ALIGNING FINANCIAL SUPERVISORY STRUCTURES WITH COUNTRY NEEDS: MAKING THE STRUCTURAL DECISION - PowerPoint PPT Presentation

Loading...

PPT – ALIGNING FINANCIAL SUPERVISORY STRUCTURES WITH COUNTRY NEEDS: MAKING THE STRUCTURAL DECISION PowerPoint presentation | free to download - id: d2fe0-ZDc1Z



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

ALIGNING FINANCIAL SUPERVISORY STRUCTURES WITH COUNTRY NEEDS: MAKING THE STRUCTURAL DECISION

Description:

SA Futures Exchange (integrated into the JSE) Modern, offering trading in most risk management instruments ... awareness and education. Reduce financial crime ... – PowerPoint PPT presentation

Number of Views:52
Avg rating:3.0/5.0
Slides: 33
Provided by: P50
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: ALIGNING FINANCIAL SUPERVISORY STRUCTURES WITH COUNTRY NEEDS: MAKING THE STRUCTURAL DECISION


1
ALIGNING FINANCIAL SUPERVISORY STRUCTURES WITH
COUNTRY NEEDS MAKING THE STRUCTURAL DECISION
THE SOUTH AFRICAN EXPERIENCE World Bank
Conference 4 December 2003 Gill Marcus Deputy
Governor South African Reserve Bank
2
Making the structural decision - The South
African experience
  • Overview
  • Introduction to the South African financial
    environment
  • History of process to review the regulatory
    environment
  • SA country specific considerations
  • Rationale for a functional approach
  • Transitional and other issues

3
South Africa at a glance
  • Population - 45 million. Much diversity
  • Rich in minerals
  • New political dispensation
  • Sophisticated infrastructure
  • Key issues
  • Unemployment /crime
  • Low savings
  • HIV/AIDS
  • Regional issues

(3)
4
Some economic indicators
  • GDP USD150bn per capita USD3300
  • Deficit before borrowing 2,4
  • Inflation (CPIX) 5.4 (was 15 in early 1990s)
  • Interest rates Prime 12, Repo 8.5, 3m NCD
    8.25
  • Government debt GDP ratio - 41
  • Growth 2 in 2003?
  • Gross gold foreign reserves - USD 20bn
  • Rand volatility - 34 in 2001
  • 26 in 2002
  • 16 in 2003
  • Unemployment 32

5
The South African financial system
  • JSE Securities Exchange - South Africa
  • 16th largest exchange in the world
  • 450 companies listed,
  • market capitalisation USD250 bn
  • SA Futures Exchange (integrated into the JSE)
  • Modern, offering trading in most risk management
    instruments
  • The Bond Exchange South Africa (BESA)
  • Turnover of USD8.5bn a day 27 of traded volumes
    done by non-residents
  • Sophisticated banking and insurance sectors

6
The SA banking system
  • Number of banks 25 (big 4 80)
  • Number of mutual banks 2
  • Local branches of foreign banks 14
  • Rep offices of foreign banks 48
  • Total balance sheets 200 billion
  • Capital adequacy 12,4
  • Liquid assets as of requirement 115
  • Return on equity 14
  • Return on assets 1,2
  • Operating expenses as of income 60
  • Loans overdue as of total LA 2,6

(7)
7
Dual character of the SA financial system
  • Highly developed financial sector
  • Sophisticated, liquid forex and capital markets
  • Investment grade rating
  • Strong banking system
  • Generally sound fundamentals
  • Emerging market
  • Unemployment, poverty, crime
  • Low savings
  • Limited access to basic financial services
  • High HIV/Aids infection rate
  • Currency volatility

8
Strengths
  • Strong banking system
  • Sound laws and regulations
  • Sound monetary, fiscal, and exchange rate
    policies
  • High growth potential
  • Real-time gross payment and settlement system

9
The current financial regulatory framework
Minister of Finance
Parliament
Advisory bodies
Standing Committee for Revision of Banks Act
Department of Trade and Industry
Financial Services Board
SA Reserve Bank
  • Advisory Committees
  • Financial Markets
  • Pension Funds
  • Unit Trusts
  • Long- term insurance
  • Short-term insurance

Office of the Registrar of Banks
Office of the Registrar of Companies
Office of the Executive Officer
Insider Trading Directorate
Appeal boards
- Banks
- Unit trust - Participation bond managers -
Portfolio managers
  • Regulated financial markets
  • - JSE
  • SAFEX
  • BESA

- Insurers - Pension funds - Friendly societies
Indicates advisory functions indicates executive
functions
10
Process to review the regulatory environment
  • Parties involved
  • - SARB, BSD, MoF, NT, FSB, PCOF, Banking Council,
    international consultants
  • History of the process
  • Current status?
  • - Uncertainty!

