## EXECUTIVE SUMMARY (1zafea2022005)

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---

### Overview and scope
- This Technical Note sets out the findings and recommendations of the Financial Sector Assessment Program (FSAP) for South Africa on financial safety net and crisis-management arrangements.
- Primary focus: arrangements for early intervention, recovery, resolution, and financial safety nets for banks in South Africa. Secondary coverage: recovery and resolution issues for insurers and Financial Market Infrastructure (FMI).
- The mission reviewed: authorities’ questionnaire responses; relevant laws; the draft Financial Sector Laws Amendment Bill (FSLAB); policy documents issued by the SARB; and the FSB 2019 peer review of South African bank resolution arrangements. Findings informed by meetings with SARB, National Treasury (NT), Prudential Authority (PA), banks, and other parties.

### Institutional framework — findings and recommendations
- FSLAB will:
  - allocate responsibility for the resolution of banks and other systemically important financial institutions to the South African Reserve Bank (SARB);
  - establish a Deposit Insurance Scheme (DIS) administered by the Corporation for Deposit Insurance (CODI), a SARB subsidiary with its own statutory mandate and governance arrangements.
- SARB responsibilities and structures:
  - SARB oversees financial stability, provision of liquidity assistance to financial institutions, and payment system oversight.
  - The SARB Deputy Governor responsible for financial stability is a member of the Prudential Committee that oversees the Prudential Authority (PA), which operates as a juristic person within SARB administration.
  - Within SARB, the Resolution Planning Division (RPD) in the Financial Stability Department (FSD) develops the resolution planning framework. SARB has established an internal Financial Stability Committee and a Resolution Policy Panel, both including PA staff.
- Recommendation summary:
  - Strengthen mandates and clarify roles of coordination bodies through charters or Memoranda of Understanding (MOU).
  - Assign FSOC a greater role in overseeing coordination.
  - Establish a financial crisis management working group under FSOC, chaired by SARB.

### Key recommendations (selected items from Table 1)
- Institutional framework:
  - (¶13) Strengthen mandate of FSOC on financial crisis management — Responsible: SARB/NT/PA/FSCA — Timing: I
- Early intervention and recovery planning:
  - (¶19-21) Further strengthen systems for early detection of bank stress — Responsible: PA — Timing: ST
  - (¶23-26) Establish a structured early intervention framework and address residual gaps in PA powers — Responsible: PA — Timing: ST
  - (¶27) Develop contingency plans for dealing with banks in stress situations and undertake regular testing — Responsible: PA — Timing: ST
  - (¶33) Issue comprehensive guidance to banking industry on recovery planning and strengthen supervisory assessment/testing — Responsible: PA — Timing: I / (PA I) and (PA I)
  - (¶34-36) Introduce recovery planning requirements for non-banks (insurance firms, FMIs) — Responsible: PA — Timing: ST/MT
- Resolution regime and planning:
  - (¶50) Introduce future legislative amendments to enhance resolution regime in line with KA, including limiting MOF role to situations where public funding is needed — Responsible: SARB/NT — Timing: ST
  - (¶54-55) Develop comprehensive generic resolution strategies and implementation guidance with cross-agency input — Responsible: SARB/PA/NT — Timing: ST
  - (¶59-60) Design new loss-absorbing instruments (“FLAC”) to avoid excessive costs and contagion — Responsible: SARB — Timing: I
  - (¶61) Develop framework for bank-specific resolution plans and resolvability assessments — Responsible: SARB — Timing: ST
  - (¶64-67) Implement resolution plans for SIFIs, then other banks — Responsible: SARB — Timing: ST
  - (¶71) Consider development of an insurance policyholder compensation scheme — Responsible: PA/SARB/NT — Timing: MT
  - (¶72) Strengthen resolution law and policy for non-designated insurers — Responsible: SARB/PA/NT — Timing: MT
- Deposit insurance and resolution funding:
  - (¶89) Develop a draft liquidity facility between CODI and SARB — Responsible: SARB — Timing: ST
  - (¶91) Formalize a target size for, and increase reliance on, the loss-absorbing tranche of the deposit insurance fund — Responsible: SARB — Timing: ST
  - (¶93) Progress operationalization of DIS — Responsible: SARB — Timing: ST
  - (¶97) Develop a policy framework for contingent public resolution funding, including options for recovering losses (e.g., ex post levies) — Responsible: NT/SARB — Timing: ST
  - (¶98) Repeal provision in SARB Act enabling SARB to inject equity into a bank — Responsible: SARB/NT — Timing: ST
  - (¶99) Introduce further safeguards for lending in resolution — Responsible: SARB/NT — Timing: ST
- Contingency planning and crisis management:
  - (¶80) Undertake regular domestic crisis simulation exercises — Responsible: SARB — Timing: ST
  - (¶81) Seek periodic cross-border crisis simulation exercises — Responsible: SARB — Timing: MT
  - (¶103) Establish MOU between CODI, SARB and PA — Responsible: CODI/SARB/PA — Timing: ST
  - (¶104) Develop contingency plan for systemic crisis management — Responsible: SARB/NT/PA/FSCA — Timing: I
  - (¶106) Strengthen cross-border cooperation arrangements for recovery and resolution planning with relevant home and host authorities — Responsible: SARB/PA — Timing: ST/MT
  - (¶107) Establish domestic cross-agency protocol on crisis management — Responsible: SARB/NT/PA/FSCA — Timing: ST
- Timing legend:
  - I − immediate: within one year
  - ST − short-term: one to three years
  - MT − medium-term: three-five years

*Source: EXECUTIVE SUMMARY (1zafea2022005).*

---

### The FSR Act and institutional coordination

### Framework and definitions
- The FSR Act defines a “systemic event” as: “an event or circumstance, including one that occurs outside [South Africa], that may reasonably be expected to have a substantial adverse effect on the financial system or economic activity in [South Africa]”.
- The Act sets out the process to be followed by the governor in determining whether an event is systemic and sets out the functions of the SARB in preventing a systemic event, mitigating the effects of a systemic event and/or managing the systemic event.

### Allocation of responsibilities under FSLAB and existing regimes
- Enactment of the FSLAB has significantly strengthened the framework for dealing with failing banks.
  - Under the new framework the SARB will be the sole resolution authority for all banks, as well as for any non-bank financial institution designated by the governor as being systemically important.
  - A financial institution can be designated by the governor at any time, including at the point of failure.
- The failure of banks prior to FSLAB:
  - Curatorship model for commercial and mutual banks under Section 69 of the Banks Act 1990; MOF may appoint a curator on recommendation of the PA where the bank will be unable to repay deposits when legally obliged or will probably be unable to meet any other obligations.
  - Judicial management under section 30(1)(iii) of the Cooperative Banks Act is available for cooperative banks.
- The resolution of insurers that are not designated as being systemically important will remain under the Insurance Act 2017 under the control of the PA and courts.

