SARB published a discussion paper on developing a methodology to determine which banks are systemically important financial institutions (SIFIs) in the South African context, in line with the requirements set out in the Financial Sector Regulation Act 9 of 2017 (FSR Act). The methodology will be reviewed annually, or when there is a significant change in the international guidance or in the information made available to SARB. The paper also includes international comparison of methodologies in which methodologies of other countries with a similar banking and regulatory structure are compared to those of South Africa. The regulatory bodies that have disclosed information on their methodologies include PRA, EBA, Bank of Japan, APRA, Bank of Canada, and RBNZ.
Even though no measurement criteria could fully capture systemic importance, BCBS proposed the use of an indicator-based measurement to reflect the various dimensions of negative externalities and contributions to systemic risk. BCBS approach for the identification of global systemically important banks (G-SIBs) consists of selected indicators with equal weights, including size, interconnectedness, the lack of readily available substitutes, global activity, and complexity, while the BCBS methodology for domestic systemically important banks (D-SIBs) proposes the customization of indicators and weightings to reflect the characteristics of the domestic financial system. The South African approach is broadly based on the BCBS approach and utilizes similar indicators, but it has been enhanced for domestic use by adding indicators and criteria that better reflect the South African conditions.
The indicators that are used to identify potential banking SIFIs in South Africa are size, interconnectedness and substitutability, global activity, and complexity. Each indicator has various sub-indicators that are used to calculate the relative systemic importance of each bank. No quantitative methodology is able to capture all potential risks. There will be a possibility that institutional risks are more systemic than indicated by the methodology. Regulators often have qualitative information available that cannot be quantified in a methodology. Therefore, there should be room for judgment to be applied by the Governor to ensure that all areas and risks are sufficiently considered. The methodology merely serves as a basis for decision making. Section 29 of the FSR Act provides the Governor with the ability to use his/her discretion when making the determination. Additional elements that might be considered when applying judgment on whether to designate an institution as a SIFI include, but are not limited to, the following:
- Reaction of investors, depositors, and the broader financial markets in the event of a failure
- Geographical area serviced and the possibility of a suitable substitute
- Products provided and the possibility of a suitable substitute
- Services provided and the possibility of a suitable substitute
- Number of clients and employees of the institution
- Possible negative perception from an international market perspective
Related Link: Discussion Paper
Keywords: Middle East and Africa, South Africa, Banking, Systemic Risk, G-SIBs, D-SIBs, FSR Act, BCBS, SARB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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