INCOMING Reserve Bank governor Lesetja Kganyago is right on trend when he says his first priority when he takes office next month will be to put into operation SA’s new framework for financial stability.

Globally financial stability will be high on the agenda when Group of 20 (G-20) leaders meet in Brisbane next month. More than six years after the start of the global financial crisis and the ensuing recession, proposals on reforming the system of financial regulation to respond to the crisis have yet to be finalised, and Australia, as this year’s G-20 president, has made it an explicit goal to get these reforms completed.

Broadly speaking, the idea is to create a safer financial system that can provide better support for economies to grow and can protect taxpayers from the costs of bailing out banks, or other financial institutions deemed too big to fail. It’s an area that has developed a new language of regulation: "Sifis", or systemically important financial institutions, must have "living wills" setting out what happens if they fail; a big challenge for regulators is how to deal with the growth of "shadow banking" — the credit activities outside the formal banking system through securitisation or money market funds, for example.

Then there are the "twin peaks" — not the surreal US TV serial due to return after 25 years, but a model for regulating the financial sector SA is to adopt, after Australia, the UK and the Netherlands.

SA’s financial system remained solid throughout the financial crisis, but as a member of the G-20, SA has been very much part of the global process of designing a new financial architecture, and is committed to complying with the new international rules. As deputy governor of the Reserve Bank, and before that director-general of the National Treasury, Kganyago has participated in those forums — and has played a leading role in devising SA’s proposals.

Those proposals are, broadly, to create the "twin" regulators, as well as an overarching entity. A prudential regulator, under the Bank (basically a much enlarged version of the bank supervision department), would supervise the soundness and solvency of banks and of short-and long-term insurers, as well as exchanges such as the JSE. Then a market conduct regulator, under the Financial Services Board (FSB), would supervise those and other financial institutions to ensure fair treatment of customers.

Above all of this would be the financial stability committee, chaired by the Bank governor, which would bring together the twins and Treasury representatives and be in charge of the stability of the system as a whole — so it could dictate to either or both twins, and would watch markets and entities not regulated by either.

SA’s financial system remained solid throughout the financial crisis, but as a member of the G-20, SA has been very much part of the global process of designing a new financial architecture, and is committed to complying with the new international rules.

But in SA, too, the new rules are long in the making. The Cabinet approved a policy document based on these principles in 2011: the finance minister mandated the Bank to oversee financial stability in 2012; and a draft bill on all of this was published for comment in December last year. It has been revised in response to industry comments and a new draft is due soon. But it’s likely to be tabled in Parliament only next year.

Meanwhile, SA has experienced its first bank failure since our 2002 banking crisis. And while the failure of African Bank highlighted some of the reasons we might need a more careful and co-ordinated approach to financial stability and regulation — and one tailored to SA’s needs — it also pointed to some important flaws in the proposals. Abil was apparently too small to be "too big to fail".

Yet its failure clearly did pose some risk to the system. Nor was Abil vulnerable to the conventional run on deposits, with people queuing to withdraw their cash. Rather, because it funded itself in the capital markets, the particular risk was a run on the money market funds that invested in Abil’s money-market instruments.

All of which makes the case for the kind of "macro-prudential" oversight the Reserve Bank does already as financial stability and banks regulator, but seeks the formal tools to do.

The tool it will not have, though, is any sort of formal oversight over the unsecured lending industry, and this, arguably, could prove the fatal flaw in the arrangements as proposed — which do not include the National Credit Regulator (NCR). The failure to put the NCR in with the new market conduct regulator was one of the big criticisms by the global Financial Stability Board when it conducted its peer review of SA last year. And no wonder. For the system SA may end up with is more triplet peak than twin peak, with no rules to resolve possible conflicts with the third peak.

The NCR regulates the granting of all credit to consumers, whether by banks, retailers or micro-lenders. It reports to the trade and industry minister, whereas the FSB and bank supervision department are accountable to the finance minister, and it is the Treasury that is in charge of policy on financial stability and regulation. In theory, the NCR could close a bank the financial stability regulators needed kept open, or vice versa. And the pre-election credit amnesty that the trade and industry minister gazetted for defaulting borrowers, raising the level of risk in the unsecured lending market, was a clear example of how that ministry’s agenda might differ from one focused on financial stability and prudential regulation.

It’s the kind of political divide within the government that tends to bedevil economic policy. It’s one of many thorny issues Kganyago, and his colleagues at the Treasury, will have to contend with as they put the new system in place.

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