### Roles of principal agencies
- Prudential Authority (PA):
  - Responsible for prudential regulation and supervision of banks and insurers.
  - Undertakes early intervention, oversees bank recovery plans, determines whether a bank is viable or non-viable.
  - No recovery plan requirements yet for insurers; PA’s responsibility under the Banks Act for curatorship has ceased with FSLAB enactment (framework remains for non-designated insurers under Insurance Act).
- National Treasury (NT):
  - Oversees financial legislation and high-level policy via the Financial Sector Policy Unit.
  - Principal economic adviser to the MOF; responsible for fiscal affairs.
  - In a bank failure, NT through its Fiscal Liability Committee (FLC) advises on public funding, guarantees or indemnities.
  - NT closely involved with SARB in development of FSLAB and related policy.
- Financial Sector Conduct Authority (FSCA):
  - Regulates securities market and market conduct; supervises FMIs (per Financial Markets Act, 2012).
  - Co-develops recovery planning requirements for FMIs with PA.
  - In a bank resolution FSCA’s main responsibilities relate to market disclosures by banks in resolution.

### Institutional arrangements for domestic coordination — findings
- Institutional arrangements for bank resolution and financial crisis management are satisfactory, but domestic coordination should be further strengthened.
- Interagency coordination as set out in the FSR Act is statutorily prescriptive but not sufficiently developed in practice.
- Recommendations:
  - Clarify roles to avoid duplication between FSCR and FSOC, e.g., amend FSCR terms of reference so FSCR focuses on overseeing regulatory developments and facilitating cooperation consistent with policy objectives.
  - Make FSOC mandate clearer by publishing a charter, focusing on crisis preparedness and financial stability assessment.
  - Establish a cross-agency working group on financial crisis management, resolution planning and related matters.
  - Enhance effectiveness of FSCR and FSOC by meeting more frequently (e.g., quarterly).
  - Strengthen transparency and accountability by publishing annual reports and websites detailing mandates and activities.

---

### Box 1 — Interagency Coordination (structure, gaps, operational changes)

### Interagency structure and mandates
- FSCR:
  - Has nine members and meets a minimum of twice a year.
  - Chaired by the director-general of the NT.
  - Serves to facilitate cooperation and collaboration, and where appropriate consistency of action.
  - Nine working groups established under FSCR by FSR Act.
- FSOC:
  - Comprises ten members and meets a minimum of twice a year.
  - Chaired by the SARB.
  - Acts as an advisory committee to the governor, the SARB and the minister, with a mandate covering financial stability, crisis management, and prevention.
- FSCF:
  - Comprises eight members including financial sector industry representatives.
  - Main role: identify potential financial risks, coordinate and mitigate these risks.
- FSMC:
  - Designed to have four members, operating under the chairmanship of the MOF, but is yet to convene.

### Assessment of usage and gaps
- None of these fora have been used to any significant degree for bank resolution and financial crisis management decision-making.
- Absence of an interagency forum for crisis management may impede policymaking and coordinated communications.
- FSMC has not yet commissioned an independent evaluation of effectiveness of cooperative and collaborative mechanisms as required under the FSR Act.
- FSR Act’s design risks overlap between FSCR and FSOC mandates and ambiguity over which body oversees coordination on financial stability, bank resolution planning, and crisis preparedness.

### Suggested operational changes
- Establish a working group under FSOC to coordinate bank resolution planning and financial crisis preparedness:
  - Would enable NT and FSCA structured input on public funding and market disclosure issues.
  - Suggested chair: SARB; report at least quarterly to FSOC.
  - Detailed policy development could continue under SARB Resolution Policy Panel (RPP) and FSC.
- Review and clarify FSMC mandate via charter or mandate to minimize risks to operational independence.

### Recommendations on mandates, transparency, governance
- Mandates of FSCR and FSOC should be clarified to minimize overlap and ensure FSOC (or alternative) oversees coordination on financial stability, bank resolution planning, and crisis management preparedness.
- Strengthen effectiveness, transparency and accountability of FSCR and FSOC via annual reports, published charters and more frequent meetings (e.g., quarterly).
- FSOC (or alternative) should establish a working group on resolution planning and crisis preparedness, chaired by SARB, comprising relevant agencies, to oversee detailed coordination and to formalize coordination arrangements for actual crises.

---

### Early detection, early intervention, and contingency planning

### Current practices
- PA and SARB undertake proactive risk assessments and use some stress testing and Early Warning Indicators (EWIs).
- Bank recovery plans have been in place for all banks since 2016.

### Recommended enhancements
- Strengthen early detection of bank stress via:
  - enhanced stress testing (top-down and bottom-up);
  - reverse stress testing;
  - greater use of early-stage EWIs.
- Strengthen PA’s corrective and remedial powers.
- Introduce a structured early intervention framework for banks with escalating triggers and corresponding response actions, allowing supervisory discretion.
- Develop and regularly test contingency plans for bank stress.
- Establish similar early intervention and contingency arrangements for insurers and FMIs.
- PA to issue comprehensive guidance to the banking industry on recovery planning and strengthen supervisory assessment and testing of bank recovery plans.
- Extend recovery planning requirements to FMIs (ongoing) and establish recovery planning requirements for all insurers in the medium-term.

---

### Recovery planning for banks, FMIs, and insurers

### Recovery planning for banks — requirements and findings
- Recovery plans should:
  - Be reviewed regularly by banks and kept up to date;
  - Be subject to supervisory approval and regular testing;
  - Specify scenarios, triggers, minimum restoration points for capital and liquidity, critical functions/systems, timeframes, financial contributions of each recovery action, governance and testing arrangements.
- PA introduced recovery planning requirements in 2015; requirements are relatively comprehensive and broadly consistent with KA and good international practice.
- Banks required to include governance, group structure, triggers, stress scenarios and recovery options.
- Larger banks have undertaken reverse stress tests; some banks have tested recovery plans, but not all have done live simulation testing.

### Identified shortcomings
- Need to strengthen supervisory oversight of recovery plans, notably for smaller banks, to ensure:
  - Plans are sufficiently comprehensive;
  - Recovery options are practicable and include implementation guidance;
  - Full integration into banks’ risk management frameworks, ICAAP, ILAAP, and BCP processes.
- More attention to minimum ‘restoration points’ for capital and liquidity so banks can restore to levels providing a reasonable cushion above minimum regulatory requirements and consistent with restoration of market confidence.
- PA should provide industry-wide guidance and more guidance on level of non-viability for calibrating reverse stress tests and recovery plan scenarios.

### FMIs and insurers
- FMIs:
  - FSCA and PA prepared a draft joint standard on recovery plans pursuant to Section 108(1)(n) of the FSR Act.
  - Draft standard minimum requirements: governance, group structure, EWIs and triggers, stress scenarios, recovery tools, recovery option considerations.
  - Recommendations: provide guidance on minimum expectations; supervisory assessment and feedback; focus on adequacy of triggers and practicability; integrate recovery plans into FMI risk management and BCP; regular testing; ensure early intervention arrangements include triggers and supportive authority actions.
- Insurers:
  - No recovery planning requirements currently in place for insurers.
  - PA encouraged to develop and implement recovery planning for all insurers, modeled on bank requirements and including critical functions, triggers/EWIs, recovery actions, restoration points for solvency and liquidity, governance and testing.
  - Initial emphasis: larger insurers and those dominant in market niches important to the economy.
  - Insurers should undertake regular testing; PA should strengthen early intervention arrangements for insurers.

