Submission on Financial Sector Laws Amendment Bill

FMF’s submission on the on Financial Sector Laws Amendment Bill to the Select Committee on Finance makes the below observations.

The full submission can be read HERE.

 There are very few specific details in the Bill on the actual arrangements for the resolution of systemically important financial institutions that may be unable to meet their obligations: 

  1. It is claimed that the Bill’s statutory deposit-insurance scheme will reduce moral hazard. It will however, not do away with moral hazard. Indeed, the existence of such a scheme might even encourage it in certain quarters.
  2. It is claimed that losses that are incurred due to failure of an institution will in the first instance be borne by shareholders and creditors “who are able to properly assess their investment risks” and “who had benefited from profits made by the institution as a going concern”. Yet there is no indication in the Bill as to precisely how these persons or entities are to be defined or identified.
  3. There is also no clear identification of which creditors can “assess their investment risks and benefits from bank profits”. The justification given for targeting such creditors may well prove to be indefensible.
  4. The Banks’ duty to pay premiums and levies to meet the expense of insuring depositors’ money will increase their overall costs and without doubt will be passed on to their customers, directly and/or indirectly.
  5. The Bill aims to “assist” in maintaining financial stability and protecting the interests of depositors through the “orderly resolution” of banks, and other financial institutions. A designated institution will be placed in resolution if (in the opinion of the Reserve Bank) it is, or will likely be, unable to meet its obligations, whether or not it is insolvent.
  6. The Reserve Bank then has extensive powers and “resolution functions” including cancelling or suspending contracts involving the institution and causing the institution to transfer assets or liabilities, amalgamate or merge, or cancel shares independently valued as worthless and issue new shares. The Bank can even reduce contractual amounts payable to other parties or cancel the contracts altogether. These wide discretionary powers bestowed upon bureaucrats are likely to violate the requirements of the Rule of Law.  
  7. Despite the sweeping powers vested in the staff of the Reserve Bank, their attempted resolution of an institution can still fail. There may then be bureaucratic “moral risk” in such persons being given power to subsequently apply to court for the winding-up of an institution in resolution, on the grounds that they have failed and that there are thus no reasonable prospects that the institution will ever cease to be in resolution.
  8. The loss-absorbing-capacity (so-called flac or tlac) investment instruments for banks to hold have yet to be designed. A recent evaluation by the Basel Financial Stability Board of the effects of current “too-big-to-fail” bank reforms, haltingly conceded that while some reforms have made banks more resilient and resolvable, numerous intractable obstacles to resolvability remain. State support for failing banks using taxpayer money has therefore had to be continued and has not been eliminated by the proposals included in this Bill.
  9. It is important to note that a late 2020 analysis for the World Bank about market appetite in South Africa for flac instruments was ambivalent about current take-up prospects.
  10. Considerable improvement are required to be made to this Bill, not only to the proposed implementation of flac instruments, but also to resolution funding, to valuation of bank assets whilst in resolution, to continuity of operations and to access to financial-market infrastructure during periods of resolution.
  11. With all of the above uncertain and unresolved matters, there is considerable doubt as to if or even when this Bill could be properly or effectively enacted.
  12. The Bill is not accompanied by the required Socio-Economic Impact Assessment. It is therefore not possible for any person to assess whether or not the costs of deposit insurance and of the proposed resolution practices, all inevitably to be passed on to the public, will justify the claimed benefits.
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