Mr Errol Kruger Registrar of Banks

1. Presentation to the Portfolio Committee on Finance Annual Report 2006Bank Supervision DepartmentCape Town7 August 2007 Mr Errol Kruger Registrar of Banks

2. Agenda • Introduction • Developments/activities in banking supervision • Developments related to banking legislation • Salient information on the South African banking sector • Trends in South African banks

3. Introduction 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.

4. Developments/activities in banking supervision

5. Outline • Core Principles for Effective Banking Supervision • Development of bank directors • New Capital Accord (Basel II) • Compliance with anti-money laundering legislation • International supervisory interaction • Proliferation of credit in South Africa • Combating illegal deposit taking • Training of Department’s staff • Other

6. Core Principles for Effective Banking Supervision

7. Description ofthe Core Principles for Effective Banking Supervision The Core Principles comprise twenty-five fundamental requirements, covering various components and aspects of a bank supervisory system, that need to be complied with for a banking supervisor to operate effectively and for banks to operate in a safe and sound manner.

8. Background 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 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 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 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 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.) • 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 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 (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 directors

17. Individual banks’ induction and training programmes • 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 banking 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 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)

21. Introduction • 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 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 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 – Credit risk

25. Overview of Basel II approaches – Operational risk

26. Conclusion • 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 Centre 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 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 Africa • Public exposed to new names linked to banking services • Confusing, banking names linked to retail outlets, cellular phone service providers andothers • 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 • 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 • 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 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 banking legislation

34. Introduction • 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, 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 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 May 2007

38. Salient information on the banking sector – May 2007 The banking system consists of: • Registered banks 20 • Mutual banks 2 • Local branches of foreign banks 14 • Foreign banks with approved local representative offices 43

39. Salient information on the banking sector* * Excludes representative offices

40. Distribution of total banking sector assets (R billions)

41. Trends in South African banks December 2006

42. Balance-sheet structure

43. Aggregate balance sheet – R2 075,1 billion

44. Composition of liabilities – R2 075,1 billion

45. Composition of non-bank deposits – R1 353,2 billion

46. Composition of non-bank deposits according to maturity – R1 353,2 billion

47. Composition of total assets – R2 075,1 billion

48. Total loans and advances – R1 735,8 billion

49. Composition of loans and advances – R1 735,8 billion

50. Capital adequacy