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Presentation to the Portfolio Presentation to the Portfolio Committee on Finance Committee on Finance
Annual Report 2006Annual Report 2006Bank Supervision DepartmentBank Supervision Department
Cape Town
7 August 2007
Mr Errol KrugerMr Errol Kruger
Registrar of BanksRegistrar of Banks
2
AgendaAgendaAgendaAgenda
IntroductionIntroduction Developments/activities in banking Developments/activities in banking
supervisionsupervision Developments related to banking legislationDevelopments related to banking legislation Salient information on the South African Salient information on the South African
banking sectorbanking sector Trends in South African banksTrends in South African banks
3
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.
IntroductionIntroductionIntroductionIntroduction
4
Developments/activities in Developments/activities in banking supervisionbanking supervision
Developments/activities in Developments/activities in banking supervisionbanking supervision
5
OutlineOutlineOutlineOutline
Core Principles for Effective Banking Core Principles for Effective Banking SupervisionSupervision
Development of bank directorsDevelopment of bank directors New Capital Accord (Basel II)New Capital Accord (Basel II) Compliance with anti-money laundering Compliance with anti-money laundering
legislationlegislation International supervisory interactionInternational supervisory interaction Proliferation of credit in South AfricaProliferation of credit in South Africa Combating illegal deposit takingCombating illegal deposit taking Training of Department’s staffTraining of Department’s staff OtherOther
6
Core Principles for Effective Core Principles for Effective Banking SupervisionBanking Supervision
Core Principles for Effective Core Principles for Effective Banking SupervisionBanking Supervision
7
Description ofDescription of the Core Principles for the Core Principles for Effective Banking SupervisionEffective Banking SupervisionDescription ofDescription of the Core Principles for the Core Principles for Effective Banking SupervisionEffective Banking Supervision
The Core Principles comprise twenty-five The Core Principles comprise twenty-five fundamental requirements, covering various fundamental requirements, covering various
components and aspects of a bank supervisory components and aspects of a bank supervisory system, that need to be complied with for a system, that need to be complied with for a
banking supervisor to operate effectively and for banking supervisor to operate effectively and for banks to operate in a safe and sound manner. banks to operate in a safe and sound manner.
8
Background to Core PrinciplesBackground to Core PrinciplesBackground to Core PrinciplesBackground 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
9
Uniqueness of the Core PrinciplesUniqueness of the Core PrinciplesUniqueness of the Core PrinciplesUniqueness 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
10
Objectives of the Core PrinciplesObjectives of the Core PrinciplesObjectives of the Core PrinciplesObjectives 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
11
Myths of the Core PrinciplesMyths of the Core PrinciplesMyths of the Core PrinciplesMyths 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
12
Revision of the Core PrinciplesRevision of the Core PrinciplesRevision of the Core PrinciplesRevision 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”
13
Revision of the Core Principles (cont.)Revision of the Core Principles (cont.)Revision of the Core Principles (cont.)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
14
Compliance with revised Core PrinciplesCompliance with revised Core PrinciplesCompliance with revised Core PrinciplesCompliance 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
15
Compliance with revised Core Principles Compliance with revised Core Principles (cont.)(cont.)Compliance with revised Core Principles Compliance with revised Core Principles (cont.)(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
16
Development of bank directorsDevelopment of bank directorsDevelopment of bank directorsDevelopment of bank directors
17
Individual banks’ induction and training Individual banks’ induction and training programmesprogrammesIndividual banks’ induction and training Individual banks’ induction and training programmesprogrammes
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
18
Director development programme for Director development programme for banking sectorbanking sectorDirector development programme for Director development programme for banking sectorbanking 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
19
Director development programme for Director development programme for banking sector (cont.)banking sector (cont.)Director development programme for Director development programme for banking sector (cont.)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
20
New Capital Accord (Basel II)New Capital Accord (Basel II)New Capital Accord (Basel II)New Capital Accord (Basel II)
21
IntroductionIntroductionIntroductionIntroduction
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
22
Accord Implementation ForumAccord Implementation ForumAccord Implementation ForumAccord 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
23
Overview of Basel II approachesOverview of Basel II approachesOverview of Basel II approachesOverview 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
24
Overview of Basel II approaches – Overview of Basel II approaches – Credit riskCredit riskOverview of Basel II approaches – Overview of Basel II approaches – Credit riskCredit risk
25
Overview of Basel II approaches – Overview of Basel II approaches – Operational riskOperational riskOverview of Basel II approaches – Overview of Basel II approaches – Operational riskOperational risk
26
ConclusionConclusionConclusionConclusion
