Transcript Document 7208493

ALIGNING FINANCIAL SUPERVISORY STRUCTURES
WITH COUNTRY NEEDS:
MAKING THE STRUCTURAL DECISION –
THE SOUTH AFRICAN EXPERIENCE
World Bank Conference
4 December 2003
Gill Marcus
Deputy Governor
South African Reserve Bank
Making the structural decision The South African experience
Overview
• Introduction to the South African financial environment
• History of process to review the regulatory environment
• SA country specific considerations
• Rationale for a functional approach
• Transitional and other issues
South Africa at a glance
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Population - 45 million.
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Rich in minerals
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New political dispensation
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Sophisticated infrastructure
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Key issues:
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Unemployment /crime
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Low savings
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HIV/AIDS
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Regional issues
Much diversity
(3)
Some economic indicators
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GDP USD150bn; per capita USD3300
Deficit before borrowing
2,4%
Inflation (CPIX): 5.4% (was 15% in early 1990s)
Interest rates: Prime 12%, Repo 8.5%, 3m NCD 8.25%
Government debt : GDP ratio - 41%
Growth: 2% in 2003?
Gross gold & foreign reserves - USD 20bn
Rand volatility: - 34% in 2001
+ 26% in 2002
+ 16% in 2003
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Unemployment : 32%
The South African financial system
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JSE Securities Exchange - South Africa
 16th largest exchange in the world
 450 companies listed,
 market capitalisation USD250 bn
SA Futures Exchange (integrated into the JSE)
 Modern, offering trading in most risk
management instruments
The Bond Exchange South Africa (BESA)
 Turnover of USD8.5bn a day; 27% of traded
volumes done by non-residents
Sophisticated banking and insurance sectors
The SA banking system
Number of banks
Number of mutual banks
25 (big 4 = 80%)
2
Local branches of foreign banks
14
Rep offices of foreign banks
48
Total balance sheets
$ 200 billion
Capital adequacy %
12,4 %
Liquid assets as % of requirement
115%
Return on equity
14%
Return on assets
1,2%
Operating expenses as % of income 60%
Loans overdue as % of total L&A
2,6%
(7)
Dual character of the SA financial system
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Highly developed financial sector
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Sophisticated, liquid forex and capital markets
Investment grade rating
Strong banking system
Generally sound fundamentals
Emerging market
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Unemployment, poverty, crime
Low savings
Limited access to basic financial services
High HIV/Aids infection rate
Currency volatility
Strengths
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Strong banking system
Sound laws and regulations
Sound monetary, fiscal, and exchange rate
policies
High growth potential
Real-time gross payment and settlement
system
The current financial regulatory framework
Minister of Finance
Parliament
Advisory bodies
Department of
Trade
Financial Services
Board
Standing Committee for
Revision of Banks Act
Advisory Committees:
and Industry
SA Reserve
Bank
•Financial Markets
•Pension Funds
•Unit Trusts
Office of the
Registrar of
Companies
Office of the
Executive
Officer
•Long- term insurance
•Short-term insurance
Office of the
Registrar of
Banks
Insider Trading
Directorate
Appeal boards
- Insurers
- Pension funds
- Friendly societies
Regulated
financial markets
- JSE
-SAFEX
-BESA
- Unit trust
- Banks
- Participation bond
managers
- Portfolio
managers
Indicates advisory functions
indicates executive functions
Process to review the regulatory environment
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Parties involved
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SARB, BSD, MoF, NT, FSB, PCOF, Banking Council,
international consultants
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History of the process
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Current status?
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Uncertainty!
Process to review the regulatory environment
History – salient events
• 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
Process to review the regulatory environment
Regulation Round–Table
• Objectives of regulation:
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Maintain confidence
Ensure fair treatment
Promote efficiency of financial system
Facilitate broad access to financial services
Promote public awareness and understanding
Reduce financial crime
• Provisos:
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Promote system stability
Enhance transparency
Fix responsibility
Free exit
Appropriate regulatory burden
Process to review the regulatory environment
Round–Table consensus?
• Systemic regulation:
– SARB is best placed to carry out
• Prudential regulation:
– Banks and non-bank financial institutions supervised through
a unified prudential regulatory agency
• Conduct regulation:
– Market conduct and prudential regulation as distinct
operations within the same institution
Process to review the regulatory environment
Round–Table consensus?
• Systemic regulation:
“The SARB is without question the institution best placed to carry
out the important function of safeguarding systemic stability. Its
responsibility for monetary policy, the payments system, its
lender of last resort role and its operational capability in money
and forex markets means that it is uniquely positioned to detect
and respond to systemic risks.”
- Summary report of the regulation Round-Table, 16 April 1999
Process to review the regulatory environment
Round–Table consensus?
• Prudential regulation:
“These considerations led to broad consensus at the Round
Table that prudential regulation of banks and non-bank financial
institutions can most effectively be carried out through a unified
prudential regulatory agency.”
• Conduct regulation
“. . degree of agreement that it may prove most appropriate to
have market conduct and prudential regulation as distinct
operations within the same institution”
- Summary report of the regulation Round-Table, 16 April 1999
Process to review the regulatory environment
Policy Board recommendations
• No single correct model
• Integration likely to benefit conglomerate supervision and
perceived public accountability
• But with probable reduced effectiveness of banking supervision
and increased systemic risk
• So: Need certainty of a clear decision
• Recommend establishment of a task team with focus on:
– Institutional capacity building
– Formal coordination mechanisms
Presumption?: Single regulator would be a new institution outside
of the SARB
Process to review the regulatory environment
SARB position post-Saambou?