### Recovery planning recommendations
- PA to provide more comprehensive guidance to banking industry on recovery plan expectations.
- PA to increase supervisory oversight of banks’ recovery plans and ensure integration with risk management and contingency arrangements.
- PA to incorporate recovery plan activation and support measures into a revised and strengthened early intervention framework.
- PA and FSCA to implement recovery planning requirement for FMIs, develop early intervention arrangements and contingency planning for FMI stress events, and test these arrangements.
- PA to develop and implement recovery planning requirements for insurers and integrate activation and support into insurer early intervention arrangements.

---

### Resolution regime, DIS design, and resolution funding

### FSLAB impact and outstanding elements
- FSLAB brings South Africa broadly into line with the Financial Stability Board Key Attributes (KA) and best international practice, addressing many gaps in prior resolution framework.
- Elements needing further review include group resolution and SARB funding in resolution.

### Policy and operational recommendations
- SARB should develop a comprehensive “resolution toolkit” with guidance on key resolution options and processes.
- Implement bank-specific resolution plans starting with domestic Systemically Important Financial Institutions (SIFIs).
- Pay particular attention to structure and calibration of bail-in instruments to avoid excessive industry costs and contagion to non-bank institutions.
- Review insurance and FMI resolution laws over the medium-term for closer alignment with the KA.
- Design new loss-absorbing instruments (“FLAC”) to avoid excessive cost impacts on banks and contagion risk.
- Develop framework for bank-specific resolution plans and resolvability assessments; implement resolution plans for SIFIs, then for other banks.
- Consider developing an insurance policyholder compensation scheme and strengthen resolution law/policy for non-designated insurers.

### Deposit insurance scheme (DIS) design and recommendations
- DIS design under FSLAB is broadly aligned with international principles, but funding structure is unorthodox:
  - No specific quantitative target size for the loss-absorbing (‘equity’) tranche that would inform annual premiums.
  - Use of interest-bearing deposits placed by banks in the deposit insurance agency as a liquidity tranche.
- Recommendations to strengthen DIS:
  - Replace the liquidity tranche with a larger equity component, calibrated to meet an explicit target (relative to covered deposits and increasing with deposit growth), funded via nonrepayable (ex-ante) industry contributions.
  - Formalize the proposed SARB liquidity facility for the DIS as quickly as possible (develop a draft liquidity facility between CODI and SARB).
  - Progress operationalization of DIS.
- Public funding and safeguards:
  - Authorities designed the resolution framework to avoid public funding, but recognize occasions where public funding or guarantees may be required (e.g., when bail-in is infeasible or insufficient).
  - Recommend development of a contingency plan identifying potential public funding needs for SIFI resolution, with guidance to limit moral hazard and enable recoveries.
  - Refine reliance on SARB for liquidity funding with clearer statutory objectives, a solvency / medium-term viability provision, and other safeguards.
  - Repeal statutory power in the South African Reserve Bank Act 1989 enabling SARB to inject equity into a bank.
  - Consider a new statutory framework setting objectives, preconditions, and safeguards for public funding in systemic bank resolution; public funding should be sourced from NT (not SARB), and any equity holding (e.g., for a bridge bank) should be held by government via an appropriate government agency (not SARB).
  - Introduce further safeguards for lending in resolution and consider options for recovering state-incurred losses (e.g., ex post levies).

---

### Cross-border cooperation and crisis management

### Cross-border cooperation — findings and planned actions
- PA has MOUs for cross-border bank supervision focused on information exchange and supervisory cooperation; they do not specifically cover recovery or resolution.
- FSLAB enables SARB to conclude MOUs relating to resolution; SARB anticipates entering into 13 such MOUs.
- PA has established supervisory colleges with some host supervisors of South African banks.
- SARB plans to establish Crisis Management Groups (CMGs) with resolution and supervisory authorities in relevant countries (particularly SADC).
- Firm-specific Cooperation Agreements (CoAgs) will eventually be needed for South African SIFIs.

### Interim and medium-term steps
- Increase information-sharing and deepen collaboration on recovery planning to reduce probability of banking failures.
- SARB to engage with home authorities of foreign banks with significant presence in South Africa to strengthen cross-border cooperation on recovery and resolution.
- Consider multilateral MOUs on financial crisis management in the medium-term involving SARB, NT, PA, FSCA, CODI and counterparts in another country covering viability assessment, systemic impact assessment, early intervention, ELA, recovery, entry into resolution, implementation of resolution, exit arrangements, and communications.
- Before cross-border arrangements, home authorities should develop a strategy for cross-border crisis management, coordinated by a working group under FSOC, including objectives for cross-border coordination, identification of cooperation expectations, assessment of SPE versus MPE implementation and burden-sharing, and verification that FSLAB provides necessary powers and safeguards.

### Crisis simulation and coordination
- Undertake regular domestic crisis simulation exercises.
- Seek to undertake periodic cross-border crisis simulation exercises.
- Establish MOU between CODI, SARB and PA.
- Develop contingency plan for systemic crisis management.
- Strengthen cross-border cooperation arrangements for recovery and (in due course) resolution planning with relevant home and host authorities.
- Establish domestic cross-agency protocol on crisis management.

---

### MOUs, contingency planning, legal protection and safeguards

### MOUs and proposed all-agency MOU
- Existing MOUs, including between SARB and NT, provide a sound basis for clarifying responsibilities and cooperation processes.
- Recommendation: develop a single MOU between SARB, NT, PA, FSCA, and CODI when established to:
  - Elaborate responsibilities of each agency;
  - Set out detailed processes for cooperation/coordination at each stage of crisis management (viability assessment; systemic impact assessment; recovery; entry into resolution; selection and implementation of resolution; resolution funding; communications; exit arrangements).

### Contingency planning
- Contingency planning is critical; SARB should lead development with other authorities.
- Contingency plans should include:
  - Assessment of key threats: failure or acute distress of a SIFI; a pandemic (Covid-19 noted); financial risk events; external threats (e.g., instability in another SADC country); operational disruption events affecting FMIs and banks (e.g., electricity and telecommunication disruptions).
  - Identification of early alerts for each scenario.
  - Escalation procedures, crisis diagnostics, response options, assessment criteria, implementation guidance, communications.
  - Clear identification of responsibilities of each agency at each crisis stage and specific coordination procedures.
- Authorities should undertake periodic testing of selected contingency plans.
- Contingency plan development to be under the auspices of FSOC and led by SARB.