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
27
Compliance with Financial Intelligence Compliance with Financial Intelligence Centre Act, 1990Centre Act, 1990Compliance with Financial Intelligence Compliance with Financial Intelligence Centre Act, 1990Centre 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
28
International supervisory interactionInternational supervisory interactionInternational supervisory interactionInternational 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
29
Proliferation of credit in South AfricaProliferation of credit in South AfricaProliferation of credit in South AfricaProliferation 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 and others
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
30
Combating illegal deposit taking Combating illegal deposit taking Combating illegal deposit taking 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
31
Training of Department’s staff Training of Department’s staff Training of Department’s staff 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
32
Other supervisory developments in 2006Other supervisory developments in 2006Other supervisory developments in 2006Other 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
33
Developments related to Developments related to banking legislationbanking legislation
Developments related to Developments related to banking legislationbanking legislation
34
IntroductionIntroductionIntroductionIntroduction
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
35
Banks Act, 1990Banks Act, 1990Banks Act, 1990Banks 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
36
Regulations relating to BanksRegulations relating to BanksRegulations relating to BanksRegulations 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
37
Salient information on the banking sector Salient information on the banking sector May 2007May 2007
Salient information on the banking sector Salient information on the banking sector May 2007May 2007
38
The banking system consists of:The banking system consists of:– Registered banksRegistered banks 2020– Mutual banksMutual banks 2 2– Local branches of foreign banksLocal branches of foreign banks 1414– Foreign banks with approvedForeign banks with approved
local representative officeslocal representative offices 4343
Salient information on the banking Salient information on the banking sector – May 2007sector – May 2007Salient information on the banking Salient information on the banking sector – May 2007sector – May 2007
39
Salient information on the banking sector*Salient information on the banking sector*Salient information on the banking sector*Salient information on the banking sector*
* Excludes representative offices* Excludes representative offices
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
Capital and reserves (R billions) 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
40
Distribution of total banking sector Distribution of total banking sector assets (R billions)assets (R billions)Distribution of total banking sector Distribution of total banking sector assets (R billions)assets (R billions)
Dec
2005
Dec
2006
May
2007
Market Share %
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
Other 175,0 212,8 228,6 10,3
Total Banks 1 677,5 2 075,1 2 221,5 100
41
Trends in South African banks Trends in South African banks December 2006December 2006
Trends in South African banks Trends in South African banks December 2006December 2006
42
Balance-sheet structureBalance-sheet structureBalance-sheet structureBalance-sheet structure
43
Aggregate balance sheet – R2 075,1 billionAggregate balance sheet – R2 075,1 billionAggregate balance sheet – R2 075,1 billionAggregate balance sheet – R2 075,1 billion
44
Composition of liabilities – R2 075,1 billionComposition of liabilities – R2 075,1 billionComposition of liabilities – R2 075,1 billionComposition of liabilities – R2 075,1 billion
45
Composition of non-bank deposits – Composition of non-bank deposits – R1 353,2 billionR1 353,2 billionComposition of non-bank deposits – Composition of non-bank deposits – R1 353,2 billionR1 353,2 billion
46
Composition of non-bank deposits Composition of non-bank deposits according to maturity – R1 353,2 billionaccording to maturity – R1 353,2 billionComposition of non-bank deposits Composition of non-bank deposits according to maturity – R1 353,2 billionaccording to maturity – R1 353,2 billion
47
Composition of total assets – R2 075,1 billionComposition of total assets – R2 075,1 billionComposition of total assets – R2 075,1 billionComposition of total assets – R2 075,1 billion
48
Total loans and advances – R1 735,8 billionTotal loans and advances – R1 735,8 billionTotal loans and advances – R1 735,8 billionTotal loans and advances – R1 735,8 billion
49
Composition of loans and advances – Composition of loans and advances – R1 735,8 billionR1 735,8 billionComposition of loans and advances – Composition of loans and advances – R1 735,8 billionR1 735,8 billion
50
Capital adequacyCapital adequacyCapital adequacyCapital adequacy
51
Capital-adequacy ratio – 12,3 per centCapital-adequacy ratio – 12,3 per centCapital-adequacy ratio – 12,3 per centCapital-adequacy ratio – 12,3 per cent
52
Distribution of banks in terms of capital Distribution of banks in terms of capital adequacyadequacyDistribution of banks in terms of capital Distribution of banks in terms of capital adequacyadequacy
53
Qualifying capital and reserves – Qualifying capital and reserves – R153,3 billionR153,3 billionQualifying capital and reserves – Qualifying capital and reserves – R153,3 billionR153,3 billion
54
Risk profile of on and off-balance-sheet Risk profile of on and off-balance-sheet itemsitemsRisk profile of on and off-balance-sheet Risk profile of on and off-balance-sheet itemsitems
55
ProfitabilityProfitabilityProfitabilityProfitability
56
