Abstract
This paper discusses key findings of the Detailed Assessment of Compliance on the Basel Core Principles for Effective Banking Supervision in South Africa. The South African banking system is highly concentrated with more than 90 percent of banking assets being controlled by the five largest banks. A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws, and undertake timely corrective actions to address safety and soundness concerns. The responsibilities and objectives of each of the authorities involved in banking supervision are clearly defined in legislation and publicly disclosed.
1. South Africa has a high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). The current supervisory regime is based on strong relationships with bank Boards and senior management, as well as with banks’ internal and external auditors, supported by intensive qualitative and quantitative analysis. The Registrar of Banks (the head of banking supervision) and his staff in the Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) hold banks to a very high standard of corporate governance and risk management.
2. The South African banking system is highly concentrated with more than 90 percent of banking assets being controlled by the five largest banks. The same laws, regulations and supervisory processes apply to all banking institutions, irrespective of their size. However, under a risk-based system, a much larger percentage of supervisory focus and resources centers quite naturally on the largest institutions.
3. The SARB, as a member of the Basel Committee on Banking Supervision (BCBS), is committed to the adoption of international standards and sound practices promulgated by the BCBS, as well as other relevant international standard-setting bodies. The SARB has implemented, or is in the process of implementing, all of the BCBS standards, most notably those related to capital adequacy and liquidity. The SARB is to be commended for its ongoing commitment to adhering to the highest standards for supervision and regulation, and also for encouraging and supporting its supervisory counterparts in neighboring countries in implementing key standards, as appropriate, which should also help to ensure the adequate oversight of South African banks’ cross-border operations as they expand.
4. Since the previous assessment conducted in 2010, the BSD has made several significant improvements to its supervisory framework. Most notably, the department has increased supervisory staff by almost 50 percent, and it now includes a corps of risk specialists to complement the analysis teams, and additional on-site inspectors, thereby enabling the BSD to have more direct interaction with the banks and place less reliance on external auditors. In addition, several shortcomings in bank regulations have been addressed since 2010. Cooperation with relevant domestic and foreign supervisors has also been strengthened.
5. There are a few areas in relation to the legal and regulatory frameworks as well as powers that still warrant improvement. These include, among others, legal provisions related to objectives of the supervisory institution and appointment and dismissal of its head, the power to suspend or limit a bank’s registration expeditiously, and supervisory techniques to address risks stemming from the non-banking activities of a financial group. While the BSD has been able, for the most part, to work around these weaknesses, amendments to the appropriate laws and regulations should be made as soon as possible. In addition, supervisory techniques to monitor the risk of an entire financial group should be further improved. The SARB anticipates that the laws and regulations will be further strengthened in the next round of amendments expected to take place as part of the restructuring of the financial regulatory system in South Africa.
6. As the country’s financial sector oversight is going through a substantial transition, efforts should be made to maximize the benefit of the new twin peaks structure. In 2011, the National Treasury announced its intention to adopt the twin peaks model of financial regulation. The new Prudential Authority will be a department within the SARB and the current BSD staff will become part of the new Authority, merging with prudential supervisors of insurers and several other categories of financial institutions currently within the Financial Services Board (FSB). This move has the potential to contribute to safeguarding the stability of the banking system, given the unique situation of the banking sector in South Africa, which is also substantially involved in insurance and other financial activities as groups. But the new prudential supervisor needs to establish an appropriate framework and improve tools to supervise these diversified entities without undermining the current high quality oversight of banks.
Background Information and Methodology
7. This assessment of the current state of the implementation of the Basel Core Principles for Effective Banking Supervision (BCPs) in South Africa has been completed as a part of a Financial Sector Assessment Program (FSAP) update undertaken by the International Monetary Fund (IMF) during 2014.1 It reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment. It is not intended to represent an analysis of the state of the banking sector or crisis management framework, which have been addressed in the broader FSAP exercise.
8. An assessment of the effectiveness of banking supervision requires a review of the legal framework, and detailed examination of the policies and practices of the institution(s) responsible for banking regulation and supervision. In line with the BCP methodology, the assessment focused on banking supervision and regulation in South Africa and did not cover the specificities of regulation and supervision of other financial intermediaries, which are covered by other assessments conducted in this FSAP.
9. The South African authorities agreed to be assessed according to the Revised Core Principles Methodology issued by the BCBS (Basel Committee of Banking Supervision) in September 2012. This assessment was thus performed according to a significantly revised content and methodology as compared with the previous BCP assessment carried out in 2010 which was conducted under the former BCP methodology. It is important to note that this assessment cannot and should not be compared to the previous undertaking, as the revised BCPs have a heightened focus on risk management and its practice by supervised institutions and its assessment by the supervisory authority, raising the bar to measure the effectiveness of a supervisory framework (see box for more information on the Revised BCPs).
10. The South African authorities also chose to be assessed against both the Essential and Additional Criteria but rated against only the Essential Criteria. In order to assess compliance, the BCP Methodology uses a set of essential and additional assessment criteria for each principle. Only the essential criteria (EC) were used to gauge full compliance with a CP. The additional criteria (AC) are recommended best practices against which the South African authorities have agreed to be assessed but not rated. A four-part grading system is used: compliant; largely compliant; materially noncompliant; and noncompliant. This is explained below in the detailed assessment section. The assessment of compliance with each CP is made on a qualitative basis to allow a judgment on whether the criteria are fulfilled in practice. Effective application of relevant laws and regulations is essential to provide indication that the criteria are met.
The 2012 Revised Core Principles
The revised BCPs reflect market and regulatory developments since the last revision, taking account of the lessons learnt from the financial crisis in 2008/2009. These have also been informed by the experiences gained from FSAP assessments as well as recommendations issued by the G-20 and Financial Stability Board, and take into account the importance now attached to: (i) greater supervisory intensity and allocation of adequate resources to deal effectively with systemically important banks; (ii) application of a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analyzing and taking pre-emptive action to address systemic risk; (iii) the increasing focus on effective crisis preparation and management, recovery and resolution measures for reducing both the probability and impact of a bank failure; and (iv) fostering robust market discipline through sound supervisory practices in the areas of corporate governance, disclosure and transparency.
The revised BCPs strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks. The supervisors are now required to assess the risk profile of the banks not only in terms of the risks they run and the efficacy of their risk management, but also the risks they pose to the banking and the financial systems. In addition, supervisors need to consider how the macroeconomic environment, business trends, and the build-up and concentration of risk inside and outside the banking sector may affect the risk to which individual banks are exposed. While the BCP set out the powers that supervisors should have to address safety and soundness concerns, there is a heightened focus on the actual use of the powers, in a forward-looking approach through early intervention.
The number of principles has increased from 25 to 29. The number of essential criteria has expanded from 196 to 231. This includes the amalgamation of previous criteria (which means the contents are the same), and the introduction of 35 new essential criteria. In addition, for countries that may choose to be assessed against the additional criteria, there are 16 additional criteria.
While raising the bar for banking supervision, the Core Principles must be capable of application to a wide range of jurisdictions. The new methodology reinforces the concept of proportionality, both in terms of the expectations on supervisors and in terms of the standards that supervisors impose on banks. The proportionate approach allows assessments of banking supervision that are commensurate with the risk profile and systemic importance of a wide range of banks and banking systems.
11. The assessors reviewed the framework of laws, rules, and other materials provided and held extensive meetings with officials of the South African Reserve Bank (SARB) Banking Supervision Department, and additional meetings with the National Treasury, auditing firms, and banking sector participants. The authorities provided a self-assessment of the CPs, as well as responses to additional questionnaires, and provided access to supervisory documents and files, staff and systems.
12. The assessors appreciated the cooperation received from the authorities. The team extends its thanks to staff of the authorities who provided cooperation, including provision of documentation and access, at a time when staff was burdened by many initiatives related to global regulatory changes and reforms in the financial sector oversight structure in South Africa.
13. The standards were evaluated in the context of the South Africa’s financial system’s structure and complexity. The CPs must be capable of application to a wide range of jurisdictions whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, according to the methodology, a proportionate approach is adopted, both in terms of the expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. An assessment of a country against the CPs must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, risk profile and cross-border operation of the banks being supervised. The assessment considers the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another.
14. An assessment of compliance with the BCPs is not, and is not intended to be, an exact science. Reaching conclusions required judgments by the assessment team. Nevertheless, by adhering to a common, agreed methodology, the assessment should provide the South African authorities with an internationally consistent measure of the quality of its banking supervision in relation to the BCPs, which are internationally acknowledged as minimum standards.
15. To determine the compliance with each principle, the assessment has made use of five categories: compliant; largely compliant, materially noncompliant, noncompliant, and nonapplicable. An assessment of “compliant” is given when all ECs are met without any significant deficiencies, including instances where the principle has been achieved by other means. A “largely compliant” assessment is given when there are only minor shortcomings, which do not raise serious concerns about the authority’s ability to achieve the objective of the principle and there is clear intent to achieve full compliance with the principle within a prescribed period of time (for instance, the regulatory framework is agreed but has not yet been fully implemented). A principle is considered to be “materially noncompliant” in case of severe shortcomings, despite the existence of formal rules and procedures and there is evidence that supervision has clearly not been effective, the practical implementation is weak or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A principle is assessed “noncompliant” if it is not substantially implemented, several ECs are not complied with, or supervision is manifestly ineffective. Finally, a category of “non-applicable” is reserved for those cases that the criteria would not relate to the country’s circumstances.
Institutional and Market Structure—Overview
A. Institutional Framework for Regulation and Supervision
16. The responsibility for the regulation and supervision of banks lies with the SARB. As provided by the Banks Act of 1990 (BA), its authority is exercised through the Registrar of Banks and the Office for Banks, also known as the BSD, which falls under the Registrar’s direction. Some important powers formally rest with the Minister of Finance, such as issuing regulations and formally making important supervisory actions. As an internal department of the SARB, the organizational governance of the BSD, including the Registrar, follows the rules applicable to the central bank. The Banks Act provides a comprehensive legal framework for banking regulation and supervision in the country. The SARB and the BSD also have the responsibility for the regulation and supervision of mutual banks as provided by the Mutual Banks Act of 1993. The National Credit Regulator (NCR), which reports to the Minister of Trade & Industry, has a certain regulatory power over lending activity for consumer protection. The Financial Intelligence Center (FIC) acts as the country’s Financial Intelligence Unit (FIU).
17. The regulatory framework for banks follows international standards, and the implementation of Basel III has started since 2013. The BSD attaches strong importance to adopting international standards established by the BCBS and other international bodies such as the Financial Stability Board and the International Accounting Standard Board (IASB). Its regulatory and supervisory framework on banks is continuously updated to incorporate the latest international standards. They were also one of the first jurisdictions implementing Basel II and 2.5. A shorter phase-in period for Basel III capital than that of internationally agreed is set. Also, one percent additional capital is required for all banks. The authorities also intend to introduce the Liquidity coverage ratio (LCR) and the Net stable funding ratio (NSFR) according to the internationally-agreed timeframe.
18. The FSB has broad regulatory authority over other types of financial activities. It regulates and supervises insurance companies, although some of their lending activities are also under the purview of the NCR. For securities companies, while the FSB is responsible for supervising fund managers and exchanges, the supervisory responsibility for market intermediaries is divided between the FSB and the Johannesburg Stock Exchange (JSE). The FSB does not have any role in issuer supervision, which is undertaken by the JSE for listed companies and by the Department of Trade and Industry (DTI) for unlisted companies. The FSB also regulates the JSE (including SAFCOM, its clearance and settlement subsidiary), Strate Limited, and pension funds.
19. The regulatory and supervisory framework for the financial sector is expected to go through a substantial transformation through the adoption of the Twin Peaks structure. Under the plan, the prudential regulation and supervision of financial conglomerates, banks, insurance companies, securities exchanges and central counterparties as well as money market funds would be assigned to a single statutory entity located in the SARB, which will be called the Prudential Authority. The market conduct regulation and supervision of financial conglomerates, banks, insurance companies, securities exchanges and central counterparties as well as money market funds would be assigned to a separate dedicated statutory entity to be situated in the FSB, which will be called the Market Conduct Authority. The National Treasury has published the relevant bill for public consultation early this year, which is expected to be revised further. Amendments to acts regulating financial industries, such as the Banks Act, are expected to take place following the completion of the reorganization.
B. Overview of the Banking Sector
20. The financial sector in South Africa is large and sophisticated. Total financial sector assets of about 298 percent of GDP exceed those of most other emerging market. Commercial banks make up the single largest segment of the financial system with assets of slightly more than 112 percent of GDP. But their share in total financial assets has been declining in recent years with the rapid growth of the nonbank financial sector, and currently only comprises less than 40 percent of the total. Close to 95 percent of banking assets is domestic; some of the largest banks shrank their operations in advanced economies and non-African emerging market economies, but South African banks’ exposure to other African countries has expanded rapidly in recent years.
Financial Assets in South Africa
Citation: IMF Staff Country Reports 2015, 055; 10.5089/9781484309773.002.A001
Source: SARB.
Financial Assets in South Africa
Citation: IMF Staff Country Reports 2015, 055; 10.5089/9781484309773.002.A001
Source: SARB.Financial Assets in South Africa
Citation: IMF Staff Country Reports 2015, 055; 10.5089/9781484309773.002.A001
Source: SARB.21. The banking sector is comprised of only 31 banks and foreign bank branches, and highly concentrated where large banks dominate. Five large banks—ABSA Bank, FirstRand Bank, Nedbank, Standard Bank of South Africa, and Investec Bank—dominates the sector, which together account for more than 90 percent of total banking assets. Four of the five large banks are providing full-scale banking services nationwide, while Investec’s operation is focused on corporate and private banking businesses. The rest of the sector consists of 7 locally owned banks, 5 subsidiaries of foreign banks, and 14 branches of foreign banks (end-2013). Except for two relatively large local banks focusing on retail banking, other banks, both locally controlled and foreign controlled, have limited operations, and not systemically important even regionally.
22. The banking industry has strong cross-border and cross-sectoral linkages. Three of the five large banks have strong ownership links with the U.K. Barclays, a U.K. global systemically important bank, has a fully-owned bank controlling company registered in South Africa, Barclays Africa Group, which owns a majority stake of ABSA Bank. Nedbank is indirectly owned by Old Mutual in the U.K, which also owns a major insurance subsidiary in South Africa. Investec is dual-listed on the JSE and London Stock Exchange and has a parallel structure where the U.K. holding company oversees the group’s non-African operations. In addition to Nedbank, all other major banks are also affiliated with insurance companies. For example, Standard Bank Group, the controlling company of Standard Bank, has the majority of shares in the Liberty Group, one of the largest insurers in the country. These bank-affiliated insurance companies underwrite a substantial proportion of private pension fund assets, and some banks also own asset management companies that offer unit trusts. These big banks have started to expand to other Sub-Saharan African countries, with Standard Bank and Barclays Africa Group spearheading the move. Four of the top five banks have 39 subsidiaries in 17 sub-Saharan countries. Their sizes of operation in these countries are still very small compared to the entire group, however.
Shares of Banking Assets
Citation: IMF Staff Country Reports 2015, 055; 10.5089/9781484309773.002.A001
Source: SARB.
Shares of Banking Assets
Citation: IMF Staff Country Reports 2015, 055; 10.5089/9781484309773.002.A001
Source: SARB.Shares of Banking Assets
Citation: IMF Staff Country Reports 2015, 055; 10.5089/9781484309773.002.A001
Source: SARB.23. Banks remained sound and profitable during the crisis, with good asset quality and high capital ratios. While non-performing loans (NPLs) jumped from 2 percent of total loans at the onset of the crisis to 6 percent in late 2009, the average NPL ratio declined steadily since then to 3.6 percent in 2013. The regulatory tier one ratio of 13.4 percent in 2013 also compares favorably with banks in other countries. Return on equity (ROE) of the four largest banks is staying close to 20 percent. South African banks have also accumulated a sizable net foreign asset position and there is no evidence of large-scale unreported borrowing from abroad. The SARB also applies a 1 percent systemic risk surcharge to the large banks in addition to minimum capital requirements.
24. Banks are dependent on wholesale deposits with high loan-to-deposit ratios. The average funding maturity seems to have shortened in recent years with short-term deposits (6 months in maturity) rising to 63.3 percent of total deposits from 60.3 percent in 2008. In addition, the liquid asset to short-term liabilities ratio is around 16 percent. While deposits make up the largest source of bank funding (87.5 percent), a large part (60 percent) of it is wholesale funding from non-bank financial institutions and corporations with maturities of six months or less, reflecting the structural situation in South Africa where households are investing in non-deposit products such as pensions, insurance products and unit trust, which are in turn deposited in banks by providers of those products. The average loan-to-deposit ratio is 127 percent.
Preconditions for Effective Banking Supervision
A. Macroeconomic Environment
25. The financial sector operates in a challenging economic environment. A combination of slow growth, high unemployment, low savings and relatively high household debt is sustaining large current account and fiscal deficits. The South African economy contracted by 0.6 percent of GDP in 2014Q1 and is projected to grow only by 1.4 percent this year, down from 2 percent in 2013, and a pre-crisis high of 5.6 percent in 2006. The unemployment rate, already persistently high, has risen steadily to 25 percent while inflation remained at 6 percent. Fiscal deficits averaging 4 ½ percent of GDP for the past five years has led to a sharp increase in government debt from 27 percent of GDP to 46 percent in 2014. Reflecting this macroeconomic environment, an international rating agency recently downgraded the sovereign foreign and local currency ratings. Exchange controls on capital transactions by residents are in place, which keeps rand in the system, although it has been gradually relaxed.
26. Household debt rose rapidly in the years prior to the global financial crisis (GFC) to 82.4 percent of disposable income in 2008, although declined somewhat since then. A credit boom in the years prior to the GFC and, from 2009 when interest rates dropped to record lows, fueled a sharp increase in household debt. Mortgage lending peaked at 30 percent annual growth rate in 2006, declining to single digits in 2012, before picking up again in the first quarter of 2014. Although the household-debt-to-disposal-income ratio has declined steadily from its peak, to 75.2 percent in 2013, it remains well above the historical average before the GFC. At end 2013, total bank lending to households is 56 percent of bank total loans and advances. Floating-rate mortgages account for a large proportion of household debt. Bank lending to the corporate sector is 31 percent of banking sector assets, and total corporate debt accounted for 62 percent of GDP in 2013, up from 57.6 percent in 2010. The increase reflected mostly external borrowing by public sector corporations, which doubled their external debt between 2010 and 2012.
B. Frameworks for Financial Stability Oversight, Crisis Management, and Systemic Protection
27. The SARB performs the function of promoting financial stability. This mandate was added by the Minister of Finance in 2010. The SARB has subsequently established the Financial Stability Committee to discuss issues related to financial stability. The Financial Stability Department of the SARB was recently separated from the BSD. To fulfill its macroprudential mandate, the SARB conducts a number of tasks including: assessing risks to system wide stability; sharing risk assessment with other agencies / the public; contributing to the development of macroprudential instruments and policies; and developing and implementing any discretionary policy actions to mitigate risks. The SARB publishes Financial Stability Review twice a year.
28. The framework is expected to be reorganized substantially as a part of the move to the Twin Peaks structure. The Financial Stability Oversight Committee (FSOC), chaired by the SARB Governor and includes the Prudential Authority and the Market Conduct Authority as a member and a representative from the National Treasury as an observer, will be created and become responsible for monitoring and assessing systemic risks to financial stability, and making recommendations or taking actions to reduce or eliminate these risks. The FSOC is also expected to play a central role in crisis management and resolution.
29. The current bank resolution regime in South Africa comprises powers assigned to a curator, who is appointed by the Minister based on the recommendation of the Registrar when a bank is close to insolvency. The curator has broad powers to take control of the bank and its assets, some of which require prior approval of the Minister, but they lack critical features necessary to deal with a systemic case, and minimize risks to public funds. The existing legal framework does not require mandatory recovery plans to be prepared by banks, but the BSD has announced the introduction of recovery and resolution planning in a phased-in approach through a number of Guidance Notes. As a member of the Financial Stability Board, the South African authorities are committed to reforming the resolution regime to make it compliant with the Key Attributes of Effective Resolution by end 2015.
30. Formal systemic protection is limited in South Africa, but the authorities have intervened in bank failure cases on an ad-hoc basis. The country does not have a depositor protection scheme or a framework for systemic liquidity provision, but, in the past, capital and liquidity injections were made mostly by the SARB in the interest of stemming deposit contagion and preserving financial stability. The authorities have been considering introducing a deposit insurance scheme for some time but no decision has been made yet. The SARB set up a committed liquidity facility (CLF) to support banks to meet the Basel III LCR requirement from 2015, but it does not prevent the central bank from providing emergency liquidity assistance on different terms than the CLF. While there is no formal legal framework for crisis management, the Financial Sector Contingency Forum, which is chaired by a Deputy Governor of the SARB and whose members include representatives from the National Treasury, SARB and FSB was established to coordinate efforts on contingency planning for financial crisis, among others.
C. Infrastructures for the Financial Sector
31. South Africa has a well-developed system of laws. The Companies Act was recently updated to incorporate the latest thinking. It includes provisions on bankruptcy/insolvency and related matters. The King Report III, which sets the corporate governance best practice, is applicable to all companies listed on the main board of the JSE. The contract law is also well developed and covers a wide range of matters including, among others, debt, mediation between parties, insurance, and share sales. Consumer protection is addressed in the Consumer Protection Act, which applies to the sale of goods and services, and supplemented by the National Credit Act (NCA) which covers credit agreements. Business laws can be enforced through the courts system or parties can make use of arbitration and mediation for the resolution of disputes. The independence and impartiality of the judiciary have not been questioned, but the efficiency of the courts can be sometimes hampered and efforts for improvement are ongoing.
32. Accounting and auditing in South Africa are based on international standard and a well developed system exists to ensure their consistency and quality.2
South Africa has implemented International Financial Reporting Standards (IFRS) and International Standards on Auditing since 2005. The JSE has required listed companies to use IFRS since January 1, 2005. The Companies Act, however, does not require all companies to have their financial statements audited. The Companies Act Regulations permit the use of either IFRS, the IFRS for SMEs, or South African GAAP in specific instances. The Financial Reporting Standards Council (FRSC), a governmental body formed in 2011, has responsibility as the advisor to the Minister of Trade and Industry on financial reporting standards.
The Independent Regulatory Board for Auditors (IRBA) is responsible for overseeing registered auditors and audits performed by them. The South African Institute of Chartered Accountants (SAICA) is the national professional organization of Chartered Accountants, with more than 36,000 members. It participates in a number of international accounting bodies, including the trustees of the International Financial Reporting Standards Foundation (IFRS Foundation) and the International Accounting Standards Board (IASB). The Auditing and Assurance Standards Board (AASB), consists of SAICA and other business bodies, is responsible for ensuring consistency between South African auditing pronouncements and those of the International Auditing and Assurance Standards Board (IAASB). The Consultative Advisory Group advices the IAASB on technical issues, and its members include representatives from the SARB, FSB, JSE, Strate, and Institute of Internal Auditors.
33. South Africa also has a developed financial infrastructure, including a stock exchange, a Central Securities Depository, a national payment system, and credit bureaus:
The JSE is the primary exchange in South Africa and the largest in Africa. It offers primary and secondary markets for a range of financial products, including equities, bonds and derivatives. SAFCOM, a wholly owned subsidiary of the JSE, is a licensed clearinghouse for derivatives listed on the JSE.
Strate is the central securities depository (CSD). It provides electronic settlement for securities—including equity, bond and derivative products, such as warrants, Exchange Traded Funds (ETFs), retail notes and tracker funds for the JSE, and money market securities for the South African market, as well as equities for the Namibian Stock Exchange. It also acts as a clearinghouse for some debt trading.
The South African Multiple Option Settlement (SAMOS) system, owned and operated by the SARB, is the core of the South African national payment system. SAMOS is a real-time gross settlement system, which settles, among others, the rand settlement of all the financial market transactions, interbank transactions and the settlement of foreign exchange transactions with other international banks.
South Africa has four major credit bureaus with consumer and business credit information. The NCA provides that the Minister of Trade & Industry must publish regulations on how consumer credit information held by credit bureau must be reviewed, verified, corrected and removed. The NCR provides oversight over these credit bureaus. Data contributors to the credit bureaus include banks, credit driven retailers, credit card companies, micro lenders, telecommunication and insurance companies, courts, debt counsellors, debt collectors.
Detailed Assessment
Table 1.
Supervisory Powers, Responsibilities, and Functions
Table 1.