• “With the recent liquidity problems of some small banks, it was again
evident that the least-cost resolution of a banking crisis would always
depend on a special collegial interaction between the RoB and at least
four other departments in the Bank. The policy formulation, decisionmaking, coordination and rapid execution of the many interventions
that were necessary would have been almost inconceivable in a
situation where the supervision of banks was not part of the Bank.”
• “. . .the capacity to perform effective banking supervision is crucial to
price and financial stability. After careful consideration of the issues, I
am therefore convinced that it is in the best interests of the South
African economy that banking supervision should remain in the Bank.”
- Governor’s address – 27 August 2002
Key issues and considerations
• Market developments
• Regulatory effectiveness
• Political accountability
• Country-specific issues
Key issues and considerations
Market developments
• Technical/product innovations
• Deregulation/liberalisation
• Internationalisation
• Conglomeration
• Complexity of risk management
• Cost pressures
Key issues and considerations
Regulatory effectiveness
• Objectives:
– Securing systemic stability in the financial system
– Ensuring institutional safety and soundness
– Promoting consumer protection
• Regulatory arbitrage
• Adding other public-policy objectives
– Facilitate broad access to financial services
– Promote public awareness and education
– Reduce financial crime
SA Country-specifics
• Openness of the economy and the degree of
discretion of the SARB
• Concentration of banking
• Quality of settlement systems and time to react
• The safety net and deposit insurance
• Existence of complex financial groups
• The role of state- and foreign-owned banks
SA Country-specifics
Openness of the economy
and the degree of discretion of the SARB
• Open economy
• Exchange control in place
• Large degree of independent discretion
• Monetary policy executed through banks as agents
• SARB is banker of banks
• Link between price and financial system stability
• Bank supervision more than just a convenience for
SARB
SA Country-specifics
Concentration of banking
• 80% of banking assets concentrated in big four
• Border between micro- and macro-prudential issues
becomes fuzzy
• Distinction between systemic and prudential
regulation fades
• In extreme case, every bank problem is systemic in
nature
• SARB likely to want to retain oversight of banks
• Acclaimed effectiveness of banking supervision
SA Country-specifics
Quality of settlement system
and time to react
• Highly sophisticated real-time gross payment and
settlement system
• High percentage of inter-bank transactions flow
through SARB settlement system
• In crisis, massive funds can be switched from a bank
in distress
• Intimate knowledge of prudential standards of banks
is crucial
• Real-time risk information is useless if time to react is
slow – hence SARB needs extremely close link with
BSD
SA Country-specifics
The safety-net and deposit insurance
• SARB will remain the lender of last resort (LOLR)
• Natural tendency to want effective oversight of banks
• Proximity of supervision helps with rapid decision-
making so crucial in a crisis – Saambou was a case in
point
• An effective DIS would enhance supervision and
increase crisis resolution options
• Without proper DIS it would be difficult for SARB to
part with supervision function
SA Country-specifics
Existence of complex financial groups
• Integrated financial conglomerates not prevalent
• Little evidence of regulatory arbitrage
• But: Insurance companies tend to control the banks
• If conglomerates increase, this will be a compelling
argument to unify prudential supervision
• But: The other country specifics dictate that the single
prudential regulator should be in the SARB (as in
Bank of Ireland and Monetary Authority of Singapore)
SA Country-specifics
The role of state and foreign-owned banks
• State-owned banks not a feature
• Role of foreign-owned banks is small
• Hence, relatively more power for supervisor
• Increases risk of removing supervision from SARB
• Scarce regulatory resources
• Political and bureaucratic tensions
Rationale for a functional approach
Alternative approaches
• Current environment:
- Systemic: SARB/FinStab
- Prudential: SARB/BSD for banks, FSB for rest
- Conduct: FSB
• Single regulator environment:
- Systemic: SARB/FinStab
- Prudential: SFSR for all
- Conduct: SFSR for all
• Possible alternative:
- Systemic: SARB/FinStab
- Prudential: SARB/BSD for all
- Conduct: FSB for all
Rationale for a functional approach
Merits at a glance
• Single regulator:
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Potentially more effective conglomerate supervision
Less regulatory arbitrage
Politically expedient/more suited to transformation?
Perceived as more modern and accountable
• Functional split:
– More effective for stability objectives
– Less risk in a crisis
– Less cost of duplication
– Superior integration of monetary and regulatory objectives
Rationale for a functional approach
• Any model can work in good times
• However, in a crisis
– Availability of ready information
– Depth of knowledge, intimate understanding of nuances
• Cooperation is key
– Formal arrangements
– Relationships and goodwill
• Single regulator only one part of safety net
Transitional and other pragmatic issues
• How to select the best structure
– Remove emotive issues and biases
• Split the decision into components:
– Integrate or separate?
– Placement?
• How to manage the transition
– Big bang vs gradual
– Policy clarity vs planned and phased implementation
• Need for certainty
Conclusion
• SA on the international radar screen
• Complicated by need to maintain systemic stability yet
ensure broader delivery of services
• Functional split seems best but single peak model can
work
• Form not so important as the substance of:
– Cooperation
– Change management
• A common (NT and SARB) position paper is required