### Legal protection, safeguards, and judicial review
- Legal protection is essential for authorities, officers, staff and agents taking resolution actions; insufficient protection may delay or prevent necessary actions.
- Existing statutory protections:
  - FSR Act provides broadly worded immunity for the State, MOF, senior management and staff of SARB, PA and FSCA.
  - Banks Act protects SARB and PA, their staff and duly appointed officials from any loss sustained by, or damage caused to, any person as a result of anything done or omitted in the bona fide performance of an official function.
  - Public Finance Management Act also provides legal protections.
- Upon FSLAB enactment it will be necessary to ensure:
  - Legal protections are explicitly extended to SARB’s new resolution-related functions and activities of CODI.
  - Both agencies establish appropriate delegations of authority, procedures, and risk management arrangements to minimize legal and reputational risks.
- Suggested reviews and measures:
  - Review existing legal protections for SARB and PA staff, and for other financial regulators including CODI, to ensure protections apply against acts taken other than in bad faith and align with international standards.
  - Ensure protections apply to parties engaged by agencies in performing resolution-related functions.
  - Consider adequacy of arrangements for provision of legal assistance to staff, officers and agents defending against legal actions.
  - In accordance with KA 5.3, ensure law provides legal protection to directors and staff of an entity in resolution against liability arising from compliance with resolution directions.
- Resolution safeguards:
  - FSLAB addresses gaps by establishing clear objectives, point of entry for resolution, the NCWOL protection, requirement to impose losses on the failing institution’s creditors and shareholders before public funds, creditor hierarchy and NCWOL safeguard, and removal of court-based resolution decision-making.
  - Remaining suggestions include ability to temporarily suspend market disclosures by a distressed bank pending implementation of resolution and review of Insurance Act and FMI laws over the medium-term for resolution safeguards.

### Recommendation (legal protection and safeguards)
- Ensure that via the FSLAB robust legal protections are explicitly extended to cover SARB’s new resolution-related functions, as well as activities of CODI; and that both agencies put in place necessary operational arrangements to minimize legal risks.

---

*Source: IMF Financial Sector Assessment Program materials contained in the provided content unit (1zafea2022005).*

### EXECUTIVE SUMMARY __________________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Overview and scope
- This Technical Note sets out the findings and recommendations of the Financial Sector Assessment Program (FSAP) for South Africa on financial safety net and crisis-management arrangements.  
- Primary focus: arrangements for early intervention, recovery, resolution, and financial safety nets for banks in South Africa. Secondary coverage: recovery and resolution issues for insurers and Financial Market Infrastructure (FMI).  
- The mission reviewed: authorities’ questionnaire responses; relevant laws; the draft Financial Sector Laws Amendment Bill (FSLAB); policy documents issued by the SARB; and the FSB 2019 peer review of South African bank resolution arrangements. Findings informed by meetings with SARB, National Treasury (NT), Prudential Authority (PA), banks, and other parties.

### Institutional framework
- The Financial Sector Laws Amendment Bill (FSLAB) will:
  - allocate responsibility for the resolution of banks and other systemically important financial institutions to the South African Reserve Bank (SARB);
  - establish a Deposit Insurance Scheme (DIS) administered by the Corporation for Deposit Insurance (CODI), a SARB subsidiary with its own statutory mandate and governance arrangements.
- SARB responsibilities and structures:
  - SARB oversees financial stability, provision of liquidity assistance to financial institutions, and payment system oversight.
  - The SARB Deputy Governor responsible for financial stability is a member of the Prudential Committee that oversees the Prudential Authority (PA), which operates as a juristic person within SARB administration.
  - Within SARB, the Resolution Planning Division (RPD) in the Financial Stability Department (FSD) develops the resolution planning framework. SARB has established an internal Financial Stability Committee and a Resolution Policy Panel, both including PA staff.
- Recommendation summary:
  - Strengthen mandates and clarify roles of coordination bodies through charters or Memoranda of Understanding (MOU).
  - Assign FSOC a greater role in overseeing coordination.
  - Establish a financial crisis management working group under FSOC, chaired by SARB.

### Early detection, early intervention, and contingency planning
- Current practices:
  - The PA and SARB undertake proactive risk assessments and use some stress testing and Early Warning Indicators (EWIs).
  - Bank recovery plans have been in place for all banks since 2016.
- Recommended enhancements:
  - Strengthen systems for early detection of bank stress via enhanced stress testing (top-down and bottom-up), reverse stress testing, and greater use of early-stage EWIs.
  - Strengthen the PA’s corrective and remedial powers.
  - Introduce a structured early intervention framework for banks with escalating triggers and corresponding response actions, allowing supervisory discretion.
  - Develop and regularly test contingency plans for dealing with bank stress.
  - Establish similar early intervention and contingency arrangements for insurers and FMIs.
  - PA to issue comprehensive guidance to the banking industry on recovery planning and strengthen supervisory assessment and testing of bank recovery plans.
  - Extend recovery planning requirements to FMIs (ongoing) and establish recovery planning requirements for all insurers in the medium-term.

### Resolution regime and resolution planning
- FSLAB impact:
  - The FSLAB brings South Africa broadly into line with the Financial Stability Board Key Attributes (KA) and best international practice, addressing many gaps in prior resolution framework.
  - Elements needing further review include group resolution and SARB funding in resolution.
- Policy and operational recommendations:
  - SARB should develop a comprehensive “resolution toolkit” with guidance on key resolution options and processes.
  - Implement bank-specific resolution plans starting with domestic Systemically Important Financial Institutions (SIFIs).
  - Pay particular attention to structure and calibration of bail-in instruments to avoid excessive industry costs and contagion to non-bank institutions.
  - Review insurance and FMI resolution laws over the medium-term for closer alignment with the KA.
  - Design new loss-absorbing instruments (“FLAC”) to avoid excessive cost impacts on banks and contagion risk.
  - Develop framework for bank-specific resolution plans and resolvability assessments.
  - Implement resolution plans for SIFIs, then for other banks.
  - Consider developing an insurance policyholder compensation scheme and strengthen resolution law/policy for non-designated insurers.

### Deposit insurance scheme (DIS) and resolution funding
- DIS design under FSLAB:
  - Broadly aligned with international principles, but funding structure is unorthodox:
    - No specific quantitative target size for the loss-absorbing (‘equity’) tranche that would inform annual premiums.
    - Use of interest-bearing deposits placed by banks in the deposit insurance agency as a liquidity tranche.
- Recommendations to strengthen DIS:
  - Replace the liquidity tranche with a larger equity component, calibrated to meet an explicit target (relative to covered deposits and increasing with deposit growth), funded via nonrepayable (ex-ante) industry contributions.
  - Formalize the proposed SARB liquidity facility for the DIS as quickly as possible (develop a draft liquidity facility between CODI and SARB).
  - Progress operationalization of DIS.
- Public funding and safeguards:
  - Authorities designed the resolution framework to avoid public funding, but recognize occasions where public funding or guarantees may be required (e.g., when bail-in is infeasible or insufficient).
  - Recommend development of a contingency plan identifying potential public funding needs for SIFI resolution, with guidance to limit moral hazard and enable recoveries.
  - Refine reliance on SARB for liquidity funding with clearer statutory objectives, a solvency / medium-term viability provision, and other safeguards.
  - Repeal statutory power in the South African Reserve Bank Act 1989 enabling SARB to inject equity into a bank.
  - Consider a new statutory framework setting objectives, preconditions, and safeguards for public funding in systemic bank resolution; public funding should be sourced from NT (not SARB), and any equity holding (e.g., for a bridge bank) should be held by government via an appropriate government agency (not SARB).
  - Introduce further safeguards for lending in resolution and consider options for recovering state-incurred losses (e.g., ex post levies).