Supervisory Powers, Responsibilities, and Functions
| Principle 1 | Responsibilities, objectives and powers. An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.3 A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.4 |
| EC1 | The responsibilities and objectives of each of the authorities involved in banking supervision5 are clearly defined in legislation and publicly disclosed. Where more than one authority is responsible for supervising the banking system, a credible and publicly available framework is in place to avoid regulatory and supervisory gaps. |
| Description and findings re EC1 | The Banks Act of 1990 (BA) Section 3 provides “for the registration as banks of public companies desiring to conduct the business of a bank and for the other purposes of this Act there shall, as part of the Reserve Bank, be an office in Pretoria called the Office for Banks, and at the head of such office shall be a person to be styled the Registrar of Banks,” thus giving the power of registration and related matters to the South African Reserve Bank (SARB) Bank Supervision Department (BSD), and the Registrar, its head. The powers of the Registrar, including the registration of banks as well as conducting a supervisory review process—consists of, among others, on- and off-site supervision—are listed in the BA. No other authorities are provided responsibilities over prudential supervision of banks. The BA and other legislation, however, do not provide the objectives of the BSD or the Registrar. Instead, the BSD’s annual report, which is required by law as explained in CP2, describes its mission as “to promote the soundness of banking system and to contribute to financial stability.” The BSD explains this is its interpretation of the BA and it has evolved over time. |
| EC 2 | The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it. |
| Description and findings re EC2 | As explained above, although no objectives are given in related legislation, the BSD views its primary mission as “to promote the soundness of the banking system and contribute to financial stability,” as described in its annual report. It regards its other responsibilities, such as the control of banking-related activities by unregulated persons, as secondary. |
| EC3 | Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile6 and systemic importance.7 |
| Description and findings re EC3 | BA Chapter VI provides a general framework of quantitative prudential requirements—minimum capital, minimum liquid assets and large exposure requirements. BA Section 74 gives the Registrar power to take actions against banks and controlling companies who failed to comply with these quantitative requirements, including imposing administrative fines. BA Chapter V also sets out organizational requirements such as on corporate governance. The Finance Minister can issue regulations “as to any matter which is required or permitted to be prescribed by regulation under this act.” Under the provision of this section, “Regulations relating to Banks” (Regulations) as well as other relevant regulations have been issued, which contain necessary details for implementing the BA, including reporting requirements (BA returns) as well as qualitative requirements on such issues as corporate governance and internal control. The Regulations are generally drafted by the BSD with necessary consultation with the National Treasury. The BSD states that it does not have any problem with issuing necessary regulations or amending them. The Registrar can also issue a circular “with guidelines regarding the application and interpretation of the provisions of this act” and a guidance note, which provides information and expectations regarding the BSD’s regulation and supervision. These do not have the power of law by themselves, but are accepted by banks as indicating the expectation of the BSD and thus followed. In addition, recently added BA Section 6(6) provides the Registrar power to issue a directive to a bank or a controlling company regarding the application of the BA, which may include the issuing of a non-financial sanction, requiring a bank to cease from engaging in acts or to perform corrective actions, or the request of additional reporting. Contrary to circulars and guidance notes, these are directly enforceable. Directives are sometimes issued to all banks to provide a requirement or guidance that apply to the whole industry. Regulation 38 (4) gives the power to the Registrar to increase prudential requirements for a bank, including to maintain additional capital, deduct amounts from the eligible capital, strengthen the risk management and other bank policies, to reflect its actual risk profile or inadequacy in risk management, internal control, remuneration or other policies. |
| EC4 | Banking laws, regulations and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate. |
| Description and findings re EC4 | The BA, which was promulgated in 1990, has been subsequently updated 8 times, to make it compliant with Basel II and III and to ratify issues detected during the previous BCP assessment, among others. Regulations, circulars and guidance notes are also revised and published frequently. In the case of changes to the Act, involvement of a Standing Committee for the Revision of the Banks Act is required (BA Section 92). The Standing Committee is chaired by a SARB Deputy Governor, and has members representing the Banking Association of South Africa, National Treasury, the BSD and other representatives of the SARB. Current employees and Board members of regulated entities, including banks, have not been appointed as members of the Standing Committee in the recent past. A first draft, prepared by the BSD, is presented to the Standing Committee. Approval of the Standing Committee is followed by release for public comment. After addressing substantive comments, a final version is again presented to the Standing Committee. Its final approval leads to approval by the Minister of Finance who furthermore obtains the Cabinet’s permission for submitting the Bill to a parliamentary process. Once the Bill has been debated and approved by the Parliament and assented to by the President it will be promulgated as an amendment to the Act. The authorities explain the involvement of the Standing Committee is to provide technical expertise to the process. The members of the Standing Committee are appointed for the term of 3 to 4 years when a need arises. At the time of the assessment, no member is appointed. Changes to regulations follow the same route through the Standing Committee and public comment, culminating with the Minister of Finance signing and publishing the amended regulations. No parliamentary process is required for changes to regulations. The regulations are amended or issued frequently. For circulars and guidance notes, no consultation is required, as they only contain interpretations of existing laws and regulations, and are often issued in response to the industry’s request for guidance. For directives, consultation with relevant banks is necessary. |
| EC5 | The supervisor has the power to:
|
| Description and findings re EC5 | On access to banks, BA Section 6(3) provides the Registrar the power to have discussions with the CEO, executive officers or staff members of a bank, controlling company of a bank, subsidiary or trust of that bank to achieve effective supervision. Section 7(1) also provides the power to direct a bank to supply any information required for the performance of the Registrar’s function s and duties prescribed in the BA. On the review of the overall activities of a banking group, in BA Section 1 (1), “banking groups” are defined in such a manner to include natural and judicial persons associated with and connected to a bank, irrespective of whether any of these persons is domiciled in the same country as any of the others. The abovementioned BA Section 6(3) provides that access to a bank and its related entities is to achieve effective supervision by the Registrar including on a consolidated basis of the group of which that bank is a member. Thus, reporting requirements prescribed in the Regulations covers consolidated activities of banks, including their cross-border activities. (Regulations 36, 37) (For details, see CP 12). On supervision of activities of foreign banks, foreign bank subsidiaries are treated as domestically incorporated banks and therefore subject to the same regulation and supervision that applies to all domestically incorporated banks in South Africa. For foreign banks operating as branches, BA section 18A provides that reference to banks in the laws covers foreign bank branches in the country unless expressly stated otherwise, making these branches subject to the same regulation and supervision as domestically-incorporated banks. |
| EC6 | When, in a supervisor’s judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor has the power to:
|
| Description and findings re EC6 | See CP 11 for detailed discussion. As explained above, BA Section 6 (6) provides the Registrar power to issue a directive concerning a particular bank, after consultation with the relevant bank. The section was recently added to the BA to provide flexible powers to the Registrar. Directives can be used to require banks to, within the specified time period, (i) cease or refrain from engaging in any act, omission or course of conduct or perform such acts necessary to remedy the situation, (ii) perform such acts necessary to comply with the directive or to effect the change required to give effect to the directive, or (iii) provide such information and documents relating to the matter as specified in the directive. Similarly, as described in EC3, the Regulation provides the supervisor power to require banks to correct their policies and processes. In addition, BA Section 74 gives the Registrar a specific power to apply measures for a case where a bank fails to comply with quantitative prudential requirements, such as minimum capital or minimum liquid assets. In this case, no consultation with the relevant banks is necessary. BA Section 91A provides the Registrar the power to impose a monetary penalty not exceeding 10 million ZAR for every day during which contravention or non-compliance with the Act continues. Regarding the banks’ registration (license), BA Section 26 provides the Registrar power to restrict activities of a bank for such reasons as: the bank or its officers has been convicted of any offence in terms of the BA; the bank does not carry on satisfactorily the business of a bank; it has failed to comply with a requirement of the BA; or, it continues to employ an undesirable practice. However, a 30-day notice period is required. Alternatively, the supervisor can apply to a competent court for an order cancelling or suspending the registration of a bank for reasons such as above. On resolution, BA Section 69 provides that, when it has become evident to the BSD or a bank has informed the BSD that it is or will be unable to repay depositors when required, the Registrar may recommend to the Minister that it be placed under curatorship. The curator is appointed by the Minister with the management of the bank vested in the curator. |
| EC7 | The supervisor has the power to review the activities of parent companies and of companies affiliated with parent companies to determine their impact on the safety and soundness of the bank and the banking group. |
| Description and findings re EC7 | The BA and the Regulations are applicable to both banks and controlling companies of banks, which have material control over banks. BA Section 4 (4) provides that the supervisory review process to be implemented and maintained by the Registrar covers “a bank or controlling company and its respective branches, subsidiaries, joint ventures or related entities, within or outside the Republic.” Those powers provided in BA Section 6 (3) and Section 7 described in EC5 apply not only to banks but also to controlling companies and subsidiaries of banks and controlling companies, with a view to achieving effective supervision of the group on a consolidated basis. For details, see CP 12. |
| Assessment of Principle 1 | Largely Compliant |
| Comments | The BA and associated rules provide a broadly appropriate framework for regulating and supervising banks. It also provides clear responsibilities of and adequate powers to the Registrar of Banks and the Banking Supervisory Department. However, the lack of legally defined objectives of the supervisor as well as regulation and supervision of banks is a shortcoming of the current BA and related legislation to be fully compliant with this CP. The assessors note and welcome, however, the authorities plan to address this issue in the expected twin peaks reform. (For discussion on the power to suspend or remove a bank registration, see CP 11.) In addition, to further improve the effectiveness and efficiency of the regulatory process, the assessors also recommend the authorities to review the following issues:
|
| Principle 2 | Independence, accountability, resourcing and legal protection for supervisors. The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor. |
| EC1 | The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision. |
| Description and findings re EC1 | As mentioned in CP1, BA Section 3 provides that the Office for Banks (BSD) be established as a part of the SARB, with a head titled as the Registrar of Banks, who is designated by the SARB, subject to the approval of the Minister, from its officers or employees. Section 4 also provides that the Registrar “shall perform, under the control of the said Bank (SARB) and in accordance with the directions issued by the Bank from time to time, the functions assigned to the Registrar by or under this act.” However, there is no legally stipulated operational independence of the Registrar and the BSD per se. Also, there are a number of supervisory actions that require the Minister’s decision. The authorities explain that these are for the check-and-balance purpose and that in practice the Registrar and BSD have full discretion to take any supervisory actions or decisions, and the recommendations by the Registrar and the BSD are usually followed by the Minister. But, the authorities also noted that in very limited cases the Minister may make a different decision in view of other legitimate policy objectives such as with regards to the competition policy while paying due regard to the prudential objectives. According to the authorities, there have been no cases in recent years where the Minister acted against the Registrar’s recommendation to reject applications by banks or bank registration applicants. Regarding the SARB, its independence is prescribed in the Constitution of the Republic of South Africa, which stipulates that “the South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour, or prejudice, but there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters.” This provision is interpreted to cover the BSD’s banking regulatory and supervisory activities. The budget and corporate governance structures of the BSD form a part of the SARB and thus are approved by the SARB Board, which is responsible for the corporate governance of the SARB. The SARB Board includes representatives from the government and industries, including the financial industry, but it does not have power over, nor is it involved in, the regulatory and supervisory work of the BSD. |
| EC2 | The process for the appointment and removal of the head(s) of the supervisory authority and members of its governing body is transparent. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The reason(s) for removal is publicly disclosed. |
| Description and findings re EC2 | BA Section 4 (2) stipulates that “the Reserve Bank shall, subject to the approval of the Minister, designate an officer or employee in its service as Registrar of Banks, who shall perform, under the control of the said Bank and in accordance with the directions issued by the Bank from time to time, the functions assigned to the Registrar by or under this act.” The Registrar has traditionally been appointed from the senior staff in the BSD (although the current Registrar came from the private sector) and is not appointed for a specific term, similar to other senior officials in SARB except for the Governor and the Deputy Governors. Laws define neither a minimum term nor specific reasons for removal from the office for the Registrar. Removal of the Registrar would be thus subject to general legal provisions in South Africa governing employment relations, as well as the SARB employment contracts and policies. There are no provisions that require reasons for removal to be publicly disclosed. The authorities explain dismissal occurs following labor law procedures and when the person is found guilty of misconduct. In such a case, the reason for dismissal may be made public. In case of the Governor and the Deputy Governors, a five-year term is stipulated in the South African Reserve Bank Act (SARBA), although the reasons for dismissal are not specified in law. |
| EC3 | The supervisor publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.8 |
| Description and findings re EC3 | BA Section 10 provides that the Registrar annually submits to the Minister a report, which will then be transferred to the Parliament. No Parliamentary discussion follows. The annual report describes the BSD’s vision and mission, provides the Registrar’s review of the year, and explains the developments of the banking sector in the country as well as activities of the BSD. |
| EC4 | The supervisor has effective internal governance and communication processes that enable supervisory decisions to be taken at a level appropriate to the significance of the issue and timely decisions to be taken in the case of an emergency. The governing body is structured to avoid any real or perceived conflicts of interest. |
| Description and findings re EC4 | The BSD is managed by a Registrar’s Committee, consisting of the Registrar and the Deputy Registrars—sometimes called “Deputies meeting,” and a management committee (ManCo), chaired by the Registrar and consisting of Deputy Registrars and Assistant General Managers (AGMs). The delegation of powers is done in accordance with a document issued by the Legal Services Department of the SARB with the approval of the Governor’s Executive Committee. With regard to the BSD, while laws and regulations give powers explicitly to the Registrar, these can be delegated to other senior-level officers according to the significance of the issue. The BSD is also subject to the risk management and internal audit functions of the SARB. As mentioned in EC1, the overall responsibility for corporate governance of the SARB, including the BSD, lies with the SARB Board, which includes persons with skills and knowledge of different industries, including the financial industry. But the SARB Board’s role is limited to governance of the central bank and its approval is only needed for such issues as the SARB’s budget, annual reports, and general remuneration polices; it is not involved in regulatory and supervisory decision-making or personnel decisions. Directors and employees of banks and controlling companies are prohibited to become a member of the SARB Board. (South African Reserve Bank Act (SARBA) Section 4 (4)). Retired officials of the financial sector are also not appointed. |
| EC5 | The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed. |
| Description and findings re EC5 | All staff of the SARB is subject to a Code of Conduct and a set of staff policies that aims to ensure professionalism and integrity. The Code of Conduct and the associated policies provide, for example, restrictions on the SARB employees taking positions outside the central bank or receiving gifts from supervised entities. In addition, the BSD has its own Code of Conduct to strengthen the aim. Regarding the information obtained through work, its confidentiality is set out in SARBA Section 33 (See CP3). Banks and external auditors confirmed to the assessors that they regard the BSD highly. They also see the BSD staff being highly professional and with integrity and technical expertise, even though a number of them joined the supervisor in recent years. The industry also expressed some concern that a number of experienced senior staff of the BSD are expected to leave in the near future. |
| EC6 | The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes:
|
| Description and findings re EC6 | As a department of the SARB, the BSD’s budget forms a part of the central bank’s budget. The BSD explains that it has always been allocated the resources it requests from the Governors Executive Committee of the SARB, which decides on the budget. Oversight of the budget process is provided by the SARB Board. The SARB’s budget is self-financed through revenues from its central banking operations. The BSD’s budget is not supported by levy on supervised entities, although registration fees are charged on banks and controlling companies which go into the SARB’s budget. The BSD staff number grew from approximately 100 in 2011 to 150 in 2014 (excluding the Financial Stability Unit) mainly due to an increase in the Risk Analysis teams and the Anti-Money Laundering Team. Among these, 54 are in charge of supervision, 34 are risk specialists, 9 in policy/regulation/legal, 7 in IT, and 17 for on-site reviews and AML. The Financial Stability Unit, with approximately 25 staff members, separated from the BSD in April 2014 to become an independent department in the SARB. Direct supervision responsibilities are allocated to those in charge of supervision, called frontline analysts in the BSD, who manage relations with banks and continuously monitor and communicate with them. Even for smaller banks, including foreign bank branches, no more than two banks are allocated to one frontline analyst. For a large bank, its frontline analysis team could consist of close to 10 staff members, including managers and senior managers. In addition, the risk specialists, who are specialized in each risk category, will be allocated to work on individual banks as needed. These risk specialists also conduct validations and reviews of banks’ internal risk models, which include on-site reviews. The on-site and AML teams focus on “deep dive” on-site reviews on AML and other issues, mostly credit risk to date. Regarding the salary scale for its staff, the SARB’s Human Resources Department conducts regular remuneration surveys to benchmark remuneration within the market. The SARB has a policy to benchmark its staff’s salary 60 percent of the salary level of comparable private sector employees, excluding other benefits. The BSD explains that it has not experienced any difficulty in attracting and retaining staff of high caliber, for reasons such as its jobs providing unique intellectual challenges and that the central bank is regarded highly as an employer in the country. It also explains that it has been able to attract talent from the banking industry in recent years, including risk specialists, although a few pockets of relatively difficult areas to recruit people remain, most notably people with advanced quantitative skills. The turnover rate for the BSD has been relatively low, with 4.47 percent in 2013. In most cases, supervisors leaving the BSD are employed by the banking industry. Cooling-off periods are required for senior staff members, e.g., the Registrar and Deputy Registrars. Two well-defined expert career-paths for staff members—bank analyst and risk analyst—are defined and brought into force from April 2014. For example, a new frontline analyst is usually assigned to offshore analysis of a large bank to gain experiences before becoming responsible for standalone banks. The budget for the BSD has also increased significantly, more than doubling from 2009/10 FY to 2013/14 FY. This includes a significant increase in international travel as a number of staff members are involved in various subcommittees of the Basel Committee on Banking Supervision (BCBS), of which South Africa is now a member. The BSD explains it does not have any difficulty in securing adequate budget for training, IT and travel. As an example, it cited that the department has moved from a paper-based system in 2012 with adequate budgetary support. On training, the BSD emphasizes the importance of On-the-Job Training and in-house, peer-to-peer training. It also stresses the importance of participating actively in international works, particularly subgroups of the BCBS, to enhance its understanding of the latest issues in banking supervision, even though it involves substantial travel costs and staff time. |
| EC7 | As part of their annual resource planning exercise, supervisors regularly take stock of existing skills and projected requirements over the short- and medium-term, taking into account relevant emerging supervisory practices. Supervisors review and implement measures to bridge any gaps in numbers and/or skill-sets identified. |
| Description and findings re EC7 | The annual budget cycle of the SARB requires senior management of the BSD to consider gaps in existing resources and skills which form the basis of its budget request. Also, the BSD is required to submit a document on its strategy to the Governor, which includes a description of necessary resourcing to implement the strategy. The BSD conducts more medium-term resource assessments from time to time. For example, in 2011, the BSD’s assessment concluded the need to increase risk specialists and resources for AML/On-site work over time. Currently, as a part of the transition to the Twin Peaks framework, the BSD is engaging in a longer-term resourcing assessment. |
| EC8 | In determining supervisory programmes and allocating resources, supervisors take into account the risk profile and systemic importance of individual banks and banking groups, and the different mitigation approaches available. |
| Description and findings re EC8 | As described in detail in CP8 and 9, an annual supervisory plan is established for each bank taking into account its risk profile and systemic relevance. The specialist resources are allocated based on specific supervisory need for a particular bank over the course of a year, which is incorporated in the supervisory plan. The supervisory plan is continuously revised, which may change the allocation of resources during the year. These are discussed constantly between the frontline analyst teams and risk teams, as well as among the BSD’s senior management. |
| EC9 | Laws provide protection to the supervisor and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. The supervisor and its staff are adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith. |
| Description and findings re EC9 | BA Section 88 stipulates that no liability shall be attached for the SARB as well as its Board members, the Registrar, officers and employees, either in their official or personal capacities for any loss sustained by or damage caused to any person as a result of their performance with good faith of any function or duty under the BA. The SARB also has a framework, as a part of its employment contract, to cover cost of litigations against its staff members that arose from their work-related conduct. In recent years, there have been no cases where the Court ruled against the BSD or its staff on lawsuits regarding their performance of their duties. |
| Assessment of Principle 2 | Largely Compliant |
| Comments | The BSD has an appropriate level of resources with highly qualified staff and substantial specialist skills recently added, even though some of them need to accumulate experiences further. The legal protection of the supervisor is also adequate. Its operational independence is fully respected in practice, but there are a few areas where the framework needs to be enhanced to enshrine the operational independence of the supervisor in related legislation and make it fully compliant with the CP. Particularly, regarding the appointment and removal processes of the Registrar, the legal framework should be revised to include (A) a fixed term of the appointment, (B) specific reasons for the removal, and (C) the requirement to publish the reasons for removal, as required in EC2. In terms of the involvement of the Minister in a few supervisory actions, although the assessors understand the supervisor’s decisions are respected in practice, there is a need to ensure that the Minister’s power is exercised under the principle of constrained discretion. Also, improvements in regulatory frameworks such as those on competition policies that overlap with the banking legislation have possibly reduced the need for the Minister’s discretion. The authorities should therefore review the legislation to limit the cases that require the Minister’s involvement to those that are absolutely necessary and clarify in the laws objectives for intervention. This should also include the clarification of the idea of “prudential veto” where the Minister should not be allowed to override the recommendation by the supervisor to reject applications on registration and other actions made on prudential grounds. Regarding the supervisory resources, while the assessors saw the current level as broadly adequate given the limited number of supervised entities, the authorities should review the adequacy of resources reflecting expected changes in the responsibility of the supervisor under the new twin peaks structure, taking into account the need for further improvements in its supervisory approach as recommended in CP 8, 9 and 12. |
| Principle 3 | Cooperation and collaboration. Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.9 |
| EC1 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and/or the stability of the financial system. There is evidence that these arrangements work in practice, where necessary. |
| Description and findings re EC1 | MOUs for cooperation have been established between the BSD and the Financial Services Board (FSB) as well as STRATE, which includes arrangements for exchange of information and mutual assistance. With the FSB, quarterly meetings are held to discuss issues related to large banks and insurance firms, most of them are interrelated. Agenda of these meetings include such issues as supervisory plans and supervisory findings. Meetings with the National Treasury and the National Credit Regulator (NCR) also take place as needed. There are also frequent informal contacts between these institutions at the technical level. Close cooperation and frequent contacts exist between the BSD and the Financial Stability Department of the SARB, which is responsible for the stability of the financial system in South Africa. As described in CP2, the latter was a part of the BSD until April 2014, which contributes to the close relationship between the two departments. |
| EC2 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with relevant foreign supervisors of banks and banking groups. There is evidence that these arrangements work in practice, where necessary. |
| Description and findings re EC2 | BA Section 4(3) provides that the Registrar may enter into written cooperation arrangements with a host or consolidating supervisor or any other person or institution as the Registrar may deem fit. A number of MOUs have been entered into between the SARB and other regulatory authorities in jurisdictions where South African banks operate or from which banking institutions operating in South Africa originate—25 MOUs are already put in place at end-2013 and a number of others are under negotiation. These memoranda provide for the sharing/exchanging of information and coordination of supervision where applicable. These MOUs provide the framework for information exchange including the confidentiality requirements, meetings between the supervisors, on-site visits to banks’ foreign operations, and crisis management. The assessors reviewed an example of MOU. For the practice of home-host relations, see CP13. Since 2009, the BSD’s policy has been to allow only the acquisition or establishment of local (inward) and cross-border banking operations in instances where an MOU with the cross-border banking supervisor concerned has been concluded. The BSD explains that this decision is underpinned by global initiatives to ensure that cross-border activities do not contribute to enhanced risk, as was evidenced by the global financial crisis. For the member countries of the Southern African Development Community (SADC), heads of state or government have signed a Protocol on Finance and Investment (PFI), which, among other things, includes a section setting out the framework for cooperation and coordination in banking regulatory and supervisory matters, similar to those included in MOUs. SADC member countries are: Angola; Botswana; the Democratic Republic of Congo; Lesotho; Malawi; Mauritius; Mozambique; Namibia; Seychelles; South Africa; Swaziland; Tanzania; Zambia; and Zimbabwe. A few South African banks are particularly active in the region, which in the BSD’s view enhances the importance of regional cooperation. |
| EC3 | The supervisor may provide confidential information to another domestic authority or foreign supervisor but must take reasonable steps to determine that any confidential information so released will be used only for bank-specific or system-wide supervisory purposes and will be treated as confidential by the receiving party. |
| Description and findings re EC3 | SARBA Section 33 provides that all information gathered by the SARB is confidential and may not be shared with third parties, except for the Minister and Director General of National Treasury. BA Section 89 then provides for specific instances when the Registrar may share information to persons who are given function by laws in South Africa (e.g., tax authorities) or to foreign supervisors, provided the recipient authorities are willing and able to keep the information confidential. As described above, clauses on sharing of confidential information are included in MOUs with foreign supervisors. |
| EC4 | The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information and is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. In the event that the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information. |
| Description and findings re EC4 | As mentioned in the previous EC, SARBA Section 33 provides that the SARB employees should not disclose information gained through participation in SARB activities, except (1) to the Finance Minister and Director General of National Treasury, (2) for the purpose of performing the employee’s duties, or (3) being required before a court of law or under any law. However, there is no provision to limit the SARB, the Finance Ministry, or the National Treasury to use confidential information only for supervisory purposes. In case of information received from a foreign supervisor, MOUs contain provisions that stipulate information provided under the MOU shall be used only for lawful supervisory purposes and remain confidential. They also require that the supervisors do not disclose or act on information given by counterparts without the prior written consent and prompt notification if required to release such information. The BSD explains that there has not been any case where the BSD had to release confidential information given by foreign supervisors. |
| EC5 | Processes are in place for the supervisor to support resolution authorities (e.g., central banks and finance ministries as appropriate) to undertake recovery and resolution planning and actions. |
| Description and findings re EC5 | The Registrar and the BSD are the resolution authority for banks. Thus, it is expected on-going supervision will support recovery and resolution planning and actions. See CP 9 for details. |
| Assessment of Principle 3 | Compliant |
| Comments | Legal provisions as well as operational frameworks for cooperation and collaboration with domestic and foreign authorities are in place. Regarding the confidentiality of information, although the assessors view the current legal framework and its practical application provides a reasonable assurance of protecting the confidentiality of supervisory information, the reliance on SARBA Section 33 as well as the manner BA Section 89 is stipulated leave room for the information to be used for non-supervisory purposes. It is therefore recommended the authorities review the relevant provisions of the BA to ensure the confidential information shall only be used for supervisory purposes, unless specifically required by court orders or provisions in other laws as provided in EC3 and 4. |
| Principle 4 | Permissible activities. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled. |
| EC1 | The term “bank” is clearly defined in laws or regulations. |
| Description and findings re EC1 | BA Section 11 stipulates that “no person shall conduct the business of a bank unless such person is a public company and is registered as a bank in terms of this act.” “The business of a bank” is then defined in Section 1(1) as accepting deposits from the general public as a regular feature of its business, soliciting or advertising for deposits, or utilizing the collected money for loans or investments. A broad definition of “deposit” is also given in the same subsection. |
| EC2 | The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations. |
| Description and findings re EC2 | As noted above “the business of a bank” is defined in BA Section 1(1). It covers such activities as accepting deposits from the general public, soliciting or advertising for deposits, and lending or investing those funds accepted as deposits. Also, the Registrar may cover certain activities as the business of banks by notice in the Gazette after consultation with the Governor. The BA does not provide restrictions on banks engaging in non-banking businesses except for investing in insurance firms. But the BSD has adopted a policy that non-banking business shall be conducted by a controlling company as its subsidiary and not directly by a bank, which is enforced by being included as a condition for registration, among others. |
| EC3 | The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled. |
| Description and findings re EC3 | BA Section 22 (5) prohibits the use of a name or a description which includes the word “bank,” or any derivative thereof, or the words “deposit-taking institution” or “building society,” or any derivative thereof, unless the business is an authorized bank, a foreign bank branch, or a registered controlling company, and authorized by the Registrar. |
| EC4 | The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks.10 |
| Description and findings re EC4 | As described in EC1, BA section 11 (1) prohibits conduct of the business of a bank, which includes the taking of deposits from the public, unless it is done by a public company and registered as a bank under the BA. The exemption of application of the BA is provided in Section 2, which includes public institutions governed by separate acts and guaranteed by Government, such as the Land Bank, the Development Bank of Southern Africa, and the Public Investment Cooperation Limited, as well as mutual banks, which are covered by the Mutual Bank Act and under the supervisory authority of the Registrar. Other entities and activities can be exempted from “the business of banks” by being designated by the Minister by notice in the Gazette. Except for mutual banks, these entities in practice do not collect retail deposits from the public. |
| EC5 | The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public. |
| Description and findings re EC5 | A list of all registered banks (including foreign bank branches and representative offices) is published in the annual report issued by the Registrar. The list is also available on SARB’s website and updated whenever changes to the list occur. |
| Assessment of Principle 4 | Compliant |
| Comments | The Banks Act provides clear definitions of activities that are only permitted to be conducted by registered banks, including taking deposits from the public. |
| Principle 5 | Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)11 of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition-(including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained. |
| EC1 | The law identifies the authority responsible for granting and withdrawing a banking license. The licensing authority could be the banking supervisor or another competent authority. If the licensing authority and the supervisor are not the same, the supervisor has the right to have its views on each application considered, and its concerns addressed. In addition, the licensing authority provides the supervisor with any information that may be material to the supervision of the licensed bank. The supervisor imposes prudential conditions or limitations on the newly licensed bank, where appropriate. |
| Description and findings re EC1 | The licensing of banks in South Africa is a two-step process where the Registrar has the power of granting application for both steps. For the first step, BA Section 12 (1) provides that any person who wishes to conduct the business of a bank may apply to the Registrar for authorization to establish a bank. Section 13 then provides that the Registrar may grant or refuse the relevant application or grant the application subject to conditions. After the authorization is granted, the applicant may apply to the Registrar for the registration of the institution as a bank (Section 16). The Registrar then either grants or refuses the application of the registration (Section 17). The Registrar can attach conditions to the registration (Section 18). Regarding revocation of authorization, the Registrar can revoke it if the application was based on false or misleading information or a bank cannot be formed within 12 months (Section 14). For revocation of registration:
Furthermore, the Registrar can apply to a court for an order of cancelling or suspending the registration if there exist grounds justifying such cancellation or suspension in the opinion of the Registrar other than those described above. (Section 25). For details, see CP 11. In practice, only a handful of foreign bank branches have been registered in recent years; no domestically incorporated bank has been registered for more than 10 years. |
| EC2 | Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or-supervisor determines that the license was based on false information, the license can be revoked. |
| Description and findings re EC2 | BA Section 13 (2) provides a number of qualitative criteria for granting authorization, including that:
In case of granting the application for registration, in addition to the above criteria for authorization, BA Section 17 provides further criteria including that the bank does not propose to adopt undesirable methods of conducting businesses and the memorandum of incorporation is consistent with requirements under the BA and not undesirable. The Regulations (52, 53) provide details for the application process. In case of foreign bank branches, additional criteria are provided in the Regulation on “Conditions for the conducting of the business of a bank by a foreign institution by means of a branch in the Republic,” such as that the parent institution’s total assets must be at least USD 1 billion and the parent bank needs to have a long-term investment grade credit rating by an internationally recognized rating agency. As described in EC1, the BA provides the Registrar the power to revoke the authorization or the registration when it is based on false or misleading information. |
| EC3 | The criteria for issuing licenses are consistent with those applied in ongoing supervision. |
| Description and findings re EC3 | As described above, the BA provides criteria for authorization and registration that are consistent with those applied for ongoing supervision. |
| EC4 | The licensing authority determines that the proposed legal, managerial, operational and ownership structures of the bank and its wider group will not hinder effective supervision on both a solo and a consolidated basis.12 The licensing authority also determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future. |
| Description and findings re EC4 | As noted in EC2, the BA provides the broad criteria that only banks that will be in the public interest and conduct their businesses in a prudent manner should be authorized and registered. In addition, the criteria include specific requirements on the bank’s management. During the application process, detailed information on various aspects of the proposed bank’s structure needs to be submitted. This would include details on such matters as the framework for corporate governance, risk management and internal controls, and for banks belonging to a corporate group, a schematic representation reflecting all interests held in and by the applicant including the nature of those entities’ businesses. (Form BA 002) In case of foreign bank branches, the parent bank is required to provide its organizational structure and internal risk management, governance and internal control policies and processes. A comfort letter is also needed to be submitted by the parent bank, which requires the parent bank to confirm the adherence of the home country to the BCPs, international minimum standards in respect of consolidated supervision of banking groups and cross-border operations, and international recommendations relating to the supervision of cross-border banking. These are evaluated by the BSD in assessing whether the application meets the criteria stipulated in the BA. The assessors reviewed files related to a recent application for registration by a foreign bank branch and confirmed that these and other assessments required by the BA and the Regulations were conducted by analysts in the BSD. |
| EC5 | The licensing authority identifies and determines the suitability of the bank’s major shareholders, including the ultimate beneficial owners, and others that may exert significant influence. It also assesses the transparency of the ownership structure, the sources of initial capital and the ability of shareholders to provide additional financial support, where needed. |