Composition of the income statementComposition of the income statementComposition of the income statementComposition of the income statement
57
Interest margin – 3,4 per centInterest margin – 3,4 per centInterest margin – 3,4 per centInterest margin – 3,4 per cent
58
Growth in staff expenses, number of Growth in staff expenses, number of employees and number of branchesemployees and number of branchesGrowth in staff expenses, number of Growth in staff expenses, number of employees and number of branchesemployees and number of branches
59
Efficiency ratio of the banking sector – Efficiency ratio of the banking sector – 58,9 per cent58,9 per centEfficiency ratio of the banking sector – Efficiency ratio of the banking sector – 58,9 per cent58,9 per cent
60
Efficiency of banking institutions Efficiency of banking institutions according to asset valueaccording to asset valueEfficiency of banking institutions Efficiency of banking institutions according to asset valueaccording to asset value
61
Profitability (12-month smoothed average)Profitability (12-month smoothed average)Profitability (12-month smoothed average)Profitability (12-month smoothed average)
62
Liquidity riskLiquidity riskLiquidity riskLiquidity risk
63
Statutory liquid assets (actual versus Statutory liquid assets (actual versus required) – R96,3 billion vs R86,6 billion required) – R96,3 billion vs R86,6 billion Statutory liquid assets (actual versus Statutory liquid assets (actual versus required) – R96,3 billion vs R86,6 billion required) – R96,3 billion vs R86,6 billion
64
Deposits from banks’ ten largest Deposits from banks’ ten largest depositors - R389,4 billion (as percentage depositors - R389,4 billion (as percentage of total funding – R1 694,1 billion)of total funding – R1 694,1 billion)
Deposits from banks’ ten largest Deposits from banks’ ten largest depositors - R389,4 billion (as percentage depositors - R389,4 billion (as percentage of total funding – R1 694,1 billion)of total funding – R1 694,1 billion)
65
Anticipated maturity of short-term funding Anticipated maturity of short-term funding – R384,8 billion (as percentage of total – R384,8 billion (as percentage of total funding – R1 694,1 billion)funding – R1 694,1 billion)
Anticipated maturity of short-term funding Anticipated maturity of short-term funding – R384,8 billion (as percentage of total – R384,8 billion (as percentage of total funding – R1 694,1 billion)funding – R1 694,1 billion)
66
Derivative contractsDerivative contractsDerivative contractsDerivative contracts
67
Turnover in derivative contracts – Turnover in derivative contracts – R2 618,2 billionR2 618,2 billionTurnover in derivative contracts – Turnover in derivative contracts – R2 618,2 billionR2 618,2 billion
68
Total unexpired derivative contracts – Total unexpired derivative contracts – R9 272,2 billionR9 272,2 billionTotal unexpired derivative contracts – Total unexpired derivative contracts – R9 272,2 billionR9 272,2 billion
69
Credit riskCredit riskCredit riskCredit risk
70
Total banking-sector overdues – Total banking-sector overdues – R18,8 billionR18,8 billionTotal banking-sector overdues – Total banking-sector overdues – R18,8 billionR18,8 billion
71
Net overdues (R8,5 billion) as Net overdues (R8,5 billion) as percentage of net qualifying capital percentage of net qualifying capital and reserves (R153,3 billion)and reserves (R153,3 billion)
Net overdues (R8,5 billion) as Net overdues (R8,5 billion) as percentage of net qualifying capital percentage of net qualifying capital and reserves (R153,3 billion)and reserves (R153,3 billion)
72
Composition of overdues – R18,8 billion Composition of overdues – R18,8 billion (as percentage of loans and advances –(as percentage of loans and advances –R1 735,8 billion)R1 735,8 billion)
Composition of overdues – R18,8 billion Composition of overdues – R18,8 billion (as percentage of loans and advances –(as percentage of loans and advances –R1 735,8 billion)R1 735,8 billion)
73
Analysis of overdues – R18,8 billion Analysis of overdues – R18,8 billion Analysis of overdues – R18,8 billion Analysis of overdues – R18,8 billion
74
Coverage ratio (specific provisions and Coverage ratio (specific provisions and security as percentage of gross overdues)security as percentage of gross overdues)Coverage ratio (specific provisions and Coverage ratio (specific provisions and security as percentage of gross overdues)security as percentage of gross overdues)
75
Large exposures (granted – R511 billion and Large exposures (granted – R511 billion and utilised – R266 billion) percentage of net utilised – R266 billion) percentage of net qualifying capital and reserves – R153,3 billionqualifying capital and reserves – R153,3 billion
Large exposures (granted – R511 billion and Large exposures (granted – R511 billion and utilised – R266 billion) percentage of net utilised – R266 billion) percentage of net qualifying capital and reserves – R153,3 billionqualifying capital and reserves – R153,3 billion
76
Asset performanceAsset performanceAsset performanceAsset performance
77
Currency riskCurrency riskCurrency riskCurrency risk
78
Maximum effective net open foreign-Maximum effective net open foreign-currency position as percentage of net currency position as percentage of net qualifying capital and reservesqualifying capital and reserves
Maximum effective net open foreign-Maximum effective net open foreign-currency position as percentage of net currency position as percentage of net qualifying capital and reservesqualifying capital and reserves
79
Position in foreign-currency instruments Position in foreign-currency instruments US$14,9 billion vs –US$14,6 billionUS$14,9 billion vs –US$14,6 billionPosition in foreign-currency instruments Position in foreign-currency instruments US$14,9 billion vs –US$14,6 billionUS$14,9 billion vs –US$14,6 billion
80
Thank you Thank you for your attentionfor your attention
Thank you Thank you for your attentionfor your attention