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BANKS AMENDMENT BILL (2007)

BRIEFING TO THE PORTFOLIO COMMITTEE ON FINANCEBRIEFING TO THE PORTFOLIO COMMITTEE ON FINANCENATIONAL TREASURY AND THE BANK SUPERVISION DEPARTMENT OF THE NATIONAL TREASURY AND THE BANK SUPERVISION DEPARTMENT OF THE

SOUTH AFRICAN RESERVE BANKSOUTH AFRICAN RESERVE BANK12 June 200712 June 2007

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BACKGROUND

• Key considerations that necessitated the amendments:

Compliance with Basel II (International standard)

Clarifications / legal certainty

Industry developments

Basel Core Principles for effective banking

supervision

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PROCESSIn respect of current Bill:

• Consultative process (National Treasury, SARB, Banks and SAICA)

• Approved by the Standing Committee for the Revision of the Banks Act during

December 2006

• Approved by Cabinet on 7 February 2007

• Published for public comment during February/March 2007- no comments received

from the public

• Introduced into Parliamentary process: Bill reviewed and certified by State Law

Advisors in April 2007.

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OVERVIEW OF PROPOSED

AMENDMENTS

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SIGNIFICANT PROPOSED AMENDMENTS

1. Co-operation between supervisors (section 4(3))

2. Increased duties of the Registrar (sections 4(5)-4(7))

3. Formal communication with banks (sections 6(4) – 6(6))

4. Capital adequacy (sections 1 & 70)

5. Consolidated supervision (sections 30, 50, 70A, 74)

6. Concentration risk (section 73)

7. Approval of rating agencies (section 85A)

8. Shareholding in banks & controlling co’s (section 37)

9. Subsidiaries and other interests (section 52)

10. Transfer of assets & liabilities of banks (section 54)

11. Control the activities of unregistered persons (section 84)

12. Imposing penalties on banks (section 91A)

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Co-operation between supervisors

Current law:• The Act does not prohibit co-operation or MOU’s

• But it does not specifically provide for it

Motivation:• Basel II requires co-operation between supervisors:-

– Home- and consolidating (Host) supervisors

– Exchange information on on-site examinations

– Avoid duplication of supervisory tasks

– Key to effective consolidated supervision

Proposed amendment (Section 4(3)):• To specifically provide for a formal written co-operation agreement to

facilitate the exchange of information, on-site investigation and to minimise the duplication of supervisory tasks

• Section 1 defines “home-” and “consolidating supervisor”

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Increased duties of the supervisor

Current law:• New provisions

Motivation:• Basel II requires supervisors to:-

– implement and maintain a supervisory review process;– assign assessment by rating agencies to risk weights;– implement various items of national discretion; and – publicly disclose certain information.

Proposed insertions (Sections 4(4)-4(7)):• Provide for the Registrar to implement and maintain supervisory review process,

including on-site & off-site examinations, discussions with board and executive management of banks, controlling co’s, subsidiaries & branches

• Provide for the Registrar to assign risk weights to assessments by rating agencies, the details to be prescribed by regulation

• Provide for the Registrar to implement certain national discretion items after consultation with banks and to disclose such implementation

• Provide for the Registrar to publicly disclose criteria relating to capital assessments, factors relating to setting capital adequacy ratios in excess of norm, process and criteria for recognising rating agencies.

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Formal communication with banks

Current law:• The Act provides that a circular may be issued furnishing banks with guidelines

regarding the application and interpretation of the provisions of the Act

Motivation:• Basel II requires supervisory duties in respect of banks, controlling co’s, rating

agencies and auditors• Technical complexities of Basel II will require mandatory directives by the

supervisor from time to time

Proposed amendments (Sections 6(4)-6(6)):• Distinguish between:-

– Circulars = guidelines regarding the application and interpretation of the provisions of the Act (not mandatory)

– Guidance notes = information in respect of market practices or developments (not mandatory)

– Directives = orders/instructions (mandatory) after consultation with the affected parties, to prescribe processes or procedures to be followed necessary in the administration of the Act.

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Capital adequacy

Current law:• The Act provides for initial capital of a bank and an enabler that the

calculation of capital adequacy be prescribed by regulation

Motivation:• Basel II provides various options and approaches to calculate capital,

subject to certain conditions• The legal framework to provide for all options and approaches

Proposed amendments (Sections 1 & 70):• Inserts an enabler to provide for all options and approaches available

under Basel II to be prescribed by regulation• Section 1 defines the following terms to reflect Basel II requirements:-

– “Allocated capital & reserve funds”, “Primary share capital”, “Primary unimpaired reserve funds”, “Qualifying capital and reserve funds”, “Secondary capital”, “Secondary unimpaired reserve funds”, “Tertiary capital”