| Description and findings re EC5 | The Regulations require the applicant to provide information regarding shareholders of a bank (From BA002) This information, based on Form BA125, includes current and proposed shareholders that own more than 1 percent of the total shares, and, when applicable, written confirmation by a public accountant that designated share capital received is held in a trust account. Regarding the treatment of the ultimate beneficial owners (UBO), see CP6. In case of a foreign bank branch, the required comfort letter from its parent bank includes the requirement that the parent bank undertakes to safeguard the financial soundness and stability of the branch, including the maintenance of the endowment of the branch’s capital. |
| EC6 | A minimum initial capital amount is stipulated for all banks. |
| Description and findings re EC6 | BA Section 70 prescribes the minimum share capital and unimpaired reserve funds that all banks are required to hold, which is currently ZAR 250 million. |
| EC7 | The licensing authority, at authorization, evaluates the bank’s proposed Board members and senior management as to expertise and integrity (fit and proper test), and any potential for conflicts of interest. The fit and proper criteria include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the bank; and (ii) no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold important positions in a bank.13 The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks. |
| Description and findings re EC7 | As described in EC2, the criteria for the authorization prescribed in BA Section 13 (2) includes those applicable to the proposed Board members and senior management, such as:
Prospective directors and executive officers need to submit statements provided in Form BA 020 in the Regulations, which includes certification related to past criminal, regulatory, and financial records. In case of a new bank, these statements need to be confirmed by an external auditor. In addition, Regulation 40 provides guidelines relating to conduct of Board members, including the need to having the competence and knowledge of banks’ businesses commensurate with their nature and scale. For details, see CP 15. |
| EC8 | The licensing authority reviews the proposed strategic and operating plans of the bank. This includes determining that an appropriate system of corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, as well as the oversight of proposed outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of the proposed activities of the bank.14 |
| Description and findings re EC8 | As noted in EC2, the authorization criteria includes that the business of the proposed bank will be conducted in a prudent manner. In order for the BSD to confirm this, Form BA 002 in the Regulations requires an applicant for authorization and registration of a bank to submit an “outline of the proposed strategic and operating or business plans in short, medium and long term,” which should include “detailed information on the relevant system related to corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, and the oversight of proposed outsourced functions” and “the scope and degree of sophistication of the proposed activities.” The information is analyzed by BSD analysts and in most cases the analysts require the bank to adjust its proposed business plan and operational systems. |
| EC9 | The licensing authority reviews pro forma financial statements and projections of the proposed bank. This includes an assessment of the adequacy of the financial strength to support the proposed strategic plan as well as financial information on the principal shareholders of the bank. |
| Description and findings re EC9 | The criteria in the BA provide that the applicant will be able to establish itself successfully as a bank and that the applicant will have the financial means to comply with the requirements of the BA. In order for the BSD to assess these, Form BA 002 requires the applicant to submit financial statements—the balance sheet, the income statement, and others—for 3 years after the start of the operation. A frontline analyst is assigned to the approval process and conducts the assessment in tandem with a dedicated analyst for the registration process. As noted in EC5, financial information on the principal shareholders of the bank is not required and not assessed, although a report by a public accountant to confirm that funds received from anticipated shareholders are held in a trust account needs to be provided. In case of a foreign bank subsidiary/branch, this is in practice conducted through assessment of the parent bank’s adherence to requirements in the home country, the requirement in the Regulations to have the parent banking group to have an investment grade rating, and the no objection letter from the home supervisor. (See below). |
| EC10 | In the case of foreign banks establishing a branch or subsidiary, before issuing a license, the host supervisor establishes that no objection (or a statement of no objection) from the home supervisor has been received. For cross-border banking operations in its country, the host supervisor determines whether the home supervisor practices global consolidated supervision. |
| Description and findings re EC10 | In case of subsidiaries of foreign banks, BA Section 13(2)(i) lists a number of criteria for granting application for authorization, which includes that the proposed establishment of a subsidiary has been authorized by the home supervisor, that the home supervisor accepts and complies with the proposals, guidelines and pronouncements of the BCBS, and that it accepts its responsibilities as a consolidated supervisor. Similarly, in case of branches, the foreign bank applying for authorization needs to provide information with regard to the nature and extent of supervision exercised by the home supervisor. In addition, as noted above, the Regulation on “Conditions for the conducting of the business of a bank by a foreign institution by means of a branch in the Republic” provides similar criteria on the home supervisor supervision as for subsidiaries, including whether the home supervisor has authorized the establishment of the branch. In practice, a letter is sent to a home supervisor requiring a no-objection letter. Unless the letter from the home supervisor is received, the authorization of application will not be granted. Moreover, an MOU with the home supervisor is usually required. The BSD explained that there was a case where a registration of a foreign bank branch had to wait the conclusion of an MOU between the BSD and the applicant’s home supervisor. |
| EC11 | The licensing authority or supervisor has policies and processes to monitor the progress of new entrants in meeting their business and strategic goals, and to determine that supervisory requirements outlined in the license approval are being met. |
| Description and findings re EC11 | Newly established banks are subject to monthly reporting requirements as with all banks, through which the BSD monitors the progress in their businesses and operations, as well as their compliance with requirements and conditions they are subject to. |
| Assessment of Principle 5 | Compliant. |
| Comments | Provisions in the laws and regulations related to licensing and the process followed by the BSD provide a comprehensive framework to assess the adequacy of new registrations for banks, including foreign bank branches. The BSD adequately assesses applications in practice. |
| Principle 6 | Transfer of significant ownership. The supervisor15 has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. |
| EC1 | Laws or regulations contain clear definitions of “significant ownership” and “controlling interest.” |
| Description and findings re EC1 | BA Section 37 (1) prohibits shareholding by a person/entity or a group of persons/entities (“associates”) beyond 15 percent of either the total nominal value or by voting rights of the issued shares, unless an approval is granted. Section 37 (7) provides a broad definition of “associate” that covers, for example: a close relative; any person who has an arrangement relating to the shareholding; a subsidiary, parent or sister company; a director of a company, and; a trust controlled or administered. Furthermore, BA Section 42 prohibits exercising control over a bank except cases where the (A) shareholding is approved, or (B) it is done by a domestic or a foreign bank or a registered controlling company, although prior approvals or registrations under the BA are necessary for the latter case. BA Section 42 (2) provides a definition of exercising control over a bank as including holding more than 50 percent of the nominal value or voting rights of total issued shares, or entitled or has the power to appoint the majority of the directors of the bank. Section 43 provides the need for registration as a controlling company in respect of a bank to exercise control over a bank. |
| EC2 | There are requirements to obtain supervisory approval or provide immediate notification of proposed changes that would result in a change in ownership, including beneficial ownership, or the exercise of voting rights over a particular threshold or change in controlling interest. |
| Description and findings re EC2 | BA Section 37 (1) and (2) prescribes multiple shareholding thresholds that require an application for the acquisition of shares in a bank or controlling company:
In cases where holding exceeds 15 percent or 24 percent, the permission is granted by the Registrar; in cases where the holding exceeds 49 percent or 74 percent, the permission is granted by the Minister thorough the Registrar. For latter cases, the Registrar provides recommendations to the Minister. Generally, the Minister follows the recommendations of the Registrar. However, the assessors were explained that there was a case where the Minister objected to an acquisition of one of the largest bank by another for a competition ground. Changes in ownership do not happen frequently in South Africa given the limited number of locally controlled banks, except cases where a banking group reorganizes its structure. During the past four years, four applications have been approved, while none has been declined. The BSD explains this is partly due to the practice that prospective shareholders and banks consult with the BSD in advance to assess whether the application will be successful. In terms of beneficial ownership, BA Section 38 prohibits banks or controlling companies to allot or issue shares to, or register any of its shares in the name of, any person other than the intended beneficial shareholder without the written approval of the Registrar. This approval has never been granted, however. The BSD explains that given the small number of banks in South Africa, it is easy to monitor changes related to ownership structures. |
| EC3 | The supervisor has the power to reject any proposal for a change in significant ownership, including beneficial ownership, or controlling interest, or prevent the exercise of voting rights in respect of such investments to ensure that any change in significant ownership meets criteria comparable to those used for licensing banks. If the supervisor determines that the change in significant ownership was based on false information, the supervisor has the power to reject, modify or reverse the change in significant ownership. |
| Description and findings re EC3 | As described above, BA Section 37 (4) stipulates that the approval of changes in significant ownership of a bank or a controlling company will only be given if the Registrar or Minister is satisfied that the proposed acquisition will not be contrary to (a) the public interest, and (b) the interests of the bank, its depositors, or the controlling company. It is understood that the minister would not grant approvals unless recommended to do so by the Registrar and, in fact, it has never happened. Also, to date, the Minister has not made any decision different from the Registrar’s recommendation. BA section 37 (5) stipulates that the Registrar or Minister may apply to court to compel a shareholder to reduce its shareholding to not more than 15 percent of the total if it is deemed to be to the detriment of the bank/controlling company. The BSD explains that this has not happened in recent years. |
| EC4 | The supervisor obtains from banks, through periodic reporting or on-site examinations, the names and holdings of all significant shareholders or those that exert controlling influence, including the identities of beneficial owners of shares being held by nominees, custodians and through vehicles that might be used to disguise ownership. |
| Description and findings re EC4 | BA Section 39 requires shareholders of a bank or a controlling company to furnish information as required by the bank or the controlling company. Regulation 21 and Form BA 125 require banks to submit to the BSD annually the list of shareholders that have more than 1 percent of total shares including information such as their addresses, and the number and value of the shares. This also applies to a group of persons that has more than 1 percent of the total shares. For those shareholders that have less than 1 percent of total shares, less detailed information is required. As a part of on-going supervision, frontline analysts monitor changes in the ownership of banks through these reports and other available information. |
| EC5 | The supervisor has the power to take appropriate action to modify, reverse or otherwise address a change of control that has taken place without the necessary notification to or approval from the supervisor. |
| Description and findings re EC5 | BA Section 37 (5) gives power to the Registrar or Minister to apply to court to compel a shareholder to reduce its shareholding. (See EC3) |
| EC6 | Laws or regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. |
| Description and findings re EC6 | The BSD requires banks to inform it of any material changes related to significant shareholders, which is included as a condition for approval of shareholdings of more than 15 percent. |
| Assessment of principle 6 | Compliant |
| Comments | The power given to the supervisor by laws and regulations as well as the current supervisory practices provide adequate control and oversight regarding significant ownership of a bank and a controlling company. As described in CP2, however, the authorities should clarify the principle of “prudential veto” in regard to approval of changes in significant ownership. |
| Principle 7 | Major acquisitions. The supervisor has the power to approve or reject (or recommend to the responsible authority the approval or rejection of), and impose prudential conditions on, major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and to determine that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. |
| EC1 | Laws or regulations clearly define:
|
| Description and findings re EC1 | BA Section 52 prohibits banks to carry out the following broad range of major acquisitions or investments without the prior approval of the Registrar:
Controlling companies are also prohibited to carry out the above mentioned operations, except opening branches, representative offices, and creating or acquiring a division. These restrictions apply to subsidiaries of banks and controlling companies. Section 52 supersedes Section 76 (2), which gives the power to the Minister to approve banks to exceeding investment limits. Directive 13/2013 limits the case where a prior approval is needed in case of investment in a foreign entity to only the acquisition of interest of more than 5 percent of that entity or when the amount is equal to or more than 1 percent of the acquiring bank’s eligible capital and reserves. In other cases, only a notification is required, except in cases where the investment has significant impact on the investing bank or the controlling company or the information flow necessary for effective supervision may be hindered. |
| EC2 | Laws or regulations provide criteria by which to judge individual proposals |
| Description and findings re EC2 | Regulation 56 provides a list of documents that an applicant must submit for a prior approval under BA Section 52, which includes, for example, the expected impact of the acquisition on management of the bank and the bank’s assessment whether the transaction will materially influence the financial and risk position of the bank. A broader set of materials are required for an off-shore interest, for example, impact of the acquisition or establishment on the bank’s profitability, capital adequacy and overall risk profile, as well as contagion potential, a worst case scenario and an opinion on the ability of the company to submit the required returns to the BSD. The BSD explains that, based on the guidance explained above, it applies a stringent set of requirements when providing approval under Section 53, including what kind of businesses a bank can conduct or operate through joint ventures or subsidiaries, which is informed to banks. |
| EC3 | Consistent with the licensing requirements, among the objective criteria that the supervisor uses is that any new acquisitions and investments do not expose the bank to undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.16 The supervisor can prohibit banks from making major acquisitions/investments (including the establishment of cross-border banking operations) in countries with laws or regulations prohibiting information flows deemed necessary for adequate consolidated supervision. The supervisor takes into consideration the effectiveness of supervision in the host country and its own ability to exercise supervision on a consolidated basis. |
| Description and findings re EC3 | As described above, the BSD checks such aspects as impact on the bank’s management as well as financial and risk positions; for an off-shore interest, the BSD assesses such aspects as the nature of supervisory functions performed by the host country, its country risk, and the ability to submit required returns. If these are not assessed as appropriate, an approval will not be granted. See also CP12 and 13. The assessors confirmed through review of relevant files that these as well as other assessments described below are conducted by the BSD. |
| EC4 | The supervisor determines that the bank has, from the outset, adequate financial, managerial and organizational resources to handle the acquisition/investment. |
| Description and findings re EC4 | See EC3. The BSD checks the bank’s resources to handle the acquisition/investment based on materials submitted by the bank. |
| EC5 | The supervisor is aware of the risks that non-banking activities can pose to a banking group and has the means to take action to mitigate those risks. The supervisor considers the ability of the bank to manage these risks prior to permitting investment in non-banking activities. |
| Description and findings re EC5 | BA Section 76 requires banks to limit investments in real estate and shares of companies to a prescribed amount, including those through subsidiaries. Regarding controlling companies, BA Section 50 requires a controlling company to limit investments in:
Directive 9/2013 Section 50 provides the ceiling of 100 percent of the regulatory capital minus the amount of market risk for the aggregate amount of these investments. For other types of investments and activities, as noted in EC2, the BSD recognizes the risk arising from non-banking activities and considers the impact on the management as well as the bank’s risk position in approving investments in or acquiring non-banking businesses. See also CP12. |
| Assessment of Principle 7 | Compliant |
| Comments | The regulatory framework subjects major acquisitions and investments by banks and controlling companies to prior approval by the Registrar. The BSD also has well established supervisory practices to limit and monitor risks arising from such activities. |
| Principle 8 | Supervisory approach. An effective system of banking supervision requires the supervisor to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; identify, assess and address risks emanating from banks and the banking system as a whole; have a framework in place for early intervention; and have plans in place, in partnership with other relevant authorities, to take action to resolve banks in an orderly manner if they become non-viable. |
| EC1 | The supervisor uses a methodology for determining and assessing on an ongoing basis the nature, impact and scope of the risks:
The methodology addresses, among other things, the business focus, group structure, risk profile, internal control environment and the resolvability of banks, and permits relevant comparisons between banks. The frequency and intensity of supervision of banks and banking groups reflect the outcome of this analysis. |
| Description and findings re EC1 | BA Section 4(4) stipulates that the Registrar shall implement and maintain a supervisory review process. The two main pillars of the BSD’s on-going supervisory work are the SREP cycle and the risk rating system. SREP cycle The BSD’s methodology for ongoing supervision of banks and banking groups is the Supervisory Review and Evaluation Process (SREP) cycle, which is described in the BSD’s internal SREP manual. The SREP cycle, as shown in the above schematic chart, is divided into various stages (stages 1 to 6) as explained below. These stages are conceptual in nature, thus a number of them are continuous processes and not necessarily sequential. The Supervisory Review and Evaluation Process (SREP) cycle  The SREP Cycle applies on a consolidated basis to both a bank and a banking group under a controlling company. (See CP 12 for details). Stage 1 “Develop supervisory plan:” The process begins with the formulation of a supervisory plan for a bank (banking group) by the frontline analyst team. An annual supervisory plan for each bank, including the branch of a foreign bank, which covers a whole calendar year, is formulated during October to December. The main product of the annual supervisory plan is a schedule of various meetings and other supervisory activities (including on-site reviews) to be held during a calendar year. The supervisory plan takes into account the systemic relevance of and key risk areas identified related to the particular bank. In the determination of the systemic relevance and identification of the key risk areas, reliance is placed on risk ratings as well as previous years’ assessments. The annual supervisory plan is communicated to the bank prior to the start of a calendar year. This process is a continuous and ongoing process—the supervisory plan is continuously updated as and when new information becomes available and a change of the supervisory plan becomes warranted. Stage 2 “Gather information:” Throughout the SREP cycle, information is gathered by analysts and risk specialists. Examples of such sources of information are the following:
Stage 2 is also a continuous ongoing process where frontline bank analysts are expected to keep gathering information from these sources year-round. Stage 3 “Form a view:” Stage 3 entails the process whereby the information gathered by analysts and risk specialists in stage 2 is assembled, and then analyzed and synthesized in order to form a view of the bank with the focus on materiality and risk. It is envisaged that these processes will enable a bank and the analyst to compare findings and challenge one another’s conclusions and recommendations in a constructive manner. This is again a continuous process, but the main outputs of the stage is the Management Information Report (MIR) for each bank/banking group which is updated monthly and contains various information regarding a bank as well as a composite risk rating and a number of component risk ratings. This MIR is discussed and reviewed quarterly by the ManCo. Semi-annually, the information is fed into a more detailed Risk Review for each bank/banking group. Also, a “pre-panel” review panel meeting could be called for at this stage by the frontline analyst team to seek guidance on priorities, clarification of issues and further work to be done from senior managers and the risk specialist and other teams. (See stage 5). Stage 4 “Focused review:” Depending on the outcome of stage 3, the analyst and the risk specialists will identify areas of the bank/banking group that may require a detailed or specialist review. This review may be carried out by the frontline analysts, risk specialists, on-site review teams, internal auditors, external auditors, or possibly by other experts. The resulting information gathered is incorporated into the SREP cycle, and necessary consequential adjustments are made, including to supervisory plans. In some cases, these reviews are conducted after supervisory plans are modified. Stage 5 “Review panel:” Stage 5 consists of the panel review process, which entails a review by the review panel of the procedural and substantive correctness of the SREP, as well as of the conclusions reached and recommendations made. For example, the risk reviews are subject to the review panel. The review panel consists of senior members of the BSD, including the Registrar and Deputy Registrars. The conclusions reached and recommendations generated during the “forming-of-a-view” stage (stage 3) and the focused review stage (stage 4) by the analyst (in conjunction with the relevant risk specialists, if applicable) forms the basis for the panel review. The review panel’s recommendations may include remedial actions to be taken and adjustments to the individual capital requirement (ICR)—the ICR is not the only tool in a supervisor’s arsenal, however, and other recommendations, such as strengthening of internal controls or risk management policies and procedures, may in certain circumstances be seen as more appropriate. Stage 6 “feed back to senior management and Board:” Stage 6 consists of the process in terms of which the conclusions and recommendations reached in stage 5 are fed back to the bank’s/banking group’s Board, risk committee, audit committee and senior management. Usually, these are communicated during regular meetings with these persons. A feedback letter is provided after a meeting that summarizes the main points of the meeting and includes remedial actions the bank should take, if any. Industry lessons identified are also fed back into the macro-surveillance cycle and report, and may warrant ad hoc sector reviews to be conducted. Rating system The BSD’s risk based supervision strategy is two-dimensional. According to the BSD’s view, in the one dimension, risk based supervision could be viewed as a methodology in order to decide where to focus supervision in terms of the banking system. In the other dimension risk-based supervision lies within the supervision of the particular bank/banking group and therefore focuses on the high-risk areas within a particular bank/banking group along with the controls in place to mitigate those risks. Based on this approach, the BSD has a dual rating system, where one rating is based on the systemic relevance of the bank (“sector impact rating”), and the other rating is based on the risks the bank is facing (“risk rating”). The ratings are included in the MIRs and updated monthly. They are given initially by the frontline analyst, discussed by his/her managers, and signed off by one of two Assistant General Managers. The consistency of ratings is checked through this process. The summary information on ratings of individual banks is provided to ManCo monthly. The sector impact rating is given as a number between 1 and 5, where the rating of 5 indicates a bank that is the most systemically relevant. Given the concentrated nature of the banking system where the five largest banks hold more than 90 percent of total banking assets, and the rest of the system comprises 25 banks including 14 branches of foreign banks, for the sector impact ratings, all the large banks are rated as 5 whereas other banks are rated between 1 and 3, based mostly on their size of operations. These ratings are stable over time as the relative size of banks do not change substantially, but the BSD explains that when a bank is in trouble and the risk of contagion to other banks is seen to be increasing, the BSD would raise the bank’s systemic relevance rating and that it has happened to one of the smaller banks. The risk rating for a bank/banking group includes one overall composite rating and component ratings. The component ratings are given each of the followings specific financial and non-financial risk categories:
The component ratings are given with scales of 1 to 5, where each scale denotes: 1 “strong;” 2 “satisfactory;” 3 “fair (watch category);” 4 “marginal (some risk of failure);” and 5 “unsatisfactory (high degree of failure evident).” Component ratings are given by frontline analyst teams based on their supervisory judgments reflecting their assessments of quantitative and qualitative information gained through banks’ supervisory returns and interaction with banks. The composite rating is a weighted average of component ratings where a fixed weight is provided for each component. Generally, a composite rating of higher than 3 is seen as warranting some form of supervisory attention and a bank with a rating of 4 and higher is regarded as a problem bank. In practice, the assessors observed that most of the component ratings are clustered around 3, with only a few outliers given ratings of 4 or higher. The frequency and intensity of the supervision of individual banks The frequency and intensity of the supervision of banks and banking groups are determined by the relevant entity’s risk assessment including the risk rating and the system impact rating referred to as the MIR and the Risk Review and would feed into stage 1 of the SREP. For example, the number of meetings would be changed according to changes in these ratings. Also, as noted in CP 2, the number of analysts allocated to a bank/banking group is also affected by these ratings. In practice, given the relatively stable nature of the banking industry in South Africa where the difference in size between five big banks and other banks is substantial, intensity and frequency devoted to these two groups of banks also differ. For example, the assessors reviewed agendas and minutes of supervisory meetings with banks and affirmed those with large banks have more depth and broader coverage in proportion to the activities and risks of such banks. The assessors also noted that on-site reviews are more frequently conducted with these big banks, although it also found that the supervisory intensity was increased even for relatively small banks when they are exposed to substantial risks in the supervisor’s view. |
| EC2 | The supervisor has processes to understand the risk profile of banks and banking groups and employs a well defined methodology to establish a forward-looking view of the profile. The nature of the supervisory work on each bank is based on the results of this analysis. |
| Description and findings re EC2 | For the detailed process of the SREP methodology and the rating system used in South Africa, see EC1. The forward-looking view on a bank’s strategy, performance and risk profile is captured and reflected in supervisory works as a part of the SREP cycle. Specifically, the following measures are used during each stage of the SREP cycle to make the oversight on and interaction with banks/banking groups forward-looking: Stage 2
Stage 3
Stage 6
|
| EC3 | The supervisor assesses banks’ and banking groups’ compliance with prudential regulations and other legal requirements. |
| Description and findings re EC3 | The BSD utilizes a number of tools to assess compliance of banks and banking groups with prudential and other requirements under the BA, which are incorporated in the SREP cycle. These include:
|
| EC4 | The supervisor takes the macroeconomic environment into account in its risk assessment of banks and banking groups. The supervisor also takes into account cross-sectoral developments, for example in non-bank financial institutions, through frequent contact with their regulators. |
| Description and findings re EC4 | The BSD’s research division prepares a banking sector overview (BSO) presentation for the whole department on a monthly basis. During this forum, others members of BSD on an ad-hoc basis provide presentations on specific risk areas and other developments in the banking industry. In addition, a booklet providing a brief overview of the South African Banking Sector is distributed on a monthly basis. A full review of the banking sector data is presented on a quarterly basis, which contributes to the quarterly MIR reviews by the ManCo. During other months, presentations are made on completed staff projects, international committee meetings attended and, presentations and discussions by the BSD to the SARB’s Monetary Policy Committee and Financial Stability Committee. The Financial Stability Department (FSD) of the SARB assesses the macro-economic risks in the context of preparing six monthly Financial Stability Reviews (FSRs), which are published. It also conducts common scenario stress testing of the banking sector. The latest one was conducted in 2012 covering 8 banks including the 5 largest, although the scope was limited to their South African banking operations. The SARB’s research department also shares the quarterly bulletin which covers key information relating to the global and South African economic environment. These works lead to identification of cross-system supervisory topics for a particular year, which is called “flavor of the year” topics. Each year, staff members of the BSD are asked to provide possible topics based on sector-wide risk assessments as well as international regulatory developments. After each of these topics is presented and discussed, a few topics were chosen as the “flavor of the year” topics by votes. These are incorporated into supervisory plans for the year and included as issues for focused discussions with banks—including their Boards—and external auditors as well as enhanced assessment by the frontline analysts and risk specialists. Banks are notified of these topics at the beginning of a year. The recent topics include such issues as unsecured lending, banks’ African strategies, recovery plans, IT projects, and conduct of business. The risk sections (for example, credit risk, market risk and operational risk) of the BSD are responsible for reviewing risks for individual institutions as well as across the sector. The risk sections also identify and produce reports on high risk focus areas—for example, the division produces a report on retail unsecured lending on a monthly basis which is distributed to the frontline analysis teams. In terms of cross-sectoral developments, quarterly “high-level” bilateral meetings are held between the BSD the Financial Services Board (FSB), which is responsible for insurance supervision, based on the MOU between the two entities. In these meetings, information on developments of supervisory activities on banking and insurance groups is shared and views on individual groups are exchanged. Also, issues that need greater consistency of approaches are identified. The assessors saw the minutes of these meetings and confirmed these discussions are taking place. In addition, BSD has a working-level relationship with the FSB to enhance the supervision of banking groups which include insurance operations. Furthermore, the BSD holds meetings with, for example, the Banking Association of South Africa, National Treasury, Johannesburg Stock Exchange, National Credit Regulator and Financial Intelligence Centre on an ad-hoc basis. South Africa is now in the process of implementing a “twin-peaks model” of financial regulation. Under the “twin peaks” approach, a prudential regulator housed in the SARB whose objectives are to maintain and enhance the safety and soundness of regulated financial institutions and which is responsible for the prudential regulation and supervision of banks and insurers will be established. The authorities explain that this would entail the merging of insurance supervisors from the FSB with the BSD to form the prudential regulator and contribute to improving cross-sectoral supervision. |
| EC5 | The supervisor, in conjunction with other relevant authorities, identifies, monitors and assesses the build-up of risks, trends and concentrations within and across the banking system as a whole. This includes, among other things, banks’ problem assets and sources of liquidity (such as domestic and foreign currency funding conditions, and costs). The supervisor incorporates this analysis into its assessment of banks and banking groups and addresses proactively any serious threat to the stability of the banking system. The supervisor communicates any significant trends or emerging risks identified to banks and to other relevant authorities with responsibilities for financial system stability. |
| Description and findings re EC5 | The SARB, as a central bank, monitors and assesses trends, developments and risks for the domestic economy, which includes banks. The BSD provides presentations in the SARB’s two senior committees—the Monetary Policy Committee and the Financial Stability Committee. The presentations to the MPC addresses credit extension in the banking sector and the one for the FSC discusses systemic issues in the banking sector. These presentations drive investigations into trends in the sector, both in preparation for the presentations and as a result of questions raised during the presentations. As described in EC4, BSD’s Research and Information Division analyses data submitted by banks from a sector perspective. This information is reported monthly to senior management in the BSD. On a quarterly basis this analysis is presented and discussed with the whole department. In addition, the risk sections also focus on specific risk areas and produces reports on specific focus areas, such as unsecured retail lending, which is distributed to frontline supervision teams. When the BSD sees that an emerging trend in the industry may have certain risks for banks and the banking system general, it is often included horizontally in relevant banks’ supervisory plans as “flavor of the year” topics. These topics are discussed in various meetings with banks and off-site analysis is conducted to support these meetings (See EC4). As an example, the BSD has recently identified unsecured lending, which has been growing significantly particularly in some banks, as an important risk factor to the sector and stepped up its supervisory effort. During 2012, specific surveys were conducted on the issue. It was also covered, as a “flavor of the year” topic, in discussions with the bank’s Board, with a particular focus on the growth of the lending. A monthly report has been published which is distributed to the frontline analysis teams. Meetings with the FSB were also held on lending taking place at large insurers. To supplement its internal analysis, the BSD also reviews external analysts’ reports on the sector and individual banks. The BSD also monitors media coverage of individual banks and the banking sector. There are also biannual presentations by global auditing firms to the BSD on their published financial analysis of the sector and surveys of banking CEOs. |
| EC6 | Drawing on information provided by the bank and other national supervisors, the supervisor, in conjunction with the resolution authority, assesses the bank’s resolvability where appropriate, having regard to the bank’s risk profile and systemic importance. When bank-specific barriers to orderly resolution are identified, the supervisor requires, where necessary, banks to adopt appropriate measures, such as changes to business strategies, managerial, operational and ownership structures, and internal procedures. Any such measures take into account their effect on the soundness and stability of ongoing business. |
| Description and findings re EC6 | The BA provides the Registrar a range of tools to address issues in banks on a going concern basis, including, among others:
Under the MOU between the BSD and the FSB, the BSD would inform the FSB of material information (including remedial supervisory action) in respect of a bank that is part of a group that includes entities that are supervised by the FSB. Recently, all banks, excluding branches of foreign banks, were requested to develop recovery plans (Guidance Note 3/2012, 4/2012 and 10/2012). During 2013 the recovery plans of the systemically significant banks were reviewed by the BSD and further guidance was given in bilateral meetings to ensure that all banks’ recovery plans were fairly consistent and covered all the required elements. During 2014 the BSD with the newly separated FSD plans to conduct a further review of the recovery plans of the systemically significant banks. In these recovery plans, banks are expected to identify barriers to smooth recovery and address them. The SARB has been identified as the resolution authority under the BA, but work is currently underway to draft a Resolution Bill, which provides additional resolution powers to the planned Prudential Authority in order to resolve a financial entity prior to failure. Work on the resolution plans will commence once the bill is enacted. |
| EC7 | The supervisor has a clear framework or process for handling banks in times of stress, such that any decisions to require or undertake recovery or resolution actions are made in a timely manner. |
| Description and findings re EC7 | The BSD explains the following factors will be considered on a case-by-case basis when a bank is in distress:
Depending on the nature of the stress experienced by a bank, emergency liquidity assistance can be given by the SARB against pledged collateral or against a government guarantee. The National Treasury can play a role in providing public funds as part of a resolution package for a systemically significant bank. Other SARB resolution powers that could be utilized include:
Also, as noted above, the BA provides the power of appointing a curator (section 69) and forcing liquidation/winding up of a bank (section 68) as the mechanisms for the handling a failed bank. As stated in EC6, however, the present laws do not provide the SARB a broad power to handle banks in stress, leading to the lack of clear framework or process for dealing with such a bank. Work is currently underway to draft a Resolution Bill to provide more extensive resolution powers. The draft Financial Sector Regulation Bill expects that the Minister of Finance will decide on the systemic significance of a financial entity and will be involved in the resolution process when public funds are involved in the resolution of a systemically significant financial entity. |
| EC8 | Where the supervisor becomes aware of bank-like activities being performed fully or partially outside the regulatory perimeter, the supervisor takes appropriate steps to draw the matter to the attention of the responsible authority. Where the supervisor becomes aware of banks restructuring their activities to avoid the regulatory perimeter, the supervisor takes appropriate steps to address this. |
| Description and findings re EC8 | BA Sections 81 to 84 set out the powers and duties of the Registrar with regard to bank-like activities being conducted. These provisions give the power to Registrar to apply for court for an order to prohibit the activities. They allow the Registrar/Supervisor to report the matter to the South African Police Services or the National Prosecuting Authority. Each year, the BSD reviews a number of cases in cooperation with the law enforcement authorities. The restructuring of a bank that involves establishing a subsidiary or investing in a joint venture requires a prior approval by the Registrar, where the bank needs to provide detailed information regarding structures and activities of the new undertaking. The BSD explains it will not approve the application if it results in avoidance of the regulatory perimeter. |
| Assessment of Principle 8 | Largely Compliant |
| Comments | The SREP cycle and the risk rating system provide an adequate general framework of supervisory approach for the BSD. These processes focusing on individual banks and banking groups are complemented by sector-wide approaches such as the “flavor of the year” topics as well as enhanced thematic on-site reviews. However, the approaches related to resolution of banks required in EC 6 and 7 are still in the process of development, which lead to the rating above. Although those on the recovery plans as well as contingency planning have started, work on resolution plans for systemic banks has yet to begin. The assessors understand the required power will not be given until the expected legislation on bank resolution becomes effective and urge the authorities to enact the bill expeditiously. Another important issue related to this principle is planned transition to the twin peaks supervisory structure. The transition should involve not only providing the prudential supervisor responsibility over various financial sector entities, but also improved oversight over systemic risk and wider financial groups. The new prudential supervisor should therefore review the supervisory approach once the organizational changes are completed in order to enable it to have capacity to monitor the prudential risk of the entire financial system as well as that of financial conglomerates. This may require a more formalized framework to detect and assess system-wide and cross-sectoral risks and its integration to supervision of individual financial groups and regulated financial institutions. New tools to address those risks may also need to be added to its arsenal, such as common scenario stress testing across different financial sectors and a risk rating framework that takes into account the entire risk of financial groups. Close cooperation with the planned Financial Stability Oversight Committee and its secretariat will be essential in these endeavors. |
| Principle 9 | Supervisory techniques and tools. The supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and deploys supervisory resources on a proportionate basis, taking into account the risk profile and systemic importance of banks. |
