Basel II Registrar of Banks Bank Supervision Department South African Reserve Bank 12 June 2007

1. Basel II Registrar of Banks Bank Supervision Department South African Reserve Bank 12 June 2007

2. Agenda • Introduction • Strategic imperatives • Basel I • Basel II • In a nutshell • In South Africa • Benefits • Conclusion

3. Introduction: Strategic imperatives SARB Mission The reason for the Bank’s existence or primary purpose is the achievement and maintenance of price stability in the South African economic system BSD Mission To promote the soundness of the banking system through the effective and efficient application of internationalregulatory and supervisory standards

4. Introduction: Role of capital in banking • Capital is a buffer against losses, and gives confidence and trust to depositors and rating agencies • Determination of extent of required capital is thus of vital importance

5. Introduction: Basel I - Strengths • Strengthens international banking system • Enhances competitiveness - level playing field • Provides a ‘capital discipline’ • Constitutes an international standard

6. Introduction: Changes since Basel I • Globalisation • Physical geography not an impediment to movement of money • Growth in cross-border trade, finance, investment • Technological advances • Computing power and storage • Networks and communications • Financial engineering (development of highly sophisticated and complex products) The above were the causes that precipitated the need for change

7. Introduction: Outcomes of developments • Risk • Evolving methodologies for managing/measuring risk • New ways to un-bundle and transfer risk • Financial derivative instruments • Securitisation • Data - improvements in technology and telecommunications speed up collection and analysis • Operational risk management as new discipline [Quantifying the risk of losses from failure of internal processes, people and systems as well as losses from external disruptions] • Cause: Barriers of time and geography have been lowered • Effect: Reduced life span of existing competitive strengths • Outcome: Tidal wave of structural change

8. Introduction: Basel I – Development areas • More forward looking approach as a result of a need to: • deal with more complex risk profiles of banks • promote sound risk management of all risks • hold capital against not only credit, but also market and operational risk • ensure that the framework is dynamic • ensure that economic principles are complied with • cater for both qualitative and quantitative aspects of sound risk management • ensure appropriate disclosure

9. Agenda • Introduction • Rationale for Banking Regulation • Strategic imperatives • Basel I • Basel II • In a nutshell • In South Africa • Benefits • Conclusion

10. Overarching General Pillar I Pillar II Pillar III Strengthen financial system Level playing fields & limit regulatory arbitrage Foster sound risk management through the following incentives Regulatory capital Risk sensitivity improved Better alignment of capital with risk Menu of approaches offered Operational risk covered Maintain level of capitalisation Economic capital vs Risks Supervisory Processes Market discipline by improved disclosure Basel II - Objectives

11. Basel II - Approaches Basel II Pillar 1 Minimum capital requirements Pillar 3 Market discipline Pillar 2 Supervisory review process Risk weighted assets Definition of capital Credit risk Operational risk Market risk Core Capital Supplementary capital Basic Indicator Approach Standardised Approach Standardised Approach Standardised Appoach Internal Ratings Based Approach Alternative Standardised Approach Models Approach Advanced Measurement Approach

12. Agenda • Introduction • Rationale for Banking Regulation • Strategic imperatives • Basel I • Basel II • In a nutshell • In South Africa • Benefits • Conclusion

13. Basel II - Stages in implementation GOAL : Implementation of B II by 2008 - 01 - 01 Establishment of a focused BII team in BSD Decision on Basel II Approaches Establishment of the AIF structure “Home straight” 06/2007 – 12/2007 Gap analysis and readiness assessment Initial policy decisions On-site visits Impact studies Implementation plans Familiarisation with Basel II Training Drafting of new legislation WHERE WE STARTED: DECISION IN 2002 TO IMPLEMENT B II

14. Basel II - Timelines 2008 2005 2004 2007 1999 - 2003 2006 June 2004 Issue B II QIS 5.5 CP1-CP3 Gap analysis Solo run Field tests Data Capturing & Storage – Mandatory Requirement QIS 1 - QIS 3 Field tests Parallel run Basel II - implemen-ted Readiness assessment QIS 5 Establish-ment of AIF Implementation – All approaches (1 Jan) Regula-tions Discuss Models with IRB Banks Legislation QIS 4 Supervi-sory Process Parliament Discovery phase Evaluation and assessment Planning Implementation

15. Basel II - Accord Implementation Forum Communication Strategy Task Group Steering Committee Risk Management Sub-Committee Pillar 1 & 2 Disclosure Sub-Committee Pillar 3 Economic Impact Sub-Committee Regulatory Framework Sub-Committee Operational Risk Task Group Cross-border Task Group Economic Study Task Group Market Risk Task Group Capital Adequacy Task Group Disclosure BA Return Task Group ALM Task Group Credit Risk Task Group General Education Task Group Credit Risk BA Return Task Group Securitisation BA Return Task Group Credit Derivative Task Group

16. Basel II – AIF meetings • Representation • Banks • SAICA (South African Institute of Chartered Accountants) • National Treasury • SARB • BSD • The Banking Association • More than 240 meetings were held • Attendance: Average: 12 to 14 people

17. Basel II - Key milestones achieved • QIS 3,4 & 5 completed. • Proposed amendments to Banks Act • Approved by cabinet during February 2007 • Tabled in Parliament during April 2007 • Proposed amendments to Regulations • Draft 4 • Approved by Standing Committee (February 2007) • Published for public comment (30 April 2007) • 2nd formal field tests by banks underway

18. Agenda • Introduction • Rationale for Banking Regulation • Strategic imperatives • Basel I • Basel II • In a nutshell • In South Africa • Benefits • Conclusions

19. Basel II – Benefits • Flexible • Menu of approaches per risk • Supervisory review • Improved corporate governance, including improved risk management • Improved capital management and stronger capital structures • Improved transparency • Improved regulatory framework and supervisory policies, practices and processes

20. Agenda • Introduction • Rationale for Banking Regulation • Strategic imperatives • Basel I • Basel II • In a nutshell • In South Africa • Benefits • Conclusions

21. Conclusions • Overarching goal of Basel II Promotion of improved financial sector stability • Good progress facilitated by interaction between National Treasury, BSD, banks and external auditors • Focused team effort will ensure successful imlementation 1 January 2008 attainable

22. Thank you for your attention