SA regulators shielded the banking sector from the financial crisis

SA’s tight banking regulations have drawn praise for shielding the sector from the worst of the financial crisis that claimed iconic institutions such as Lehman Brothers two years ago.

In a joint report issued yesterday, the International Monetary Fund (IMF) and World Bank said local banks and insurance firms had remained profitable during the crisis, while their capital adequacy ratios had remained above the regulatory minimum.

The report states:

1. Banking supervision in South Africa has been effective and has contributed to reducing the impact on the financial sector of the global financial crisis. Throughout the crisis, the banks have remained profitable and capital adequacy ratios have been maintained well above the regulatory minimum. The registrar’s direct access to the board and the audit committee, combined with the sound governance requirements for banks, have been effective in raising board awareness of regulatory and supervisory matters and ensuring strong risk management in South African banks. 
2. The Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) is to be commended for its early adoption and full implementation of the Basel II framework in an emerging market environment on 1 January 2008, and its continuous efforts to remain in line with subsequent international developments. The systemic risk-add on and the implementation of idiosyncratic capital buffers have contributed to the strength and stability of the South African banking system. The overall implementation of the Basel II advanced approaches has been rigorous and comprehensive.
3. The supervisory and regulatory framework has been strengthened substantially following the recommendations of the 2000 FSAP and the 2008 FSAP Update. A legal framework and practical arrangements for combating money laundering and other forms of financial crime have been introduced, as well as regulatory powers to address related party lending. Banking supervision is now applied on a consolidated basis, and cooperation between the BSD and the Financial Services Board (FSB) has advanced. The authorities are encouraged to further intensify their cooperation, e.g., by conducting joint inspections at group level and by exchanging supervisory reports on individual groups.
4. The assessment found some areas where the regulatory and supervisory framework should be further improved. The capital adequacy regulation should allow for explicit revocation of the advanced approaches for credit and market risk. A specific regulation dealing with country and transfer risk regulation should be drafted. Although the exposures are considered relatively small, the BSD does not have a consolidated view of banks’ individual country and transfer risks. Prudential returns should be expanded to include information on country and transfer risk exposures, as well as related party lending.
5. The registrar’s remedial powers for addressing problems in banks should be strengthened. The registrar cannot appoint a curator at a bank, and there are severe limitations on his authority to cancel or suspend a bank’s license. These constraints limit the registrar’s ability to act decisively in case of emerging problems at a bank.
6. The BSD appears to be short of human resources, considering the increasing complexity of banking and banking regulation. It needs to expand its expertise in specialized areas such as operational risk (including IT risk) and countering the abuse of financial services (AML/CFT). It also needs to expand staff involved in credit risk reviews. The BSD’s extensive reliance on internal and external auditors for IT operational risk matters is not in line with international best practice.