| EC1 | The supervisor employs an appropriate mix of on-site17 and off-site18 supervision to evaluate the condition of banks and banking groups, their risk profile, internal control environment and the corrective measures necessary to address supervisory concerns. The specific mix between on-site and off-site supervision may be determined by the particular conditions and circumstances of the country and the bank. The supervisor regularly assesses the quality, effectiveness and integration of its on-site and off-site functions, and amends its approach, as needed. |
| Description and findings re EC1 | BA Section 4(4) stipulates that the Registrar shall implement and maintain a supervisory review process, which may include any one or any combination of: an on-site examination, inspection or review; an off-site review; a discussion with banks’ management; a discussion with banks’ Board members; a review of work done by external auditors, and; a review of reports submitted by banks. Off-site work Off-site reviews by the BSD include, among other things, ongoing analysis of statutory data submitted by individual banks/banking groups, internal and external auditors’ reports, and minutes of the Boards. Also, analysis of various other sources of information are conducted such as published financial statements, media coverage, financial analyst’s reports and industry reviews, etc. These are primarily conducted by frontline analysts in the BSD responsible for each bank/banking group. For example, the analysts go through each report submitted by banks and ask banks for clarifications regarding any substantial changes. Specialized risk units also conduct reviews of works assigned to external auditors on risk-specific assessment, such as the long-form reports on credit risk and operational risk models. The result of these reviews feeds into, primarily, MIR, which is produced monthly for each bank and includes risk ratings. These reviews may also result in the identification of areas within a bank that require detailed monitoring or specialized on-site review, as well as modification of supervisory plans. Where relevant, issues identified in a particular bank that may also be relevant at an industry level are elevated to the relevant specialized risk units for information purposes. Supervisory meetings The BSD attaches particular importance to periodic meetings with banks’/banking groups’ Boards, Board subcommittees, CEOs and managers at various levels including CROs and those in compliance and internal audit functions, as well as external auditors. These are held at least annually for large banks. (For details of each meeting, see CP8). Given the BSD’s emphasis on corporate governance and internal control, these meetings are used not only to communicate and follow-up supervisory concerns but also to evaluate risk profiles and quality of management and control of banks/banking groups. These are regarded as one of the major sources of information that feeds into the non-financial risk part of the bank ratings. On-site work The BSD employs focused on-site reviews to complement the above-mentioned supervisory meetings and off-site reviews. These on-site reviews are usually carried out either by specialist risk teams or the on-site review team, with participation from the frontline analyst teams as necessary. The on-site reviews led by specialist risk teams are usually conducted to assess internal models for advanced approaches in Basel II/III, but also used for other purposes. Horizontal reviews are performed periodically based on inter alia, specific topics and emerging risks that could impact the industry as a whole. These reviews are often a combination of on-site and off-site work, and the total length is from a few days to a few weeks. Thematic inspections are often performed on an industry-wide level (i.e., all banks) or a peer group level (i.e., the 5 large banks). Topics are determined based on various factors such as prevailing market conditions, emerging risks, international and/or domestic regulatory developments, etc. Recent and planned thematic reviews include: a) counterparty credit risk; b) asset and liability management; c) equity risk in the banking book; and d) investment risk. This on-site work includes focused review of bank files, for example loan files in case of on-site reviews related to credit risk management. Traditionally, the BSD has relied on banks’ statutory external auditors to conduct on-site verification of accuracy of their supervisory reporting and compliance of their practices to regulatory requirements as well the banks’ own policies and processes. Through formal bilateral meetings as well as informal communications, the BSD maintains close contact with the statutory auditors of banks. Through these meetings, the BSD may require the audit program to be changed based on its supervisory concerns. The assessors’ review of meeting agendas and minutes with statutory auditors and discussion with audit firms confirmed that the BSD is proactively involved in setting audit scopes for banks and informed of the audit results in detail. Audit firms also explained that the BSD challenges their work frequently. These interactions with audit firms feed into regulatory actions. For example, the BSD is now finalizing the policy to clarify treatment of restructured loans. (See CP 18.) Furthermore, the practice in South Africa supported by the BSD to have multiple statutory audit firms for a large bank is contributing to standardizing audit practices among major audit firms. The BSD has also used auditing firms that are not statutory auditors of a bank to conduct specific on-site assessments under BA Section 7 as described below (EC11). Since the last BCP assessment in 2010, the BSD has enhanced its on-site reviews by conducting more deep-dive reviews utilizing its on-site review team. The team conducts on-site reviews for major topics that require extensive assessment of banks’ actual practices. For example, the team has recently worked on the unsecured loan portfolio. The work involved an extensive review of sample loan files to assess, among other things, the adequacy of treatment regarding impaired loans and restructured loans. For these reviews, a core team consists of around 6 staff members with additional staff participation from specialist risk divisions and frontline analysis teams, and the length of the review can be more than one month. In the assessors’ view, this added capacity now enables the BSD to adequately cover important risk areas for banks by itself, which is also contributing to its ability to monitor and assess the adequacy of external auditors’ work. The increased intensity on on-site work is recognized by banks and audit firms and generally welcomed. The on-site review of AML/CFT is also conducted following a similar format. For large banks, the whole inspection process could take up to 2 months with around 10 staff members. The final report will typically be sent to banks within a period of 6 to 8 weeks subsequent to the completion of the review. There is no mandated frequency for on-site inspections. Planning of supervisory work As described in CP8 EC1, the planning of supervisory work is carried out through formulation of an annual supervisory plan for each bank/banking group during the SREP cycle. The plan is based on, among other things, the risk assessment and profile of a particular bank, and takes a form of a schedule of supervisory actions during the year, such as meetings with bank officials and on-site reviews for particular areas. The BSD communicates the plan to the bank before the beginning of a year. The BSD views the main purpose of the supervisory plan as ensuring a disciplined and comprehensive planning process that forms the foundation for supervisory actions, interactions with the bank, and interventions. The SREP cycle is continuous in nature and hence it is subject to ongoing reviews and revisions if and where necessary to ensure effective supervision of a particular bank. As new information becomes available during the cycle, the supervisory plan is continuously updated. During the quarterly review of the MIR, review and sign-off of supervisory programs at a departmental level takes place, and appropriateness of the mix of supervisory tools are also revisited. In addition, the BSD has an annual strategic planning process where strategic risks are identified that should be taken into account in ongoing supervisory activities. It also provides an opportunity to review the current processes and tools for supervision. For example, the BSD is currently preparing a policy on the forward-looking supervisory approach. |
| EC2 | The supervisor has a coherent process for planning and executing on-site and off-site activities. There are policies and processes to ensure that such activities are conducted on a thorough and consistent basis with clear responsibilities, objectives and outputs, and that there is effective coordination and information sharing between the on-site and off-site functions. |
| Description and findings re EC2 | As described in EC1, during Stage 1 of the SREP cycle, a supervisory plan for a particular bank is compiled annually. While the frontline analysis teams are primarily responsible for the supervision of a bank/banking group, discussions between frontline analysis teams and the various specialist risk teams, with involvement of the BSD’s senior management as necessary, takes place during the preparation process. Through these discussions, on-site reviews required in respect of each bank during the supervisory cycle and a discussion of the allocation of responsibilities pertaining to each review, among others, are determined. The supervisory plan is further expanded at an operational level to include high-level details of key off-site activities, such as monthly and quarterly reviews of statutory data, timing of risk reviews and management information, etc.; and is supported by more granular operational schedules setting timelines and target dates for, among other things, internal graph discussions, risk reviews, management information reports, and queries flowing from off-site analysis of statutory data submitted by banks. The objectives, principles and processes pertaining to ad-hoc on-site meetings (e.g., model reviews or thematic on-site reviews) with banks are also discussed and determined between frontline analysis and specialist risk teams. In certain instances standard questionnaires have been formalized and form part of the SREP Manual, such as a questionnaire on equity risk in the banking book and a questionnaire on counterparty credit risk. Customized and/or ad-hoc questionnaires are also compiled to suit particular on-site interventions if and when required. The BSD explains that it views off-site and on-site activities are often a combined effort involving both frontline analysis and specialist risk teams based on the type of intervention, although the frontline analysis team remains ultimately responsible for the supervision of individual banks. In order to ensure effective coordination and information sharing through ongoing interaction and communication between frontline analysis and the relevant specialist risk teams, the Principles of Engagement guidelines has been prepared, which provides high-level principles and guidelines pertaining to, among other things, ongoing interaction, key responsibilities and the flow of information. Sharing of relevant information between frontline analysis and risk support functions are also facilitated by formal interactions such as the departmental Correspondence Meetings, Management Forum Meetings, Risk Specialist Analysis Committee meetings and Divisional Meetings. The assessors’ discussion with frontline analysts and specialist risk teams as well as review of a number of internal documents related to on-going supervisions confirmed that the BSD has a coherent supervisory process and coordination among various teams in the BSD is taking place. |
| EC3 | The supervisor uses a variety of information to regularly review and assess the safety and soundness of banks, the evaluation of material risks, and the identification of necessary corrective actions and supervisory actions. This includes information, such as prudential reports, statistical returns, information on a bank’s related entities, and publicly available information. The supervisor determines that information provided by banks is reliable19 and obtains, as necessary, additional information on the banks and their related entities. |
| Description and findings re EC3 | In the SREP cycle, different types of information are used to form a view not only on the risk profile of a particular bank but also in terms of the operating environment relevant to banking institutions. (See CP 8 as well s CP 9 EC1 for details). These sources include, among other things:
Any discrepancies or inconsistencies in reporting identified in ongoing analysis is followed up with the particular bank and monitored to ensure that corrective action is taken. For example, queries on statutory BA submissions are sent to banks by frontline analysts on a regular basis. Although this is to understand any substantial movement in bank’s submitted data, it could lead to issuance of directives from the BSD for banks to correct reporting on the statutory BA returns and to resubmit statutory data. The BSD also has the authority to call for any additional information that is required to perform its supervisory duties. The BSD explained it does not have a significant concern with the accuracy of reporting data, although it takes some time for banks to be able to provide quality data as reporting requirements have been expanded substantially in recent years reflecting regulatory changes. |
| EC4 | The supervisor uses a variety of tools to regularly review and assess the safety and soundness of banks and the banking system, such as:
The supervisor communicates its findings to the bank as appropriate and requires the bank to take action to mitigate any particular vulnerabilities that have the potential to affect its safety and soundness. The supervisor uses its analysis to determine follow-up work required, if any. |
| Description and findings re EC4 | See CP 8 above. During the SREP cycle, a wide range of tools are used to assess and monitor the safety and soundness of banks. Examples of tools used include, but are not limited to, the following:
Information/knowledge gained throughout the various stages of the supervisory cycle feeds into MIR and used to update and/or refine the supervisory plan as well as to determine further action required in respect of each individual bank on an ongoing basis. The BSD senior management reviews the overall supervisory program on a monthly basis and the revised program is signed off. Feedback is provided to banks through various means, including meetings with the Board, audit committee, chairperson of the Board, senior management, etc. During such meetings issues identified will be shared and the bank will be requested to furnish the BSD with action/remedial plans as well as provide regular feedback/updates on progress made in addressing identified issues. The key issues raised at such meetings are usually formally recorded in feedback letters provided to the relevant bank subsequent to meetings held. |
| EC5 | The supervisor, in conjunction with other relevant authorities, seeks to identify, assess and mitigate any emerging risks across banks and to the banking system as a whole, potentially including conducting supervisory stress tests (on individual banks or system-wide). The supervisor communicates its findings as appropriate to either banks or the industry and requires banks to take action to mitigate any particular vulnerabilities that have the potential to affect the stability of the banking system, where appropriate. The supervisor uses its analysis to determine follow-up work required, if any. |
| Description and findings re EC5 | See CP8 EC4 and 5 for the BSD’s efforts and tools to address emerging risks. In addition to the supervisory interactions with individual banks and the work on the whole sector, the BSD holds meetings with various parties including: quarterly meetings with the Financial Services Board to discuss matters relating to conglomerate groups comprising banks and non-bank financial institutions; periodic interaction with National Treasury and the Minister of Finance; ad-hoc meetings with the Financial Intelligence Centre, National Credit Regulator; attendance to the BCBS meetings and its subgroups; participation in international surveys, such as QIS exercises, and; representation in numerous domestic and regional committees, task groups and working groups. Issues and/or emerging risks identified owing to the above-mentioned interactions are assessed and follow-up actions are determined based on the particular circumstances. Follow-up action varies and could include:
As noted in CP 8, the BSD uses “flavor of the year” topics for possible system-wide risk sources which are discussed during meetings with the bank Boards or CEOs. Regarding the stress testing exercises, the most recent common-scenario stress testing was conducted in 2012 with a severe but plausible economic downturn scenario which covers banks’ South African operations. The BSD plans to repeat a similar exercise in the context of FSAP and continue thereafter. |
| EC6 | The supervisor evaluates the work of the bank’s internal audit function, and determines whether, and to what extent, it may rely on the internal auditors’ work to identify areas of potential risk. |
| Description and findings re EC6 | BA Section 4(4) defines the supervisory review process to be implemented and maintained by the Registrar to include a discussion with the head of internal audit of a bank. The Regulations also include a number of references to the internal audit function, most notably Regulation 48 which provides requirements for internal audit (See CP 26). In the supervisory framework, a prudential meeting with the head of internal audit of individual banks/controlling company is held on an annual basis, or more regularly if necessary. The BSD will also discuss bank’s internal audit function, including the appropriateness and reliability thereof, with the external auditors of the bank annually during the bilateral meeting. The BSD views that this gives a perspective on the external auditors’ assessment of the internal audit function as well as the level of reliance placed by the external auditors on the work performed by the bank’s internal auditors. This, together with information gathered during the prudential meetings with the internal auditor, provides the BSD with a perspective on the functioning of the internal audit function and the level of reliance that can be placed on the work performed by the function. The BSD requests copies of internal audit reports periodically, particularly for audits performed in key areas. In addition, the BSD requires internal audit reports which are submitted to the Board or the Board audit committee to be provided. A discussion of internal audit findings and steps taken by banks to resolve such finding is generally a standard agenda item in respect of most prudential meetings and on-site reviews performed by the BSD. |
| EC7 | The supervisor maintains sufficiently frequent contacts as appropriate with the bank’s Board, non-executive Board members and senior and middle management (including heads of individual business units and control functions) to develop an understanding of and assess matters such as strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality, risk management systems and internal controls. Where necessary, the supervisor challenges the bank’s Board and senior management on the assumptions made in setting strategies and business models. |
| Description and findings re EC7 | As mentioned in CP8 and 9, various interactions with Board members and senior and middle management take place during the SREP cycle, which form a major component of the supervisory plans. In addition to the scheduled interactions with banks, periodic ad-hoc meetings with banks’ Boards, Board sub committees, executive/senior management, middle management, control functions, staff in operational areas, etc. may take place. Interaction is not limited by the supervisory program but is flexible and can be adjusted depending on circumstances to ensure effective and efficient supervision of banks. The BSD maintains multiple communication lines with banks. The BSD liaises with banks through a single point of entry namely the frontline analysis teams. The BSD explains there are typically strong professional relationships built between the BSD teams and the heads of compliance as well as internal audit functions of banks to facilitate the flow of relevant information between the BSD and banks. The assessors observed these frontline analysis teams having a good understanding of banks they are in charge of. Review of files and discussions with banks also confirmed that frequent and intensive discussions take place between various levels of banks and the BSD’s frontline analysis teams. Banks also confirmed that the BSD often challenges the banks’ Board and senior management on various issues. Matters such as strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality, risk management systems and internal controls are typically discussed during prudential meetings held annually with the Board, Board audit committee, CEO, internal auditor, compliance head, external auditors, heads of selected business units, etc. of a bank/controlling company, depending on the supervisory program and prevailing circumstances pertaining to a particular bank or banking group. For example, a BSD frontline analyst team meets biannually with the CEO and the CFO of a large bank to discuss half-year and year-end financial results prior to information being made public. These discussions often cover items such as planned strategies and key areas of concern. Annual prudential meetings with, inter alia, the CEO, head of compliance and head of internal audit generally includes a discussion on emerging risks and concerns and changes in business strategies and plans. Supervisory challenge during these interactions is common practice and is often formalized in correspondence with banks subsequent to interventions. |
| EC8 | The supervisor communicates to the bank the findings of its on- and off-site supervisory analyses in a timely manner by means of written reports or through discussions or meetings with the bank’s management. The supervisor meets with the bank’s senior management and the Board to discuss the results of supervisory examinations and the external audits, as appropriate. The supervisor also meets separately with the bank’s independent Board members, as necessary. |
| Description and findings re EC8 | As described above, step 6 of the SREP cycle is feedback to the Board and senior management of a bank. Conclusions and recommendations reached through the SREP cycle are communicated to the bank’s Board, risk committee, audit committee and senior management through meetings, particularly through biannual result presentations. Annual scheduled meetings with the Board, the chairperson of the Board, the audit committee and the CEO of a bank also provide platforms for discussion of any issues that may be relevant or necessary to ensure effective supervision of banks, including any supervisory findings. BSD may also choose to meet with the Board as a whole or separately with the chairperson of the Board to discuss particular issues of concern. The main points of these meetings, including supervisory findings and concerns raised by the BSD are documented in feedback letters and provided to the bank. Meetings with chairpersons of the Boards, who are independent Board members, are held without attendance of senior management. Also, key and/or material findings or issues, whether identified through off-site or on-site activities of the BSD, will be documented and shared promptly with the particular bank and/or industry. A typical example would be issues identified during an on-site review, which are shared with the bank by means of a letter or a report. The bank would have the option to respond to issues raised, which could be subject to further meetings being held with a bank or further correspondence with the bank. If violations of regulations or laws are identified during on-site reviews, they are formally communicated to banks in a close-out meeting following the on-site review. Banks are then normally afforded the opportunity to respond to the issues raised by BSD. The bank’s response will be considered in preparing the final report that will be sent to the bank. Similarly, queries may be sent to a bank for follow-up subsequent to off-site analysis of statutory returns or a report submitted by the bank. |
| EC9 | The supervisor undertakes appropriate and timely follow-up to check that banks have addressed supervisory concerns or implemented requirements communicated to them. This includes early escalation to the appropriate level of the supervisory authority and to the bank’s Board if action points are not addressed in an adequate or timely manner. |
| Description and findings re EC9 | See EC 8. The issues that need to be followed up are considered during the supervisory planning process and included in the topics for various meetings between the supervisor and the bank. Major issues are followed-up with the Board or the chairperson of the Board. Also, supervisory concerns may be communicated to internal or external auditors for follow-up. The assessors saw evidence that these issues are raised and followed up by a bank’s Board or internal/external auditors. |
| EC10 | The supervisor requires banks to notify it in advance of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements. |
| Description and findings re EC10 | The BA provides a number of requirements for prior notification or approval from the BSD, including cases such as:
Regulation 47 also requires banks to report offences to the BSD that come to the attention of banks, such as breaches in fiduciary duties, market abuse and any other material irregularities. |
| EC11 | The supervisor may make use of independent third parties, such as auditors, provided there is a clear and detailed mandate for the work. However, the supervisor cannot outsource its prudential responsibilities to third parties. When using third parties, the supervisor assesses whether the output can be relied upon to the degree intended and takes into consideration the biases that may influence third parties. |
| Description and findings re EC11 | BA Section 6 stipulates that third parties may be appointed, with specific terms of reference, to conduct an inspection on behalf of the Registrar. Similarly, BA Section 7 allows the Registrar to direct a bank or any other appropriately skilled person to perform a review and to submit a report in respect of any matter that is reasonably necessary to enable the BSD to perform its supervisory functions and duties. Such a request will be subject to specified terms or reference. As described in EC1, in cases where an extensive review of certain issues are deemed to be necessary, the BSD requires banks to be reviewed by independent audit firms under BA Section 7. In these cases, clear and detailed terms of reference are provided. |
| EC12 | The supervisor has an adequate information system which facilitates the processing, monitoring and analysis of prudential information. The system aids the identification of areas requiring follow-up action. |
| Description and findings re EC12 | The BSD uses three main software packages to manage information submitted by banks, namely:
Various key statistical and trigger reports as well as graphs are produced and saved in OFA to aid frontline analysts and specialist risk units in identifying and monitoring key risk areas and areas requiring follow-up actions. Various reports, such as MIRs and risk specific heat maps are also produced periodically within frontline analysis and specialist risk units to assist analysts and management to identify, analyze and monitor key risk areas. |
| AC1 | The supervisor has a framework for periodic independent review, for example by an internal audit function or third party assessor, of the adequacy and effectiveness of the range of its available supervisory tools and their use, and makes changes as appropriate. |
| Description and findings re AC1 | The BSD as a department is subject to periodic review/audit by the SARB’s Internal Audit Division. The audit findings are shared with management and the Governor’s Executive Committee, and used to guide ongoing improvements and refinements of the various supervisory tools and processes applied by BSD. |
| Assessment of Principle 9 | Compliant |
| Comments | The BSD has improved its supervisory techniques and tools significantly. In particular, it has moved from a model relying substantially on external auditors for on-site work to one where the BSD’s own staff conducts a number of on-site reviews to complement the work of external auditors, including deep-dive reviews that verify banks’ actual practices through such means as extensive review of loan files. It has also added a number of risk specialists who conduct on-site reviews on particular risk areas including model validations, but also other topics related to particular risk areas. These improvements, in addition to detailed and intensive off-site analysis and frequent interactions with various levels of banks/banking groups, including their Boards, equip the BSD with wide-ranging high quality techniques and tools that are appropriate for providing oversight of risk profiles and operations of banks and banking groups in South Africa. The assessors encourage the BSD to further continue its effort to enhance its ability to conduct deep-dive on-site reviews and improve tools and technique to assess and monitor spill over risks to the banks from non banking activities in their financial groups. |
| Principle 10 | Supervisory reporting. The supervisor collects, reviews and analyses prudential reports and statistical returns20 from banks on both a solo and a consolidated basis, and independently verifies these reports through either on-site examinations or use of external experts. |
| EC1 | The supervisor has the power21 to require banks to submit information, on both a solo and a consolidated basis, on their financial condition, performance, and risks, on demand and at regular intervals. These reports provide information such as on- and off-balance sheet assets and liabilities, profit and loss, capital adequacy, liquidity, large exposures, risk concentrations (including by economic sector, geography and currency), asset quality, loan loss provisioning, related party transactions, interest rate risk, and market risk. |
| Description and findings re EC1 | BA Section 6 provides powers of inspection as stipulated in the Inspection of Financial Institutions Act, which includes access to any person related to the inspected institution or any document of the institution. Section 7 also provides powers to the Registrar to request banks, controlling companies or a subsidiary of a bank or controlling company to furnish information. Section 75 then requires banks and controlling companies to submit their returns in conformity with financial reporting standards. Based on these provisions in the BA, the Regulations then require banks to periodically report to the BSD a broad range of detailed information, which includes their balance sheets (BA 100), off-balance sheet activities (BA 110), income statement (BA120), capital adequacy and leverage (BA 700), liquidity risk (BA 300), credit risk—including large exposures, risk concentrations, asset quality, loan loss provisioning and related party transactions (BA 200, 210, 220), interest rate risk (BA 330), and market risk (BA 320). Returns related to financial statements are usually required for a bank’s South African operations and the bank as a legal entity including foreign branches as well as at the consolidated level from the bank and below and from its controlling company and below, but with less frequency. For other returns, they are usually required only for the bank’s South African operations, but key information is required by form BA 600, Consolidated return. Also, individual branches and subsidiaries abroad are required to submit similar information quarterly by form BA 610. In addition, as described in CPs 8 and 9, the BSD requires a number of reports by banks on demand through its SREP cycle. |
| EC2 | The supervisor provides reporting instructions that clearly describe the accounting standards to be used in preparing supervisory reports. Such standards are based on accounting principles and rules that are widely accepted internationally. |
| Description and findings re EC2 | BA Section 75(3A) provides that the returns shall be prepared in conformity with financial reporting standards in terms of the Companies Act and shall be furnished to the Registrar in respect of such period, at such times and on such a form as may be prescribed. Regulation 3, Financial Reporting Standards, then provides that all the relevant prescribed returns shall be prepared in accordance with International Financial Reporting Standards. In terms of auditing, Regulation 46 requires a bank’s external auditor to report to the Registrar the adequacy of returns on the year-end results. |
| EC3 | The supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations. The measurement of fair values maximizes the use of relevant and reliable inputs and are consistently applied for risk management and reporting purposes. The valuation framework and control procedures are subject to adequate independent validation and verification, either internally or by an external expert. The supervisor assesses whether the valuation used for regulatory purposes is reliable and prudent. Where the supervisor determines that valuations are not sufficiently prudent, the supervisor requires the bank to make adjustments to its reporting for capital adequacy or regulatory reporting purposes. |
| Description and findings re EC3 | Regarding valuation of assets and liabilities, Regulation 3 (4) requires a bank to:
It further requires regular verification of valuations by independent and qualified units and periodic reviews by the bank’s internal audit function. Regulation 39(13) also provides detailed key elements of the required robust governance structures and control processes to ensure prudent valuation. The BSD discusses these issues in the annual bilateral meetings with external auditors or in the annual trilateral meetings that also include Board audit committees as necessary and internal audit functions. The BSD can require banks to make adjustments if needed. |
| EC4 | The supervisor collects and analyses information from banks at a frequency commensurate with the nature of the information requested, and the risk profile and systemic importance of the bank. |
| Description and findings re EC4 | Based on the provisions of the BA as described in EC1, Regulation 4 stipulates frequencies for different types of returns. For example, most of the financial statements as well as basic information regarding credit, liquidity and other risks are required monthly. Some of the more detailed credit risk related information as well as consolidated returns are required quarterly. Some information is required biannually. The frequencies stipulated in the Regulation do not differ among banks; ad-hoc information requests may be made depending on the risk profile and systemic importance of the bank, however. In the past, for example, frequent liquidity monitoring reports were requested of certain troubled banks. In on-going supervision, the SREP cycle includes a review of data submitted by banks, e.g., by utilizing time series analysis, automated key stats, trigger reports and automated graphical analysis. The BSD has also implemented validation rules that prevent banks from submitting incorrect data. Based on such a framework, monthly queries are performed by frontline analysts, following a review of statutory returns on, for example, large or unexpected movements in data. Queries are sent to the banks, and their responses are reviewed, and followed up if necessary. Other tools being used in analyzing data submitted by banks include:
These provide an opportunity to conduct in-depth, focused reviews of the risks that banks face at a point in time. The results of these analyses are discussed internally in the BSD. They are also discussed in various meetings, including those with the banks’ Boards and senior management. In addition, ad hoc consolidated supervision prudential meetings are held with banking groups to discuss, amongst other things, the data submitted on the group. The files reviewed by assessors show these analyses and discussions are taking place regularly with sufficient depth. |
| EC5 | In order to make meaningful comparisons between banks and banking groups, the supervisor collects data from all banks and all relevant entities covered by consolidated supervision on a comparable basis and related to the same dates (stock data) and periods (flow data). |
| Description and findings re EC5 | See above ECs. The requirement of returns stipulated in the Regulations applies to all banks and controlling companies established in South Africa in the same manner in terms of the content and frequency. |
| EC6 | The supervisor has the power to request and receive any relevant information from banks, as well as any entities in the wider group, irrespective of their activities, where the supervisor believes that it is material to the condition of the bank or banking group, or to the assessment of the risks of the bank or banking group or is needed to support resolution planning. This includes internal management information. |
| Description and findings re EC6 | As described in EC 1, BA Section 6 provides powers of inspection as stipulated in the Inspection of Financial Institutions Act, which includes access to any person related to the inspected institution or any document of the institution “for the purposes of the performance of his or her functions under this Act.” Section 7 also provides powers to the Registrar to request banks, controlling companies or a subsidiary of a bank or controlling company to furnish information. Section 75 then requires banks and controlling companies to submit their returns in conformity with financial reporting standards. This requirement can cover internal management information as long as it is related to the BSD’s responsibility. The assessors were informed that the BSD in the past requested, for example, a non-banking subsidiary of a controlling company to submit a number of BA returns on a quarterly basis. |
| EC7 | The supervisor has the power to access22 all bank records for the furtherance of supervisory work. The supervisor also has similar access to the bank’s Board, management and staff, when required. |
| Description and findings re EC7 | The Registrar has the power to access all bank records as well as a bank’s Board, management and staff. (See EC1 and EC6) |
| EC8 | The supervisor has a means of enforcing compliance with the requirement that the information be submitted on a timely and accurate basis. The supervisor determines-the appropriate level of the bank’s senior management is responsible for the accuracy of supervisory returns, imposes sanctions for misreporting and persistent errors, and requires that inaccurate information be amended. |
| Description and findings re EC8 | BA Section 91(6) provides that if any person fails to submit to the Registrar or to furnish the Registrar with any return, statement, report or other document or information in accordance with a requirement of the BA within the period determined, the Registrar may impose a fine not exceeding ZAR1000 for every day during which such failure continues. BA Section 91 (6A) also provides the same power to impose a fine in case where information or returns provided are materially incorrect or inaccurate information. To date, no fines have been imposed on banks based on these provisions but a bank’s ability to furnish appropriate returns has been one of the issues where BSD has been focusing. If a bank is seen as problematic in furnishing BA returns, the concern is conveyed to the bank’s senior management or the Board and the bank is required to take corrective actions which are then followed up by the BSD in the supervisory cycle. In addition, according to Form BA099, the CEO, the Chief Accounting Officer and the FICA Officer have to sign and certify the form. For re-submissions of data, an updated form BA099 has to be completed and sent prior to re-submission of data, with appropriate sign-off by management responsible for each specific risk areas, and the 3 officers mentioned above also need to sign and certify the BA099. Discussions with banks and audit firms confirmed that the BSD is continuously making efforts to ensure correct reporting by banks. |
| EC9 | The supervisor utilizes policies and procedures to determine the validity and integrity of supervisory information. This includes a programme for the periodic verification of supervisory returns by means either of the supervisor’s own staff or of external experts.23 |
| Description and findings re EC9 | As described in EC3, BA Section 75 (3C) provides that, for those returns that most nearly coincide with the end of the financial year of the bank, the bank’s external auditor is required to report to the Registrar whether or not those returns present the condition of the bank fairly and are in conformity with financial reporting standards. The Registrar also has the power to require submission of such a report for other returns. Regulation 46 also provides that the bank’s external auditor shall annually report on the bank’s financial position and the results of its operations at the financial year-end as well as the completeness and accuracy of year-end materials. It also requires the external auditors to report on whether other returns reflect the information of the management accounts, using the same accounting policies as those applied in the management and statutory accounts, and following BA and the Regulations. In addition to the use of external auditors, as described in EC3, the BSD has implemented validation rules that prevent banks from submitting incorrect data and therefore ensuring the quality of reporting. Monthly queries are performed by the BSD analysts, following a review of statutory returns on, for example, large or unexpected movements. Queries are sent to the banks, and their responses are reviewed, and followed up if necessary. Based on Regulation 46(9), the BSD meets at least annually with the external auditors to discuss, amongst other things, the quality of reporting, financial condition of the bank, major risk areas and management. The BSD also holds annual trilateral discussions (with representatives from BSD, the Bank’s Audit Committee and senior management and the external auditors) to discuss the findings and reports issued by the external auditors in terms of Regulation 46. The result of monitoring of submitted information by BSD staff feeds into these discussions. |
| EC10 | The supervisor clearly defines and documents the roles and responsibilities of external experts,24 including the scope of the work, when they are appointed to conduct supervisory tasks. The supervisor assesses the suitability of experts for the designated task(s) and the quality of the work and takes into consideration conflicts of interest that could influence the output/recommendations by external experts. External experts may be utilized for routine validation or to examine specific aspects of banks’ operations. |
| Description and findings re EC10 | BA Section 7(1)(b) provides the Registrar with the power to direct banks, controlling companies or subsidiaries to provide a report by a public accountant or any other person with appropriate skill on any matter about which the Registrar has directed or may direct the bank, controlling company or subsidiary to furnish information. In this case, the person needs to be designated or approved by the Registrar. The BSD provides a clear terms of reference for these works. In practice, the BSD usually requires the bank to be assessed by an audit firm which is not its statutory auditor. |
| EC11 | The supervisor requires that external experts bring to its attention promptly any material shortcomings identified during the course of any work undertaken by them for supervisory purposes. |
| Description and findings re EC11 | In case of the assessment under BA Section 7, the audit firm is required to report all material information they find during the assessment to the BSD according to the TOR. |
| EC12 | The supervisor has a process in place to periodically review the information collected to determine that it satisfies a supervisory need. |
| Description and findings re EC12 | The BSD reviews reporting forms at the annual policy meeting. The forms were last revised substantially at the time when Basel III was introduced. |
| Assessment re Principle 10 | Compliant |
| Comments | The regulatory framework requires banks and controlling companies to periodically submit a broad range of information. Strong regulatory and supervisory processes exist to ensure accuracy and comparability of submitted returns. Well developed procedures for analyzing collected information and feeding into supervisory actions are in place. |
| Principle 11 | Corrective and sanctioning powers of supervisors. The supervisor acts at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system. The supervisor has at its disposal an adequate range of supervisory tools to bring about timely corrective actions. This includes the ability to revoke the banking license or to recommend its revocation. |
| EC1 | The supervisor raises supervisory concerns with the bank’s management or, where appropriate, the bank’s Board, at an early stage, and requires that these concerns be addressed in a timely manner. Where the supervisor requires the bank to take significant corrective actions, these are addressed in a written document to the bank’s Board. The supervisor requires the bank to submit regular written progress reports and checks that corrective actions are completed satisfactorily. The supervisor follows through conclusively and in a timely manner on matters that are identified. |
