Presentation to the Portfolio
Committee on Finance
Annual Report 2006
Bank Supervision Department
Cape Town
7 August 2007
Mr Errol Kruger
Registrar of Banks
Agenda
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Introduction
Developments/activities in banking
supervision
Developments related to banking legislation
Salient information on the South African
banking sector
Trends in South African banks
2
Introduction
The Bank Supervision Department executes the
functions assigned to the Registrar of Banks
under the Banks Act, 1990 and its mission is:
To promote the soundness of the banking
system through the effective and efficient
application of international regulatory and
supervisory standards.
3
Developments/activities in
banking supervision
4
Outline
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Core Principles for Effective Banking
Supervision
Development of bank directors
New Capital Accord (Basel II)
Compliance with anti-money laundering
legislation
International supervisory interaction
Proliferation of credit in South Africa
Combating illegal deposit taking
Training of Department’s staff
Other
5
Core Principles for Effective
Banking Supervision
6
Description of the Core Principles for
Effective Banking Supervision
The Core Principles comprise twenty-five
fundamental requirements, covering various
components and aspects of a bank supervisory
system, that need to be complied with for a
banking supervisor to operate effectively and for
banks to operate in a safe and sound manner.
7
Background to Core Principles
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Core Principles originally published in 1997
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Core Principles Methodology - published in 1999 allows for uniform assessment
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Developed by the Basel Committee on Banking
Supervision at request of G7 Finance Ministers
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Developed in close cooperation with supervisors
across the world
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IMF and World Bank monitors implementation of
Core Principles
8
Uniqueness of the Core Principles
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The first comprehensive document dealing with
banking supervision
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Resulted in the establishment of first non-G10
Basel Committee working group, i.e. the Core
Principles Liaison Group (renamed December
2006 as International Liaison Group - ILG)
– Originally tasked to discuss and oversee the
application of Core Principles
– Developed into a high-level forum for the Basel
Committee liaison with senior non-G10 supervisors,
the IMF and World Bank
• South Africa active member of ILG
9
Objectives of the Core Principles
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Provision of sufficient powers, independence
and resources to supervisory authorities
Provision of a roadmap for a sound supervisory
framework
Strengthening legal framework
Establishment of appropriate checks and
balances
Establishment of good governance practices
10
Myths of the Core Principles
The Core Principles do not:
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provide an instant “magic potion” for countries
with inexperienced supervisors or weak
supervisory regimes
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repair economic/financial mismanagement
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change (reduce) the responsibilities of the
supervisory authority
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guarantee that no bank will fail
11
Revision of the Core Principles
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Significant developments in banking and bank
regulation since 1997, inter alia:
– Enhanced risk management
– Corporate governance issues
– Anti-money laundering and terrorist financing
concerns
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Lessons from the IMF/World Bank FSAPs –
more precision required on certain issues
However, the objective was to update and not
to “change the goalposts”
12
Revision of the Core Principles (cont.)
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Establishment of the Basel Core Principles
Reference Group
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BCP Reference Group consisted of members
from Basel Committee and International
Liaison Group
– South Africa participated
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Revised Core Principles published in October
2006
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Compliance with revised Core Principles
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Bank Supervision Department performed a Core
Principles self-assessment in 2006
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Objectives of self-assessment
– Benchmark South African banking system against
revised Core Principles
– Conduct comprehensive gap analysis
– Develop action plans to eliminate identified
shortcomings
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Project commenced first half 2006 - prior to
finalisation of revised Core Principles, further
changes therefore closely monitored and
considered
14
Compliance with revised Core Principles
(cont.)
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Project team established to co-ordinate and
steer assessments
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Conservative approach, every compliance
grading supported by one or more of:
– Banks Act, 1990
– Regulations relating to Banks
– Supervisory process
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Culminated in workshop attended by all staff
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Project team continues to meet to assess
implementation of action plans
15
Development of bank directors
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Individual banks’ induction and training
programmes
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Department continued to focus on banks’
corporate governance processes in 2006
Department analysed banks’ induction and
training programmes
– diverged significantly
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Banks’ operations are unique, however bank
directors should be exposed to homogenous
development programmes
17
Director development programme for
banking sector
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Department communicated divergence of
induction and training programmes to The
Banking Association South Africa
– No bank-specific development programme available
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Banking Association requested University of
Pretoria to develop director development
programme
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Development programme consists:
– Introductory course
– Governance-level risk management course
– Leadership forum – focus on “real-life” experience
18
Director development programme for
banking sector (cont.)