11
Process to review the regulatory environment
History salient events
  • Apr 1999 Regulation Round-Table
  • Feb 2000 MoF announces possibility of single
    regulator
  • Dec 2000 Multi-lateral workshop of Policy Board
  • Alternative Financial Regulatory Architectures
    for SA
  • Mar 2001 Second Multi-lateral workshop
  • Financial Stability and the Regulatory
    Architecture
  • May 2001 Policy Board recommendations to MOF
  • Feb 2002 MoF re-affirms intentions
  • Aug 2002 Governors Address expresses concerns

12
Process to review the regulatory environment
Regulation RoundTable
  • Objectives of regulation
  • Maintain confidence
  • Ensure fair treatment
  • Promote efficiency of financial system
  • Facilitate broad access to financial services
  • Promote public awareness and understanding
  • Reduce financial crime
  • Provisos
  • Promote system stability
  • Enhance transparency
  • Fix responsibility
  • Free exit
  • Appropriate regulatory burden

13
Process to review the regulatory environment
RoundTable consensus?
  • Systemic regulation
  • SARB is best placed to carry out
  • Prudential regulation
  • Banks and non-bank financial institutions
    supervised through a unified prudential
    regulatory agency
  • Conduct regulation
  • Market conduct and prudential regulation as
    distinct operations within the same institution

14
Process to review the regulatory environment
RoundTable consensus?
  • Systemic regulation
  • The SARB is without question the institution
    best placed to carry out the important function
    of safeguarding systemic stability. Its
    responsibility for monetary policy, the payments
    system, its lender of last resort role and its
    operational capability in money and forex markets
    means that it is uniquely positioned to detect
    and respond to systemic risks.
  • - Summary report of the regulation Round-Table,
    16 April 1999

15
Process to review the regulatory environment
RoundTable consensus?
  • Prudential regulation
  • These considerations led to broad consensus at
    the Round Table that prudential regulation of
    banks and non-bank financial institutions can
    most effectively be carried out through a unified
    prudential regulatory agency.
  • Conduct regulation
  • . . degree of agreement that it may prove most
    appropriate to have market conduct and prudential
    regulation as distinct operations within the same
    institution
  • - Summary report of the regulation Round-Table,
    16 April 1999

16
Process to review the regulatory environment
Policy Board recommendations
  • No single correct model
  • Integration likely to benefit conglomerate
    supervision and perceived public accountability
  • But with probable reduced effectiveness of
    banking supervision and increased systemic risk
  • So Need certainty of a clear decision
  • Recommend establishment of a task team with focus
    on
  • Institutional capacity building
  • Formal coordination mechanisms
  • Presumption? Single regulator would be a new
    institution outside of the SARB

17
Process to review the regulatory environment
SARB position post-Saambou?
  • With the recent liquidity problems of some small
    banks, it was again evident that the least-cost
    resolution of a banking crisis would always
    depend on a special collegial interaction between
    the RoB and at least four other departments in
    the Bank. The policy formulation,
    decision-making, coordination and rapid execution
    of the many interventions that were necessary
    would have been almost inconceivable in a
    situation where the supervision of banks was not
    part of the Bank.
  • . . .the capacity to perform effective banking
    supervision is crucial to price and financial
    stability. After careful consideration of the
    issues, I am therefore convinced that it is in
    the best interests of the South African economy
    that banking supervision should remain in the
    Bank.
  • - Governors address 27 August 2002

18
Key issues and considerations
  • Market developments
  • Regulatory effectiveness
  • Political accountability
  • Country-specific issues

19
Key issues and considerations
Market developments
  • Technical/product innovations
  • Deregulation/liberalisation
  • Internationalisation
  • Conglomeration
  • Complexity of risk management
  • Cost pressures

20
Key issues and considerations
Regulatory effectiveness
  • Objectives
  • Securing systemic stability in the financial
    system
  • Ensuring institutional safety and soundness
  • Promoting consumer protection
  • Regulatory arbitrage
  • Adding other public-policy objectives
  • Facilitate broad access to financial services
  • Promote public awareness and education
  • Reduce financial crime

