Daniel Mminele: Flourishing in financial markets post crisis - how do we
achieve this?
Address by Mr Daniel Mminele, Deputy Governor of the South African Reserve Bank, at the
Gordon Institute of Business Science Conference on "Flourishing in Financial Markets Post
Crisis - How do we achieve this?", Johannesburg, 2 October 2012.
* * *
1. Introduction
Good morning ladies and gentlemen and thank you to the Gordon Institute of Business
Science (GIBS), Payments Association South Africa (PASA) and Strate, for the invitation to
provide the opening remarks this morning. Let me at the outset congratulate the organisers
for putting together a programme that is quite wide-ranging in terms of content, and brings
together a broad spectrum of speakers to provide different perspectives from their respective
vantage points in the financial markets and financial market infrastructure space.
Unfortunately, I will not be able to stay for the rest of the day.
The theme of the conference: "Flourishing in Financial Markets Post Crisis - How do we
achieve this?" is encouragingly forward-looking and results- oriented - how do we get there,
how do we achieve this? Allow me, however, to sound a word of caution when it comes to
post crisis, because such a characterisation would be pre-mature at this stage. The crisis is
not over yet, and in fact may be deepening.
Global economic prospects and financial market conditions have been deteriorating in recent
months, growth projections for 2012 and 2013 are being adjusted lower, and indications are
that the balance of risks is firmly on the downside. The three main risks to a sustained
recovery of the global economy on our way to a post crisis environment are: (i) the on-going
sovereign debt crisis in the euro area (with feedback loops into the banking system), (ii) the
fiscal situation in the United States with regard to the so-called "fiscal cliff", and (iii) resurgent
oil prices and rapidly rising global food prices. All three factors represent external shocks that
weigh on household disposable income and economic growth, with a disproportionate impact
on emerging markets and lower income households (where food is a larger share of the
consumption basket).
While the authorities in the euro area have recently made significant efforts to help address
weaknesses in their economies, such as through the recent announcement of the European
Central Bank's Outright Monetary Transactions programme and the ratification of the
European Stability Mechanism by the German Federal Constitutional Court, the success and
credibility of these efforts, which have resulted in near-term risks to global financial markets
at least subsiding somewhat, is critically dependent on timeous activation and effective
implementation.
But, let me not divert too much and turn to the topic I have been asked to speak on, namely,
the importance of inter-regulatory harmonisation in the Financial Markets including
cooperation at the industry level.
2. The importance of cooperation and collaboration
The global financial crisis has brought to the fore and encouraged an environment of
increased cooperation and coordination among regulatory authorities, with the view of
preventing or at least minimising the impact of possible market disruptions arising out of
financial crises. In the wake of the global financial crisis, the international community
embarked on various initiatives aimed at improving the regulation of the financial sector, and
by so doing, creating an environment that fosters financial stability, in support of growth and
development. In addition, a number of changes are also envisaged in the areas of market
conduct, consumer protection and financial inclusion. South Africa participates in various
international fora (such as the G20, the Basel Committee for Banking Supervision, the
Financial Stability Board) and standard setting bodies where these initiatives are being
undertaken, and thereby contributes towards building a safer and more efficient global
financial system.
The G20 in particular has been at forefront of international efforts to harmonise regulation.
G20 Leaders have endorsed the broadening of the regulatory net to all markets, institutions,
and infrastructures that are systemic (like hedge funds, credit rating agencies, OTC
derivatives, and the catch-all phrase of "shadow banking"), thereby encouraging agreed
international standards in this regard to be translated into domestic environments.
While South Africa's financial sector may have come through the crisis relatively unscathed,
we are part of the global community and are also undertaking various regulatory reforms to
ensure that our financial sector is further strengthened. To this end, in early 2011, the
National Treasury published a document entitled "A safer financial sector to serve South
Africa better", which is the guiding document in migrating South Africa towards a twin-peak
approach to financial regulation, addressing both prudential regulation and market conduct.
Collaborative engagements are underway among various South African regulators and
stakeholders to ensure the successful implementation of these regulatory reforms in the near
future.