### Cross-border cooperation and crisis management
- Strengthen cross-border cooperation arrangements within the resolution framework:
  - Develop clear policy guidance on cross-border coordination of recovery, resolution, and financial crisis management.
  - Establish MOUs with foreign authorities in the region for resolution cooperation and coordination, together with bank-specific crisis management groups.
  - Consider establishment of crisis management groups or extensions of supervisory colleges for major South African banks with extensive cross-border operations.
- Crisis simulation and coordination:
  - Undertake regular domestic crisis simulation exercises.
  - Seek to undertake periodic cross-border crisis simulation exercises.
  - Establish MOU between CODI, SARB and PA.
  - Develop contingency plan for systemic crisis management.
  - Strengthen cross-border cooperation arrangements for recovery and (in due course) resolution planning with relevant home and host authorities.
  - Establish domestic cross-agency protocol on crisis management.

### Key recommendations (selected items from Table 1)
- Institutional framework:
  - (¶13) Strengthen mandate of FSOC on financial crisis management — Responsible: SARB/NT/PA/FSCA — Timing: I
- Early intervention and recovery planning:
  - (¶19-21) Further strengthen systems for early detection of bank stress — Responsible: PA — Timing: ST
  - (¶23-26) Establish a structured early intervention framework and address residual gaps in PA powers — Responsible: PA — Timing: ST
  - (¶27) Develop contingency plans for dealing with banks in stress situations and undertake regular testing — Responsible: PA — Timing: ST
  - (¶33) Issue comprehensive guidance to banking industry on recovery planning and strengthen supervisory assessment/testing — Responsible: PA — Timing: I / (PA I) and (PA I)
  - (¶34-36) Introduce recovery planning requirements for non-banks (insurance firms, FMIs) — Responsible: PA — Timing: ST/MT
- Resolution regime and planning:
  - (¶50) Introduce future legislative amendments to enhance resolution regime in line with KA, including limiting MOF role to situations where public funding is needed — Responsible: SARB/NT — Timing: ST
  - (¶54-55) Develop comprehensive generic resolution strategies and implementation guidance with cross-agency input — Responsible: SARB/PA/NT — Timing: ST
  - (¶59-60) Design new loss-absorbing instruments (“FLAC”) to avoid excessive costs and contagion — Responsible: SARB — Timing: I
  - (¶61) Develop framework for bank-specific resolution plans and resolvability assessments — Responsible: SARB — Timing: ST
  - (¶64-67) Implement resolution plans for SIFIs, then other banks — Responsible: SARB — Timing: ST
  - (¶71) Consider development of an insurance policyholder compensation scheme — Responsible: PA/SARB/NT — Timing: MT
  - (¶72) Strengthen resolution law and policy for non-designated insurers — Responsible: SARB/PA/NT — Timing: MT
- Deposit insurance and resolution funding:
  - (¶89) Develop a draft liquidity facility between CODI and SARB — Responsible: SARB — Timing: ST
  - (¶91) Formalize a target size for, and increase reliance on, the loss-absorbing tranche of the deposit insurance fund — Responsible: SARB — Timing: ST
  - (¶93) Progress operationalization of DIS — Responsible: SARB — Timing: ST
  - (¶97) Develop a policy framework for contingent public resolution funding, including options for recovering losses (e.g., ex post levies) — Responsible: NT/SARB — Timing: ST
  - (¶98) Repeal provision in SARB Act enabling SARB to inject equity into a bank — Responsible: SARB/NT — Timing: ST
  - (¶99) Introduce further safeguards for lending in resolution — Responsible: SARB/NT — Timing: ST
- Contingency planning and crisis management:
  - (¶80) Undertake regular domestic crisis simulation exercises — Responsible: SARB — Timing: ST
  - (¶81) Seek periodic cross-border crisis simulation exercises — Responsible: SARB — Timing: MT
  - (¶103) Establish MOU between CODI, SARB and PA — Responsible: CODI/SARB/PA — Timing: ST
  - (¶104) Develop contingency plan for systemic crisis management — Responsible: SARB/NT/PA/FSCA — Timing: I
  - (¶106) Strengthen cross-border cooperation arrangements for recovery and resolution planning with relevant home and host authorities — Responsible: SARB/PA — Timing: ST/MT
  - (¶107) Establish domestic cross-agency protocol on crisis management — Responsible: SARB/NT/PA/FSCA — Timing: ST
- Timing legend:
  - I − immediate: within one year
  - ST − short-term: one to three years
  - MT − medium-term: three-five years

*Source: EXECUTIVE SUMMARY (1zafea2022005).*

### 7.      The FSR Act creates the framework for managing a financial crisis to the extent that

### 7.      The FSR Act creates the framework for managing a financial crisis to the extent that

### Framework and definitions
- The FSR Act defines a “systemic event” as: “an event or circumstance, including one that occurs outside [South Africa], that may reasonably be expected to have a substantial adverse effect on the financial  system or economic activity in [South Africa]”.
- The Act sets out the process to be followed by the governor in determining whether an event is systemic and sets out the functions of the SARB in preventing a systemic event, mitigating the effects of a systemic event and/or managing the systemic event.

### Existing failure and resolution regimes
- The failure of banks is currently dealt with under a curatorship model for commercial and mutual banks, and via liquidation for banks.
- The process and grounds for placing a bank in curatorship is contained in Section 69 of the Banks Act 1990 (Banks Act).
  - This enables the MOF, on the recommendation of the PA, to appoint a curator if it is determined that a bank will be unable to repay its deposits when legally obliged to do so, or will probably be unable to meet any other of its obligations.
  - The authorities have relied on curatorship in recent years to address idiosyncratic problems in a commercial bank and a mutual bank.
- Under section 30(1)(iii) of the Cooperative Banks Act, judicial management (which is similar to curatorship) is an avenue that can be used for the resolution of cooperative banks via application to the court.

### Enactment of FSLAB and scope of resolution authority
- Enactment of the FSLAB has significantly strengthened the framework for dealing with failing banks.
- Under the new framework:
  - the SARB will be the sole resolution authority for all banks, as well as for any non-bank financial institution designated by the governor as being systemically important.
  - a financial institution can be designated by the governor at any time, including at the point of failure.
- The resolution of insurers that are not designated as being systemically important will remain under the Insurance Act 2017 (Insurance Act) under the control of the PA and courts.

