S&P Global Ratings expects most emerging markets (EMs) in Europe, the Middle East, and Africa (EMEA) to continue to take a cautious approach in the adoption of resolution regimes for banks. As members of the G20, three EMs--Saudi Arabia, South Africa, and Turkiye--have endorsed the resolution standards, and South Africa has already made the move.

Resolution planning considers what happens if a systemically important bank fails to recover--that is, if it becomes nonviable. At this stage, it consists of regulators identifying the best approach to stabilize the institution and how to avoid contagion to other parts of the financial system while winding down the unviable segments of the business.

However, some of the EMs that were among the first adopters of international regulations (such as Basel II and III, for example) are still dragging on implementation of a resolution regime, and in our view, the implications for their banking systems could be significant.

As part of South Africa's resolution planning, the Financial Laws Amendment Act was signed into law in 2021. The law enhanced the South Africa Reserve Bank's (SARB) power as the resolution authority, established the Corporation for Deposit Insurance (CODI), and introduced legal mechanisms for bail-ins, allowing creditors to bear losses, among other amendments. CODI went into effect in 2024 and provided retail insurance deposit coverage of up to South African rand (ZAR)100,000 (about $5,500) per account. Subsequently, the SARB published the final prudential standard for first loss after capital (FLAC) instrument requirements for designated institutions, which comes into effect in January 2026.

Saudi Arabia has published its law for systemically important financial institutions in 2020, but the implementing acts are still being developed. The Saudi Central Bank (SAMA) circulated a draft of the regulation in August 2023 for public consultation. To our knowledge, there was no significant progress since then.

In Turkiye, reforms are under development, but the timeline of adoption remains unclear. A few other countries have also looked at the standard for potential adoption. Oman has published its resolution framework but did not request banks to set aside an additional loss absorbing capital buffer.

Finally, Georgia is another country that decided to adopt a resolution regime. The country has already introduced legislation to create a resolution fund and introduced a minimum for own funds and eligible liabilities (MREL) for the three systemically important banks of the country. It has also dedicated resources to the Resolution and Liquidation Division within the central bank and is in the process of putting the resolution framework into effect.

Why Emerging Markets Are Proving Cautious

We see three main reasons behind the cautious approach of most EMs in adopting resolution regimes.

Financial stability concerns could arise

This is particularly true for countries with a strong track record of government support to prevent banking failure or systemic crises. If they were to move to resolution regimes, they would most likely close the door to such support, potentially providing scope for the emergence of financial stability concerns. In emerging markets in EMEA, we assess seven countries as either highly supportive or supportive of their banking systems.

Specifically, we assess four out of the six Gulf Cooperation Council (GCC) countries as highly supportive toward their banking systems. In Oman and Bahrain, we consider the authorities' capacity to support their banking system as weaker than that of the other GCC countries and therefore we do not incorporate any rating uplift in our ratings of systemically important banks in these two countries.

For the four others, we believe any change in government support expectations might have some negative impact on depositors' and investors' perception of risks. For a long time, investors and depositors perceived government support as a stabilizing factor for banks' creditworthiness, given the strong balance sheets of some of these governments and the strong track record of support provision when it was needed.

The most recent demonstration of such support was when Qatar was boycotted by some of its neighbors, leading to external funding outflows for Qatar in excess of $20 billion that were replaced by local funding from the government and its related entities in excess of $40 billion. This also explains the significant external debt that the Qatari banking system maintains and its relative stability through episodes of increased capital market volatility.

Adopting resolution regimes could increase the volatility of a portion of this external debt, particularly if external creditors perceive that such a move would result in a lower likelihood of support from the government. Therefore, managing the narratives around the move will be important.

Chart 1

Capital market depth and costs

With resolution regimes, banks are typically required to build or maintain a substantial additional buffer of instruments that can be used to absorb losses or recapitalize the bank beyond their capital requirement. These are long-term debt instruments sourced from local or international capital markets.

In the broader context of emerging markets in EMEA, only South Africa has a broad and deep local capital market that could absorb such issuance. For all the other markets, the issuance of capital market instruments is either happening in foreign currency--for example, in the Gulf where local currencies are pegged to the U.S. dollar--or not happening at all. In our view, many EM banking systems have limited access to international capital markets. As such, even if regulators were to require additional loss-absorbing buffers, sourcing these instruments might prove challenging unless the authorities start by developing local capital markets.

The cost related to building the additional loss-absorbing buffer is also another key consideration, particularly as EM banking systems are typically sufficiently funded by deposits. Finally, raising these instruments on the international capital markets may increase banks' exposure to foreign currency risk, particularly for countries with unstable currencies.