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Development programme satisfies needs of
new and experienced directors
Comprehensive programme – provides solid
foundation for new directors entering banking
sector
Banks Act Circular 9/2006
– Banks’ chairpersons encouraged to utilise
programme
– Development programme supplementary to
individual banks’ internal programmes
19
New Capital Accord (Basel II)
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Introduction
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Efficient management of capital essential for
stability of individual banks and banking
system
Capital management – part of overall risk
management framework
Basel II – Basel Committee’s revised guidance
on regulatory capital
Basel II to be implemented by all South African
banks on 1 January 2008
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Accord Implementation Forum
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Accord Implementation Forum (AIF) – body
established to pursue sound and robust
implementation of Basel II
– South African Reserve Bank, all commercial banks,
National Treasury, South African Institute of
Chartered Accountants and Banking Association
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AIF stakeholders intensified efforts during 2006
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Department engaged actively with AIF working
group chairpersons following November 2006
issuing of draft 3 of the proposed Regulations
– Conclude high-priority issues to be incorporated in
draft 4 of Regulations
22
Overview of Basel II approaches
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Basel I did not allow for different approaches
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Basel II offers menu of approaches,
particularly for credit risk and operational risk
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Advanced approaches are subject to approval
from the Department
– Applications to be processed during 2007
23
Overview of Basel II approaches –
Credit risk
24
Overview of Basel II approaches –
Operational risk
25
Conclusion
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Significant progress made with Basel II project
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Supervisors worldwide face many challenges
in ensuring effective and appropriate
implementation for their respective countries
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Chairman of Basel Committee
– Supervisors have utilised supervisory tools in the
past which fortunately will still be relevant for
Basel II implementation, such as sound
judgement
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Compliance with Financial Intelligence
Centre Act, 1990
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Department performed review to verify compliance
with requirements of Financial Intelligence Centre
Act (FICA)
– Largest 5 banks reviewed in 2005
– Similar review of remaining local banks and selected
branches of foreign banks in 2006
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All banks have made good progress in
implementing anti-money laundering and counterterrorist financing measures
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Role of internal audit function proposed to be
extended to include FICA requirements
27
International supervisory interaction
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Meetings held with supervisors in Argentina,
Mauritius and Namibia
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Department attended seminar hosted by
Indonesian supervisory authorities
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Department maintained participation in Basel
Committee working groups and Financial
Stability Institute training initiatives
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Department participated in IMF and World
Bank events
28
Proliferation of credit in South Africa
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Public exposed to new names linked to banking
services
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Confusing, banking names linked to retail outlets,
cellular phone service providers and others
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Form – joint ventures or divisions of banks not
stand-alone initiatives
Uncertainty as regards origin and soundness of
above initiatives
Supervisory viewpoint – Department ensures
prudent risk-management of above joint ventures
or bank divisions
29
Combating illegal deposit taking
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Department responsible for regulation and
supervision of registered banks
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Department not responsible for registering or
supervising investment schemes
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However, Banks Act – powers to control
activities of unregistered persons conducting
banking business
Approximately 40 unregistered businesses or
investment schemes investigated by
Department in 2006
30
Training of Department’s staff
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IMF meeting on Financial Soundness Indicators
in Brazil
Financial Stability Institute’s (FSI) International
Banking Supervision seminar in Switzerland and
subscription to FSI Connect – web-based training
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Seminars of national supervisory authorities in
the United Kingdom and United States
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Ongoing Basel II training
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Department hosted and presented Intermediate
course in risk-based supervision, attended by
SADC countries
31
Other supervisory developments in 2006
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Department attended International Conference of
Banking Supervisors in Mexico
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International Monetary Fund conducted Article IV