| Description and findings re EC1 | The SREP cycle provides in Step 6 that feedback to the Board and senior management of a bank is to take place. More generally, key/material findings or issues identified through off-site or on-site activities, such as meetings with banks’ Boards and senior management as well as on-site reviews, will be documented and shared with the bank in the form of feedback letters. These are followed up in subsequent meetings with the bank and other supervisory actions. See CPs 8 and 9, particularly CP 8 EC1 on the SREP cycle and CP9 EC8. The review of supervisory files, including MIRs and feedback letters, as well as discussion with banks by the assessors confirmed that in practice such process is applied forcibly by the BSD. The discussion on supervisory concerns, including follow-up on the banks’ progress in addressing shortcomings communicated in the past, is one of the main topics in the supervisory meetings with the Boards or senior management of banks. |
| EC2 | The supervisor has available25 an appropriate range of supervisory tools for use when, in the supervisor’s judgment, a bank is not complying with laws, regulations or supervisory actions, is engaged in unsafe or unsound practices or in activities that could pose risks to the bank or the banking system, or when the interests of depositors are otherwise threatened. |
| Description and findings re EC2 | See CP1 EC3 and 5. The BA provides the Registrar a range of tools, including:
Moreover, Sections 23 to 26 of the BA provide the power to the Registrar to suspend registration of a bank or controlling company or to restrict its activities, but a number of limitations apply. In the case of a bank that does not comply with conditions attached to the registration, the Registrar can, after consultation with the Minister, suspend or cancel the registration. Similarly, the Registrar can restrict a bank’s activities for various broad reasons including cases where: the bank does not carry on satisfactorily the business of a bank; the bank has failed to comply with a requirement of the BA; or the bank continues to employ an undesirable practice. However, the Registrar must notify the bank at a minimum 30 days in advance to give an opportunity to the bank to refute the claim and during that time cancellation or suspension of registration or restriction of activities does not become effective. Alternatively, the Registrar can apply to the court for an order of cancellation or suspension of the registration. In this case, the 30-day notice period does not apply. The BSD explains that this court process can be processed expeditiously, possibly in a matter of days, but it has not been tested. In addition, Regulation 38(4) affords the Registrar the power to increase prudential requirements commensurate with a bank’s risk profile. |
| EC3 | The supervisor has the power to act where a bank falls below established regulatory threshold requirements, including prescribed regulatory ratios or measurements. The supervisor also has the power to intervene at an early stage to require a bank to take action to prevent it from reaching its regulatory threshold requirements. The supervisor has a range of options to address such scenarios. |
| Description and findings re EC3 | See EC2. In particular, BA Section 74(2) provides that the Registrar may take action against a bank or controlling company if there is a failure to comply with prudential requirements. Unlike directives stipulated in BA Section 6(6), no consultation with the relevant bank is required in this case. Regarding early interventions, as described in CPs 8 and 9, the SREP cycle emphasizes early identification of problems in banks. Once problems are identified in a bank, the bank is requested to submit action/remedial plans and provide regular feedback/updates on the progress made in addressing identified issues, which is followed by the BSD closely. These are often carried out without issuing directives stipulated in BA Section 6(6). The BSD explains such an approach can be applied to prevent a bank from breaching the regulatory minimum requirements. |
| EC4 | The supervisor has available a broad range of possible measures to address, at an early stage, such scenarios as described in essential criterion 2 above. These measures include the ability to require a bank to take timely corrective action or to impose sanctions expeditiously. In practice, the range of measures is applied in accordance with the gravity of a situation. The supervisor provides clear prudential objectives or sets out the actions to be taken, which may include restricting the current activities of the bank, imposing more stringent prudential limits and requirements, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from the banking sector, replacing or restricting the powers of managers, Board members or controlling owners, facilitating a takeover by or merger with a healthier institution, providing for the interim management of the bank, and revoking or recommending the revocation of the banking license. |
| Description and findings re EC4 | See above, particularly EC2, as well as CP1. BA section 6 (6) gives the Registrar power to issue directives which include non-financial sanctions or require banks, controlling companies, or their auditors to cease or refrain from engaging in any act, perform certain acts, and providing information to the Registrar. This provision is interpreted as enabling the Registrar to, among others: require banks to restrict or suspend payments to shareholders or share repurchases; restricting asset transfers; restricting the powers of managers, Board members or controlling owners; or facilitating takeover by or merger with a healthier institution. While a consultation with the relevant bank is required, the agreement with the bank is not required. As explained in EC2, BA Section 26 provides the power to the Registrar to restrict the activities of a bank for a number of reasons including if the bank does not carry out satisfactorily the business of a bank or fails to comply with a requirement of the BA, subject to the 30 days advance notice. BA Section 25 also provides the Registrar to apply to a court for an order of cancelling or suspending the registration of a bank. The bank’s registration lapses on the date that order comes into force. BA Section 60 (6) provides the power to the Registrar to object to the appointment or continued employment of a CEO, director or executive officer of a bank if the Registrar believes that these persons are not or no longer a fit and proper person or it is not in the public interest for these persons to hold or to continue to hold these positions. However, the Registrar does not have power to impose temporary management. In addition to the above, the BA and the Regulations give the supervisor power to impose more stringent prudential requirements (Regulation 38 (4)) and subject most new activities and acquisitions to prior approval (BA Section 52). In practice, most supervisory concerns are addressed without resorting to particular powers given by the laws described above. In some cases, directives under BA Section 6 (6) are issued. The request of review by independent audit firms under BA Section 7 is also seen by the BSD as a strong corrective action. Furthermore, administrative fines have been applied under BA section 91 A for AML/CFT related issues. |
| EC5 | The supervisor applies sanctions not only to the bank but, when and if necessary, also to management and/or the Board, or individuals therein. |
| Description and findings re EC5 | As described in EC4, the Registrar has the power to remove senior managers or Board members of a bank. In addition, BA Section 60(1B) provides that the Registrar may, according to the provisions in the Company Act, order restitution against a director, CEO or executive officer of a bank who was knowingly carrying on the business of the bank “recklessly.” The BA, however, does not provide the supervisor the power to impose administrative fines on members of the Board, senior management or other employees of banks. |
| EC6 | The supervisor has the power to take corrective actions, including ring-fencing of the bank from the actions of parent companies, subsidiaries, parallel-owned banking structures and other related entities in matters that could impair the safety and soundness of the bank or the banking system. |
| Description and findings re EC6 | As described in EC4, directives under BA Section 6 (6) can be used to implement wide-ranging corrective actions on banks and controlling companies. For example, this could be used to restrict a subsidiary bank’s dividend payment to its controlling company, its exposure to the controlling company or to its related entities, or controlling company’s exercise of its shareholder’s right over the bank. |
| EC7 | The supervisor cooperates and collaborates with relevant authorities in deciding when and how to effect the orderly resolution of a problem bank situation (which could include closure, or assisting in restructuring, or merger with a stronger institution). |
| Description and findings re EC7 | BA Section 68 provides that:
BA Section 69 provides that if the Registrar believes a bank will be unable to repay deposits or will probably be unable to meet any other obligations, the Minister may appoint a curator to the bank, in whom the management of the bank is vested, subject to the supervision of the Registrar. The section also enables the Minister to empower the curator to take such actions as: suspending or reducing the right of creditors of the bank to claim or receive interest; making payments to creditors; canceling any agreement between the bank and other parties to advance funds or extend facilities; convening a meeting of creditors; negotiating with creditors; and, to cancel guarantees issued by the bank. The curator is required to provide reports to the Registrar monthly whether there is a reasonable probability exists that the bank will become a successful concern. The curatorship lapses when the bank is regarded as having no reasonable probability recover. The curator may be dismissed by the Minister at any time or upon application by the Registrar to that effect. |
| AC1 | Laws or regulations guard against the supervisor unduly delaying appropriate corrective actions. |
| Description and findings re AC1 | There is no provision in laws and regulations that set dates for taking corrective actions or other measures to guard against undue delay of actions, although the authorities explain the common law principles require such actions to be taken within an appropriate timeframe. |
| AC2 | When taking formal corrective action in relation to a bank, the supervisor informs the supervisor of non-bank related financial entities of its actions and, where appropriate, coordinates its actions with them. |
| Description and findings re AC2 | During the regular bilateral meeting with the FSB, information on corrective actions taken is provided and coordination is made between the two supervisors. Also, the BSD explains that it will inform the FSB promptly of a formal corrective action if the action is expected to affect entities supervised by the FSB substantially. |
| Assessment re Principle 11 | Materially non-compliant |
| Comments | While there have been a few significant improvements since the last assessment, the major problem of the need for 30 days prior notice in suspending registration or restricting activities based on BA Sections 23, 24 and 26 has not been changed. The newly introduced power of directives under BA Section 6(6) as well as the application of a motion by the court could address the issue partially. But the former still requires consultation with the relevant bank and the bank may challenge on the ground that a similar due process to that of Section 24 should be required for sanctions with similar effect. The latter is yet untested and relies on a court’s judgment, which may take a different position than that of the supervisor. Given supervisors would consider taking such drastic measures only in cases where the risk is imminent and large, impact to the public could be significant, and when the relevant bank is not cooperating with the supervisor, any possible delays in or uncertainty regarding the outcome of the process needs to be avoided. The assessors understand the strong framework for licensing and corporate governance as well as relatively stable structure of the banking industry enables the supervisor to address these issues in a cooperative manner using less formal and stringent measures in most of the cases. However, the supervisor needs to be prepared for cases where these cooperative and more informal measures may not work—the framework for corrective and enforcement actions need to cover such situations. The assessors are thus still of the view that strengthening laws to provide the Registrar with the power to suspend or limit a bank’s activities without delay is essential to improve compliance with the CP. The lack of ability for the supervisor to fine individuals related to banks, such as Board members and senior management, is another important gap in the current regulatory framework in relation to EC5, which also contributed to the above grading. |
| Principle 12 | Consolidated supervision. An essential element of banking supervision is that the supervisor supervises the banking group on a consolidated basis, adequately monitoring and, as appropriate, applying prudential standards to all aspects of the business conducted by the banking group worldwide.26 |
| EC1 | The supervisor understands the overall structure of the banking group and is familiar with all the material activities (including non-banking activities) conducted by entities in the wider group, both domestic and cross-border. The supervisor understands and assesses how group-wide risks are managed and takes action when risks arising from the banking group and other entities in the wider group, in particular contagion and reputation risks, may jeopardize the safety and soundness of the bank and the banking system. |
| Description and findings re EC1 | BA Section 4(4) provides that the Registrar shall implement and maintain a supervisory review process, which includes on-site and off-site works on a bank or controlling company and its respective branches, subsidiaries, joint ventures or related entities. Section 52 prohibits establishment of subsidiaries, branch offices, other interests and representative offices of banks and controlling companies without prior approval of the Registrar. (See CP7). Similarly, Section 55 provides that no reconstruction (restructuring) of companies within a group shall be effected without the prior written approval of the Registrar. Regulation 36 on consolidated return states the primary objectives of the consolidated supervision as “to duly capture all material risks to which the banking group may be exposed, including its exposures to credit risk, market risk and operational risk” as well as “to preserve the integrity of the banking group’s capital and reserve funds, amongst other things, by eliminating any double or multiple gearing of capital and reserve funds.” It also states that consolidated supervision extends to all the companies, institutions or entities. A broad scope of consolidated supervision is defined in Regulation 36, including:
A bank or a controlling company is required to submit Form BA 600 quarterly that includes group capital adequacy, intragroup exposures, group large exposures, group currency risk, and group liquidity. These capture the group as the controlling company and below. The BSD has a dedicated consolidated supervision analyst for every large banking group as a part of its frontline analysis team. All banking groups have to submit biannually a detailed organizational charts reflecting all interests under the bank or controlling company. During various meetings with the bank, it is usual practices to discuss issues at the consolidated level. Given large banks in South Africa are parts of financial conglomerates that engage in other financial activities through subsidiaries, the BSD is well aware of risks coming from non-banking activities conducted by entities in the groups. The BSD therefore pays particular attention to the situation of entities in the banking groups, monitors their conditions and impact on banks, and discusses these issues regularly with banks’ and controlling companies’ Board members and senior management. The review of supervisory files and the discussion with banks and external auditors confirmed these are monitored by the BSD and discussed with banks. Furthermore, for all applications in terms of BA Section 52, the BSD’s internal Section 52 Committee will consider the impact that the proposed investment could have on the banking group, in which occasion all banking group structures are reviewed and assessed. However, tools for monitoring risks stemming from non banking activities of a larger financial group is not yet highly developed. ICAAP stress testing requirements are not yet applied on the impact from insurance activities of a banking group, or the reputational spill-over from a parent group. The SARB’s common scenario stress testing is also only applied to banking operations in South Africa. |
| EC2 | The supervisor imposes prudential standards and collects and analyses financial and other information on a consolidated basis for the banking group, covering areas such as capital adequacy, liquidity, large exposures, exposures to related parties, lending limits and group structure. |
| Description and findings re EC2 | BA Section 70a provides that controlling companies are subject to the minimum capital requirement. The large exposure limit is also applied to controlling companies (Section 73). Regulation 36 then provides details of consolidated supervision, which in Subsection (2) prescribes that all the directives, instructions or requirements specified in the Regulations that relate to a bank on a solo basis shall mutatis mutandis apply to that bank or its controlling company on a consolidated basis. Thus, prudential requirements stipulated in the BA and Regulations, such as capital adequacy, liquidity, large exposures and exposures to related parties are applied on a consolidated basis. Regarding reporting requirements, Form BA 600 on consolidated supervision covers such vareas as: consolidated balance sheet (Form BA 100); consolidated off-balance-sheet activities (Form BA 110); consolidated income statement (Form BA 120); group capital adequacy; intragroup exposures; group large exposures; group currency risk; and group Liquidity risk. In addition, Regulation 37 (Foreign operations of South African Bank, Form BA 610) which applies to individual foreign subsidiaries and branches covers the following areas: balance sheet; off-balance sheet; income statement; capital adequacy; credit risk; liquidity risk; market risk; interest-rate risk in the banking book; equity risk in the banking book; and operational risk. As described in EC 1, for the analysis of such information, the BSD has a dedicated consolidated supervision analyst for every large banking group. During prudential and other meetings held with banks, consolidated groups are discussed. Also, all banking group structures are reviewed and assessed, and reflected in their risk ratings in the monthly MIR and the biannual risk review, which are discussed internally. |
| EC3 | The supervisor reviews whether the oversight of a bank’s foreign operations by management (of the parent bank or head office and, where relevant, the holding company) is adequate having regard to their risk profile and systemic importance and there is no hindrance in host countries for the parent bank to have access to all the material information from their foreign branches and subsidiaries. The supervisor also determines that banks’ policies and processes require the local management of any cross-border operations to have the necessary expertise to manage those operations in a safe and sound manner, and in compliance with supervisory and regulatory requirements. The home supervisor takes into account the effectiveness of supervision conducted in the host countries in which its banks have material operations. |
| Description and findings re EC3 | BA Section 52 provides that establishing a subsidiary, a joint venture, or a branch requires prior approval by the Registrar as described in CP 7. For the Section 52 application, the applicant is required to provide a broad range of information including the proposed managerial structure, nature of supervisory functions performed by the host country, and an opinion on the ability to submit the returns required by the BA. For all applications of establishing foreign operations, the Section 52 Committee, which consists of BSD staff members from different teams, considers amongst other things the experience and qualifications of the management of the entities. For the acquisition or establishment of cross-border banking operations, the BSD requires the establishment of a MOU with the cross-border banking supervisor concerned, which includes the assurance that necessary information will not be hindered in the host country. On the oversight of a bank’s foreign operations by management, BA Section 60B provides requirements on corporate governance. Regulation 36 (17) provides details of the requirement of corporate governance, which applies to the oversight by a bank’s head office on its operations abroad. The quarterly return, Form BA 610, is required for each foreign subsidiary and branch of South African banking groups. The form requires detailed financial and risk information on individual subsidiaries/branches including, for example, financial statements as well as regulatory risk weighted exposures on credit, market, operational and other risks. These are reviewed by the off-shore analyst, who belongs to frontline analyst teams of large banks. The related Regulation 27 stipulates requirements related to governance, risk management and internal governance that applies both at the consolidated level and at the level of each foreign operation. In addition, during the CEO meetings with banks and control companies in South Africa, issues relating to the bank’s foreign operations, including branches, joint ventures and subsidiaries, are addressed, including their oversight over these operations. The BSD also meets with CEOs of local operations of large banking groups from time to time. Also, according to Regulation 46, the external auditors are required to issue a report on each foreign banking operation, which reports are reviewed and discussed at the trilateral meeting. Banks confirmed that the BSD exercises close monitoring of their control over foreign operations including appointments of local Board members and senior management. They also confirmed that these are regularly discussed at the periodic meetings between the BSD and the banks’ Boards and CEOs. |
| EC4 | The home supervisor visits the foreign offices periodically, the location and frequency being determined by the risk profile and systemic importance of the foreign operation. The supervisor meets the host supervisors during these visits. The supervisor has a policy for assessing whether it needs to conduct on-site examinations of a bank’s foreign operations, or require additional reporting, and has the power and resources to take those steps as and when appropriate. |
| Description and findings re EC4 | The BSD holds regular as well as ad-hoc meetings with foreign supervisors to discuss supervisory issues concerning cross-border establishments. Ad-hoc meetings will take place whenever either side reasonably requests on the basis that it has a material supervisory concern, based on MOUs with those foreign authorities. The BSD would also on an ad-hoc basis pay visits to host supervisors of South African banks. These meetings are planned between all parties involved, in advance, with agreed upon agendas, and from the BSD side, based on its supervisory plans. (See CP13 for details). The Registrar has the power to require additional reporting on a bank or a controlling company on its foreign operations. (BA Section 7). |
| EC5 | The supervisor reviews the main activities of parent companies, and of companies affiliated with the parent companies, that have a material impact on the safety and soundness of the bank and the banking group, and takes appropriate supervisory action. |
| Description and findings re EC5 | As described above, the BSD’s supervisory process covers controlling companies and the consolidated returns cover the consolidated groups, including controlling companies and their subsidiaries. As noted in EC1, the BSD monitors subsidiaries of controlling companies that may have a material impact on the safety and soundness of banks. For example, the supervisor continues to monitor the soundness of a large insurance company which is a subsidiary of a bank controlling company to ensure appropriate actions are taken by the controlling company which is a major shareholder of the insurance group to manage the risk arising from the subsidiary. |
| EC6 | The supervisor limits the range of activities the consolidated group may conduct and the locations in which activities can be conducted (including the closing of foreign offices) if it determines that:
|
| Description and findings re EC6 | BA Section 50 limits a controlling company’s investment in as well as loans and advances to (A) undertakings of non-bank activities, and (B) fixed property not intended or used mainly for the business of the bank, to no more than its share capital and reserve funds minus regulatory capital required for the market risk. Section 26 also provides the power to the Registrar to restrict activities of a bank. BA Section 76 restricts the amount a bank can invest in real estate or shares of any company, or provide loans and advances to its subsidiary whose main object is acquiring, holding or developing real estate. Similar restrictions exist for investments in, loans and advances to, and guarantees for its associates. (BA Section 77) During the process for approvals under BA Section 52 to acquire or establish subsidiaries, joint ventures, branch offices, divisions, other interests and representative offices of banks or controlling companies, the Section 52 Committee will consider the impact that the proposed investment could have on the banking group, and has the right to reject application. The Committee attaches a set of conditions that accompanies the approval letter, which needs to be adhered to or the approval can be withdrawn. The BSD in its capacity as home supervisor also uses moral suasion to impose limits on South African banks’ foreign banking operations. Regarding supervision by foreign supervisors, the BSD requires the establishment of a MOU with the host supervisor of its banks’ foreign operations. As described in EC2, during the approval process under BA Section 52, the applicant is required to submit information concerning the supervision by the host country and the capacity of the subsidiary/branch to submit required returns. These are taken into account in determining the application. The BSD also looks at the quality of supervision of foreign supervisors using various information sources and reviews the legal framework of the country to see whether it would hinder provision of information needed for effective supervision on a consolidated basis. These assessments are reviewed and confirmed by the Section 52 Committee. The assessors reviewed the Section 52 Committee minutes and confirmed these assessments are conducted and discussed. |
| EC7 | In addition to supervising on a consolidated basis, the responsible supervisor supervises individual banks in the group. The responsible supervisor supervises each bank on a stand-alone basis and understands its relationship with other members of the group.27 |
| Description and findings re EC7 | The primary focus of the supervision of banks in South Africa is that of the supervision on a stand-alone (solo) basis. The consolidated supervision acts as a compliment to the solo supervision in the BSD’s view. For example, Regulation 36(3) stipulates that “consolidated supervision… (v) serves as a compliment to, instead of a substitute for, the solo supervision of a bank.” All locally registered banks are required to comply with all the prudential and reporting requirements on a solo basis. As described above, reporting requirements are established on a banking group’s structure. Currently, there is no bank in South Africa that belongs to the same banking group as another bank. |
| AC1 | For countries which allow corporate ownership of banks, the supervisor has the power to establish and enforce fit and proper standards for owners and senior management of parent companies. |
| Description and findings re AC1 | As described in CP8, BA Section 38 provides requirements of prior approval by the Registrar for an increase in shareholding in a bank or a controlling company that exceeds a certain level. In addition, BA Section 42 restricts entities that can control a bank to another bank, a foreign bank, ora controlling company, which needs to be registered. The definition of control is broad, including not only holding of more than 50 percent of shares in the total nominal value or voting rights, but also having the power to determine the appointment of the majority of Board members. To be granted registration as a controlling company by the Registrar, BA Section 44 (2) provides that “every director or executive officer of the applicant is, as far as can reasonably be ascertained, a fit and proper person to hold the office of such director or executive officer, and that every such executive officer has sufficient knowledge and experience to manage the affairs of the applicant in its capacity of a controlling company” and that “no interest with any person has in the applicant is inconsistent with a provision of this act.” In on-going supervision, meetings with a bank and a controlling company are frequently held in which the consolidated group and its shareholding, corporate governance structures, and management of risk and activities, among others, are discussed. For reporting, form BA 020 is submitted in respect of all senior management appointments in terms of the controlling company and the bank. |
| Assessment of Principle 12 | Compliant |
| Comments | The supervisory and reporting framework provides an adequate framework for monitoring and assessing risks to banks in South Africa from non-banking and foreign banking operations in banking groups to be compliant with this CP. However, given the prevalence of conglomerate-type financial groups in South Africa, the authorities should make further effort to monitor and manage risks arising from non-banking activities or parent entities of a financial group (some of which are not bank controlling companies) to which a South African bank belongs. In this regard, as described in CP 8 and 9, the authorities should strengthen its technique, such as group-wide stress testing, to monitor and assess those risks. The authorities should further improve the recovery and resolution planning of large banking groups particularly once the necessary power is given to the supervisor by the expected new legislation. Such planning should also consider scenarios where shocks originate from non banking entities or parent groups. |
| Principle 13 | Home-host relationships. Home and host supervisors of cross-border banking groups share information and cooperate for effective supervision of the group and group entities, and effective handling of crisis situations. Supervisors require the local operations of foreign banks to be conducted to the same standards as those required of domestic banks. |
| Essential criteria | |
| EC1 | The home supervisor establishes bank-specific supervisory colleges for banking groups with material cross-border operations to enhance its effective oversight, taking into account the risk profile and systemic importance of the banking group and the corresponding needs of its supervisors. In its broadest sense, the host supervisor who has a relevant subsidiary or a significant branch in its jurisdiction and who, therefore, has a shared interest in the effective supervisory oversight of the banking group, is included in the college. The structure of the college reflects the nature of the banking group and the needs of its supervisors. |
| Description and findings re EC1 | A few large South African banks have started to expand further into other African countries. Also, traditionally, some of the large South African banks have close relations with the UK’s financial industry—two of them belonging to large financial groups based in the UK and one of them being listed there. In this context, the BSD has in recent years started organizing supervisory colleges for its large banking groups with the host country supervisors in Africa. The BSD is also attending supervisory colleges of foreign banks as a host supervisor. In addition, various ad hoc meetings have been held with supervisors from other jurisdictions, particularly the Prudential Regulation Authority (PRA) in the UK. In 2007 the BSD organized a meeting for host supervisors of the African operations of one of the biggest banking groups. The purpose of this meeting was to inform the host supervisors of the impact of Basel II on the banking group. In May 2013, the BSD hosted a supervisory college for the same banking group, which has operations in a number of African countries. It has material market shares in most of the jurisdictions where it has a presence, although the size of banking assets in these countries is still small compared to that of the whole group. All the African countries where the group has presence were invited to the supervisory college and 15 countries attended. During the meeting, representatives from the group made presentations on its strategy, strategic focus, risk management, corporate governance and plans for its African operations. They also informed attendees about their oversight and controls throughout the entire group to combat money laundering. In turn, the BSD presenters shared their supervisory assessment of the group with the other regulators, while the attending African delegates presented information on their risk analyses of the relevant entity operating in their jurisdiction. Attending delegates also provided an update on Basel II and Basel III implementation, and their requirements and controls with regard to anti-money laundering and terrorist financing in their respective jurisdictions. The BSD informed the assessors that the attendees agreed that communication between supervisors was of immense importance to ensure an effective understanding and supervision of the banking group. It was also agreed that home and host regulators would make use of formal and informal communication lines to ensure the frequent and timely sharing of information between supervisors. The next college meeting for the group is scheduled in 2015. This non-annual frequency is due to the fact that the host supervisors do not think that an annual frequency is needed at this stage. The BSD explains that it received overwhelming positive feedback from the attending delegates subsequent to the college and is of the view that such colleges are the way forward to ensure effective consolidated supervision of cross-border banking operations. The supervisory college for another large bank with host supervisors in Africa is also planned this year. |
| EC2 | Home and host supervisors share appropriate information on a timely basis in line with their respective roles and responsibilities, both bilaterally and through colleges. This includes information both on the material risks and risk management practices of the banking group28 and on the supervisors’ assessments of the safety and soundness of the relevant entity under their jurisdiction. Informal or formal arrangements (such as memoranda of understanding) are in place to enable the exchange of confidential information. |
| Description and findings re EC2 | In addition to college meetings as described in EC1, the BSD visits the host supervisors as well as the foreign banking operations of South African banks based on the significance of their operations, although it has not become a regular practice. During the meetings with host country supervisors, aspects of common interest are discussed and information is shared. Informal and formal arrangements exist to facilitate information sharing, including the MOU which is required for the acquisition or establishment of and cross-border banking operations. (See CP3). In particular, given many banking groups have substantial operations in the UK, the BSD has a various arrangements with the UK’s PRA to ensure smooth communication and sharing of information. Meetings between the two supervisors are held frequently. For example, for a bank which is dual-listed both in the UK and South Africa, annual meetings are held between the two authorities. Banks also confirmed that frequent communications and sharing of information are taking place between the BSD and supervisors of jurisdictions where their substantial operations exist. |
| EC3 | Home and host supervisors coordinate and plan supervisory activities or undertake collaborative work if common areas of interest are identified in order to improve the effectiveness and efficiency of supervision of cross-border banking groups. |
| Description and findings re EC3 | As noted above, an agreement exists between the BSD and the PRA for annual meetings to discuss a banking group that has a dual listed company structure over South Africa and the UK. The typical format of the meetings includes presentations by the BSD and the PRA on their assessments of the risk profile of the group. A trilateral discussion involving representatives of the banking group is also held. The results of these meetings feed into the BSD’s ongoing supervision. |
| EC4 | The home supervisor develops an agreed communication strategy with the relevant host supervisors. The scope and nature of the strategy reflects the risk profile and systemic importance of the cross-border operations of the bank or banking group. Home and host supervisors also agree on the communication of views and outcomes of joint activities and college meetings to banks, where appropriate, to ensure consistency of messages on group-wide issues. |
| Description and findings re EC4 | As described above, a MOU is required for the approval of establishing cross-border banking. The MOU provides a framework for communication including for such cases as a bank is in trouble. The BSD staff also visits host supervisors to discuss matters related to foreign operations of South African banks, although it is still relatively limited except in the UK, and joint supervisory activities are yet to happen with African host supervisors. |
| EC5 | Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities, develops a framework for cross-border crisis cooperation and coordination among the relevant home and host authorities. The relevant authorities share information on crisis preparations from an early stage in a way that does not materially compromise the prospect of a successful resolution and subject to the application of rules on confidentiality. |
| Description and findings re EC5 | The BSD participates in the crisis management groups and supervisory colleges of G-SIFIs in which South African entities play significant roles. The draft Resolution Bill is currently being worked on and should be available by the end of 2014, to be promulgated in 2015. The authorities explain cross-border cooperation and coordination on crisis preparation for South African banking groups with the countries where their significant subsidiaries/branches are located will be developed after the new prudential authority is given appropriate mandates through the approval and implementation of the required legislation. |
| EC6 | Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities and relevant host authorities, develops a group resolution plan. The relevant authorities share any information necessary for the development and maintenance of a credible resolution plan. Supervisors also alert and consult relevant authorities and supervisors (both home and host) promptly when taking any recovery and resolution measures. |
| Description and findings re EC6 | See EC5. The BSD has required all banks to prepare recovery plans that cover the entire group, although the coverage of non-banking activities and beyond the controlling company is still sporadic. The BSD plans to address the issue of resolution plans for large banks once they are given the necessary mandates by the planned new legislation. |
| EC7 | The host supervisor’s national laws or regulations require that the cross-border operations of foreign banks are subject to prudential, inspection and regulatory reporting requirements similar to those for domestic banks. |
| Description and findings re EC7 | In South Africa, a bank subsidiary of a foreign banking group is regarded as a domestic bank and therefore treated the same as a locally owned bank. Regarding a branch of a foreign banking group, BA Section 18A requires such a branch to be registered and that provisions in the BA or other legislation that apply to a bank also apply to the foreign bank branch. Based on these provisions, all foreign branches under South African jurisdiction are required to comply with the same prudential requirements as domestic banks, and they need to submit BA returns as are required for domestic banks. As described in CP2, a dedicated frontline supervision analyst is assigned to each foreign bank branch. The SREP cycle described in CPs 8 and 9, including the off-site monitoring and the on-site review also applies to foreign bank branches. |
| EC8 | The home supervisor is given on-site access to local offices and subsidiaries of a banking group in order to facilitate their assessment of the group’s safety and soundness and compliance with customer due diligence requirements. The home supervisor informs host supervisors of intended visits to local offices and subsidiaries of banking groups. |
| Description and findings re EC8 | Foreign supervisors are permitted to conduct on-site visits to branches and subsidiaries based in South Africa in order to enable them to assess the entities’ soundness and compliance with KYC requirements, provided that such visits are arranged in conjunction with the BSD. The conditions are described in MOUs, including the need for a prior notice and “no objection” from the host supervisors. |
| EC9 | The host supervisor supervises booking offices in a manner consistent with internationally agreed standards. The supervisor does not permit shell banks or the continued operation of shell banks. |
| Description and findings re EC9 | The BSD does not permit the creation of shell banks and booking offices. Representative offices are not allowed to do any banking business. |
| EC10 | A supervisor that takes consequential action on the basis of information received from another supervisor consults with that supervisor, to the extent possible, before taking such action. |
| Description and findings re EC10 | A standardized MOU provides that both home and host supervisors notify each other of remedial actions on banks to address material supervisory concerns prior to or immediately after such actions are taken. As prescribed in these MOUs, the BSD will consult with the foreign supervisor who provided the information before taking consequential action based on the information. The BSD will also provide assurance that all possible steps are taken to preserve the confidentiality of information received, including that information obtained will not be passed to third parties without the provider of the information approval. |
| Assessment of Principle 13 | Largely Compliant |
| Comments | The current arrangements and frameworks for cooperation with foreign supervisors are broadly adequate, although cooperation with supervisors in other African countries needs further enhancement as the South African banking groups are expected to continue to expand their operations in these countries. While the biennial frequency of the college meetings with host supervisors for the largest banks is understandable at this stage—particularly considering the resource constraints the host supervisors are facing, the authorities should consider increasing the frequency in the future. One option would be to have conference call meetings in between physical meetings. To further improve the effectiveness of cooperation and ensure adequate oversight is carried out on African operations of South African banking groups, the assessors encourage the authorities to continue their efforts to support the capacity building of these supervisors. The authorities also need to finalize their policies and processes on the conduct of on-site reviews/inspections of South African banks’ cross-border operations in other African countries and enhance practices, with due consideration to the risk those operations pose to the parent banks. These should in time evolve to incorporate joint supervisory activities with the host supervisors. The supervisor should also enhance its effort in cross-border recovery and resolution planning, lack of which is reflected in the rating of this CP. Given a few of the big banks have strong ties with the UK, the recovery and resolution plans need to be developed with close collaboration with the UK authorities. Furthermore, as a few South African banking groups’ foreign operations in other African groups have become systemically important for some host jurisdictions, in developing recovery and resolution plans of these groups, due regards need to be paid to the impact on these jurisdictions’ financial system. This will also require close cooperation with supervisory authorities in these jurisdictions. |
Table 1.