Evolving local regulation and standards

Most of the banking systems and business models in EMs in EMEA are generally simple. Banks remain at the heart of financial intermediation in most of these countries, raising deposits on the one hand and recycling the money in local lending and government paper on the other.

For many of them, we see significant weaknesses either in banking regulation and supervision or the quality of governance and transparency within the banking system. In fact, we assess the institutional framework of 35% of the 23 EMEA EM jurisdictions as extremely high risk (see chart 2).

However, some regulators are also relatively more advanced in their supervision frameworks and approaches. For example, in the GCC, all the banking systems have adopted Basel III with relatively stringent requirements on the capital side. South Africa is another country where the Prudential Authority (PA) has been an early adopter of global best practices.

Countries like Tunisia and Iraq, however, are lagging. For Tunisia, banks continue to report their capital adequacy ratios under outdated standards, and we view the system as significantly undercapitalized. To their credit, in their 2016 banking law, the authorities created a framework for bank resolution that was tested in 2022 with the resolution of Banque Franco Tunisienne, a very small institution that had financial difficulties for a long time. Iraq is another example where large banks are reportedly undercapitalized.

Some countries, such as Azerbaijan and Kazakhstan, are implementing reforms to improve the quality of their regulation and supervision. For others, the lack of transparency, the volatile institutional landscape, and political interference are among the factors that shape our assessment. Therefore, we expect that for the majority of these countries and where no legal resolution framework exists, regulators will continue to use ad hoc solutions to face any banking crisis. In some countries, for example, banks are allowed to operate while in breach of the minimum capital adequacy requirements for a prolonged period. Also, in some countries, the legal framework that allows the regulators to intervene and take direct action for banks facing difficulties may need some strengthening.

Chart 2

Why Recovery Matters

Recovery planning's main goal is to enable banks to restore their creditworthiness through specific actions prior to the need of a bailout from the authorities. Recovery would typically take the form of recapitalization or other restructuring, such as asset sales. As such, it is relevant way for any bank to improve resilience.

Making a bank truly resolvable is a long process. Regulators use their authority to force banks to remedy any barriers to an effective resolution, such as obliging banks to enhance their bail-in buffers to facilitate recapitalization and organizational changes.

What Comes Next?

For South Africa, where we consider the resolution regime to be effective, we could incorporate up to two notches of ratings uplift for banks, depending on the amount of ALAC that they issue. However, most bank ratings in South Africa are constrained by the sovereign foreign currency rating. Unless banks pass a hypothetical sovereign default stress test, we do not rate banks above the sovereign rating. Therefore, we expect that any uplift the banks can get would be still constrained by the sovereign rating.

Georgia will continue to harmonize its legislation with the European Bank Recovery and Resolution Directive (BRRD). For the GCC, the question remains whether the authorities will keep the possibility of direct intervention and support provision for banks that need such support.

We currently incorporate two to four notches of uplift in the ratings on eligible banks due to government support. If countries were to move to resolution regimes and if we were to consider these effective, we would still consider the highest number of notches due to either ALAC or government support, assuming we keep the same view on their propensity to support their systemically important banks and that support provision is still possible.

If the approach changes and direct support is no longer an option, thus leading to a revision in our view of the support assessment to "uncertain," we may incorporate fewer notches of support into our ratings, depending on the amount of ALAC accumulated. The upper limit we would incorporate is two notches of uplift. We therefore expect that any move from the regulators will carefully consider the potential implications in terms of the perception of the creditworthiness of the banking systems.

For rated banks in Saudi Arabia, we currently do not incorporate more than two notches of support in our bank ratings due to the proximity between banks' intrinsic creditworthiness and the sovereign rating. Therefore, even if we were to change our view of the propensity of the authorities to support their banking system, the impact on bank ratings may be neutral if they set aside a sufficient buffer of ALAC.

We are also aware of a few countries in Central Asia and the Caucasus region that are working toward the adoption of resolution regimes--with some more advanced than others, including Armenia, Azerbaijan, and Kazakhstan. For other countries, if they decide to move in this direction, we think the adoption may take a long time to materialize.

Related Criteria

• Financial Institutions Rating Methodology, Dec. 9, 2021

Related Research

• South Africa's Bank Resolution Framework Will Reduce Systemic Risk, March 11, 2025
• Asia-Pacific Banking: Despite Different Strokes, Government Lifeline Is Still Likely, April 4, 2019
• Ending Too Big To Fail: Different Journeys, Different Destinations, April 4, 2019
• Recovery And Resolution Regimes In The Gulf Cooperation Council: More Questions Than Answers, Feb. 11, 2018