Appraising the regulatory framework of the new South African Deposit Insurance System

• Jurisdiction: South Africa
• DOI: 10.17159/2225-7160/2024/v57a3
• Author: Matsietso Agnes Matasane
• Pages: 24-45
• Date: 01 June 2024
• Published date: 01 June 2024
• Published By: University of Pretoria

24 2024 De Jure Law Journal

Appraising the regulatory framework of the

new South African Deposit Insurance

System*

Matsietso Agnes Matasane

Lecturer, School of Law, University of Witwatersrand

SUMMARY

South Africa has recently established its first deposit insurance body, the

Corporation for Deposit Insurance (the Corporation), as part of the Twin

Peaks regulatory reforms following the 2008/09 Global Financial Crisis

(Crisis). The primary responsibilities of the Corporation are to establish,

maintain and administer a deposit insurance fund to protect the banks’

covered depositors and inform the depositors of its benefits and

limitations, should a bank be placed into resolution. The rationale behind

the protection of depositors is premised on the need to maintain

confidence and financial stability in the banking sector. This article

appraises the features of the new deposit insurance system as enshrined in

the Financial Sector Laws Amendment Act 2021 (FSLA Act). The article

evaluates whether the new framework for the protection of depositors

aligns with international standards, particularly the International

Association of Deposit Insurers’ Core Principles for Effective Deposit

Insurance Systems. The pertinent question is whether the current features

of South Africa’s deposit insurance are optimally designed to ensure its

effectiveness. The article ends with practical suggestions for strengthening

the South African deposit insurance framework to ensure its optimal

alignment with international good practice.

1Introduction

In recent decades, and especially during the 2008 Global Financial Crisis,

it has become evident that not only are banks “special” given their critical

role in the financial system, but their insolvency is also “special” given

the impact that a bank failure may have on financial stability. It has

further become evident that normal commercial insolvency procedures,

which are subject to appeals and reviews, may be too protracted and can

lead to loss of value hence they are not best suited to dealing with failing

How to cite: Matasane ‘Appraising the regulatory framework of the new South African Deposit Insurance

System’ 2024 De Jure Law Journal 24-45

http://dx.doi.org/10.17159/2225-7160/2024/v57a3

* This article derives from my Doctoral thesis titled “A deposit guarantee

framework for South Africa: a comparative appraisal”. See Matasane A

deposit guarantee framework for South Africa: a comparative appraisal (LLD

Dissertation 2023 UP).

Regulatory framework of the new South African Deposit Insurance System 25

banks.1 Therefore, dealing with a bank failure thus requires a unique

approach that entails swift action, preferably by the bank supervisor who

is aware of the special character and role of banks. Such regulators must

be capable of taking appropriate, calculated actions to prevent loss of

value and maintain financial stability whilst also protecting depositors.

Addressing the question of why bank failure merits a different approach,

Hupkes points out that: “the common answer is that banks play a special

role in a country’s economy in that, collectively, their functions are so

important as to constitute a type of public service.”2

The regulatory paradigm following the Crisis places significant

emphasis on ensuring financial stability as a core pursuit. As a result, it

prioritises achieving the ‘orderly resolution’ of financial institutions as the

final part of a financial safety net arrangement. This arrangement

includes a robust prudential regulation and supervision, a timely and self-

corrective early intervention, as well as a well-conceptualised explicit

deposit insurance framework to minimise the potential for bank failure

and where banks do fail, to operate in tandem with a comprehensive

orderly resolution framework.

As with most financial sectors, South Africa’s financial sector has

become more globally connected and concentrated, potentially exposing

the country to significant financial risks.3 The Crisis was a systemic

failure of global proportions which not only revealed the shortcomings in

the financial regulatory frameworks and policies of the most advanced

economies around the world but also exposed the fundamental

weaknesses of globalization and of economic models and assumptions.4

The aftermath of the Crisis saw governments reviewing their country’s

financial regulation frameworks in a bid to create a more robust banking

system for the future. Consequently, South Africa, as a G20 member that

committed itself to the post-crisis international financial reform agenda,5

joined in the momentum to adopt an explicit deposit insurance system.

However, it was only in 2018 that the South African government

introduced the Financial Sector Laws Amendment Bill 2018 which

1 Randell “Legal aspects of bank resolution: designing the powers and

solutions” Paper presented at conference on “Operational Aspects of Bank

Resolution and Restructuring” at the European Bank for Reconstruction and

Development, London, 19 March 2012 at 1. See also Nyaude Regulatory

Measures to address bank failures in Zimbabwe (LLD Dissertation 2021 UP)

306. See further Nyaude and Van Heerden “Bank resolution in South Africa:

Recent developments” 2023 International Insolvency Review 3.

2 Hüpkes “Insolvency – why a special regime for banks?” 2005 Current

Developments in Monetary and Financial Law 3.

3 Demirguc-Kunt & Kane “Deposit Insurance: Handle with care” 2003 Central

Bank of Chile Working Paper No 227 6.

4 Tettey Managing Bank Resolution in South Africa (Master of Management

dissertation 2014 University of Witwatersrand).

5 The G20 Seoul Summit Leaders’ Declaration http://www.g20.utoronto.ca/

2010/g20seoul.html#:~:text=To%20provide%20broader%2C%20forw

ard%2Dlooking,fossil%20fuel%20price%20volatility%3B%20safeguard/

(last accessed 2023-04-04).