Supervisory Powers, Responsibilities, and Functions
| Principle 1 | Responsibilities, objectives and powers. An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.3 A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.4 |
| EC1 | The responsibilities and objectives of each of the authorities involved in banking supervision5 are clearly defined in legislation and publicly disclosed. Where more than one authority is responsible for supervising the banking system, a credible and publicly available framework is in place to avoid regulatory and supervisory gaps. |
| Description and findings re EC1 | The Banks Act of 1990 (BA) Section 3 provides “for the registration as banks of public companies desiring to conduct the business of a bank and for the other purposes of this Act there shall, as part of the Reserve Bank, be an office in Pretoria called the Office for Banks, and at the head of such office shall be a person to be styled the Registrar of Banks,” thus giving the power of registration and related matters to the South African Reserve Bank (SARB) Bank Supervision Department (BSD), and the Registrar, its head. The powers of the Registrar, including the registration of banks as well as conducting a supervisory review process—consists of, among others, on- and off-site supervision—are listed in the BA. No other authorities are provided responsibilities over prudential supervision of banks. The BA and other legislation, however, do not provide the objectives of the BSD or the Registrar. Instead, the BSD’s annual report, which is required by law as explained in CP2, describes its mission as “to promote the soundness of banking system and to contribute to financial stability.” The BSD explains this is its interpretation of the BA and it has evolved over time. |
| EC 2 | The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it. |
| Description and findings re EC2 | As explained above, although no objectives are given in related legislation, the BSD views its primary mission as “to promote the soundness of the banking system and contribute to financial stability,” as described in its annual report. It regards its other responsibilities, such as the control of banking-related activities by unregulated persons, as secondary. |
| EC3 | Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile6 and systemic importance.7 |
| Description and findings re EC3 | BA Chapter VI provides a general framework of quantitative prudential requirements—minimum capital, minimum liquid assets and large exposure requirements. BA Section 74 gives the Registrar power to take actions against banks and controlling companies who failed to comply with these quantitative requirements, including imposing administrative fines. BA Chapter V also sets out organizational requirements such as on corporate governance. The Finance Minister can issue regulations “as to any matter which is required or permitted to be prescribed by regulation under this act.” Under the provision of this section, “Regulations relating to Banks” (Regulations) as well as other relevant regulations have been issued, which contain necessary details for implementing the BA, including reporting requirements (BA returns) as well as qualitative requirements on such issues as corporate governance and internal control. The Regulations are generally drafted by the BSD with necessary consultation with the National Treasury. The BSD states that it does not have any problem with issuing necessary regulations or amending them. The Registrar can also issue a circular “with guidelines regarding the application and interpretation of the provisions of this act” and a guidance note, which provides information and expectations regarding the BSD’s regulation and supervision. These do not have the power of law by themselves, but are accepted by banks as indicating the expectation of the BSD and thus followed. In addition, recently added BA Section 6(6) provides the Registrar power to issue a directive to a bank or a controlling company regarding the application of the BA, which may include the issuing of a non-financial sanction, requiring a bank to cease from engaging in acts or to perform corrective actions, or the request of additional reporting. Contrary to circulars and guidance notes, these are directly enforceable. Directives are sometimes issued to all banks to provide a requirement or guidance that apply to the whole industry. Regulation 38 (4) gives the power to the Registrar to increase prudential requirements for a bank, including to maintain additional capital, deduct amounts from the eligible capital, strengthen the risk management and other bank policies, to reflect its actual risk profile or inadequacy in risk management, internal control, remuneration or other policies. |
| EC4 | Banking laws, regulations and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate. |
| Description and findings re EC4 | The BA, which was promulgated in 1990, has been subsequently updated 8 times, to make it compliant with Basel II and III and to ratify issues detected during the previous BCP assessment, among others. Regulations, circulars and guidance notes are also revised and published frequently. In the case of changes to the Act, involvement of a Standing Committee for the Revision of the Banks Act is required (BA Section 92). The Standing Committee is chaired by a SARB Deputy Governor, and has members representing the Banking Association of South Africa, National Treasury, the BSD and other representatives of the SARB. Current employees and Board members of regulated entities, including banks, have not been appointed as members of the Standing Committee in the recent past. A first draft, prepared by the BSD, is presented to the Standing Committee. Approval of the Standing Committee is followed by release for public comment. After addressing substantive comments, a final version is again presented to the Standing Committee. Its final approval leads to approval by the Minister of Finance who furthermore obtains the Cabinet’s permission for submitting the Bill to a parliamentary process. Once the Bill has been debated and approved by the Parliament and assented to by the President it will be promulgated as an amendment to the Act. The authorities explain the involvement of the Standing Committee is to provide technical expertise to the process. The members of the Standing Committee are appointed for the term of 3 to 4 years when a need arises. At the time of the assessment, no member is appointed. Changes to regulations follow the same route through the Standing Committee and public comment, culminating with the Minister of Finance signing and publishing the amended regulations. No parliamentary process is required for changes to regulations. The regulations are amended or issued frequently. For circulars and guidance notes, no consultation is required, as they only contain interpretations of existing laws and regulations, and are often issued in response to the industry’s request for guidance. For directives, consultation with relevant banks is necessary. |
| EC5 | The supervisor has the power to:
|
| Description and findings re EC5 | On access to banks, BA Section 6(3) provides the Registrar the power to have discussions with the CEO, executive officers or staff members of a bank, controlling company of a bank, subsidiary or trust of that bank to achieve effective supervision. Section 7(1) also provides the power to direct a bank to supply any information required for the performance of the Registrar’s function s and duties prescribed in the BA. On the review of the overall activities of a banking group, in BA Section 1 (1), “banking groups” are defined in such a manner to include natural and judicial persons associated with and connected to a bank, irrespective of whether any of these persons is domiciled in the same country as any of the others. The abovementioned BA Section 6(3) provides that access to a bank and its related entities is to achieve effective supervision by the Registrar including on a consolidated basis of the group of which that bank is a member. Thus, reporting requirements prescribed in the Regulations covers consolidated activities of banks, including their cross-border activities. (Regulations 36, 37) (For details, see CP 12). On supervision of activities of foreign banks, foreign bank subsidiaries are treated as domestically incorporated banks and therefore subject to the same regulation and supervision that applies to all domestically incorporated banks in South Africa. For foreign banks operating as branches, BA section 18A provides that reference to banks in the laws covers foreign bank branches in the country unless expressly stated otherwise, making these branches subject to the same regulation and supervision as domestically-incorporated banks. |
| EC6 | When, in a supervisor’s judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor has the power to:
|
| Description and findings re EC6 | See CP 11 for detailed discussion. As explained above, BA Section 6 (6) provides the Registrar power to issue a directive concerning a particular bank, after consultation with the relevant bank. The section was recently added to the BA to provide flexible powers to the Registrar. Directives can be used to require banks to, within the specified time period, (i) cease or refrain from engaging in any act, omission or course of conduct or perform such acts necessary to remedy the situation, (ii) perform such acts necessary to comply with the directive or to effect the change required to give effect to the directive, or (iii) provide such information and documents relating to the matter as specified in the directive. Similarly, as described in EC3, the Regulation provides the supervisor power to require banks to correct their policies and processes. In addition, BA Section 74 gives the Registrar a specific power to apply measures for a case where a bank fails to comply with quantitative prudential requirements, such as minimum capital or minimum liquid assets. In this case, no consultation with the relevant banks is necessary. BA Section 91A provides the Registrar the power to impose a monetary penalty not exceeding 10 million ZAR for every day during which contravention or non-compliance with the Act continues. Regarding the banks’ registration (license), BA Section 26 provides the Registrar power to restrict activities of a bank for such reasons as: the bank or its officers has been convicted of any offence in terms of the BA; the bank does not carry on satisfactorily the business of a bank; it has failed to comply with a requirement of the BA; or, it continues to employ an undesirable practice. However, a 30-day notice period is required. Alternatively, the supervisor can apply to a competent court for an order cancelling or suspending the registration of a bank for reasons such as above. On resolution, BA Section 69 provides that, when it has become evident to the BSD or a bank has informed the BSD that it is or will be unable to repay depositors when required, the Registrar may recommend to the Minister that it be placed under curatorship. The curator is appointed by the Minister with the management of the bank vested in the curator. |
| EC7 | The supervisor has the power to review the activities of parent companies and of companies affiliated with parent companies to determine their impact on the safety and soundness of the bank and the banking group. |
| Description and findings re EC7 | The BA and the Regulations are applicable to both banks and controlling companies of banks, which have material control over banks. BA Section 4 (4) provides that the supervisory review process to be implemented and maintained by the Registrar covers “a bank or controlling company and its respective branches, subsidiaries, joint ventures or related entities, within or outside the Republic.” Those powers provided in BA Section 6 (3) and Section 7 described in EC5 apply not only to banks but also to controlling companies and subsidiaries of banks and controlling companies, with a view to achieving effective supervision of the group on a consolidated basis. For details, see CP 12. |
| Assessment of Principle 1 | Largely Compliant |
| Comments | The BA and associated rules provide a broadly appropriate framework for regulating and supervising banks. It also provides clear responsibilities of and adequate powers to the Registrar of Banks and the Banking Supervisory Department. However, the lack of legally defined objectives of the supervisor as well as regulation and supervision of banks is a shortcoming of the current BA and related legislation to be fully compliant with this CP. The assessors note and welcome, however, the authorities plan to address this issue in the expected twin peaks reform. (For discussion on the power to suspend or remove a bank registration, see CP 11.) In addition, to further improve the effectiveness and efficiency of the regulatory process, the assessors also recommend the authorities to review the following issues:
|
| Principle 2 | Independence, accountability, resourcing and legal protection for supervisors. The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor. |
| EC1 | The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision. |
| Description and findings re EC1 | As mentioned in CP1, BA Section 3 provides that the Office for Banks (BSD) be established as a part of the SARB, with a head titled as the Registrar of Banks, who is designated by the SARB, subject to the approval of the Minister, from its officers or employees. Section 4 also provides that the Registrar “shall perform, under the control of the said Bank (SARB) and in accordance with the directions issued by the Bank from time to time, the functions assigned to the Registrar by or under this act.” However, there is no legally stipulated operational independence of the Registrar and the BSD per se. Also, there are a number of supervisory actions that require the Minister’s decision. The authorities explain that these are for the check-and-balance purpose and that in practice the Registrar and BSD have full discretion to take any supervisory actions or decisions, and the recommendations by the Registrar and the BSD are usually followed by the Minister. But, the authorities also noted that in very limited cases the Minister may make a different decision in view of other legitimate policy objectives such as with regards to the competition policy while paying due regard to the prudential objectives. According to the authorities, there have been no cases in recent years where the Minister acted against the Registrar’s recommendation to reject applications by banks or bank registration applicants. Regarding the SARB, its independence is prescribed in the Constitution of the Republic of South Africa, which stipulates that “the South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour, or prejudice, but there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters.” This provision is interpreted to cover the BSD’s banking regulatory and supervisory activities. The budget and corporate governance structures of the BSD form a part of the SARB and thus are approved by the SARB Board, which is responsible for the corporate governance of the SARB. The SARB Board includes representatives from the government and industries, including the financial industry, but it does not have power over, nor is it involved in, the regulatory and supervisory work of the BSD. |
| EC2 | The process for the appointment and removal of the head(s) of the supervisory authority and members of its governing body is transparent. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The reason(s) for removal is publicly disclosed. |
| Description and findings re EC2 | BA Section 4 (2) stipulates that “the Reserve Bank shall, subject to the approval of the Minister, designate an officer or employee in its service as Registrar of Banks, who shall perform, under the control of the said Bank and in accordance with the directions issued by the Bank from time to time, the functions assigned to the Registrar by or under this act.” The Registrar has traditionally been appointed from the senior staff in the BSD (although the current Registrar came from the private sector) and is not appointed for a specific term, similar to other senior officials in SARB except for the Governor and the Deputy Governors. Laws define neither a minimum term nor specific reasons for removal from the office for the Registrar. Removal of the Registrar would be thus subject to general legal provisions in South Africa governing employment relations, as well as the SARB employment contracts and policies. There are no provisions that require reasons for removal to be publicly disclosed. The authorities explain dismissal occurs following labor law procedures and when the person is found guilty of misconduct. In such a case, the reason for dismissal may be made public. In case of the Governor and the Deputy Governors, a five-year term is stipulated in the South African Reserve Bank Act (SARBA), although the reasons for dismissal are not specified in law. |
| EC3 | The supervisor publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.8 |
| Description and findings re EC3 | BA Section 10 provides that the Registrar annually submits to the Minister a report, which will then be transferred to the Parliament. No Parliamentary discussion follows. The annual report describes the BSD’s vision and mission, provides the Registrar’s review of the year, and explains the developments of the banking sector in the country as well as activities of the BSD. |
| EC4 | The supervisor has effective internal governance and communication processes that enable supervisory decisions to be taken at a level appropriate to the significance of the issue and timely decisions to be taken in the case of an emergency. The governing body is structured to avoid any real or perceived conflicts of interest. |
| Description and findings re EC4 | The BSD is managed by a Registrar’s Committee, consisting of the Registrar and the Deputy Registrars—sometimes called “Deputies meeting,” and a management committee (ManCo), chaired by the Registrar and consisting of Deputy Registrars and Assistant General Managers (AGMs). The delegation of powers is done in accordance with a document issued by the Legal Services Department of the SARB with the approval of the Governor’s Executive Committee. With regard to the BSD, while laws and regulations give powers explicitly to the Registrar, these can be delegated to other senior-level officers according to the significance of the issue. The BSD is also subject to the risk management and internal audit functions of the SARB. As mentioned in EC1, the overall responsibility for corporate governance of the SARB, including the BSD, lies with the SARB Board, which includes persons with skills and knowledge of different industries, including the financial industry. But the SARB Board’s role is limited to governance of the central bank and its approval is only needed for such issues as the SARB’s budget, annual reports, and general remuneration polices; it is not involved in regulatory and supervisory decision-making or personnel decisions. Directors and employees of banks and controlling companies are prohibited to become a member of the SARB Board. (South African Reserve Bank Act (SARBA) Section 4 (4)). Retired officials of the financial sector are also not appointed. |
| EC5 | The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed. |
| Description and findings re EC5 | All staff of the SARB is subject to a Code of Conduct and a set of staff policies that aims to ensure professionalism and integrity. The Code of Conduct and the associated policies provide, for example, restrictions on the SARB employees taking positions outside the central bank or receiving gifts from supervised entities. In addition, the BSD has its own Code of Conduct to strengthen the aim. Regarding the information obtained through work, its confidentiality is set out in SARBA Section 33 (See CP3). Banks and external auditors confirmed to the assessors that they regard the BSD highly. They also see the BSD staff being highly professional and with integrity and technical expertise, even though a number of them joined the supervisor in recent years. The industry also expressed some concern that a number of experienced senior staff of the BSD are expected to leave in the near future. |
| EC6 | The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes:
|
| Description and findings re EC6 | As a department of the SARB, the BSD’s budget forms a part of the central bank’s budget. The BSD explains that it has always been allocated the resources it requests from the Governors Executive Committee of the SARB, which decides on the budget. Oversight of the budget process is provided by the SARB Board. The SARB’s budget is self-financed through revenues from its central banking operations. The BSD’s budget is not supported by levy on supervised entities, although registration fees are charged on banks and controlling companies which go into the SARB’s budget. The BSD staff number grew from approximately 100 in 2011 to 150 in 2014 (excluding the Financial Stability Unit) mainly due to an increase in the Risk Analysis teams and the Anti-Money Laundering Team. Among these, 54 are in charge of supervision, 34 are risk specialists, 9 in policy/regulation/legal, 7 in IT, and 17 for on-site reviews and AML. The Financial Stability Unit, with approximately 25 staff members, separated from the BSD in April 2014 to become an independent department in the SARB. Direct supervision responsibilities are allocated to those in charge of supervision, called frontline analysts in the BSD, who manage relations with banks and continuously monitor and communicate with them. Even for smaller banks, including foreign bank branches, no more than two banks are allocated to one frontline analyst. For a large bank, its frontline analysis team could consist of close to 10 staff members, including managers and senior managers. In addition, the risk specialists, who are specialized in each risk category, will be allocated to work on individual banks as needed. These risk specialists also conduct validations and reviews of banks’ internal risk models, which include on-site reviews. The on-site and AML teams focus on “deep dive” on-site reviews on AML and other issues, mostly credit risk to date. Regarding the salary scale for its staff, the SARB’s Human Resources Department conducts regular remuneration surveys to benchmark remuneration within the market. The SARB has a policy to benchmark its staff’s salary 60 percent of the salary level of comparable private sector employees, excluding other benefits. The BSD explains that it has not experienced any difficulty in attracting and retaining staff of high caliber, for reasons such as its jobs providing unique intellectual challenges and that the central bank is regarded highly as an employer in the country. It also explains that it has been able to attract talent from the banking industry in recent years, including risk specialists, although a few pockets of relatively difficult areas to recruit people remain, most notably people with advanced quantitative skills. The turnover rate for the BSD has been relatively low, with 4.47 percent in 2013. In most cases, supervisors leaving the BSD are employed by the banking industry. Cooling-off periods are required for senior staff members, e.g., the Registrar and Deputy Registrars. Two well-defined expert career-paths for staff members—bank analyst and risk analyst—are defined and brought into force from April 2014. For example, a new frontline analyst is usually assigned to offshore analysis of a large bank to gain experiences before becoming responsible for standalone banks. The budget for the BSD has also increased significantly, more than doubling from 2009/10 FY to 2013/14 FY. This includes a significant increase in international travel as a number of staff members are involved in various subcommittees of the Basel Committee on Banking Supervision (BCBS), of which South Africa is now a member. The BSD explains it does not have any difficulty in securing adequate budget for training, IT and travel. As an example, it cited that the department has moved from a paper-based system in 2012 with adequate budgetary support. On training, the BSD emphasizes the importance of On-the-Job Training and in-house, peer-to-peer training. It also stresses the importance of participating actively in international works, particularly subgroups of the BCBS, to enhance its understanding of the latest issues in banking supervision, even though it involves substantial travel costs and staff time. |
| EC7 | As part of their annual resource planning exercise, supervisors regularly take stock of existing skills and projected requirements over the short- and medium-term, taking into account relevant emerging supervisory practices. Supervisors review and implement measures to bridge any gaps in numbers and/or skill-sets identified. |
| Description and findings re EC7 | The annual budget cycle of the SARB requires senior management of the BSD to consider gaps in existing resources and skills which form the basis of its budget request. Also, the BSD is required to submit a document on its strategy to the Governor, which includes a description of necessary resourcing to implement the strategy. The BSD conducts more medium-term resource assessments from time to time. For example, in 2011, the BSD’s assessment concluded the need to increase risk specialists and resources for AML/On-site work over time. Currently, as a part of the transition to the Twin Peaks framework, the BSD is engaging in a longer-term resourcing assessment. |
| EC8 | In determining supervisory programmes and allocating resources, supervisors take into account the risk profile and systemic importance of individual banks and banking groups, and the different mitigation approaches available. |
| Description and findings re EC8 | As described in detail in CP8 and 9, an annual supervisory plan is established for each bank taking into account its risk profile and systemic relevance. The specialist resources are allocated based on specific supervisory need for a particular bank over the course of a year, which is incorporated in the supervisory plan. The supervisory plan is continuously revised, which may change the allocation of resources during the year. These are discussed constantly between the frontline analyst teams and risk teams, as well as among the BSD’s senior management. |
| EC9 | Laws provide protection to the supervisor and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. The supervisor and its staff are adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith. |
| Description and findings re EC9 | BA Section 88 stipulates that no liability shall be attached for the SARB as well as its Board members, the Registrar, officers and employees, either in their official or personal capacities for any loss sustained by or damage caused to any person as a result of their performance with good faith of any function or duty under the BA. The SARB also has a framework, as a part of its employment contract, to cover cost of litigations against its staff members that arose from their work-related conduct. In recent years, there have been no cases where the Court ruled against the BSD or its staff on lawsuits regarding their performance of their duties. |
| Assessment of Principle 2 | Largely Compliant |
| Comments | The BSD has an appropriate level of resources with highly qualified staff and substantial specialist skills recently added, even though some of them need to accumulate experiences further. The legal protection of the supervisor is also adequate. Its operational independence is fully respected in practice, but there are a few areas where the framework needs to be enhanced to enshrine the operational independence of the supervisor in related legislation and make it fully compliant with the CP. Particularly, regarding the appointment and removal processes of the Registrar, the legal framework should be revised to include (A) a fixed term of the appointment, (B) specific reasons for the removal, and (C) the requirement to publish the reasons for removal, as required in EC2. In terms of the involvement of the Minister in a few supervisory actions, although the assessors understand the supervisor’s decisions are respected in practice, there is a need to ensure that the Minister’s power is exercised under the principle of constrained discretion. Also, improvements in regulatory frameworks such as those on competition policies that overlap with the banking legislation have possibly reduced the need for the Minister’s discretion. The authorities should therefore review the legislation to limit the cases that require the Minister’s involvement to those that are absolutely necessary and clarify in the laws objectives for intervention. This should also include the clarification of the idea of “prudential veto” where the Minister should not be allowed to override the recommendation by the supervisor to reject applications on registration and other actions made on prudential grounds. Regarding the supervisory resources, while the assessors saw the current level as broadly adequate given the limited number of supervised entities, the authorities should review the adequacy of resources reflecting expected changes in the responsibility of the supervisor under the new twin peaks structure, taking into account the need for further improvements in its supervisory approach as recommended in CP 8, 9 and 12. |
| Principle 3 | Cooperation and collaboration. Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.9 |
| EC1 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and/or the stability of the financial system. There is evidence that these arrangements work in practice, where necessary. |
| Description and findings re EC1 | MOUs for cooperation have been established between the BSD and the Financial Services Board (FSB) as well as STRATE, which includes arrangements for exchange of information and mutual assistance. With the FSB, quarterly meetings are held to discuss issues related to large banks and insurance firms, most of them are interrelated. Agenda of these meetings include such issues as supervisory plans and supervisory findings. Meetings with the National Treasury and the National Credit Regulator (NCR) also take place as needed. There are also frequent informal contacts between these institutions at the technical level. Close cooperation and frequent contacts exist between the BSD and the Financial Stability Department of the SARB, which is responsible for the stability of the financial system in South Africa. As described in CP2, the latter was a part of the BSD until April 2014, which contributes to the close relationship between the two departments. |
| EC2 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with relevant foreign supervisors of banks and banking groups. There is evidence that these arrangements work in practice, where necessary. |
| Description and findings re EC2 | BA Section 4(3) provides that the Registrar may enter into written cooperation arrangements with a host or consolidating supervisor or any other person or institution as the Registrar may deem fit. A number of MOUs have been entered into between the SARB and other regulatory authorities in jurisdictions where South African banks operate or from which banking institutions operating in South Africa originate—25 MOUs are already put in place at end-2013 and a number of others are under negotiation. These memoranda provide for the sharing/exchanging of information and coordination of supervision where applicable. These MOUs provide the framework for information exchange including the confidentiality requirements, meetings between the supervisors, on-site visits to banks’ foreign operations, and crisis management. The assessors reviewed an example of MOU. For the practice of home-host relations, see CP13. Since 2009, the BSD’s policy has been to allow only the acquisition or establishment of local (inward) and cross-border banking operations in instances where an MOU with the cross-border banking supervisor concerned has been concluded. The BSD explains that this decision is underpinned by global initiatives to ensure that cross-border activities do not contribute to enhanced risk, as was evidenced by the global financial crisis. For the member countries of the Southern African Development Community (SADC), heads of state or government have signed a Protocol on Finance and Investment (PFI), which, among other things, includes a section setting out the framework for cooperation and coordination in banking regulatory and supervisory matters, similar to those included in MOUs. SADC member countries are: Angola; Botswana; the Democratic Republic of Congo; Lesotho; Malawi; Mauritius; Mozambique; Namibia; Seychelles; South Africa; Swaziland; Tanzania; Zambia; and Zimbabwe. A few South African banks are particularly active in the region, which in the BSD’s view enhances the importance of regional cooperation. |
| EC3 | The supervisor may provide confidential information to another domestic authority or foreign supervisor but must take reasonable steps to determine that any confidential information so released will be used only for bank-specific or system-wide supervisory purposes and will be treated as confidential by the receiving party. |
| Description and findings re EC3 | SARBA Section 33 provides that all information gathered by the SARB is confidential and may not be shared with third parties, except for the Minister and Director General of National Treasury. BA Section 89 then provides for specific instances when the Registrar may share information to persons who are given function by laws in South Africa (e.g., tax authorities) or to foreign supervisors, provided the recipient authorities are willing and able to keep the information confidential. As described above, clauses on sharing of confidential information are included in MOUs with foreign supervisors. |
| EC4 | The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information and is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. In the event that the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information. |
| Description and findings re EC4 | As mentioned in the previous EC, SARBA Section 33 provides that the SARB employees should not disclose information gained through participation in SARB activities, except (1) to the Finance Minister and Director General of National Treasury, (2) for the purpose of performing the employee’s duties, or (3) being required before a court of law or under any law. However, there is no provision to limit the SARB, the Finance Ministry, or the National Treasury to use confidential information only for supervisory purposes. In case of information received from a foreign supervisor, MOUs contain provisions that stipulate information provided under the MOU shall be used only for lawful supervisory purposes and remain confidential. They also require that the supervisors do not disclose or act on information given by counterparts without the prior written consent and prompt notification if required to release such information. The BSD explains that there has not been any case where the BSD had to release confidential information given by foreign supervisors. |
| EC5 | Processes are in place for the supervisor to support resolution authorities (e.g., central banks and finance ministries as appropriate) to undertake recovery and resolution planning and actions. |
| Description and findings re EC5 | The Registrar and the BSD are the resolution authority for banks. Thus, it is expected on-going supervision will support recovery and resolution planning and actions. See CP 9 for details. |
| Assessment of Principle 3 | Compliant |
| Comments | Legal provisions as well as operational frameworks for cooperation and collaboration with domestic and foreign authorities are in place. Regarding the confidentiality of information, although the assessors view the current legal framework and its practical application provides a reasonable assurance of protecting the confidentiality of supervisory information, the reliance on SARBA Section 33 as well as the manner BA Section 89 is stipulated leave room for the information to be used for non-supervisory purposes. It is therefore recommended the authorities review the relevant provisions of the BA to ensure the confidential information shall only be used for supervisory purposes, unless specifically required by court orders or provisions in other laws as provided in EC3 and 4. |
| Principle 4 | Permissible activities. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled. |
| EC1 | The term “bank” is clearly defined in laws or regulations. |
| Description and findings re EC1 | BA Section 11 stipulates that “no person shall conduct the business of a bank unless such person is a public company and is registered as a bank in terms of this act.” “The business of a bank” is then defined in Section 1(1) as accepting deposits from the general public as a regular feature of its business, soliciting or advertising for deposits, or utilizing the collected money for loans or investments. A broad definition of “deposit” is also given in the same subsection. |
| EC2 | The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations. |
| Description and findings re EC2 | As noted above “the business of a bank” is defined in BA Section 1(1). It covers such activities as accepting deposits from the general public, soliciting or advertising for deposits, and lending or investing those funds accepted as deposits. Also, the Registrar may cover certain activities as the business of banks by notice in the Gazette after consultation with the Governor. The BA does not provide restrictions on banks engaging in non-banking businesses except for investing in insurance firms. But the BSD has adopted a policy that non-banking business shall be conducted by a controlling company as its subsidiary and not directly by a bank, which is enforced by being included as a condition for registration, among others. |
| EC3 | The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled. |
| Description and findings re EC3 | BA Section 22 (5) prohibits the use of a name or a description which includes the word “bank,” or any derivative thereof, or the words “deposit-taking institution” or “building society,” or any derivative thereof, unless the business is an authorized bank, a foreign bank branch, or a registered controlling company, and authorized by the Registrar. |
| EC4 | The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks.10 |