21
SA Country-specifics
  • Openness of the economy and the degree of
    discretion of the SARB
  • Concentration of banking
  • Quality of settlement systems and time to react
  • The safety net and deposit insurance
  • Existence of complex financial groups
  • The role of state- and foreign-owned banks

22
SA Country-specifics
Openness of the economy and the degree of
discretion of the SARB
  • Open economy
  • Exchange control in place
  • Large degree of independent discretion
  • Monetary policy executed through banks as agents
  • SARB is banker of banks
  • Link between price and financial system stability
  • Bank supervision more than just a convenience for
    SARB

23
SA Country-specifics
Concentration of banking
  • 80 of banking assets concentrated in big four
  • Border between micro- and macro-prudential issues
    becomes fuzzy
  • Distinction between systemic and prudential
    regulation fades
  • In extreme case, every bank problem is systemic
    in nature
  • SARB likely to want to retain oversight of banks
  • Acclaimed effectiveness of banking supervision

24
SA Country-specifics
Quality of settlement system and time to react
  • Highly sophisticated real-time gross payment and
    settlement system
  • High percentage of inter-bank transactions flow
    through SARB settlement system
  • In crisis, massive funds can be switched from a
    bank in distress
  • Intimate knowledge of prudential standards of
    banks is crucial
  • Real-time risk information is useless if time to
    react is slow hence SARB needs extremely close
    link with BSD

25
SA Country-specifics
The safety-net and deposit insurance
  • SARB will remain the lender of last resort (LOLR)
  • Natural tendency to want effective oversight of
    banks
  • Proximity of supervision helps with rapid
    decision-making so crucial in a crisis Saambou
    was a case in point
  • An effective DIS would enhance supervision and
    increase crisis resolution options
  • Without proper DIS it would be difficult for SARB
    to part with supervision function

26
SA Country-specifics
Existence of complex financial groups
  • Integrated financial conglomerates not prevalent
  • Little evidence of regulatory arbitrage
  • But Insurance companies tend to control the
    banks
  • If conglomerates increase, this will be a
    compelling argument to unify prudential
    supervision
  • But The other country specifics dictate that the
    single prudential regulator should be in the SARB
    (as in Bank of Ireland and Monetary Authority of
    Singapore)

27
SA Country-specifics
The role of state and foreign-owned banks
  • State-owned banks not a feature
  • Role of foreign-owned banks is small
  • Hence, relatively more power for supervisor
  • Increases risk of removing supervision from SARB
  • Scarce regulatory resources
  • Political and bureaucratic tensions

28
Rationale for a functional approach
  • Alternative approaches
  • Current environment
  • - Systemic SARB/FinStab
  • - Prudential SARB/BSD for banks, FSB for rest
  • - Conduct FSB
  • Single regulator environment
  • - Systemic SARB/FinStab
  • - Prudential SFSR for all
  • Conduct SFSR for all
  • Possible alternative
  • - Systemic SARB/FinStab
  • - Prudential SARB/BSD for all
  • Conduct FSB for all

29
Rationale for a functional approach
  • Merits at a glance
  • Single regulator
  • Potentially more effective conglomerate
    supervision
  • Less regulatory arbitrage
  • Politically expedient/more suited to
    transformation?
  • Perceived as more modern and accountable
  • Functional split
  • More effective for stability objectives
  • Less risk in a crisis
  • Less cost of duplication
  • Superior integration of monetary and regulatory
    objectives

30
Rationale for a functional approach
  • Any model can work in good times
  • However, in a crisis
  • Availability of ready information
  • Depth of knowledge, intimate understanding of
    nuances
  • Cooperation is key
  • Formal arrangements
  • Relationships and goodwill
  • Single regulator only one part of safety net

31
Transitional and other pragmatic issues
  • How to select the best structure
  • Remove emotive issues and biases
  • Split the decision into components
  • Integrate or separate?
  • Placement?
  • How to manage the transition
  • Big bang vs gradual
  • Policy clarity vs planned and phased
    implementation
  • Need for certainty

32
Conclusion
  • SA on the international radar screen
  • Complicated by need to maintain systemic
    stability yet ensure broader delivery of services
  • Functional split seems best but single peak model
    can work
  • Form not so important as the substance of
  • Cooperation
  • Change management
  • A common (NT and SARB) position paper is required
About PowerShow.com