IMF Staff Report on the 2017 Article IV Consultation with South Africa

The staff report reveals that authorities have made progress in implementing the 2014 IMF FSAP recommendations, particularly on modernizing the macro-prudential framework, including the introduction of “Twin Peaks” and resolution regimes. These reforms will likely increase financial stability by removing regulatory gaps and reducing implicit contingent liabilities from the banking sector. Capital ratios (both risk-weighted and unweighted) increased, with the tier 1 capital ratio at 14.6% in April 2017, well above regulatory requirements. The non-performing loan ratio (NPL) declined to 2.4% in April 2017 from 3.1% in 2015 and 2.9% in 2016. Banks’ profitability improved as the rise in interest rates was transmitted more rapidly to their lending rates than to their deposit rates. The banking sector’s resilience to the sluggish macro-economy stems from the sector’s conservative management, which focuses lending on less risky/higher net worth firms and individuals.

The Financial Sector Regulation bill to execute the Twin Peaks reform is likely to be approved and implemented in 2017 and the Designated Institutions Resolution bill to introduce the new resolution regime is expected to be submitted to parliament in late 2017. In this context, National Treasury and the South African Reserve Bank (SARB) published for public comment a policy document on an explicit, privately-funded deposit insurance scheme. The SARB is also working toward an enhanced macro-prudential framework, including the addition of new tools such as countercyclical capital buffers, sectoral capital requirements, dynamic provisioning, and leverage and liquidity ratios. The third draft on the OTC derivative regulatory framework will be reviewed by National Treasury and the SARB in 2017. However, limited progress has been made on the reform of collective investment schemes, promotion of fair competition and financial inclusion, and better consumer protection.

The high degree of concentration in the banking sector provides stability but also has downsides, such as a tendency for “too-big-to-fail” situations and greater risk of contagion. This tradeoff can be managed through a combination of effective prudential regulations and the oversight of competition authorities. In addition, the authorities were analyzing possible ways of moving toward a tiered banking system allowing for mid-sized banks with proportionally less stringent regulatory requirements. The authorities are exploring ways to improve availability of credit information, establish viable risk-sharing schemes, extend the asset classes that can practically be used as collateral, and promote fintech. Subject to the passage of the Financial Sector Regulation Bill, the Financial Sector Conduct Authority and Ombud Council will be established in 2017 to ensure a fairer and more effective financial sector. Additionally, fintech regulatory framework (part of the Conduct of Financial Institutions Bill) could include a “regulatory sandbox” to encourage innovation within a controlled environment while managing any potential risks.

Related Link: Staff Report (PDF)

Keywords: IMF, Africa, South Africa, Article IV, Banking, Macroprudential Framework, NPL, Resolution