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FINANCE PORTFOLIO COMMITTEE
01 September 2006
BANK SUPERVISION DEPARTMENT OF SOUTH AFRICAN RESERVE BANK: ANNUAL REPORT
Chairperson: Mr N Nene (ANC)
Documents handed out:
Presentation on the Annual Report of the Bank Supervision Department of the South African Reserve Bank.
Annual Report of the Bank Supervision Department of the SA Reserve Bank 2005
The Committee was briefed on the 2005 Annual Report of the Banking Supervision Department of the SA Reserve Bank. The presentation focussed on salient issues in the SA banking system as at June 2006, the quantitative trends in the system in the period under review and some of the developments relating to banking legislation. The total assets of the banking industry were just under R2 trillion. The "big four" banks constituted 83, 8 per cent of the total balance sheet of the banking sector. South Africa had a capital adequacy requirement of 10%. Only one bank did not meet the adequacy requirement of 10% and remedial steps were being taken to ensure that it met the requirement. Generally, the capital adequacy situation of the sector was very healthy.
The Department had reviewed 14 South African banks on the issue of corporate governance. The review started in 2004 and excluded the five largest banks which were reviewed in 2001. The purpose was to access compliance with the Banks Act, regulations and the recommendations of both the Myburgh and King II reports. The general findings indicated that Banks were committed to adherence to high standards. The boards and senior management were serious about their corporate governance responsibilities. Corporate governance was generally sound.
The review had identified a number of areas of concern. These included the following:
- compliance function. Compliance was not receiving the kind of attention it needed.
- Director selection was at times not subjected to proper processes and scrutiny. It was almost like a club.
- Board monitoring of management and follow-ups on unresolved issues was not up to scratch.
- Transformation within boards was not up to sufficient standards.
- Effectiveness of directors' affairs Committee was still a challenge. These Committees were still fairly new and finding their feet.
-Segregation of duties was a problem. Some of the small banks could not afford the luxury of having the correct governance processes in place.
- Succession planning and training was also a problem. Some directors had accepted appointment whilst they did not know their duties or responsibilities fully well. This should be followed up because the directors were the ultimate risk managers and takers of the banks.
The Department had also reviewed banks in order to look at their compliance with anti-money laundering legislation. Guidance Note 3 on customer identification was published in July 2005. Banks were making good progress towards full implementing of anti-money laundering measures. There would be some amendments to legislation that impacted on banking as a result of Basel II (New Capital Accord) and legislative developments within the country.
Dr Xolile Guma (Deputy Governor), Mr Errol Kruger (Banks Registrar) and Mr Eugene Bates (Senior Analyst: Bank Supervision Department) and Mr Dave Mitchell (Head: National Payment Systems Department) attended the meeting. Dr Guma thanked the Committee for the opportunity to present the annual report. He said he had attended the meeting because the Bank Supervision Department (BSD) reported to him. Mr Kruger made the presentation. (See document attached).
Mr B Mnguni (ANC) said that the Annual Report provided that "the publication of the Codes of Good Practice by the Department of Trade and Industry subsequent to publication of the Charter led to the Charter Council announcing that it had formally applied for the conversion of the Charter into a code, under section 9 of the Broad-Based Economic Empowerment Act, 2003. The Charter may have to be realigned to the DTI Codes in terms of definition and measurement, which may pose far reaching challenges for banks that have already made significant progress in that qualifying criteria may be changed". He asked how the qualifying criteria had since been changed. Some research had indicated that the South African bank charges were quite high. SA had very sophisticated information technology. Kenya had lower charges than SA despite that SA had more sophisticated technology. He asked if the Banking Supervision Department (BSD) looked at this issue.
Mr Kruger replied that the Financial Services Charter was voluntarily implemented prior to the enactment of the codes by the Department of Trade and Industry. There were areas in which the criteria were different from those contained in the Charter. Some realignment might be needed there. There was also some uncertainty on the finalisation of all the codes. The BSD was not involved in the issues of bank charges. Judge Jali appointed was appointed to head a commission to deal with this issue. The initial interviews with banks had started and the process should follow its course.
Dr van Dyk (DA) said that 51% of the operating expenses were related to staff expenditure. There was a 16% increase in staff expenditure. Staff expenditure referred bonuses and specialised personnel. There was difference between these two issues. He asked what the difference from directors down to bank officials was. The presentation had referred to profitability of banks where in the total income had increased by R8 billion and public deposits and by 5%. However, there was very little happening in relation to banking costs to the public. The presentation had also indicated that the number of branches had decreased by 2, 8% but the administration expenditure had increased 14, 1%. He asked the presenter to reconcile the two.
