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The ins and outs of banking regulation in South Africa

The Bank Supervision Department of the South African Reserve Bank, headed up by the Registrar of Banks, is responsible for regulating and supervising all the registered banks and banking groups in South Africa. Neil Maree explains.

The Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) derives its authority, rights, and powers from the Banks Act 94 of 1990, through which it supervises all the registered banks, banking groups and mutual banks (referred to as banks below) using a supervisory review process by means of on- and off-site supervisory actions and discussions with members of boards of directors.

At the end of 2014, there were 30 banks registered by the Registrar of Banks in South Africa, of which 14 were branches of international banks. The BSD also supervises three mutual banks registered in terms of the Mutual Banks Act 124 of 1993. As per the BSD’s Annual Report for 2014,1 the total assets of the banking sector, covering banking groups and mutual banks, stood at just over R4,1 trillion as at December 2014, of which R3,2 trillion was gross loans and advances.

Banks are monitored for compliance with the prudential requirements set out in the Regulations relating to Banks, which are regularly amended to stay aligned with all the requirements released by the Basel Committee on Banking Supervision2 (BCBS). The Regulations incorporate requirements such as the Basel II and Basel III frameworks as well as the BCBS Core Principles for Effective Supervision.

The BSD’s strategic focus areas are to maintain a forward-looking supervisory approach and to assess the impact of potential emerging risks on banks and/or the banking sector. As a member of the BCBS, South Africa, through the BSD, contributes to the initiatives, strategies, and development of regulatory requirements and standards, which address the fundamental weaknesses revealed by the global financial crisis. The BSD continues to be actively involved in developing regulatory reforms to promote the safety and soundness of the South African banking system.

The BCBS consists of 28 member countries. South Africa is the only member country from Africa represented on the BCBS and its various subcommittees.

The BSD supervises and monitors banks on a regular basis, and engages with executive management and board members to assess the nature, impact, and scope of risks faced by banks. The frequency and intensity of the supervision of banks is determined by an entity’s risk assessment. The BSD engages with banks via on-site examinations and discussions, various off-site analyses of regulatory data submitted by banks, and the liaison with the internal and external auditors of banks. Various prudential requirements are monitored to ensure that banks comply with minimum prudential requirements such as the capital adequacy ratio (CAR) (the ratio that expresses an entity’s available capital to its risk, and is expressed as a percentage of its risk-weighted exposures), the liquidity ratio, and minimum reserve requirements.

The BSD also monitors the developments and changes in relevant accounting and auditing standards in order to assess their potential impact on the banking sector. As such, BSD monitors banks’ implementation readiness for the new International Financial Reporting Standard (IFRS) 9, and will continue to engage with key stakeholders – such as banks, audit firms, and other regulatory bodies – to assess the impact of IFRS 9 on the banking sector, especially pertaining to impairment methodologies to be based on a more forward-looking expected-loss basis.

South Africa is currently implementing a Twin Peaks model of financial regulation. TheSARB, as the Prudential Authority, will become responsible for the prudential oversight of banks, insurers, financial conglomerates, and financial market infrastructures (FMIs); the current Financial Services Board (FSB) will become the Financial Sector Conduct Authority responsible for supervising the conduct of all financial services institutions. The Financial Sector Regulation Bill of 2014 will enable the establishment of the Prudential Authority; the second draft of the FSR Bill was released for public comment at the end of 2014 and it is expected that it will be tabled in Parliament before the end of 2015.

1 See http://www.resbank.co.za/Publications/Reports/Pages/BankSupervisionAnnualReports.
2 See https://www.bis.org/bcbs/index.

Neil Maree CA(SA) is Acting Deputy Head at the BSD.

This article was originally published in ASA.