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Consolidated supervision

Current law:• The Act provides for the regulation and supervision of controlling co’s, banks

and their various subsidiaries and branches

Motivation:• Basel II requires regulation and supervision on a fully consolidated basis,

including:-– the bank controlling company– every tier within the banking group– capturing risks of the whole banking group

Proposed amendments (Sections 30, 50, 70A & 74):• Provide for disclosure of approvals of certain applications by banks, controlling

co’s, branches, subsidiaries and rating agencies• Controlling co’s investments and loans and advances to be restricted as

prescribed by regulation• Provide for capital requirements for controlling companies• Provide procedure & sanctions when controlling co fails to comply

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Concentration riskCurrent law:• The Act provides for limits relating to large exposures, i.e loans to

individual persons

Motivation:• Basel II requires concentration of loans to be managed by banks,

including risks to counterparties, industries, sectors and geographical areas

Proposed amendment (Section 73):• Provides for concentration risk, incorporating Basel II requirements

• Also provides for the Registrar, with the consent of the Minister, to grant exemptions

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Approval of rating agencies

Current law:• New provision

Motivation:• Basel II requires supervisors to approve eligible institutions in terms

of set criteria• Banks may only rely on assessment of eligible institutions in

calculating capital requirement

Proposed insertion (Section 85A):• Provides for application and approval process • Section 1 defines-

– “Eligible institution” (external credit assessment institution or export credit agency)

– “External credit assessment”

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Shareholding in banks and controlling co’s

Current law:• The Act restricts the acquisition of shares in banks and controlling

co’s. Application is required for acquisitions above 15%, 24%, 49% and 74% of the total nominal value of issued shares

Problem:• Various forms of hybrid instruments may be issued that qualify as

capital and certain shareholder agreements – could result in:– a single shareholder owning less than threshold of nominal value

of shares– but breaching the thresholds in respect of voting rights

Proposed amendment (Section 37):• Provides for threshold to be applicable also to voting rights

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Subsidiaries and other interests

Current law:• The Act restricts the expansion policies of banks and controlling co’s.

Application and approval is required to establish subsidiaries, branches and JV’s

Problem:• Enforcement of provisions is problematic due to unclear wording.• Regulation of the establishment of divisions with third parties using

the name of the bank proved ineffective

Proposed amendment (Section 52):• Provides for the clarification of the wording “establish or acquire”• Provides for an application and approval process regarding the

establishment of divisions with third parties • Section 1 defines “division”

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Transfer of assets and liabilities of banks

Current law:• The Act provides that any transfer of assets and liabilities of a bank

requires the approval of the Minister

Problem:• Interpretation difficulties relating to the term “assets and liabilities” • Role of the Minister to be clarified, not necessary in every case

Proposed amendment (Section 54):• Provides for the transfer of assets, liabilities or assets and liabilities• Provides for Minister’s approval for transfer of more than 25% of

assets, liabilities or assets and liabilities • 25% and below requires approval by the Registrar

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Control the activities of unregistered persons

Current law:• The Act provides that the Registrar may require information and inspect

persons suspected of contravening the Banks Act (taking deposits from the general public)

• If the Registrar is satisfied that deposits were illegally taken, he/she may issue order to repay – and appoint managers to manage repayment process

Problem:• Liquidation/sequestration of a person whilst under investigation/management

disrupts work done – results in liquidator taking control • Higher fees of liquidators are detrimental to depositors

Proposed amendment (Section 84):• Provides that a person under investigation/management only be

liquidated/sequestrated –– with the leave of the Court; and – the Registrar having been notified of the application beforehand

• Provides that the Registrar may apply for liquidation/sequestration• The Master shall appoint person as liquidator nominated by the Registrar

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Imposing penalties on banks

Current law:• New provision

Motivation:• The revised Core Principles for Effective Banking Supervision issued

by the Basel Committee on Banking Supervision requires that supervisors should have power to impose penalties on banks & controlling co’s

Proposed insertion (Section 91A):• Provides that the Registrar may impose penalties on banks &

controlling co’s that have contravened the Act–– R10 million per day of non-compliance; – after due process– reviews/appeals available to banks/controlling co’s– the Registrar may publish names and penalties– not a conviction – but no prosecution competent

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END OF PRESENTATION

CONTACT DETAILS:

National Treasury:

Jonathan Dixon, Jo-Ann FerreiraChief Director: Financial Sector Policy Unit Chief Director: LegislationJonathan.Dixon@treasury.gov.za Jo-Ann.Ferreira@treasury.gov.za(012) 315 5808 (012) 315 5263

Bank Supervision Department:

Errol Kruger Michael BlackbeardRegistrar of Banks Deputy Registrar of BanksErrol.Kruger@resbank.co.za Michael.Blackbeard@resbank.co.za(012) 313 3601 (012) 313 3484