Mr Kruger replied that administrative charges did not only refer to bricks and mortar. There were a number of enhancements that took place within the banks. He could not offer a definitive answer on bonuses. This had to deal with remuneration policies that people agreed with their employers.
Ms J Fubbs (ANC) said that SA did not have an explicit deposit insurance scheme. A number of vulnerable people were at risk. The SA Reserve Bank (SARB) was applying its mind to this area. She asked for a progress report in this regard. The SARB had noted the growth rate of house prices which had reached peak over nearly 36%. She asked what the banks were doing to review the risk management criteria with respect to the management of mortgages.
Mr Kruger replied that SARB (and not the Banking Supervision Department) was in consultation with Treasury on the deposit insurance scheme. The owner of the proposal was the National Treasury. It was not a Banking Supervision issue per se but more of a financial stability issue. On the prices of houses, he said that those mortgage loans where the loan to value ratio of the loan was less than 80% qualified for a 50% capital adequacy requirement. A 100% weighting was applied to those loans where the loan to value ratio was higher than 80% in order to cater for the excess risk in those loans. The banks had enhanced their systems on the valuation of security side. The overdue(s) were 99% covered by provision and security. Banks had been looking at the revaluation of security in line with how the housing industry had moved. Banks were also visiting sample portfolios to ensure that quality of the houses were in conditions that would fetch the value of the security that they had allocated.
Dr Guma said that the discussion between Treasury and the SARB on the deposit insurance scheme were ongoing and progress had been made.
Mr T Vezi (IFP) noted that the prosperity or growth of bigger banks was happening at the expense of smaller banks. He was of the view that this would adversely affect the second economy. He wondered if the SARB shared his sentiments.
Mr Kruger replied that there was no differentiation made between small and big banks. There were niche banks. One of the small banks (Capitec) had grown tremendously over the last two years. There was space for focused and well-managed banks to co-exist. The GBS Mutual Bank had grown in prosperity and had managed itself throughout the banking crisis of 1999 and 2001. The entrepreneurial spirit and the risk management systems determined how well banks would do.
Mr L Johnson (ANC) focussed on the capital adequacy requirement and international norms. One of the small banks was currently under curatorship. He asked what plans were in place to help the bank concerned. The smaller banks were suffering whilst the bigger ones were getting all the cream. The non-banking deposits constituted a huge amount of money. The Department was keeping a very close eye on institutions that were taking deposits illegally. He asked if the stokvels were one of those institutions.
Mr Kruger replied that there was one bank that was under liquidation. There was no participation by the banking system and the risk was outside the system.
Mr Johnson said that the statistics indicated that the share of smaller banks in the market place was going down compared to the bigger banks. He asked the presenter to enlighten the Committee on what going on. It was indicated that some of the smaller banks were truly making progress. There was a need to grow access to banking institution. The BSD was in charge of banks especially in relation to their life span.
Mr Kruger replied that banks were healthy and that there were no problems in the system at the moment. Bigger banks were expanding to areas wherein they previously did not business. There was a proportionate growth and a not bad encroachment. The structure of the systems in big banks was similar to what one would see in other countries
The Chairperson said that the broader question was whether the situation was conducive for small banks to grow. Was the cartel so strong and so large that smaller banks could not gain the market share that big banks were holding?
Dr Guma replied that SA had seen considerable expansion in the banking sector in the last few years. Everybody was growing but growth was happening faster amongst the big banks. This did not mean that growth was not happening in the small banks. Access to banks was not necessarily easier when offered by small banks than by big banks because big banks were expanding to areas where they were not previously involved.
Mr Dithebe (ANC) noted that one bank could not meet the capital adequacy requirements. He asked what the concomitant risks were if one player did not meet the requirements. With regard to operating expenses, he asked if the changes in the information technology systems were for the better or causing confusion and disarray in the operation aspects of banks. With regard to transformation, he asked what plans were in place to ensure that transformation was not lost as the country progressed with the transformation based on Basel I and II.
Mr Kruger replied that the bank that had not met the capital adequacy requirement was marginally under 10%. There was a programme in place to correct the situation. Internationally, the capital adequacy requirement was 8%. A number of countries prescribed own individual bank requirements. One might find that the requirement was set at 8% for one bank and 15% for another. South Africa had a straight 10% requirement across the board.