consultation
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Market-risk and liquidity risk management in
South African banks
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Joint Forum’s working stream on the supervision
of financial conglomerates
Implementation of the Auditing Profession Act,
2005
32
Developments related to
banking legislation
33
Introduction
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Department continued to ensure legal
framework remains relevant and current
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Department reviews banking legislation
– Banks Act, 1990
– Mutual Banks Act, 1993
– Regulations to above Acts
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Incorporation of guidelines of Basel Committee
and other international standard-setters,
inter alia:
– Basel II
– Core Principles for Effective Supervision
34
Banks Act, 1990
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Banks Amendment Bill through a thorough
consultation process in 2006
– Accord Implementation Forum
– Standing Committee approval
– Ministerial approval
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During 2007 Bill approved by Cabinet and
Portfolio Committee on Finance
35
Regulations relating to Banks
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Drafting of proposed Regulations managed via
AIF structure
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Draft 3 of proposed Regulations submitted to
Minister of Finance in August 2006 for initial
review
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Revised draft discussed at Standing Committee
meeting in first half 2007, subsequently revised
and issued for public comment in first half 2007
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Final draft to be tabled at August 2007 Standing
Committee meeting for approval
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Following above approval, to be submitted to
Minister of Finance for consideration and
ultimate approval
36
Salient information on the banking sector
May 2007
37
Salient information on the banking
sector – May 2007
The banking system consists of:
– Registered banks
– Mutual banks
– Local branches of foreign banks
– Foreign banks with approved
local representative offices
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2
14
43
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Salient information on the banking sector*
Dec
2005
Dec
2006
May
2007
Total assets (R billions)
1 677,5
2 075,1
2 221,5
Loans and advances (R billions)
1 338,3
1 721,9
1 880,9
Funding related liabilities to the public (R billions)
1 358,9
1 694,1
1 825,4
Non-bank funding (R billions)
1 101,5
1 353,2
1 471,5
133,3
164,9
181,0
Capital adequacy ratio (%)
12,7
12,3
12,4
Return on equity – smoothed (%)
15,2
18,3
18,8
Return on assets – smoothed (%)
1,2
1,4
1,4
Efficiency ratio – smoothed (%)
66,3
58,9
57,2
Non-performing loans (R billions)
20,1
18,8
22,0
Non-performing loans as % of loans and advances
1,5
1,1
1,2
Specific provisions as % of non-performing loans
59,4
54,4
47,3
Capital and reserves (R billions)
* Excludes representative offices
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Distribution of total banking sector
assets (R billions)
Market Share %
May
2007
Dec
2005
Dec
2006
May
2007
5 Largest banks
1 502,6
1 862,3
1 992,9
89,7
Standard Bank
436,3
530,6
564,4
25,4
Absa
358,6
446,4
483,3
21,8
FirstRand
307,3
388,2
414,9
18,7
Nedbank
303,2
379,3
399,5
18,0
Investec
97,1
117,8
130,9
5,9
175,0
212,8
228,6
10,3
1 677,5
2 075,1
2 221,5
100
Other
Total Banks
40
Trends in South African banks
December 2006
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Balance-sheet structure
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Aggregate balance sheet – R2 075,1 billion
43
Composition of liabilities – R2 075,1 billion
44
Composition of non-bank deposits –
R1 353,2 billion
45
Composition of non-bank deposits
according to maturity – R1 353,2 billion
46
Composition of total assets – R2 075,1 billion
47
Total loans and advances – R1 735,8 billion
48
Composition of loans and advances –
R1 735,8 billion
49
Capital adequacy
50
Capital-adequacy ratio – 12,3 per cent
51
Distribution of banks in terms of capital
adequacy
52
Qualifying capital and reserves –
R153,3 billion
53
Risk profile of on and off-balance-sheet
items
54
Profitability
55
Composition of the income statement
56
Interest margin – 3,4 per cent
57
Growth in staff expenses, number of
employees and number of branches
58
Efficiency ratio of the banking sector –
58,9 per cent
59
Efficiency of banking institutions
according to asset value
60
Profitability (12-month smoothed average)
61
Liquidity risk
62
Statutory liquid assets (actual versus
required) – R96,3 billion vs R86,6 billion
63
Deposits from banks’ ten largest
depositors - R389,4 billion (as percentage
of total funding – R1 694,1 billion)
64
Anticipated maturity of short-term funding
– R384,8 billion (as percentage of total
funding – R1 694,1 billion)
65
Derivative contracts
66
Turnover in derivative contracts –
R2 618,2 billion
67
Total unexpired derivative contracts –
R9 272,2 billion
68
Credit risk
69
Total banking-sector overdues –
R18,8 billion
70
Net overdues (R8,5 billion) as
percentage of net qualifying capital
and reserves (R153,3 billion)
71
Composition of overdues – R18,8 billion
(as percentage of loans and advances –
R1 735,8 billion)
72
Analysis of overdues – R18,8 billion
73
Coverage ratio (specific provisions and
security as percentage of gross overdues)
74
Large exposures (granted – R511 billion and
utilised – R266 billion) percentage of net
qualifying capital and reserves – R153,3 billion
75
Asset performance
76
Currency risk
77
Maximum effective net open foreigncurrency position as percentage of net
qualifying capital and reserves
78
Position in foreign-currency instruments
US$14,9 billion vs –US$14,6 billion
79
Thank you
for your attention
80