| Description and findings re EC4 | As described in EC1, BA section 11 (1) prohibits conduct of the business of a bank, which includes the taking of deposits from the public, unless it is done by a public company and registered as a bank under the BA. The exemption of application of the BA is provided in Section 2, which includes public institutions governed by separate acts and guaranteed by Government, such as the Land Bank, the Development Bank of Southern Africa, and the Public Investment Cooperation Limited, as well as mutual banks, which are covered by the Mutual Bank Act and under the supervisory authority of the Registrar. Other entities and activities can be exempted from “the business of banks” by being designated by the Minister by notice in the Gazette. Except for mutual banks, these entities in practice do not collect retail deposits from the public. |
| EC5 | The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public. |
| Description and findings re EC5 | A list of all registered banks (including foreign bank branches and representative offices) is published in the annual report issued by the Registrar. The list is also available on SARB’s website and updated whenever changes to the list occur. |
| Assessment of Principle 4 | Compliant |
| Comments | The Banks Act provides clear definitions of activities that are only permitted to be conducted by registered banks, including taking deposits from the public. |
| Principle 5 | Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)11 of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition-(including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained. |
| EC1 | The law identifies the authority responsible for granting and withdrawing a banking license. The licensing authority could be the banking supervisor or another competent authority. If the licensing authority and the supervisor are not the same, the supervisor has the right to have its views on each application considered, and its concerns addressed. In addition, the licensing authority provides the supervisor with any information that may be material to the supervision of the licensed bank. The supervisor imposes prudential conditions or limitations on the newly licensed bank, where appropriate. |
| Description and findings re EC1 | The licensing of banks in South Africa is a two-step process where the Registrar has the power of granting application for both steps. For the first step, BA Section 12 (1) provides that any person who wishes to conduct the business of a bank may apply to the Registrar for authorization to establish a bank. Section 13 then provides that the Registrar may grant or refuse the relevant application or grant the application subject to conditions. After the authorization is granted, the applicant may apply to the Registrar for the registration of the institution as a bank (Section 16). The Registrar then either grants or refuses the application of the registration (Section 17). The Registrar can attach conditions to the registration (Section 18). Regarding revocation of authorization, the Registrar can revoke it if the application was based on false or misleading information or a bank cannot be formed within 12 months (Section 14). For revocation of registration:
Furthermore, the Registrar can apply to a court for an order of cancelling or suspending the registration if there exist grounds justifying such cancellation or suspension in the opinion of the Registrar other than those described above. (Section 25). For details, see CP 11. In practice, only a handful of foreign bank branches have been registered in recent years; no domestically incorporated bank has been registered for more than 10 years. |
| EC2 | Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or-supervisor determines that the license was based on false information, the license can be revoked. |
| Description and findings re EC2 | BA Section 13 (2) provides a number of qualitative criteria for granting authorization, including that:
In case of granting the application for registration, in addition to the above criteria for authorization, BA Section 17 provides further criteria including that the bank does not propose to adopt undesirable methods of conducting businesses and the memorandum of incorporation is consistent with requirements under the BA and not undesirable. The Regulations (52, 53) provide details for the application process. In case of foreign bank branches, additional criteria are provided in the Regulation on “Conditions for the conducting of the business of a bank by a foreign institution by means of a branch in the Republic,” such as that the parent institution’s total assets must be at least USD 1 billion and the parent bank needs to have a long-term investment grade credit rating by an internationally recognized rating agency. As described in EC1, the BA provides the Registrar the power to revoke the authorization or the registration when it is based on false or misleading information. |
| EC3 | The criteria for issuing licenses are consistent with those applied in ongoing supervision. |
| Description and findings re EC3 | As described above, the BA provides criteria for authorization and registration that are consistent with those applied for ongoing supervision. |
| EC4 | The licensing authority determines that the proposed legal, managerial, operational and ownership structures of the bank and its wider group will not hinder effective supervision on both a solo and a consolidated basis.12 The licensing authority also determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future. |
| Description and findings re EC4 | As noted in EC2, the BA provides the broad criteria that only banks that will be in the public interest and conduct their businesses in a prudent manner should be authorized and registered. In addition, the criteria include specific requirements on the bank’s management. During the application process, detailed information on various aspects of the proposed bank’s structure needs to be submitted. This would include details on such matters as the framework for corporate governance, risk management and internal controls, and for banks belonging to a corporate group, a schematic representation reflecting all interests held in and by the applicant including the nature of those entities’ businesses. (Form BA 002) In case of foreign bank branches, the parent bank is required to provide its organizational structure and internal risk management, governance and internal control policies and processes. A comfort letter is also needed to be submitted by the parent bank, which requires the parent bank to confirm the adherence of the home country to the BCPs, international minimum standards in respect of consolidated supervision of banking groups and cross-border operations, and international recommendations relating to the supervision of cross-border banking. These are evaluated by the BSD in assessing whether the application meets the criteria stipulated in the BA. The assessors reviewed files related to a recent application for registration by a foreign bank branch and confirmed that these and other assessments required by the BA and the Regulations were conducted by analysts in the BSD. |
| EC5 | The licensing authority identifies and determines the suitability of the bank’s major shareholders, including the ultimate beneficial owners, and others that may exert significant influence. It also assesses the transparency of the ownership structure, the sources of initial capital and the ability of shareholders to provide additional financial support, where needed. |
| Description and findings re EC5 | The Regulations require the applicant to provide information regarding shareholders of a bank (From BA002) This information, based on Form BA125, includes current and proposed shareholders that own more than 1 percent of the total shares, and, when applicable, written confirmation by a public accountant that designated share capital received is held in a trust account. Regarding the treatment of the ultimate beneficial owners (UBO), see CP6. In case of a foreign bank branch, the required comfort letter from its parent bank includes the requirement that the parent bank undertakes to safeguard the financial soundness and stability of the branch, including the maintenance of the endowment of the branch’s capital. |
| EC6 | A minimum initial capital amount is stipulated for all banks. |
| Description and findings re EC6 | BA Section 70 prescribes the minimum share capital and unimpaired reserve funds that all banks are required to hold, which is currently ZAR 250 million. |
| EC7 | The licensing authority, at authorization, evaluates the bank’s proposed Board members and senior management as to expertise and integrity (fit and proper test), and any potential for conflicts of interest. The fit and proper criteria include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the bank; and (ii) no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold important positions in a bank.13 The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks. |
| Description and findings re EC7 | As described in EC2, the criteria for the authorization prescribed in BA Section 13 (2) includes those applicable to the proposed Board members and senior management, such as:
Prospective directors and executive officers need to submit statements provided in Form BA 020 in the Regulations, which includes certification related to past criminal, regulatory, and financial records. In case of a new bank, these statements need to be confirmed by an external auditor. In addition, Regulation 40 provides guidelines relating to conduct of Board members, including the need to having the competence and knowledge of banks’ businesses commensurate with their nature and scale. For details, see CP 15. |
| EC8 | The licensing authority reviews the proposed strategic and operating plans of the bank. This includes determining that an appropriate system of corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, as well as the oversight of proposed outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of the proposed activities of the bank.14 |
| Description and findings re EC8 | As noted in EC2, the authorization criteria includes that the business of the proposed bank will be conducted in a prudent manner. In order for the BSD to confirm this, Form BA 002 in the Regulations requires an applicant for authorization and registration of a bank to submit an “outline of the proposed strategic and operating or business plans in short, medium and long term,” which should include “detailed information on the relevant system related to corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, and the oversight of proposed outsourced functions” and “the scope and degree of sophistication of the proposed activities.” The information is analyzed by BSD analysts and in most cases the analysts require the bank to adjust its proposed business plan and operational systems. |
| EC9 | The licensing authority reviews pro forma financial statements and projections of the proposed bank. This includes an assessment of the adequacy of the financial strength to support the proposed strategic plan as well as financial information on the principal shareholders of the bank. |
| Description and findings re EC9 | The criteria in the BA provide that the applicant will be able to establish itself successfully as a bank and that the applicant will have the financial means to comply with the requirements of the BA. In order for the BSD to assess these, Form BA 002 requires the applicant to submit financial statements—the balance sheet, the income statement, and others—for 3 years after the start of the operation. A frontline analyst is assigned to the approval process and conducts the assessment in tandem with a dedicated analyst for the registration process. As noted in EC5, financial information on the principal shareholders of the bank is not required and not assessed, although a report by a public accountant to confirm that funds received from anticipated shareholders are held in a trust account needs to be provided. In case of a foreign bank subsidiary/branch, this is in practice conducted through assessment of the parent bank’s adherence to requirements in the home country, the requirement in the Regulations to have the parent banking group to have an investment grade rating, and the no objection letter from the home supervisor. (See below). |
| EC10 | In the case of foreign banks establishing a branch or subsidiary, before issuing a license, the host supervisor establishes that no objection (or a statement of no objection) from the home supervisor has been received. For cross-border banking operations in its country, the host supervisor determines whether the home supervisor practices global consolidated supervision. |
| Description and findings re EC10 | In case of subsidiaries of foreign banks, BA Section 13(2)(i) lists a number of criteria for granting application for authorization, which includes that the proposed establishment of a subsidiary has been authorized by the home supervisor, that the home supervisor accepts and complies with the proposals, guidelines and pronouncements of the BCBS, and that it accepts its responsibilities as a consolidated supervisor. Similarly, in case of branches, the foreign bank applying for authorization needs to provide information with regard to the nature and extent of supervision exercised by the home supervisor. In addition, as noted above, the Regulation on “Conditions for the conducting of the business of a bank by a foreign institution by means of a branch in the Republic” provides similar criteria on the home supervisor supervision as for subsidiaries, including whether the home supervisor has authorized the establishment of the branch. In practice, a letter is sent to a home supervisor requiring a no-objection letter. Unless the letter from the home supervisor is received, the authorization of application will not be granted. Moreover, an MOU with the home supervisor is usually required. The BSD explained that there was a case where a registration of a foreign bank branch had to wait the conclusion of an MOU between the BSD and the applicant’s home supervisor. |
| EC11 | The licensing authority or supervisor has policies and processes to monitor the progress of new entrants in meeting their business and strategic goals, and to determine that supervisory requirements outlined in the license approval are being met. |
| Description and findings re EC11 | Newly established banks are subject to monthly reporting requirements as with all banks, through which the BSD monitors the progress in their businesses and operations, as well as their compliance with requirements and conditions they are subject to. |
| Assessment of Principle 5 | Compliant. |
| Comments | Provisions in the laws and regulations related to licensing and the process followed by the BSD provide a comprehensive framework to assess the adequacy of new registrations for banks, including foreign bank branches. The BSD adequately assesses applications in practice. |
| Principle 6 | Transfer of significant ownership. The supervisor15 has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. |
| EC1 | Laws or regulations contain clear definitions of “significant ownership” and “controlling interest.” |
| Description and findings re EC1 | BA Section 37 (1) prohibits shareholding by a person/entity or a group of persons/entities (“associates”) beyond 15 percent of either the total nominal value or by voting rights of the issued shares, unless an approval is granted. Section 37 (7) provides a broad definition of “associate” that covers, for example: a close relative; any person who has an arrangement relating to the shareholding; a subsidiary, parent or sister company; a director of a company, and; a trust controlled or administered. Furthermore, BA Section 42 prohibits exercising control over a bank except cases where the (A) shareholding is approved, or (B) it is done by a domestic or a foreign bank or a registered controlling company, although prior approvals or registrations under the BA are necessary for the latter case. BA Section 42 (2) provides a definition of exercising control over a bank as including holding more than 50 percent of the nominal value or voting rights of total issued shares, or entitled or has the power to appoint the majority of the directors of the bank. Section 43 provides the need for registration as a controlling company in respect of a bank to exercise control over a bank. |
| EC2 | There are requirements to obtain supervisory approval or provide immediate notification of proposed changes that would result in a change in ownership, including beneficial ownership, or the exercise of voting rights over a particular threshold or change in controlling interest. |
| Description and findings re EC2 | BA Section 37 (1) and (2) prescribes multiple shareholding thresholds that require an application for the acquisition of shares in a bank or controlling company:
In cases where holding exceeds 15 percent or 24 percent, the permission is granted by the Registrar; in cases where the holding exceeds 49 percent or 74 percent, the permission is granted by the Minister thorough the Registrar. For latter cases, the Registrar provides recommendations to the Minister. Generally, the Minister follows the recommendations of the Registrar. However, the assessors were explained that there was a case where the Minister objected to an acquisition of one of the largest bank by another for a competition ground. Changes in ownership do not happen frequently in South Africa given the limited number of locally controlled banks, except cases where a banking group reorganizes its structure. During the past four years, four applications have been approved, while none has been declined. The BSD explains this is partly due to the practice that prospective shareholders and banks consult with the BSD in advance to assess whether the application will be successful. In terms of beneficial ownership, BA Section 38 prohibits banks or controlling companies to allot or issue shares to, or register any of its shares in the name of, any person other than the intended beneficial shareholder without the written approval of the Registrar. This approval has never been granted, however. The BSD explains that given the small number of banks in South Africa, it is easy to monitor changes related to ownership structures. |
| EC3 | The supervisor has the power to reject any proposal for a change in significant ownership, including beneficial ownership, or controlling interest, or prevent the exercise of voting rights in respect of such investments to ensure that any change in significant ownership meets criteria comparable to those used for licensing banks. If the supervisor determines that the change in significant ownership was based on false information, the supervisor has the power to reject, modify or reverse the change in significant ownership. |
| Description and findings re EC3 | As described above, BA Section 37 (4) stipulates that the approval of changes in significant ownership of a bank or a controlling company will only be given if the Registrar or Minister is satisfied that the proposed acquisition will not be contrary to (a) the public interest, and (b) the interests of the bank, its depositors, or the controlling company. It is understood that the minister would not grant approvals unless recommended to do so by the Registrar and, in fact, it has never happened. Also, to date, the Minister has not made any decision different from the Registrar’s recommendation. BA section 37 (5) stipulates that the Registrar or Minister may apply to court to compel a shareholder to reduce its shareholding to not more than 15 percent of the total if it is deemed to be to the detriment of the bank/controlling company. The BSD explains that this has not happened in recent years. |
| EC4 | The supervisor obtains from banks, through periodic reporting or on-site examinations, the names and holdings of all significant shareholders or those that exert controlling influence, including the identities of beneficial owners of shares being held by nominees, custodians and through vehicles that might be used to disguise ownership. |
| Description and findings re EC4 | BA Section 39 requires shareholders of a bank or a controlling company to furnish information as required by the bank or the controlling company. Regulation 21 and Form BA 125 require banks to submit to the BSD annually the list of shareholders that have more than 1 percent of total shares including information such as their addresses, and the number and value of the shares. This also applies to a group of persons that has more than 1 percent of the total shares. For those shareholders that have less than 1 percent of total shares, less detailed information is required. As a part of on-going supervision, frontline analysts monitor changes in the ownership of banks through these reports and other available information. |
| EC5 | The supervisor has the power to take appropriate action to modify, reverse or otherwise address a change of control that has taken place without the necessary notification to or approval from the supervisor. |
| Description and findings re EC5 | BA Section 37 (5) gives power to the Registrar or Minister to apply to court to compel a shareholder to reduce its shareholding. (See EC3) |
| EC6 | Laws or regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. |
| Description and findings re EC6 | The BSD requires banks to inform it of any material changes related to significant shareholders, which is included as a condition for approval of shareholdings of more than 15 percent. |
| Assessment of principle 6 | Compliant |
| Comments | The power given to the supervisor by laws and regulations as well as the current supervisory practices provide adequate control and oversight regarding significant ownership of a bank and a controlling company. As described in CP2, however, the authorities should clarify the principle of “prudential veto” in regard to approval of changes in significant ownership. |
| Principle 7 | Major acquisitions. The supervisor has the power to approve or reject (or recommend to the responsible authority the approval or rejection of), and impose prudential conditions on, major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and to determine that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. |
| EC1 | Laws or regulations clearly define:
|
| Description and findings re EC1 | BA Section 52 prohibits banks to carry out the following broad range of major acquisitions or investments without the prior approval of the Registrar:
Controlling companies are also prohibited to carry out the above mentioned operations, except opening branches, representative offices, and creating or acquiring a division. These restrictions apply to subsidiaries of banks and controlling companies. Section 52 supersedes Section 76 (2), which gives the power to the Minister to approve banks to exceeding investment limits. Directive 13/2013 limits the case where a prior approval is needed in case of investment in a foreign entity to only the acquisition of interest of more than 5 percent of that entity or when the amount is equal to or more than 1 percent of the acquiring bank’s eligible capital and reserves. In other cases, only a notification is required, except in cases where the investment has significant impact on the investing bank or the controlling company or the information flow necessary for effective supervision may be hindered. |
| EC2 | Laws or regulations provide criteria by which to judge individual proposals |
| Description and findings re EC2 | Regulation 56 provides a list of documents that an applicant must submit for a prior approval under BA Section 52, which includes, for example, the expected impact of the acquisition on management of the bank and the bank’s assessment whether the transaction will materially influence the financial and risk position of the bank. A broader set of materials are required for an off-shore interest, for example, impact of the acquisition or establishment on the bank’s profitability, capital adequacy and overall risk profile, as well as contagion potential, a worst case scenario and an opinion on the ability of the company to submit the required returns to the BSD. The BSD explains that, based on the guidance explained above, it applies a stringent set of requirements when providing approval under Section 53, including what kind of businesses a bank can conduct or operate through joint ventures or subsidiaries, which is informed to banks. |
| EC3 | Consistent with the licensing requirements, among the objective criteria that the supervisor uses is that any new acquisitions and investments do not expose the bank to undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.16 The supervisor can prohibit banks from making major acquisitions/investments (including the establishment of cross-border banking operations) in countries with laws or regulations prohibiting information flows deemed necessary for adequate consolidated supervision. The supervisor takes into consideration the effectiveness of supervision in the host country and its own ability to exercise supervision on a consolidated basis. |
| Description and findings re EC3 | As described above, the BSD checks such aspects as impact on the bank’s management as well as financial and risk positions; for an off-shore interest, the BSD assesses such aspects as the nature of supervisory functions performed by the host country, its country risk, and the ability to submit required returns. If these are not assessed as appropriate, an approval will not be granted. See also CP12 and 13. The assessors confirmed through review of relevant files that these as well as other assessments described below are conducted by the BSD. |
| EC4 | The supervisor determines that the bank has, from the outset, adequate financial, managerial and organizational resources to handle the acquisition/investment. |
| Description and findings re EC4 | See EC3. The BSD checks the bank’s resources to handle the acquisition/investment based on materials submitted by the bank. |
| EC5 | The supervisor is aware of the risks that non-banking activities can pose to a banking group and has the means to take action to mitigate those risks. The supervisor considers the ability of the bank to manage these risks prior to permitting investment in non-banking activities. |
| Description and findings re EC5 | BA Section 76 requires banks to limit investments in real estate and shares of companies to a prescribed amount, including those through subsidiaries. Regarding controlling companies, BA Section 50 requires a controlling company to limit investments in:
Directive 9/2013 Section 50 provides the ceiling of 100 percent of the regulatory capital minus the amount of market risk for the aggregate amount of these investments. For other types of investments and activities, as noted in EC2, the BSD recognizes the risk arising from non-banking activities and considers the impact on the management as well as the bank’s risk position in approving investments in or acquiring non-banking businesses. See also CP12. |
| Assessment of Principle 7 | Compliant |
| Comments | The regulatory framework subjects major acquisitions and investments by banks and controlling companies to prior approval by the Registrar. The BSD also has well established supervisory practices to limit and monitor risks arising from such activities. |
| Principle 8 | Supervisory approach. An effective system of banking supervision requires the supervisor to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; identify, assess and address risks emanating from banks and the banking system as a whole; have a framework in place for early intervention; and have plans in place, in partnership with other relevant authorities, to take action to resolve banks in an orderly manner if they become non-viable. |
| EC1 | The supervisor uses a methodology for determining and assessing on an ongoing basis the nature, impact and scope of the risks:
The methodology addresses, among other things, the business focus, group structure, risk profile, internal control environment and the resolvability of banks, and permits relevant comparisons between banks. The frequency and intensity of supervision of banks and banking groups reflect the outcome of this analysis. |
| Description and findings re EC1 | BA Section 4(4) stipulates that the Registrar shall implement and maintain a supervisory review process. The two main pillars of the BSD’s on-going supervisory work are the SREP cycle and the risk rating system. SREP cycle The BSD’s methodology for ongoing supervision of banks and banking groups is the Supervisory Review and Evaluation Process (SREP) cycle, which is described in the BSD’s internal SREP manual. The SREP cycle, as shown in the above schematic chart, is divided into various stages (stages 1 to 6) as explained below. These stages are conceptual in nature, thus a number of them are continuous processes and not necessarily sequential. The Supervisory Review and Evaluation Process (SREP) cycle The SREP Cycle applies on a consolidated basis to both a bank and a banking group under a controlling company. (See CP 12 for details). Stage 1 “Develop supervisory plan:” The process begins with the formulation of a supervisory plan for a bank (banking group) by the frontline analyst team. An annual supervisory plan for each bank, including the branch of a foreign bank, which covers a whole calendar year, is formulated during October to December. The main product of the annual supervisory plan is a schedule of various meetings and other supervisory activities (including on-site reviews) to be held during a calendar year. The supervisory plan takes into account the systemic relevance of and key risk areas identified related to the particular bank. In the determination of the systemic relevance and identification of the key risk areas, reliance is placed on risk ratings as well as previous years’ assessments. The annual supervisory plan is communicated to the bank prior to the start of a calendar year. This process is a continuous and ongoing process—the supervisory plan is continuously updated as and when new information becomes available and a change of the supervisory plan becomes warranted. Stage 2 “Gather information:” Throughout the SREP cycle, information is gathered by analysts and risk specialists. Examples of such sources of information are the following:
Stage 2 is also a continuous ongoing process where frontline bank analysts are expected to keep gathering information from these sources year-round. Stage 3 “Form a view:” Stage 3 entails the process whereby the information gathered by analysts and risk specialists in stage 2 is assembled, and then analyzed and synthesized in order to form a view of the bank with the focus on materiality and risk. It is envisaged that these processes will enable a bank and the analyst to compare findings and challenge one another’s conclusions and recommendations in a constructive manner. This is again a continuous process, but the main outputs of the stage is the Management Information Report (MIR) for each bank/banking group which is updated monthly and contains various information regarding a bank as well as a composite risk rating and a number of component risk ratings. This MIR is discussed and reviewed quarterly by the ManCo. Semi-annually, the information is fed into a more detailed Risk Review for each bank/banking group. Also, a “pre-panel” review panel meeting could be called for at this stage by the frontline analyst team to seek guidance on priorities, clarification of issues and further work to be done from senior managers and the risk specialist and other teams. (See stage 5). Stage 4 “Focused review:” Depending on the outcome of stage 3, the analyst and the risk specialists will identify areas of the bank/banking group that may require a detailed or specialist review. This review may be carried out by the frontline analysts, risk specialists, on-site review teams, internal auditors, external auditors, or possibly by other experts. The resulting information gathered is incorporated into the SREP cycle, and necessary consequential adjustments are made, including to supervisory plans. In some cases, these reviews are conducted after supervisory plans are modified. Stage 5 “Review panel:” Stage 5 consists of the panel review process, which entails a review by the review panel of the procedural and substantive correctness of the SREP, as well as of the conclusions reached and recommendations made. For example, the risk reviews are subject to the review panel. The review panel consists of senior members of the BSD, including the Registrar and Deputy Registrars. The conclusions reached and recommendations generated during the “forming-of-a-view” stage (stage 3) and the focused review stage (stage 4) by the analyst (in conjunction with the relevant risk specialists, if applicable) forms the basis for the panel review. The review panel’s recommendations may include remedial actions to be taken and adjustments to the individual capital requirement (ICR)—the ICR is not the only tool in a supervisor’s arsenal, however, and other recommendations, such as strengthening of internal controls or risk management policies and procedures, may in certain circumstances be seen as more appropriate. Stage 6 “feed back to senior management and Board:” Stage 6 consists of the process in terms of which the conclusions and recommendations reached in stage 5 are fed back to the bank’s/banking group’s Board, risk committee, audit committee and senior management. Usually, these are communicated during regular meetings with these persons. A feedback letter is provided after a meeting that summarizes the main points of the meeting and includes remedial actions the bank should take, if any. Industry lessons identified are also fed back into the macro-surveillance cycle and report, and may warrant ad hoc sector reviews to be conducted. Rating system The BSD’s risk based supervision strategy is two-dimensional. According to the BSD’s view, in the one dimension, risk based supervision could be viewed as a methodology in order to decide where to focus supervision in terms of the banking system. In the other dimension risk-based supervision lies within the supervision of the particular bank/banking group and therefore focuses on the high-risk areas within a particular bank/banking group along with the controls in place to mitigate those risks. Based on this approach, the BSD has a dual rating system, where one rating is based on the systemic relevance of the bank (“sector impact rating”), and the other rating is based on the risks the bank is facing (“risk rating”). The ratings are included in the MIRs and updated monthly. They are given initially by the frontline analyst, discussed by his/her managers, and signed off by one of two Assistant General Managers. The consistency of ratings is checked through this process. The summary information on ratings of individual banks is provided to ManCo monthly. The sector impact rating is given as a number between 1 and 5, where the rating of 5 indicates a bank that is the most systemically relevant. Given the concentrated nature of the banking system where the five largest banks hold more than 90 percent of total banking assets, and the rest of the system comprises 25 banks including 14 branches of foreign banks, for the sector impact ratings, all the large banks are rated as 5 whereas other banks are rated between 1 and 3, based mostly on their size of operations. These ratings are stable over time as the relative size of banks do not change substantially, but the BSD explains that when a bank is in trouble and the risk of contagion to other banks is seen to be increasing, the BSD would raise the bank’s systemic relevance rating and that it has happened to one of the smaller banks. The risk rating for a bank/banking group includes one overall composite rating and component ratings. The component ratings are given each of the followings specific financial and non-financial risk categories:
The component ratings are given with scales of 1 to 5, where each scale denotes: 1 “strong;” 2 “satisfactory;” 3 “fair (watch category);” 4 “marginal (some risk of failure);” and 5 “unsatisfactory (high degree of failure evident).” Component ratings are given by frontline analyst teams based on their supervisory judgments reflecting their assessments of quantitative and qualitative information gained through banks’ supervisory returns and interaction with banks. The composite rating is a weighted average of component ratings where a fixed weight is provided for each component. Generally, a composite rating of higher than 3 is seen as warranting some form of supervisory attention and a bank with a rating of 4 and higher is regarded as a problem bank. In practice, the assessors observed that most of the component ratings are clustered around 3, with only a few outliers given ratings of 4 or higher. The frequency and intensity of the supervision of individual banks The frequency and intensity of the supervision of banks and banking groups are determined by the relevant entity’s risk assessment including the risk rating and the system impact rating referred to as the MIR and the Risk Review and would feed into stage 1 of the SREP. For example, the number of meetings would be changed according to changes in these ratings. Also, as noted in CP 2, the number of analysts allocated to a bank/banking group is also affected by these ratings. In practice, given the relatively stable nature of the banking industry in South Africa where the difference in size between five big banks and other banks is substantial, intensity and frequency devoted to these two groups of banks also differ. For example, the assessors reviewed agendas and minutes of supervisory meetings with banks and affirmed those with large banks have more depth and broader coverage in proportion to the activities and risks of such banks. The assessors also noted that on-site reviews are more frequently conducted with these big banks, although it also found that the supervisory intensity was increased even for relatively small banks when they are exposed to substantial risks in the supervisor’s view. |
| EC2 | The supervisor has processes to understand the risk profile of banks and banking groups and employs a well defined methodology to establish a forward-looking view of the profile. The nature of the supervisory work on each bank is based on the results of this analysis. |
| Description and findings re EC2 | For the detailed process of the SREP methodology and the rating system used in South Africa, see EC1. The forward-looking view on a bank’s strategy, performance and risk profile is captured and reflected in supervisory works as a part of the SREP cycle. Specifically, the following measures are used during each stage of the SREP cycle to make the oversight on and interaction with banks/banking groups forward-looking: Stage 2
Stage 3
Stage 6
|