### Prudential Authority (PA)
- The PA has responsibility for prudential regulation and supervision of banks and insurers.
- Responsibilities include:
  - undertaking early intervention should a bank or insurer come under stress or fail to comply with prudential requirements.
  - overseeing bank recovery plans.
  - determining if a bank is able to restore itself to viability through recovery actions or other remedial measures, or making the determination that it is non-viable.
- No recovery plan requirements have yet been put in place for insurers.
- With the enactment of the FSLAB, the PA’s responsibility under the Banks Act for the resolution of banks through a curatorship model has ceased, although this framework remains applicable to non-designated insurers under the Insurance Act.

### National Treasury (NT)
- The NT is responsible for overseeing financial legislation and high-level policy through the Financial Sector Policy Unit of the NT.
- The NT is the principal economic adviser to the MOF and has responsibility for the country’s fiscal affairs.
- In a bank failure situation, the NT, through its Fiscal Liability Committee (FLC), would have lead responsibility for advising the government on any matters relating to the provision of public funding or government guarantees or indemnities.
- The NT has been closely involved, together with the SARB, in the development of the FSLAB and related policy matters.

### Financial Sector Conduct Authority (FSCA)
- The FSCA is the responsible regulatory authority for the securities market and market conduct.
- Responsibilities include:
  - regulation and supervision of market infrastructures (FMI, as defined in the Financial Markets Act, 2012).
  - development (with the PA, in its capacity as prudential regulatory authority responsible for the safety and soundness of FMI) of recovery planning requirements for FMIs.
- In a bank resolution, the main responsibilities of the FSCA would relate to market disclosures by the bank(s) in resolution and related matters.

### Institutional arrangements for domestic coordination — findings and recommendations
- Findings:
  - Institutional arrangements for bank resolution and financial crisis management are satisfactory, but domestic coordination arrangements for bank resolution and financial crisis management should be further strengthened.
  - There is a clear and well-understood allocation of responsibility for the different functions across the agencies, particularly the SARB, PA, NT, and FSCA.
  - The enactment of the FSLAB will further strengthen these arrangements by formalizing the SARB’s role as the resolution authority for banks and designated (non-bank) financial institutions.
  - Interagency coordination as set out in the FSR Act is statutorily prescriptive but not sufficiently developed in practice.
- Policy recommendations and guidance:
  - First, clarify roles to avoid duplication between the Financial System Council of Regulators (FSCR) and Financial Stability Oversight Committee (FSOC), for example by amending the FSCR terms of reference so the FSCR focuses primarily on overseeing regulatory developments in the financial system and facilitating cooperation and coordination consistent with meeting policy objectives.
  - Second, make the FSOC mandate to advise the Governor and Minister on financial stability, bank resolution, and financial crisis management clearer by way of a published charter, with a focus on regularly reviewing progress in crisis management preparedness and assessing the stability of the financial system.
  - Establish a cross-agency working group on financial crisis management, resolution planning and related matters, comprising representatives of all relevant agencies, to facilitate closer cooperation and coordination on the development and maintenance of financial crisis management and resolution policies and practices.
  - Third, enhance the effectiveness of the FSCR and FSOC by meeting more frequently than currently, such as quarterly.
  - Finally, strengthen transparency and accountability by the FSCR and FSOC publishing annual reports on their activities and websites that set out information on their respective mandates and activities.

*1zafea2022005 - 7.      The FSR Act creates the framework for managing a financial crisis to the extent that*

### Box 1. Interagency Coordination

### Box 1. Interagency Coordination

### Interagency structure and mandated bodies
- The FSR Act established a multi-tiered structure to facilitate coordination between the domestic financial sector agencies.
- FSCR:
  - Has nine members and meets a minimum of twice a year.
  - Chaired by the director-general of the NT.
  - Serves as a forum to facilitate cooperation and collaboration, and where appropriate consistency of action, between the institutions represented.
  - The FSR Act established nine working groups under the umbrella of the FSCR.
- FSOC:
  - Comprises ten members and meets a minimum of twice a year.
  - Chaired by the SARB.
  - Acts as an advisory committee to the governor, the SARB and the minister, with a mandate covering financial stability, crisis management, and prevention.
- FSCF:
  - Assists the FSOC.
  - Comprises eight members including financial sector industry representatives.
  - Main role is to identify potential financial risks, and to coordinate and mitigate these risks.
- FSMC:
  - Established to facilitate cooperation and collaboration between cabinet members responsible for administering legislation relevant to financial sector supervision and regulation.
  - Designed to have four members, operating under the chairmanship of the MOF, but is yet to convene.

### Assessment of usage and gaps
- None of the existing fora have been used to any significant degree for bank resolution and financial crisis management decision-making.
- The absence of an interagency forum for crisis management may impede policymaking and hamper coordinated communications.
- The FSMC has not yet commissioned an independent evaluation of the effectiveness of cooperative and collaborative mechanisms as required under the FSR Act, and has not taken other actions to date.
- The FSR Act’s design risks overlap between FSCR and FSOC mandates and potential ambiguity over which body oversees coordination on financial stability, bank resolution planning, and crisis preparedness.

### Suggested operational changes and coordination mechanisms
- Establish a working group under the auspices of the FSOC to coordinate bank resolution planning and financial crisis preparedness:
  - Would enable the NT and FSCA to have structured input into formulation of bank resolution and financial crisis management in areas relevant to their statutory mandates (e.g., public funding for the NT; market disclosures for the FSCA).
  - Would elevate the role of key staff and promote strengthened interagency coordination at a senior working level.
  - Suggested to be chaired by the SARB and report at least quarterly to the FSOC.
  - Detailed policy development on resolution-related matters under SARB leadership could continue under the SARB Resolution Policy Panel (RPP) and FSC.
- Review and clarify the mandate of the FSMC:
  - Develop a charter or other form of mandate to clarify purpose and functions.
  - Minimize risk of compromising operational independence and effectiveness of regulatory agencies.

### Recommendations on mandates, transparency, and governance
- It is recommended that:
  - The mandates of the FSCR and FSOC be further clarified to minimize overlap and to ensure that the FSOC (or an alternative body, if appropriate) has oversight of coordination between agencies on financial stability, bank resolution planning, and financial crisis management preparedness.
  - The effectiveness, transparency and accountability of the FSCR and FSOC be strengthened, including through the issuance of annual reports, published charters and more frequent meetings (e.g., quarterly).
  - The FSOC (or an alternative body, if appropriate) establish a working group on resolution planning and financial crisis preparedness and management, chaired by the SARB, comprising representatives of other relevant agencies, to oversee detailed coordination between the SARB, PA, NT, and FSCA on all aspects of resolution and crisis management. Cross-agency coordination in actual crisis could be achieved either through the proposed working group or via a smaller group of senior management drawn from the relevant agencies, and the authorities are suggested to formalize these coordination arrangements.
  - The mandate of the FSMC be clarified, including through future amendment of the FSR Act, to avoid any risk of compromising the operational independence of regulatory agencies or distorting their respective mandates.