A safe and effective financial system supports the regulators' objective of ensuring financial
stability. Systemic and prominent market participants and infrastructures (such as the
National Payments System, which my colleague Dave Mitchell will provide more detail on
later) require appropriate regulation, supervision and oversight. It is thus imperative that
relevant regulatory authorities have the oversight powers and resources to carry out this
task. In exercising these powers, authorities should be transparent, adopt relevant standards
and principles and apply them consistently. It is also crucial for central banks, market
regulators and other authorities to cooperate in undertaking these tasks. The need for
increased cooperation also stems from the fact that the crisis has made us appreciate more
the interconnectedness (domestically and internationally) of the various parts of the financial
system we operate in, and how, in the absence of cooperation and coordination, regulatory
arbitrage (on the back of financial innovation) can lead to a rapid build-up of systemic risks.
Market regulators should always strive to implement interventions that are in the interest of
the system as whole and do not serve the interest of individual participants only, or certain
sections of the market. Although it is recognised that a disorderly failure in the financial
market infrastructure or problems with systemic market participants can interrupt or impede
the effective operation of markets, and cause severe systemic disruptions and financial
instability, it is imperative that all regulatory actions or interventions should still maintain the
correct balance. This is of course easier said than done! In most instances the impact of any
crisis would differ across jurisdictions, depending on the stance of the relevant authorities on
regulation and oversight, that is, whether regulators adopt more of an intrusive approach or
take an arms length approach. Depending on the approach taken, the market participant's
risk management practices will be different and therefore the impact will differ accordingly. A
coordinated approach by regulators is thus imperative to ensure that the swing does not
move to over-regulation, based on the experience of only one, thereby having detrimental
effects or even introducing systemic risk in other jurisdictions. It is therefore imperative to
ensure that any changes in the regulatory environment in different parts of the financial
sector, whether within one country or across countries, are not in conflict with each other.
The potential for spill overs has increased substantially over recent years, as global financial
market systems have become highly interlinked, creating significant dependencies. Under
these circumstances, it thus becomes crucial that regulators have formalised arrangements
to harmonise their regulatory practices and align these to appropriate best practice.
Appropriate international standard setting bodies thus become key in driving the agenda to
achieve these practices. These platforms should have appropriate structures that will foster
effective consultation, so as to ensure the appropriateness of the desired harmonised
standards or regulatory frameworks and avoid unintended consequences. That is where the
role of the G20, the Basel Committee, the Financial Stability Board and IOSCO becomes
very important.
Once appropriately harmonised standards or regulatory frameworks have been adopted and
implemented, a consistent assessment of implementation should be undertaken. These
assessments could take three forms:
•
Systemic participants and financial market infrastructure operators should conduct
periodic formal full or partial self assessments of their observance of the set
standards and principles. The outcome of these assessments would lead to
continuous improvement or enhancement of risk management practices, which
should also meet organisational objectives rather than being just relevant for
regulatory compliance purposes.
•
Regulatory and oversight authorities, as part of discharging their mandates, should
regularly assess adherence to standards and observance of relevant principles by
entities that they regulate or oversee
•
Independent assessments could be undertaken by international financial institutions
(IFI) such as the IMF and World Bank, or take the form of country peer reviews, also
in order to ensure that there is a standardisation of assessments to determine best
practice.
Current requirements that have been set for banking institutions are being interrogated by
various jurisdictions to see how best they could be adopted and to ensure implementation.
As many of you will be aware, a second draft of revised regulations to give effect to the Basel
III Accord in South Africa was released in September 2012. The revised regulations will
come into effect on 1 January 2013, and steps had been taken to ensure that South African
banks will be in a position to comply with the Liquidity Coverage Ratio by 2013.
Some jurisdictions and entities viewed international standards as only the minimum
benchmark and rather strive to achieve higher goals, an approach that South Africa has
tended to follow when it comes to capital adequacy. It is also important to always reiterate
that in the implementation of standards and principles, as much as there is an important role
for regulators, similarly, there is also an important role for market participants. It is in the
interest of market participants to cooperate with regulators to ensure a safer financial system
in which they operate.
