T T Mboweni: International regulatory developments and the South African
banking sector
Address by Mr T T Mboweni, Governor of the South African Reserve Bank, to trainee chartered
accountants in the Western Cape, at the South African Institute of Chartered Accountants, Cape
Town, 2 October 2006.
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Honoured guests
Ladies and gentlemen
1. Introduction
Thank you for the invitation to address you today. Financial markets have become increasingly
globalised and our markets are no exception. Within this context, regulation according to international
best practice, has a big part to play in ensuring the stability of the financial sector. You may be aware
the international community has adopted some measures to harmonise the regulation of banks. Today
I will provide a brief overview of two of these initiatives namely, the new Capital Accord and the Basel
Core Principles, which have been adopted under the auspices of the Bank for InternationaI
Settlements (BIS). I will pay particular attention to how these initiatives impact on the regulation of
banks in South Africa. As future chartered accountants, these developments will have an important
impact on your working lives. I will conclude by making some observations on the performance of the
South African banking sector.
2. The Bank for International Settlements
Many industries and businesses have established associations, whose aims are to conduct research,
review important issues and promote the development of these industries or businesses. The BIS,
established in 1930, could be described as a club or association for central bankers. The BIS was
established in the context of the Young Plan, which dealt with the issue of the reparation payments
imposed on Germany by the Treaty of Versailles following the First World War. The name of the BIS is
derived from this original role, and was also created to promote central bank cooperation in general.
The reparations issue quickly faded, focusing the activities of the BIS entirely on world-wide
cooperation among central banks and, increasingly, other multi-lateral agencies in pursuit of monetary
and financial stability. Today, central banks from 55 countries are members of the BIS.
The BIS fulfils its mandate by acting as a forum to promote discussion and policy analysis among
central banks and within the international financial community. It is also a centre for economic and
monetary research; a prime counterparty for central banks in their financial transactions; and acts as
an agent or trustee in connection with international financial operations.
The most important meetings held at the BIS are the regular meetings of Governors and senior
officials of member central banks. I regularly attend these meetings which are held every two months
in Basel. These gatherings provide an opportunity for participants to discuss the world economy and
financial markets, and to exchange views on topical issues of central bank interest or concern. Other
meetings of senior central bank officials focus on the conduct of monetary policy, the surveillance of
international financial markets and central bank governance issues.
The growth of international financial markets and cross-border money flows in the 1970s highlighted
the lack of efficient banking supervision at an international level. National banking supervisory
authorities basically regulated domestic banks and the domestic activities of international banks, while
the international activities of these banks were not always closely supervised. The collapse in 1974 of
Bankhaus Herstatt in Germany and of the Franklin National Bank in the United States prompted the
G10 central bank Governors to set up the Basel Committee on Banking Supervision. This Committee,
known as the Basel Committee, concerns itself with guidelines for international co-operation in bank
supervision. The Committee, which includes representatives from the major supervisory agencies as
well as from central banks, provides a forum for regular cooperation on banking supervisory matters.
Over the years, the Committee has developed increasingly into a standard-setting body on all aspects
of banking supervision.
3. The Basel Capital Accord
No bank can maintain the public's trust for long if it lacks sufficient capital, so supervisors impose
capital requirements to safeguard the banking system. Since capital is the last line of defense against
bank insolvency, regulatory capital requirements are one of the fundamental elements of banking
supervision.
In 1988 the Basel Committee issued the Basel Capital Accord. This introduced a credit risk
measurement framework for banks which became a globally accepted standard. South Africa complies
with the Basel Capital Accord. A revision of this Capital Accord, known as Basel II, is due to be
implemented worldwide from the end of 2006. Such standards aim to achieve a better and more
transparent measurement of the various risks incurred by internationally active banks, limiting the
possibility of contagion in cases of a crisis and strengthening the global financial infrastructure overall.
The new Capital Accord is based on three pillars, namely, minimum capital requirements, a
supervisory review process, and effective use of market discipline, through minimum disclosure
standards. With regard to the first pillar, a material development was the internal rating-based
approach to credit risk. Since the board of directors and management of a bank have, or ought to
have, the most complete understanding of the risks that their bank faces, the board and management
have primary responsibility for the management of these risks. Internal ratings are intended to become
an integral part of a bank's risk-management process and its own assessment of capital adequacy
before such ratings may be applied in the determination of the bank's statutory capital requirement.
Supervisory review of capital, the second pillar of the new Accord, will be a critical complement to
minimum capital requirements. Supervisors will have to evaluate how well banks are assessing their
capital needs relative to their risks, including whether banks are appropriately addressing the
relationship between different types of risk.