### Link to Early Intervention and Recovery Planning (contextual connection)
- The box emphasizes that structured interagency coordination is necessary to support bank resolution and financial crisis management decision-making, complementing recommendations in the Early Intervention and Recovery Planning section regarding supervisory powers, early warning indicators, stress testing, contingency planning, viability assessments, and the PA’s legal and operational toolkit.

*Source: IMF Financial Sector Assessment Program materials contained in the provided content unit.*

### 29.      Recovery planning is important to facilitate the restoration of banks in anticipation of,

### 29.      Recovery planning is important to facilitate the restoration of banks in anticipation of,

### Recovery planning for banks: requirements, implementation, and gaps
- Recovery plans should set out means by which banks would restore themselves to financial soundness and compliance with prudential requirements following an adverse financial impact.
- Recovery plans should be:
  - Reviewed regularly by banks and kept up to date.
  - Subject to supervisory approval.
  - Subject to regular testing by banks as part of contingency planning arrangements.
- The supervisory authority should specify requirements for recovery plans, including:
  - Types of scenarios for which plans should be designed.
  - Triggers for invoking the plans.
  - Minimum restoration points for capital and liquidity.
  - Identification of critical functions and systems.
  - Timeframe required for recovery actions to be completed.
  - Identification of the financial contribution of each recovery action.
  - Governance arrangements and testing arrangements.

Findings on South Africa’s bank recovery planning
- In 2015 the PA introduced recovery planning requirements for all banks; requirements are relatively comprehensive and broadly consistent with the KA and good international practice.
- The PA requires banks to include in recovery plans:
  - Governance requirements;
  - Group structure and key information on legal entities;
  - Triggers;
  - Stress scenarios; and
  - Recovery options.
- Banks have produced recovery plans in accordance with these requirements for several years; plans have been subject to supervisory assessment by the PA with input from the RPD.
- Larger banks have undertaken reverse stress tests as part of recovery planning.
- Some banks have undertaken testing of their recovery plans, although live simulation testing does not seem to have been done by all banks.

Identified shortcomings and desired enhancements
- Need to strengthen supervisory oversight of recovery plans, notably for smaller banks, to ensure:
  - Plans are sufficiently comprehensive.
  - Recovery options are practicable and include implementation guidance.
  - Full integration into banks’ risk management frameworks, ICAAP, ILAAP, and BCP processes.
- More attention desirable to minimum ‘restoration points’ for capital and liquidity so banks can restore to levels providing a reasonable cushion above minimum regulatory requirements and consistent with restoration of market confidence.
- PA should provide industry-wide guidance on recovery plans to improve quality for smaller institutions.
- PA should provide more guidance on level of non-viability for capital and liquidity for calibrating reverse stress tests and recovery plan scenarios.

### Recovery planning for FMIs and insurers
- FMIs:
  - FSCA and PA have prepared a draft joint standard on recovery plans for FMIs pursuant to Section 108(1)(n) of the FSR Act.
  - Draft standard minimum requirements for FMIs include:
    - Governance requirements;
    - Group structure requirements;
    - Requirements for early warning indicators and triggers;
    - Stress scenarios requirements;
    - Recovery tools; and
    - Considerations in respect of recovery options.
  - Recommendations for FMIs:
    - Provide guidance on minimum expectations.
    - Undertake effective supervisory assessment and provide feedback.
    - Focus on adequacy of triggers and practical implementation of recovery actions.
    - Integrate recovery plans into FMI risk management systems, risk appetite, and BCP arrangements.
    - Subject FMI recovery plans to regular testing once initial iterations completed.
    - Ensure early intervention arrangements for FMIs incorporate triggers for activation and supportive actions by authorities.
- Insurers:
  - No recovery planning requirements currently in place for insurers.
  - PA is encouraged to develop and implement recovery planning for all insurers, in consultation with industry.
  - Insurance recovery plans should be broadly modeled on bank requirements and include:
    - Identification of critical functions and systems;
    - Triggers (and associated EWIs);
    - Recovery actions;
    - Restoration points for solvency and liquidity;
    - Governance and testing.
  - Recovery plans should address both idiosyncratic and system-wide stress events; guidance on expected impact levels in recovery plan scenarios should be provided.
  - Initial emphasis on larger insurers and those dominant in market niches important to the economy.
  - Insurers should undertake regular testing of recovery plans.
  - PA should strengthen early intervention arrangements for insurers to incorporate activation of recovery plans and identification of supportive measures.

### Recommendations (recovery planning)
- It is recommended that:
  - a. The PA provides more comprehensive guidance to the banking industry on recovery plan expectations.
  - b. The PA increases its supervisory oversight of banks’ recovery plans, including to ensure effective integration of recovery plans with risk management frameworks and other bank contingency arrangements.
  - c. The PA incorporate recovery plan activation and support measures into a revised and strengthened early intervention framework.
  - d. The PA and FSCA implement the intended recovery planning requirement for FMIs and, in parallel, develop effective early intervention arrangements and contingency planning for FMI stress events, and undertake regular testing of these arrangements.
  - e. The PA develop and implement recovery planning requirements for insurers and integrate recovery plan activation and support into the PA’s arrangements for insurer early intervention.

*Source: 1zafea2022005 - 29.      Recovery planning is important to facilitate the restoration of banks in anticipation of,*

### 100. Various MOUs  and cooperative  agreements have been entered into between  the

### 1zafea2022005 - 100. Various MOUs  and cooperative  agreements have been entered into between  the

### MOUs, cooperative agreements, and a proposed all-agency MOU
- Existing MOUs and cooperative agreements between the authorities, including between the SARB and the NT, provide a sound basis for clarifying respective functions, responsibilities, and cooperation/coordination processes.
- Recommendation to develop a single MOU between all four agencies (SARB, NT, PA, and FSCA), and with the CODI when established, to:
  - Elaborate responsibilities of each agency.
  - Set out detailed processes for cooperation and coordination at each stage of crisis management, including: viability assessment, systemic impact assessment, recovery processes, entry into resolution, selection of resolution options, implementation of resolution, resolution funding, communications, and exit arrangements.

### Contingency planning for crisis management
- Contingency planning is a critical element of crisis management; SARB should lead development of contingency plans with other authorities.
- Contingency plans should be comprehensive and include:
  - Assessment of key threats to financial and economic stability, including: failure or acute distress of a SIFI; a pandemic (Covid-19 noted as the current example); financial risk events; external threats (such as instability arising in another SADC country); and operational disruption events affecting FMIs and banks (such as electricity and telecommunication disruptions).
  - Identification of early alerts for each scenario.
  - Escalation procedures, crisis diagnostics, response options, assessment criteria, implementation guidance, and communications.
  - Clear identification of responsibilities of each agency at each stage of a crisis and specific coordination procedures.
- Desirable that authorities undertake periodic testing of selected contingency plans.
- Contingency plan development to be under the auspices of the FSOC and led by the SARB (see Recommendations, item b).

