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Aligning Financial Regulatory Architecture with Country Needs: Lessons from International Experience. World Bank Conference, New Delhi, 5 June 2004 Choosing an appropriate regulatory structure – South Africa’s experience Andre Bezuidenhout South African Reserve Bank.
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Aligning Financial Regulatory Architecture with Country Needs: Lessons from International Experience World Bank Conference, New Delhi, 5 June 2004 Choosing an appropriate regulatory structure – South Africa’s experience Andre Bezuidenhout South African Reserve Bank
CHOOSING AN APPROPRIATE REGULATORY STRUCTURE - SOUTH AFRICA’S EXPERIENCE OVERVIEW • South Africa’s financial regulatory environment • The need for change • The process to review the regulatory environment • Alternative approaches • The current status and likely prognosis
SOUTH AFRICA’S FINANCIAL REGULATORY ENVIRONMENT SOUTH AFRICA AT A GLANCE • Population - 45 million. Much diversity • Ten years of democracy • Rich in minerals – commodity producer • GDP US$150bn, per capita US$3300, growth 2% p.a. • Inflation (CPIX): 4.4%, within target range • Sound macro economic fundamentals
SOUTH AFRICA’S FINANCIAL REGULATORY ENVIRONMENT DUAL CHARACTER OF THE FINANCIAL SYSTEM • Highly developed financial sector - Sophisticated, liquid forex and capital markets -Investment grade rating - Strong banking system - Generally sound fundamentals • Emerging market characteristics - Unemployment, poverty, crime - Low savings - Limited access to basic financial services - High HIV/Aids infection rate - Currency volatility
SOUTH AFRICA’S FINANCIAL REGULATORY ENVIRONMENT THE CURRENT REGULATORY ARCHITECTURE Partially integrated • Systemic regulation/oversight: SARB (FinStab) • Prudential regulation/supervision: - Banks SARB (BSD) - Insurance, P/F, Securities FSB • Conduct regulation: - Banks - Industry association - Others - FSB
THE NEED TO CHANGE ISSUES AND CONSIDERATIONS FOR CHANGE • Technical/product innovations • Deregulation/liberalisation/Internationalisation • Conglomeration, complexity of risk management • Concerns about regulatory effectiveness • Expansion of objectives of regulation: - Facilitate broad access to financial services - Promote public awareness and education - Reduce financial crime • Need to reform corporate law and accounting/ auditing profession
THE NEED TO CHANGE • EVENTS THAT LED TO A NEED FOR CHANGE • Several small bank failures • Commissions of enquiry • FSAP • A bank liquidity mini-crisis • Second tier banks • Deposit insurance debate
THE PROCESS TO REVIEW THE REGULATORY ENVIRONMENT PROCESS TO REVIEW THE REGULATORY ENVIRONMENT Apr 1999: Regulation Round-Table Feb 2000: MoF announces possibility of single regulator Dec 2000: Multi-lateral workshop of Policy Board “Alternative Financial Regulatory Architectures for SA” Mar 2001: Second Multi-lateral workshop “Financial Stability and the Regulatory Architecture” May 2001: Policy Board recommendations to MoF Feb 2002: MoF re-affirms intentions Aug 2002: Governor’s Address expresses concerns
ALTERNATIVE APPROACHES THREE MAINALTERNATIVES • Status quo • Single (Mega?) regulator environment: - Systemic regulation/oversight: SARB - Prudential, all sectors: SFSR - Conduct, all sectors: SFSR (Single regulator would be a new institution outside of the SARB) • Objective driven integration: - Systemic regulation/oversight: SARB - Prudential, all sectors: SARB - Conduct, all sectors: FSB (Unification by objective)
ALTERNATIVE APPROACHES • MERITS AT A GLANCE • Single (mega) regulator: • - Potentially more effective conglomerate supervision • - Less regulatory arbitrage • - Politically expedient/more suited to transformation? • Perceived as more modern and accountable • Objective based split: • - More effective for stability objectives • - Less risk in a crisis • - Less cost of duplication • - Superior integration of monetary and regulatory objectives
THE CURRENT STATUS AND LIKELY PROGNOSIS THE CURRENT STATUS OF DEBATE • Systemic regulation: • SARB is best placed to carry out • Prudential regulation: • Banks and non-bank financial institutions best supervised through a unified prudential regulatory agency • Debate?: Can it be within the SARB? • Conduct regulation: • Market conduct for all financial institutions should be within the same institution • Debate?: Does it have to be the same institution that does prudential regulation?
THE CURRENT STATUS AND LIKELY PROGNOSIS EMERGING CONSENSUS • There is no single correct model • Country specific circumstances should determine most appropriate structure • Benefits of further integration are worthwhile pursuing • But, there are systemic risks that have to be managed • Mega regulator approach likely to benefit conglomerate supervision and perceived public accountability • But with probable reduced effectiveness of banking supervision and increased systemic risk • Joint Task Team to focus on: • Management of change risk • Institutional capacity building • Formal coordination mechanisms