3. Areas of cooperation and collaboration by regulatory authorities
Cooperation among regulatory authorities should be fostered both domestically and
internationally. This should happen in normal times where ideas and experiences are shared
with a view to strengthening the overall financial system. This also allows for building and
strengthening of relationships that would be useful in more stressful situations.
Due to the interlinkages of the various markets and their financial systems as well as global
financial institutions that operate in multiple jurisdictions, the need for cooperation will also be
crucial in crisis situations. It is specifically in such times that it is in the interest of all the
regulatory authorities to coordinate their actions in the interest of achieving a smooth
recovery or resolution that could have affected entities or infrastructures in which they have
some form of regulatory authority. In the implementation of standards and principles, various
authorities with common interests will have to cooperate and collaborate in various areas
such as oversight, supervision and recovery and resolution.
4. Regulation of financial market infrastructures
As mentioned earlier, financial market infrastructures went largely unnoticed until the global
financial crisis broke, and although they performed well through the crisis, it was only then
that an appreciation was found for the true importance of such infrastructures, reflecting the
fundamental role they play in ensuring financial stability.
With this in mind, in April 2012, the Committee on Payment and Settlement Systems at the
Bank for International Settlements (CPSS) and the International Organization of Securities
Commissions (IOSCO) published new international standards for payment and securities
clearing and settlement systems, including central counterparties. The main objectives of the
new principles are to ensure a robust global financial market infrastructure, which if faced
with the financial shocks of the magnitude experienced in 2007/2008, will continue to operate
effectively.
South Africa is expected to adopt these principles and ensure that systemic and prominent
financial market infrastructures in its jurisdiction do observe them. These principles will apply
to payment systems, securities settlement systems, central security depositories, central
counter parties as well as trade repositories. The principles will in most probability be
adopted in either of the following ways:
•
through policy positions that are outlined by regulatory authorities in a transparent
manner;
•
incorporated in relevant regulation applied by the relevant regulatory authorities; or
•
incorporated in law or legal provisions administered by the relevant authority.
This will happen in parallel with the regulatory reforms that South Africa has chosen to
undertake in the effort to drive towards "A safer financial sector to serve South Africa better"
as stated earlier, and it is envisaged that the two objectives will be complementary and
aligned. South Africa also sees itself as part of the broader region as well as the international
community and thus also strives to drive its financial sector development initiatives with this
goal in mind.
5. Concluding remarks
There can be no doubt that going forward we need better and appropriately regulated
financial markets, institutions and infrastructures, such that strong, sustainable and balanced
growth can be achieved in order to support our national objectives. Luckily when it comes to
regulatory reform in South Africa it is the case of making good even better, or great, rather
than having to fix what is broken. South Africa's financial system is rated among the best in
the world. In the recent World Economic Forum's (WEF) Competitiveness Survey, South
Africa ranked third on overall financial market development, first in the regulation of securities
exchanges and first in the strength of auditing and reporting standards. But there is no room
for complacency, and the need for various regulators to work together more closely is crucial.
We also have our work cut out in the area of financial inclusion, to address the challenge of a
large proportion of the population not having access to formal banking, insurance and
investment products.
Financial Market Infrastructures are a source of strength for the financial system, but could
also bring risk that could be catastrophic. It is heartening to say that the South African
regulatory environment is well developed and should foster confidence in our financial
institutions as well as our financial market infrastructures. These institutions strive to meet
international standards and best practice in order to be open for integration with other
markets to ensure that we take advantage of opportunities that present themselves and
manage risks appropriately. It is also encouraging to note that some of our domestic
Financial Market Infrastructure operators are already conducting self assessments based on
the recently released international principles in the positive spirit of accepting the standards
as being good for their risk management rather than viewing them as something that is being
imposed on them by regulatory authorities.
Our participation in regional formations, international standard setting bodies and oversight
arrangements also offers a platform for us to gain insight and learn from developments
elsewhere. This also offers us an opportunity to make a contribution to these regional and
international developments and shape them.
I thank you for the opportunity to share these thoughts and trust that you will have a good
conference.
References:
Principles for Financial Market Infrastructures, BIS CPSS & IOSCO, April 2012
A safer financial sector to serve South Africa better, National Treasury Policy Document,
Republic of South Africa, February 2011