### Cross-border cooperation: MOUs, CMGs, and strategy
- PA has a number of MOUs for coordination of cross-border bank supervision focused on information exchange and supervisory cooperation; they do not specifically cover recovery or resolution.
- The FSLAB enables SARB to conclude MOUs relating to resolution; the SARB anticipates entering into 13 such MOUs, which should be informed by international guidance.
- PA has established supervisory colleges with some host supervisors of South African banks.
- SARB plans to establish Crisis Management Groups (CMGs) with resolution and supervisory authorities in relevant countries (particularly SADC), which is encouraged to strengthen cross-border coordination.
- Firm-specific Cooperation Agreements (CoAgs) will eventually be needed for South African SIFIs; negotiating these may be challenging due to divergence in regional legal frameworks and operational capacity.
- SARB has engaged in SADC discussions to strengthen national resolution frameworks aiming for a broadly common platform across the region; realistic timeframe is that it will take a number of years.
- Interim steps recommended:
  - Increase information-sharing and deepen collaboration on recovery planning to reduce probability of banking failures.
  - SARB to engage with home authorities of foreign banks with significant presence in South Africa to strengthen cross-border cooperation on recovery and resolution.

### Multilateral MOUs and preparatory strategy
- Missions suggest consideration of establishing multilateral MOUs on financial crisis management in the medium-term, involving SARB, NT, PA, FSCA, and CODI jointly with counterparts in another country covering:
  - Viability assessment, systemic impact assessment, early intervention, ELA, recovery, entry into resolution, implementation of resolution, exit arrangements, and communications.
- Potential benefits: reduce complexity of multiple bilateral MOUs and provide a coordinated framework for crisis-management elements.
- Precedents cited (no external details provided other than existence): northern Europe and Australia-New Zealand arrangements.
- Before entering into cross-border arrangements, South African authorities (as home authority) should:
  - Jointly develop a strategy for cross-border crisis management, coordinated by a working group under FSOC.
  - Strategy to set out objectives for cross-border coordination on early intervention, ELA, recovery, resolution, and exit arrangements.
  - Identify matters on which South Africa expects cooperation from home/host authorities and matters on which home/host authorities would expect cooperation from South Africa.
  - Include assessment of SPE versus MPE implementation and possible burden-sharing arrangements.
  - Verify that the FSLAB provides necessary legal powers and safeguards for effective cross-border cooperation and coordination, including:
    - Obligation on SARB to seek to avoid adverse impacts on financial systems and economies of other countries when resolving banks in South Africa.
    - Robust legal basis for confidential exchange of information.

### Recommendations (crisis cooperation and cross-border)
- It is recommended that:
  a. The authorities establish a MOU between the SARB, NT, PA, FSCA, and CODI to set out the responsibilities of each agency and the processes for cooperation for all stages of crisis management.
  b. The authorities develop a comprehensive contingency plan, under the auspices of the FSOC and led by the SARB, setting out the strategies for responding to a range of threats to the stability of the financial system.
  c. The authorities seek to establish bilateral or multilateral MOUs with their counterparts in key home and host countries to facilitate cooperation and coordination on cross-border financial crisis management, with the SARB following this with bank-specific CMGs (or extended mandates for supervisory colleges).
  d. As a precursor to establishing MOUs, the South African authorities—in their capacity as home supervisor—develop the key elements of a strategy for cross-border crisis management.

### Legal protection, safeguards, and judicial review — overview
- Effective legal protection is essential for authorities, their officers, staff and agents in resolution and crisis management due to substantial legal risks when taking actions such as removing board/management, changing property rights, or placing an entity into liquidation.
- If legal protection is insufficient, authorities may delay or avoid required actions, undermining resolution objectives.
- KA (Key Attributes) emphasize need for robust legal protections for relevant authorities, officers, staff and agents, except for acts taken in bad faith.

### Existing legal protections and gaps
- Existing legal protections are set out in various statutes, including:
  - FSR Act, which provides broadly worded immunity for, among others, the State and the MOF, as well as senior management and staff of the SARB, the PA and the FSCA.
  - The Banks Act protects the SARB and PA, their staff and duly appointed officials from any loss sustained by, or damage caused to, any person as a result of anything done or omitted in the bona fide performance of an official function.
  - Public Finance Management Act also provides legal protections.
- Existing protections are relatively robust and reinforced by agency risk management practices ensuring officers and staff follow correct procedures and act within delegated authorities.
- Upon enactment of the FSLAB, it will be necessary to ensure:
  - Legal protections are explicitly extended to cover SARB’s new resolution-related functions and activities of the CODI.
  - Both agencies establish appropriate delegations of authority, procedures, and risk management arrangements to minimize legal and reputational risks.
- Suggested reviews and measures:
  - Review existing legal protections for SARB and PA staff, and for other financial regulators including CODI, to ensure protections apply against acts taken other than in bad faith, aligning with internationally accepted standards and practices.
  - Ensure protections apply not just to management and employees of agencies but also to any parties engaged by them in performing resolution-related functions.
  - Consider adequacy of arrangements for provision of legal assistance to staff, officers and agents of SARB and other authorities in defending against legal actions.
  - In accordance with KA 5.3, authorities are encouraged to ensure law provides legal protection to directors and staff of an entity in resolution against liability arising from compliance with resolution directions.
- Footnote on FSR Act provision:
  - The relevant provision (section 285) offers protection against any loss or damage incurred by any person from a decision taken or action performed in good faith in the exercise of a function, power or duty under a financial sector law.

### Resolution safeguards — assessment and suggestions
- Resolution safeguards are critical and should include well-defined statutory objectives, clearly specified triggers for resolution, protections against misuse of public funds, and protection against abuse of property rights.
- The current Banks Act framework lacks critical KA components: clearly defined and appropriate resolution objectives; measures to protect public funds; measures to ensure no parties are worse off in resolution than under conventional liquidation.
- The FSLAB substantially addresses these by:
  - Establishing clear objectives.
  - Setting a point of entry for resolution.
  - Establishing the NCWOL protection.
  - Requiring SARB to impose losses on the failing institution’s own creditors and shareholders before relying on public funds.
  - Requiring actions by authorities to be subject to the creditor hierarchy and the NCWOL safeguard.
  - Removing court-based resolution decision-making and eliminating the risk of courts suspending, reversing or amending resolution decisions.
- Remaining suggestions:
  - Review legal framework to ensure authorities can temporarily suspend market disclosures by a bank in distress pending implementation of resolution.
  - Review Insurance Act and laws relating to FMIs in the medium-term to promote amendments establishing robust safeguards for resolution powers exercised under those laws.

### Recommendations (legal protection and safeguards)
- It is recommended that:
  a. The authorities seek to ensure that, via the FSLAB, robust legal protections are explicitly extended to cover SARB’s new resolution-related functions, as well as the activities of the CODI; and that both agencies put in place the necessary operational arrangements to minimize legal risks.

*Source: IMF staff report text extracted from the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1zafea2022005.pdf_