Market discipline, the third pillar, performs an essential role in ensuring that the capital of banking
institutions is maintained at adequate levels. Since effective public disclosure enhances market
discipline and allows market participants to assess a bank's capital adequacy, disclosure can be a
strong incentive for banks to conduct their business in a safe, sound and efficient manner.
South Africa has made good progress with preparations for the implementation of Basel II on 1
January 2008. The South African Reserve Bank remains committed to providing a regulatory
environment that will allow South African banks to adopt international best practice. South Africa's
financial sector is held in high regard, and the introduction of Basel II will enable South African banks
to maintain, if not strengthen, their international standing, to the benefit of the economy.
4. The Basel Core Principles
Countries use the Basel Core Principles as a benchmark for assessing the quality of their supervisory
systems and for identifying future work needed to ensure sound supervisory practices. The Core
Principles have also been used by the International Monetary Fund and the World Bank in the context
of the Financial Sector Assessment Program. Changes have occurred in banking regulation over the
years, however, and much experience has been gained with implementing the Core Principles in
individual countries. Subsequently, the Basel Committee established the Core Principles Liaison
Group to update the Core Principles to reflect these changes. This is to ensure their continued validity,
usefulness and relevance as a flexible, globally applicable standard.
The updated Principles remain focused on banking supervision. Issues related to the necessary
infrastructure for effective banking supervision are discussed as preconditions and provide
background for the assessment. The review also stresses the importance of the independence,
accountability and transparency of bank supervisory authorities.
Recently, an exercise benchmarking the bank supervisory framework of South Africa against the
revised Core Principles was conducted and areas of non-compliance identified. An action plan has
been initiated to implement the changes, thereby ensuring that the South African bank supervisory
framework meets international standards.
5. The global financial sector
According to the 76th Annual Report of the BIS, the main risks confronting the global financial sector
are of a macroeconomic nature. These relate to the potential effects of higher interest rates, a turn in
the credit cycle and, possibly, associated declines in real estate prices and aggregate expenditure.
The current global environment places a premium on system-wide risk management. The report
highlights the importance of making available information about risk as well as the interplay, and need
for consistency, between financial reporting standards, risk management practices and the overall
prudential framework.
The South African financial sector is also exposed to these risks and the planned implementation of
Basel II by South African banks will strengthen reporting standards and market discipline.
6. The South African banking industry
The South African banking system is sound and stable. Banks are well capitalised, and the average
risk-weighted capital-adequacy ratio for the banking system as a whole was 12,3 per cent at the end of
July 2006.
Growth in the total balance sheet of banks remained strong during the past year and by the end of
July 2006, the total assets of banks - comprising, amongst other things, money, loans and advances,
investment and trading position and non-financial assets - had increased by 20 per cent year-on-year,
to a level of R1 939,5 billion.
By the end of July 2006, the South African banking sector had recorded year-on-year
mortgagelending growth of 30,8 per cent to a level of R608,9 billion. This growth was due to a number of factors
including lower mortgage-interest rates, a lower level of inflation, lower income-tax rates and an
increase in the real disposable income of households. There was also an increase in speculative
buying, known as the 'buy-to-let' boom. Real estate prices are currently experiencing a slow-down in
growth, which suggests some strong resistance from consumers.
Consumer spending through credit card lending has recorded year-on-year growth of 38,6 per cent to
a level of R36,9 billion at the end of July 2006, while the growth in installment-sales debtors has also
continued unabated, growing by 18,8 per cent, to a level of R201,6 billion over the same period. As
the regulator of banks, the Bank Supervision Department of the South African Reserve Bank will
continue to ensure that banks' risk-management processes are appropriate for monitoring these
activities in the light of increasing household sector indebtedness and the increasing cost of credit.
This high rate of credit extension has become a major cause for concern for the Bank. The high levels
of credit extension have resulted in record levels of household debt, which have reached levels of
almost 70 per cent of household disposable income. The high levels of consumer expenditure have
also contributed to the expanding deficit on the current account of the balance of payments. These
developments pose a threat to the inflation outlook, and have prompted the Monetary Policy
Committee to raise the repo rate by 50 basis points at each of the past two MPC meetings.
7. Conclusion
In conclusion, there are three points which I would like to emphasise. Firstly, the implementation of the
new Capital Accord by our banks will result in the adoption of a globally accepted standard, which will
lead to a more transparent risk measurement and better corporate governance practices.
Secondly, complying with the Basel Core Principles, will ensure that banks are regulated according to
international standards. Finally, it will be in consumers' own interests to take note of local economic
trends, such as the recent increases in the repo rate of the Bank, prior to incurring new debt.
I thank you.