With the twin peaks model of financial regulation still to be finalised, the Reserve Bank had to use the principles of the Financial Stability Board of the Group of 20 (G20) major economies to bail out African Bank, Daniel Mminele, the central bank’s deputy governor, said yesterday.
Mminele said the legal structure of the curatorship of African Bank would facilitate an orderly, structured, and fair approach to addressing its current challenges in an effort to secure a viable future on the basis of a transformed business model while ensuring minimum disruption to the country’s financial and credit markets.
Speaking at a breakfast briefing of the SA Chamber of Commerce and Industry, he said: “The proposed solutions were developed in a collaborative process between the public and private sector. The leadership and commitment shown by South African commercial banks and the Public Investment Corporation in underwriting the capital raising for the envisaged ‘good bank’ bears testimony to the strong underpinnings of our banking and financial system, the resilience of which will be enhanced by these measures.”
Mminele said the 2008 global financial crisis had shown that imbalances between the real and financial sectors of the economy could increase the vulnerability of the financial system.
“For this reason, macroprudential aspects of financial stability have gained traction in policy circles around the globe. South African policymakers have also engaged in a process of reviewing and revamping the regulation of the financial sector.”
He said in the absence of legislation, some of the support measures announced by the Reserve Bank for African Bank were informed by the principles contained in the Financial Stability Board’s key attributes of effective resolution regimes for financial institutions.
These key attributes included building resilient financial institutions; working to end “too big to fail” regimes; strengthening oversight and regulation of shadow banking; and reforming the setting of interbank and other financial benchmark rates.
It was hoped the twin peaks model would become handy in the event of a financial crisis, such as that of African Bank, and would transform the traditional regulatory and oversight authorities from being too reactive, responding only when problems were brought to their attention.
The Financial Sector Regulation Bill would establish a new prudential authority within the Reserve Bank. This would be responsible for the oversight of the safety and soundness of banks, insurers and financial conglomerates.
The Financial Services Board would be turned into a new market conduct authority to protect customers of financial services firms, and to improve the way financial services providers conducted their business.
Mminele said it was envisaged that the twin peaks model would be in effect by the end of the year.
Matthew Pimie, a bank analyst at Standard & Poor’s, said his agency did not rate African Bank. However, he added that the bank would probably have failed even if the twin peaks model had been in place.
“The failure can be attributed to African Bank’s failure to make adequate provision for bad loans. Nothing in twin peaks says we will monitor this provision. I wish the bailout process could have been more transparent and open.”