soundness
  • Registration and operational requirements

Relevant changes are expected to be published for public consultation during the upcoming financial year. Mutual banks, cooperative financial institutions and cooperative banks will be dealt with in the new standards.

Previous amendments in Regulations relating to banking include recent changes made in September 2022 that incorporated the revised internationally agreed frameworks published by the Basel Committee on Banking Supervision (BCBS).

Ultimately, international standards relating to credit risk levels are being looked into with the aim of setting regulations based on them. In 2022, the National Treasury also published amendments to regulations of section 90 of the Banks Act 94 of 1990, dealing with:

  • The revised securitisation framework as issued by the BCBS for implementation by member jurisdictions – the amended Regulations were implemented with effect from 1 October 2022;
  • The revised framework for banks’ exposure to interest rate risk in the banking book (IRRBB), issued by the BCBS for implementation by member jurisdictions – the amended Regulations were implemented with effect from 1 January 2023.

Changes to banking supervision come while the global banking space is dealing with the aftermath of many bank failures.

As cited by the governor of the SARB Letsetja Kganyago, the previous financial period closed with the PA observing the market volatility created by the failure of three banks in the UK and the Credit Suisse bank in Switzerland.

“The failures of Silvergate Bank and Signature Bank were due to significant adverse exposure to cryptocurrency, whereas the bank run on Silicon Valley Bank was a result of excessive interest rate exposures. The Credit Suisse collapse was exacerbated by changes to its top management, losses of client funds and strategy challenges.”

Kganyago said that these events had no direct impact on South Africa. However, it is important to still monitor these types of developments.

Monitoring new types of developments in the banking space has been a goal of the SARB for a while now, as enshrined in its five-year strategic objectives to modernise. According to the central bank, as banks are evolving, new technologies need to be investigated and regulated.

“Underlying technologies such as distributed ledger technology (DLT); cloud computing; application programming interfaces (APIs); artificial intelligence (AI); and machine learning (ML) serve as enablers to transform payments, savings, lending, insurance and financial markets – all areas of critical importance to central banks,” said the bank.

“While the wave of innovation and the rise of the digital economy are unpredictable, public policy objectives remain relevant to ensure the continued safety and stability of the financial system. The potential scalability and network effects of fintech, underpinned by big data and high levels of interconnectedness, underscore the need for central banks to foster innovation in a safe manner and to mitigate potential risks,” it said.

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