Dr Guma replied that there was no systemic risk arising from the one bank that was under capitalised and the one that was under liquidation. It was important to note that the BSD could only supervise the banks. The policies of the banks had to be contested with the shareholders. For instance, the Department could not express opinions on the declaration of dividends or bonuses by banks.
Mr Mnguni said that there was a campaign to have credit bureaux remove people from their black books. He asked how this would impact on overdue(s) and credit risks. The capital requirements were composed differently. The Department was reviewing the composition of the requirements.
Mr Kruger replied that the composition of the capital requirements had not changed over the current period. Capital was composed of capital that had to be held in terms of the credit risk profile, market risk profile and operational risks. All three areas where applicable to all banks. The Department did not know as to what the effect of removing people from the black list would be. The risks management system of banks would have to track the performance of the loans and advances books. He imagined that the risks management systems were looking at this very carefully.
Ms Fubbs asked if the capital adequacy requirement included gold deposits held in reserves. There was an IMF view on this and the intention was to establish if South Africa was in line with international norms. The presenter had emphasised the importance of Board of directors and their impact on risk management. She asked if the directors' affairs committees would address matters of internal strategic importance. Internal systems were critical to ensure robust risk management. The presentation did not mention any induction programmes for directors. Mr Kruger had said that it sounded like an old boys club where one decided who would be placed where. She asked what criteria the BSD was thinking of recommending in this regard.
Mr Kruger replied that the directors' affairs Committees had been constituted. They had been in existing for roughly 18 months and their functioning still had to be established. Directors were beginning to take their roles seriously in the implementation of the prescription as laid out. He concurred that no induction programmes were in place. The Department had engaged with a business school to draw up curriculum on what the induction programme should look like. There was a programme that would be put in place and its dissemination would take place in the next two to three months. He said that gold could not be part of capital. Capital was what shareholders injected into banks.
Mr Johnson said that the presenter should take the Committee seriously when it asks questions. The Committee wanted real answers and not snippets that would necessitate follow-ups. He said that he had asked a simple question about a bank that was under curatorship and no specific answer was given to the question. He asked what was the nature of the relationship between the BSD and the Financial Services Board (FSB). The SARB or the Banking Supervision Department had concerns on the National Credit Act. What were the concerns?
Mr Kruger replied that the Islamic and Regal banks were not under curatorship but liquidation. Curatorship was intended to nurse the banks back to health. A liquidator was appointed if curatorship had failed to nurse the bank back to health. The repealing of the curatorship and the appointment of the liquidator took place via the Minister. There was a memorandum of understanding between the FSB and the Bank in terms of which the two institutions met on regular basis to discuss matters of common interests. They also discussed issues around those groups where they both had supervisory roles.
The Chairperson asked for comments on the issue of corporate governance in banks in relation to question by Ms Fubbs. He also asked what the role of the Department in this regard was and what progress had been made. He noted that the role of the BSD was that of a watchdog and not a bloodhound. He asked the presenter to elaborate on this.
Mr Kruger replied that the policy was one of risk based supervision as opposed to an inspection based approach. The BSD had to understand the business of the banks in order to be able to supervise them effectively. The BSD should not be seen to be managing banks and absolving the management from their duties and responsibilities.
Ms Fubbs noted that the capital adequacy requirement could vary from 8% to 15% internationally. The requirement was 10% in South Africa. She imagined a scenario wherein a particular country's requirement was 8% or 15%. There could be serious differences of opinion on what constituted a risk with respect to the capital adequacy requirement. She was a little bit concerned that the BSD had said that there still some unresolved issues in the banks. She asked what the issues were.
Mr Kruger replied that the interaction between various supervisory bodies was one of harmonisation. The intention was to ensure that the home country could place some reliance on the host country and that there was compliance with core principles. The Basel Committee had 25 principles on which the IMF assessed countries. The reliance that the home country could place on the host country for the effective supervision and oversight for its subsidiary or branch emanated from the compliance by the regulator with the home-host requirements. For instance, when the Barclays-ABSA deal was considered, Barclays Bank PLC was taking a majority stake in a South African bank. They had to get an approval from their regulator to make up the stake. The regulator in UK evaluated South Africa's regulatory regime in so far as they could place reliance on it.
With regard to the capita adequacy requirement, he said that the implementation of Basel II was to cater for risks sensitivity. He said that the unresolved issues cover issues like implementation to an amendment to a policy or procedures. The issues were on the side of the banks and not the BSD.
The meeting was adjourned.