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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. Introduction Developments/activities in banking supervision Developments related to banking legislation
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Presentation to the Portfolio Committee on Finance Annual Report 2006Bank Supervision DepartmentCape Town7 August 2007 Mr Errol Kruger Registrar of Banks
Agenda • Introduction • Developments/activities in banking supervision • Developments related to banking legislation • Salient information on the South African banking sector • Trends in South African banks
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.
Outline • 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
Description ofthe 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.
Background to Core Principles • Core Principles originally published in 1997 • Core Principles Methodology - published in 1999 - allows for uniform assessment • Developed by the Basel Committee on Banking Supervision at request of G7 Finance Ministers • Developed in close cooperation with supervisors across the world • IMF and World Bank monitors implementation of Core Principles
Uniqueness of the Core Principles • The first comprehensive document dealing with banking supervision • 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
Objectives of the Core Principles • 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
Myths of the Core Principles The Core Principles do not: • provide an instant “magic potion” for countries with inexperienced supervisors or weak supervisory regimes • repair economic/financial mismanagement • change (reduce) the responsibilities of the supervisory authority • guarantee that no bank will fail
Revision of the Core Principles • Significant developments in banking and bank regulation since 1997, inter alia: • Enhanced risk management • Corporate governance issues • Anti-money laundering and terrorist financing concerns • 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”
Revision of the Core Principles (cont.) • Establishment of the Basel Core Principles Reference Group • BCP Reference Group consisted of members from Basel Committee and International Liaison Group • South Africa participated • Revised Core Principles published in October 2006
Compliance with revised Core Principles • Bank Supervision Department performed a Core Principles self-assessment in 2006 • Objectives of self-assessment • Benchmark South African banking system against revised Core Principles • Conduct comprehensive gap analysis • Develop action plans to eliminate identified shortcomings • Project commenced first half 2006 - prior to finalisation of revised Core Principles, further changes therefore closely monitored and considered
Compliance with revised Core Principles (cont.) • Project team established to co-ordinate and steer assessments • Conservative approach, every compliance grading supported by one or more of: • Banks Act, 1990 • Regulations relating to Banks • Supervisory process • Culminated in workshop attended by all staff • Project team continues to meet to assess implementation of action plans
Individual banks’ induction and training programmes • Department continued to focus on banks’ corporate governance processes in 2006 • Department analysed banks’ induction and training programmes • diverged significantly • Banks’ operations are unique, however bank directors should be exposed to homogenous development programmes
Director development programme for banking sector • Department communicated divergence of induction and training programmes to The Banking Association South Africa • No bank-specific development programme available • Banking Association requested University of Pretoria to develop director development programme • Development programme consists: • Introductory course • Governance-level risk management course • Leadership forum – focus on “real-life” experience
Director development programme for banking sector (cont.) • 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
Introduction • 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
Accord Implementation Forum • 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 • AIF stakeholders intensified efforts during 2006 • 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
Overview of Basel II approaches • Basel I did not allow for different approaches • Basel II offers menu of approaches, particularly for credit risk and operational risk • Advanced approaches are subject to approval from the Department • Applications to be processed during 2007
Conclusion • Significant progress made with Basel II project • Supervisors worldwide face many challenges in ensuring effective and appropriate implementation for their respective countries • 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
Compliance with Financial Intelligence Centre Act, 1990 • 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 • All banks have made good progress in implementing anti-money laundering and counter-terrorist financing measures • Role of internal audit function proposed to be extended to include FICA requirements
International supervisory interaction • Meetings held with supervisors in Argentina, Mauritius and Namibia • Department attended seminar hosted by Indonesian supervisory authorities • Department maintained participation in Basel Committee working groups and Financial Stability Institute training initiatives • Department participated in IMF and World Bank events
Proliferation of credit in South Africa • Public exposed to new names linked to banking services • Confusing, banking names linked to retail outlets, cellular phone service providers andothers • 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
Combating illegal deposit taking • Department responsible for regulation and supervision of registered banks • Department not responsible for registering or supervising investment schemes • 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
Training of Department’s staff • 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 • Seminars of national supervisory authorities in the United Kingdom and United States • Ongoing Basel II training • Department hosted and presented Intermediate course in risk-based supervision, attended by SADC countries
Other supervisory developments in 2006 • Department attended International Conference of Banking Supervisors in Mexico • International Monetary Fund conducted Article IV consultation • Market-risk and liquidity risk management in South African banks • Joint Forum’s working stream on the supervision of financial conglomerates • Implementation of the Auditing Profession Act, 2005
Introduction • Department continued to ensure legal framework remains relevant and current • Department reviews banking legislation • Banks Act, 1990 • Mutual Banks Act, 1993 • Regulations to above Acts • Incorporation of guidelines of Basel Committee and other international standard-setters, inter alia: • Basel II • Core Principles for Effective Supervision
Banks Act, 1990 • Banks Amendment Bill through a thorough consultation process in 2006 • Accord Implementation Forum • Standing Committee approval • Ministerial approval • During 2007 Bill approved by Cabinet and Portfolio Committee on Finance
Regulations relating to Banks • Drafting of proposed Regulations managed via AIF structure • Draft 3 of proposed Regulations submitted to Minister of Finance in August 2006 for initial review • Revised draft discussed at Standing Committee meeting in first half 2007, subsequently revised and issued for public comment in first half 2007 • Final draft to be tabled at August 2007 Standing Committee meeting for approval • Following above approval, to be submitted to Minister of Finance for consideration and ultimate approval
Salient information on the banking sector – May 2007 The banking system consists of: • Registered banks 20 • Mutual banks 2 • Local branches of foreign banks 14 • Foreign banks with approved local representative offices 43
Salient information on the banking sector* * Excludes representative offices
Composition of non-bank deposits according to maturity – R1 353,2 billion