| EC3 | The supervisor assesses banks’ and banking groups’ compliance with prudential regulations and other legal requirements. |
| Description and findings re EC3 | The BSD utilizes a number of tools to assess compliance of banks and banking groups with prudential and other requirements under the BA, which are incorporated in the SREP cycle. These include:
|
| EC4 | The supervisor takes the macroeconomic environment into account in its risk assessment of banks and banking groups. The supervisor also takes into account cross-sectoral developments, for example in non-bank financial institutions, through frequent contact with their regulators. |
| Description and findings re EC4 | The BSD’s research division prepares a banking sector overview (BSO) presentation for the whole department on a monthly basis. During this forum, others members of BSD on an ad-hoc basis provide presentations on specific risk areas and other developments in the banking industry. In addition, a booklet providing a brief overview of the South African Banking Sector is distributed on a monthly basis. A full review of the banking sector data is presented on a quarterly basis, which contributes to the quarterly MIR reviews by the ManCo. During other months, presentations are made on completed staff projects, international committee meetings attended and, presentations and discussions by the BSD to the SARB’s Monetary Policy Committee and Financial Stability Committee. The Financial Stability Department (FSD) of the SARB assesses the macro-economic risks in the context of preparing six monthly Financial Stability Reviews (FSRs), which are published. It also conducts common scenario stress testing of the banking sector. The latest one was conducted in 2012 covering 8 banks including the 5 largest, although the scope was limited to their South African banking operations. The SARB’s research department also shares the quarterly bulletin which covers key information relating to the global and South African economic environment. These works lead to identification of cross-system supervisory topics for a particular year, which is called “flavor of the year” topics. Each year, staff members of the BSD are asked to provide possible topics based on sector-wide risk assessments as well as international regulatory developments. After each of these topics is presented and discussed, a few topics were chosen as the “flavor of the year” topics by votes. These are incorporated into supervisory plans for the year and included as issues for focused discussions with banks—including their Boards—and external auditors as well as enhanced assessment by the frontline analysts and risk specialists. Banks are notified of these topics at the beginning of a year. The recent topics include such issues as unsecured lending, banks’ African strategies, recovery plans, IT projects, and conduct of business. The risk sections (for example, credit risk, market risk and operational risk) of the BSD are responsible for reviewing risks for individual institutions as well as across the sector. The risk sections also identify and produce reports on high risk focus areas—for example, the division produces a report on retail unsecured lending on a monthly basis which is distributed to the frontline analysis teams. In terms of cross-sectoral developments, quarterly “high-level” bilateral meetings are held between the BSD the Financial Services Board (FSB), which is responsible for insurance supervision, based on the MOU between the two entities. In these meetings, information on developments of supervisory activities on banking and insurance groups is shared and views on individual groups are exchanged. Also, issues that need greater consistency of approaches are identified. The assessors saw the minutes of these meetings and confirmed these discussions are taking place. In addition, BSD has a working-level relationship with the FSB to enhance the supervision of banking groups which include insurance operations. Furthermore, the BSD holds meetings with, for example, the Banking Association of South Africa, National Treasury, Johannesburg Stock Exchange, National Credit Regulator and Financial Intelligence Centre on an ad-hoc basis. South Africa is now in the process of implementing a “twin-peaks model” of financial regulation. Under the “twin peaks” approach, a prudential regulator housed in the SARB whose objectives are to maintain and enhance the safety and soundness of regulated financial institutions and which is responsible for the prudential regulation and supervision of banks and insurers will be established. The authorities explain that this would entail the merging of insurance supervisors from the FSB with the BSD to form the prudential regulator and contribute to improving cross-sectoral supervision. |
| EC5 | The supervisor, in conjunction with other relevant authorities, identifies, monitors and assesses the build-up of risks, trends and concentrations within and across the banking system as a whole. This includes, among other things, banks’ problem assets and sources of liquidity (such as domestic and foreign currency funding conditions, and costs). The supervisor incorporates this analysis into its assessment of banks and banking groups and addresses proactively any serious threat to the stability of the banking system. The supervisor communicates any significant trends or emerging risks identified to banks and to other relevant authorities with responsibilities for financial system stability. |
| Description and findings re EC5 | The SARB, as a central bank, monitors and assesses trends, developments and risks for the domestic economy, which includes banks. The BSD provides presentations in the SARB’s two senior committees—the Monetary Policy Committee and the Financial Stability Committee. The presentations to the MPC addresses credit extension in the banking sector and the one for the FSC discusses systemic issues in the banking sector. These presentations drive investigations into trends in the sector, both in preparation for the presentations and as a result of questions raised during the presentations. As described in EC4, BSD’s Research and Information Division analyses data submitted by banks from a sector perspective. This information is reported monthly to senior management in the BSD. On a quarterly basis this analysis is presented and discussed with the whole department. In addition, the risk sections also focus on specific risk areas and produces reports on specific focus areas, such as unsecured retail lending, which is distributed to frontline supervision teams. When the BSD sees that an emerging trend in the industry may have certain risks for banks and the banking system general, it is often included horizontally in relevant banks’ supervisory plans as “flavor of the year” topics. These topics are discussed in various meetings with banks and off-site analysis is conducted to support these meetings (See EC4). As an example, the BSD has recently identified unsecured lending, which has been growing significantly particularly in some banks, as an important risk factor to the sector and stepped up its supervisory effort. During 2012, specific surveys were conducted on the issue. It was also covered, as a “flavor of the year” topic, in discussions with the bank’s Board, with a particular focus on the growth of the lending. A monthly report has been published which is distributed to the frontline analysis teams. Meetings with the FSB were also held on lending taking place at large insurers. To supplement its internal analysis, the BSD also reviews external analysts’ reports on the sector and individual banks. The BSD also monitors media coverage of individual banks and the banking sector. There are also biannual presentations by global auditing firms to the BSD on their published financial analysis of the sector and surveys of banking CEOs. |
| EC6 | Drawing on information provided by the bank and other national supervisors, the supervisor, in conjunction with the resolution authority, assesses the bank’s resolvability where appropriate, having regard to the bank’s risk profile and systemic importance. When bank-specific barriers to orderly resolution are identified, the supervisor requires, where necessary, banks to adopt appropriate measures, such as changes to business strategies, managerial, operational and ownership structures, and internal procedures. Any such measures take into account their effect on the soundness and stability of ongoing business. |
| Description and findings re EC6 | The BA provides the Registrar a range of tools to address issues in banks on a going concern basis, including, among others:
Under the MOU between the BSD and the FSB, the BSD would inform the FSB of material information (including remedial supervisory action) in respect of a bank that is part of a group that includes entities that are supervised by the FSB. Recently, all banks, excluding branches of foreign banks, were requested to develop recovery plans (Guidance Note 3/2012, 4/2012 and 10/2012). During 2013 the recovery plans of the systemically significant banks were reviewed by the BSD and further guidance was given in bilateral meetings to ensure that all banks’ recovery plans were fairly consistent and covered all the required elements. During 2014 the BSD with the newly separated FSD plans to conduct a further review of the recovery plans of the systemically significant banks. In these recovery plans, banks are expected to identify barriers to smooth recovery and address them. The SARB has been identified as the resolution authority under the BA, but work is currently underway to draft a Resolution Bill, which provides additional resolution powers to the planned Prudential Authority in order to resolve a financial entity prior to failure. Work on the resolution plans will commence once the bill is enacted. |
| EC7 | The supervisor has a clear framework or process for handling banks in times of stress, such that any decisions to require or undertake recovery or resolution actions are made in a timely manner. |
| Description and findings re EC7 | The BSD explains the following factors will be considered on a case-by-case basis when a bank is in distress:
Depending on the nature of the stress experienced by a bank, emergency liquidity assistance can be given by the SARB against pledged collateral or against a government guarantee. The National Treasury can play a role in providing public funds as part of a resolution package for a systemically significant bank. Other SARB resolution powers that could be utilized include:
Also, as noted above, the BA provides the power of appointing a curator (section 69) and forcing liquidation/winding up of a bank (section 68) as the mechanisms for the handling a failed bank. As stated in EC6, however, the present laws do not provide the SARB a broad power to handle banks in stress, leading to the lack of clear framework or process for dealing with such a bank. Work is currently underway to draft a Resolution Bill to provide more extensive resolution powers. The draft Financial Sector Regulation Bill expects that the Minister of Finance will decide on the systemic significance of a financial entity and will be involved in the resolution process when public funds are involved in the resolution of a systemically significant financial entity. |
| EC8 | Where the supervisor becomes aware of bank-like activities being performed fully or partially outside the regulatory perimeter, the supervisor takes appropriate steps to draw the matter to the attention of the responsible authority. Where the supervisor becomes aware of banks restructuring their activities to avoid the regulatory perimeter, the supervisor takes appropriate steps to address this. |
| Description and findings re EC8 | BA Sections 81 to 84 set out the powers and duties of the Registrar with regard to bank-like activities being conducted. These provisions give the power to Registrar to apply for court for an order to prohibit the activities. They allow the Registrar/Supervisor to report the matter to the South African Police Services or the National Prosecuting Authority. Each year, the BSD reviews a number of cases in cooperation with the law enforcement authorities. The restructuring of a bank that involves establishing a subsidiary or investing in a joint venture requires a prior approval by the Registrar, where the bank needs to provide detailed information regarding structures and activities of the new undertaking. The BSD explains it will not approve the application if it results in avoidance of the regulatory perimeter. |
| Assessment of Principle 8 | Largely Compliant |
| Comments | The SREP cycle and the risk rating system provide an adequate general framework of supervisory approach for the BSD. These processes focusing on individual banks and banking groups are complemented by sector-wide approaches such as the “flavor of the year” topics as well as enhanced thematic on-site reviews. However, the approaches related to resolution of banks required in EC 6 and 7 are still in the process of development, which lead to the rating above. Although those on the recovery plans as well as contingency planning have started, work on resolution plans for systemic banks has yet to begin. The assessors understand the required power will not be given until the expected legislation on bank resolution becomes effective and urge the authorities to enact the bill expeditiously. Another important issue related to this principle is planned transition to the twin peaks supervisory structure. The transition should involve not only providing the prudential supervisor responsibility over various financial sector entities, but also improved oversight over systemic risk and wider financial groups. The new prudential supervisor should therefore review the supervisory approach once the organizational changes are completed in order to enable it to have capacity to monitor the prudential risk of the entire financial system as well as that of financial conglomerates. This may require a more formalized framework to detect and assess system-wide and cross-sectoral risks and its integration to supervision of individual financial groups and regulated financial institutions. New tools to address those risks may also need to be added to its arsenal, such as common scenario stress testing across different financial sectors and a risk rating framework that takes into account the entire risk of financial groups. Close cooperation with the planned Financial Stability Oversight Committee and its secretariat will be essential in these endeavors. |
| Principle 9 | Supervisory techniques and tools. The supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and deploys supervisory resources on a proportionate basis, taking into account the risk profile and systemic importance of banks. |
| EC1 | The supervisor employs an appropriate mix of on-site17 and off-site18 supervision to evaluate the condition of banks and banking groups, their risk profile, internal control environment and the corrective measures necessary to address supervisory concerns. The specific mix between on-site and off-site supervision may be determined by the particular conditions and circumstances of the country and the bank. The supervisor regularly assesses the quality, effectiveness and integration of its on-site and off-site functions, and amends its approach, as needed. |
| Description and findings re EC1 | BA Section 4(4) stipulates that the Registrar shall implement and maintain a supervisory review process, which may include any one or any combination of: an on-site examination, inspection or review; an off-site review; a discussion with banks’ management; a discussion with banks’ Board members; a review of work done by external auditors, and; a review of reports submitted by banks. Off-site work Off-site reviews by the BSD include, among other things, ongoing analysis of statutory data submitted by individual banks/banking groups, internal and external auditors’ reports, and minutes of the Boards. Also, analysis of various other sources of information are conducted such as published financial statements, media coverage, financial analyst’s reports and industry reviews, etc. These are primarily conducted by frontline analysts in the BSD responsible for each bank/banking group. For example, the analysts go through each report submitted by banks and ask banks for clarifications regarding any substantial changes. Specialized risk units also conduct reviews of works assigned to external auditors on risk-specific assessment, such as the long-form reports on credit risk and operational risk models. The result of these reviews feeds into, primarily, MIR, which is produced monthly for each bank and includes risk ratings. These reviews may also result in the identification of areas within a bank that require detailed monitoring or specialized on-site review, as well as modification of supervisory plans. Where relevant, issues identified in a particular bank that may also be relevant at an industry level are elevated to the relevant specialized risk units for information purposes. Supervisory meetings The BSD attaches particular importance to periodic meetings with banks’/banking groups’ Boards, Board subcommittees, CEOs and managers at various levels including CROs and those in compliance and internal audit functions, as well as external auditors. These are held at least annually for large banks. (For details of each meeting, see CP8). Given the BSD’s emphasis on corporate governance and internal control, these meetings are used not only to communicate and follow-up supervisory concerns but also to evaluate risk profiles and quality of management and control of banks/banking groups. These are regarded as one of the major sources of information that feeds into the non-financial risk part of the bank ratings. On-site work The BSD employs focused on-site reviews to complement the above-mentioned supervisory meetings and off-site reviews. These on-site reviews are usually carried out either by specialist risk teams or the on-site review team, with participation from the frontline analyst teams as necessary. The on-site reviews led by specialist risk teams are usually conducted to assess internal models for advanced approaches in Basel II/III, but also used for other purposes. Horizontal reviews are performed periodically based on inter alia, specific topics and emerging risks that could impact the industry as a whole. These reviews are often a combination of on-site and off-site work, and the total length is from a few days to a few weeks. Thematic inspections are often performed on an industry-wide level (i.e., all banks) or a peer group level (i.e., the 5 large banks). Topics are determined based on various factors such as prevailing market conditions, emerging risks, international and/or domestic regulatory developments, etc. Recent and planned thematic reviews include: a) counterparty credit risk; b) asset and liability management; c) equity risk in the banking book; and d) investment risk. This on-site work includes focused review of bank files, for example loan files in case of on-site reviews related to credit risk management. Traditionally, the BSD has relied on banks’ statutory external auditors to conduct on-site verification of accuracy of their supervisory reporting and compliance of their practices to regulatory requirements as well the banks’ own policies and processes. Through formal bilateral meetings as well as informal communications, the BSD maintains close contact with the statutory auditors of banks. Through these meetings, the BSD may require the audit program to be changed based on its supervisory concerns. The assessors’ review of meeting agendas and minutes with statutory auditors and discussion with audit firms confirmed that the BSD is proactively involved in setting audit scopes for banks and informed of the audit results in detail. Audit firms also explained that the BSD challenges their work frequently. These interactions with audit firms feed into regulatory actions. For example, the BSD is now finalizing the policy to clarify treatment of restructured loans. (See CP 18.) Furthermore, the practice in South Africa supported by the BSD to have multiple statutory audit firms for a large bank is contributing to standardizing audit practices among major audit firms. The BSD has also used auditing firms that are not statutory auditors of a bank to conduct specific on-site assessments under BA Section 7 as described below (EC11). Since the last BCP assessment in 2010, the BSD has enhanced its on-site reviews by conducting more deep-dive reviews utilizing its on-site review team. The team conducts on-site reviews for major topics that require extensive assessment of banks’ actual practices. For example, the team has recently worked on the unsecured loan portfolio. The work involved an extensive review of sample loan files to assess, among other things, the adequacy of treatment regarding impaired loans and restructured loans. For these reviews, a core team consists of around 6 staff members with additional staff participation from specialist risk divisions and frontline analysis teams, and the length of the review can be more than one month. In the assessors’ view, this added capacity now enables the BSD to adequately cover important risk areas for banks by itself, which is also contributing to its ability to monitor and assess the adequacy of external auditors’ work. The increased intensity on on-site work is recognized by banks and audit firms and generally welcomed. The on-site review of AML/CFT is also conducted following a similar format. For large banks, the whole inspection process could take up to 2 months with around 10 staff members. The final report will typically be sent to banks within a period of 6 to 8 weeks subsequent to the completion of the review. There is no mandated frequency for on-site inspections. Planning of supervisory work As described in CP8 EC1, the planning of supervisory work is carried out through formulation of an annual supervisory plan for each bank/banking group during the SREP cycle. The plan is based on, among other things, the risk assessment and profile of a particular bank, and takes a form of a schedule of supervisory actions during the year, such as meetings with bank officials and on-site reviews for particular areas. The BSD communicates the plan to the bank before the beginning of a year. The BSD views the main purpose of the supervisory plan as ensuring a disciplined and comprehensive planning process that forms the foundation for supervisory actions, interactions with the bank, and interventions. The SREP cycle is continuous in nature and hence it is subject to ongoing reviews and revisions if and where necessary to ensure effective supervision of a particular bank. As new information becomes available during the cycle, the supervisory plan is continuously updated. During the quarterly review of the MIR, review and sign-off of supervisory programs at a departmental level takes place, and appropriateness of the mix of supervisory tools are also revisited. In addition, the BSD has an annual strategic planning process where strategic risks are identified that should be taken into account in ongoing supervisory activities. It also provides an opportunity to review the current processes and tools for supervision. For example, the BSD is currently preparing a policy on the forward-looking supervisory approach. |
| EC2 | The supervisor has a coherent process for planning and executing on-site and off-site activities. There are policies and processes to ensure that such activities are conducted on a thorough and consistent basis with clear responsibilities, objectives and outputs, and that there is effective coordination and information sharing between the on-site and off-site functions. |
| Description and findings re EC2 | As described in EC1, during Stage 1 of the SREP cycle, a supervisory plan for a particular bank is compiled annually. While the frontline analysis teams are primarily responsible for the supervision of a bank/banking group, discussions between frontline analysis teams and the various specialist risk teams, with involvement of the BSD’s senior management as necessary, takes place during the preparation process. Through these discussions, on-site reviews required in respect of each bank during the supervisory cycle and a discussion of the allocation of responsibilities pertaining to each review, among others, are determined. The supervisory plan is further expanded at an operational level to include high-level details of key off-site activities, such as monthly and quarterly reviews of statutory data, timing of risk reviews and management information, etc.; and is supported by more granular operational schedules setting timelines and target dates for, among other things, internal graph discussions, risk reviews, management information reports, and queries flowing from off-site analysis of statutory data submitted by banks. The objectives, principles and processes pertaining to ad-hoc on-site meetings (e.g., model reviews or thematic on-site reviews) with banks are also discussed and determined between frontline analysis and specialist risk teams. In certain instances standard questionnaires have been formalized and form part of the SREP Manual, such as a questionnaire on equity risk in the banking book and a questionnaire on counterparty credit risk. Customized and/or ad-hoc questionnaires are also compiled to suit particular on-site interventions if and when required. The BSD explains that it views off-site and on-site activities are often a combined effort involving both frontline analysis and specialist risk teams based on the type of intervention, although the frontline analysis team remains ultimately responsible for the supervision of individual banks. In order to ensure effective coordination and information sharing through ongoing interaction and communication between frontline analysis and the relevant specialist risk teams, the Principles of Engagement guidelines has been prepared, which provides high-level principles and guidelines pertaining to, among other things, ongoing interaction, key responsibilities and the flow of information. Sharing of relevant information between frontline analysis and risk support functions are also facilitated by formal interactions such as the departmental Correspondence Meetings, Management Forum Meetings, Risk Specialist Analysis Committee meetings and Divisional Meetings. The assessors’ discussion with frontline analysts and specialist risk teams as well as review of a number of internal documents related to on-going supervisions confirmed that the BSD has a coherent supervisory process and coordination among various teams in the BSD is taking place. |
| EC3 | The supervisor uses a variety of information to regularly review and assess the safety and soundness of banks, the evaluation of material risks, and the identification of necessary corrective actions and supervisory actions. This includes information, such as prudential reports, statistical returns, information on a bank’s related entities, and publicly available information. The supervisor determines that information provided by banks is reliable19 and obtains, as necessary, additional information on the banks and their related entities. |
| Description and findings re EC3 | In the SREP cycle, different types of information are used to form a view not only on the risk profile of a particular bank but also in terms of the operating environment relevant to banking institutions. (See CP 8 as well s CP 9 EC1 for details). These sources include, among other things:
Any discrepancies or inconsistencies in reporting identified in ongoing analysis is followed up with the particular bank and monitored to ensure that corrective action is taken. For example, queries on statutory BA submissions are sent to banks by frontline analysts on a regular basis. Although this is to understand any substantial movement in bank’s submitted data, it could lead to issuance of directives from the BSD for banks to correct reporting on the statutory BA returns and to resubmit statutory data. The BSD also has the authority to call for any additional information that is required to perform its supervisory duties. The BSD explained it does not have a significant concern with the accuracy of reporting data, although it takes some time for banks to be able to provide quality data as reporting requirements have been expanded substantially in recent years reflecting regulatory changes. |
| EC4 | The supervisor uses a variety of tools to regularly review and assess the safety and soundness of banks and the banking system, such as:
The supervisor communicates its findings to the bank as appropriate and requires the bank to take action to mitigate any particular vulnerabilities that have the potential to affect its safety and soundness. The supervisor uses its analysis to determine follow-up work required, if any. |
| Description and findings re EC4 | See CP 8 above. During the SREP cycle, a wide range of tools are used to assess and monitor the safety and soundness of banks. Examples of tools used include, but are not limited to, the following:
Information/knowledge gained throughout the various stages of the supervisory cycle feeds into MIR and used to update and/or refine the supervisory plan as well as to determine further action required in respect of each individual bank on an ongoing basis. The BSD senior management reviews the overall supervisory program on a monthly basis and the revised program is signed off. Feedback is provided to banks through various means, including meetings with the Board, audit committee, chairperson of the Board, senior management, etc. During such meetings issues identified will be shared and the bank will be requested to furnish the BSD with action/remedial plans as well as provide regular feedback/updates on progress made in addressing identified issues. The key issues raised at such meetings are usually formally recorded in feedback letters provided to the relevant bank subsequent to meetings held. |
| EC5 | The supervisor, in conjunction with other relevant authorities, seeks to identify, assess and mitigate any emerging risks across banks and to the banking system as a whole, potentially including conducting supervisory stress tests (on individual banks or system-wide). The supervisor communicates its findings as appropriate to either banks or the industry and requires banks to take action to mitigate any particular vulnerabilities that have the potential to affect the stability of the banking system, where appropriate. The supervisor uses its analysis to determine follow-up work required, if any. |
| Description and findings re EC5 | See CP8 EC4 and 5 for the BSD’s efforts and tools to address emerging risks. In addition to the supervisory interactions with individual banks and the work on the whole sector, the BSD holds meetings with various parties including: quarterly meetings with the Financial Services Board to discuss matters relating to conglomerate groups comprising banks and non-bank financial institutions; periodic interaction with National Treasury and the Minister of Finance; ad-hoc meetings with the Financial Intelligence Centre, National Credit Regulator; attendance to the BCBS meetings and its subgroups; participation in international surveys, such as QIS exercises, and; representation in numerous domestic and regional committees, task groups and working groups. Issues and/or emerging risks identified owing to the above-mentioned interactions are assessed and follow-up actions are determined based on the particular circumstances. Follow-up action varies and could include:
As noted in CP 8, the BSD uses “flavor of the year” topics for possible system-wide risk sources which are discussed during meetings with the bank Boards or CEOs. Regarding the stress testing exercises, the most recent common-scenario stress testing was conducted in 2012 with a severe but plausible economic downturn scenario which covers banks’ South African operations. The BSD plans to repeat a similar exercise in the context of FSAP and continue thereafter. |
| EC6 | The supervisor evaluates the work of the bank’s internal audit function, and determines whether, and to what extent, it may rely on the internal auditors’ work to identify areas of potential risk. |
| Description and findings re EC6 | BA Section 4(4) defines the supervisory review process to be implemented and maintained by the Registrar to include a discussion with the head of internal audit of a bank. The Regulations also include a number of references to the internal audit function, most notably Regulation 48 which provides requirements for internal audit (See CP 26). In the supervisory framework, a prudential meeting with the head of internal audit of individual banks/controlling company is held on an annual basis, or more regularly if necessary. The BSD will also discuss bank’s internal audit function, including the appropriateness and reliability thereof, with the external auditors of the bank annually during the bilateral meeting. The BSD views that this gives a perspective on the external auditors’ assessment of the internal audit function as well as the level of reliance placed by the external auditors on the work performed by the bank’s internal auditors. This, together with information gathered during the prudential meetings with the internal auditor, provides the BSD with a perspective on the functioning of the internal audit function and the level of reliance that can be placed on the work performed by the function. The BSD requests copies of internal audit reports periodically, particularly for audits performed in key areas. In addition, the BSD requires internal audit reports which are submitted to the Board or the Board audit committee to be provided. A discussion of internal audit findings and steps taken by banks to resolve such finding is generally a standard agenda item in respect of most prudential meetings and on-site reviews performed by the BSD. |
| EC7 | The supervisor maintains sufficiently frequent contacts as appropriate with the bank’s Board, non-executive Board members and senior and middle management (including heads of individual business units and control functions) to develop an understanding of and assess matters such as strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality, risk management systems and internal controls. Where necessary, the supervisor challenges the bank’s Board and senior management on the assumptions made in setting strategies and business models. |
| Description and findings re EC7 | As mentioned in CP8 and 9, various interactions with Board members and senior and middle management take place during the SREP cycle, which form a major component of the supervisory plans. In addition to the scheduled interactions with banks, periodic ad-hoc meetings with banks’ Boards, Board sub committees, executive/senior management, middle management, control functions, staff in operational areas, etc. may take place. Interaction is not limited by the supervisory program but is flexible and can be adjusted depending on circumstances to ensure effective and efficient supervision of banks. The BSD maintains multiple communication lines with banks. The BSD liaises with banks through a single point of entry namely the frontline analysis teams. The BSD explains there are typically strong professional relationships built between the BSD teams and the heads of compliance as well as internal audit functions of banks to facilitate the flow of relevant information between the BSD and banks. The assessors observed these frontline analysis teams having a good understanding of banks they are in charge of. Review of files and discussions with banks also confirmed that frequent and intensive discussions take place between various levels of banks and the BSD’s frontline analysis teams. Banks also confirmed that the BSD often challenges the banks’ Board and senior management on various issues. Matters such as strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality, risk management systems and internal controls are typically discussed during prudential meetings held annually with the Board, Board audit committee, CEO, internal auditor, compliance head, external auditors, heads of selected business units, etc. of a bank/controlling company, depending on the supervisory program and prevailing circumstances pertaining to a particular bank or banking group. For example, a BSD frontline analyst team meets biannually with the CEO and the CFO of a large bank to discuss half-year and year-end financial results prior to information being made public. These discussions often cover items such as planned strategies and key areas of concern. Annual prudential meetings with, inter alia, the CEO, head of compliance and head of internal audit generally includes a discussion on emerging risks and concerns and changes in business strategies and plans. Supervisory challenge during these interactions is common practice and is often formalized in correspondence with banks subsequent to interventions. |
| EC8 | The supervisor communicates to the bank the findings of its on- and off-site supervisory analyses in a timely manner by means of written reports or through discussions or meetings with the bank’s management. The supervisor meets with the bank’s senior management and the Board to discuss the results of supervisory examinations and the external audits, as appropriate. The supervisor also meets separately with the bank’s independent Board members, as necessary. |
| Description and findings re EC8 | As described above, step 6 of the SREP cycle is feedback to the Board and senior management of a bank. Conclusions and recommendations reached through the SREP cycle are communicated to the bank’s Board, risk committee, audit committee and senior management through meetings, particularly through biannual result presentations. Annual scheduled meetings with the Board, the chairperson of the Board, the audit committee and the CEO of a bank also provide platforms for discussion of any issues that may be relevant or necessary to ensure effective supervision of banks, including any supervisory findings. BSD may also choose to meet with the Board as a whole or separately with the chairperson of the Board to discuss particular issues of concern. The main points of these meetings, including supervisory findings and concerns raised by the BSD are documented in feedback letters and provided to the bank. Meetings with chairpersons of the Boards, who are independent Board members, are held without attendance of senior management. Also, key and/or material findings or issues, whether identified through off-site or on-site activities of the BSD, will be documented and shared promptly with the particular bank and/or industry. A typical example would be issues identified during an on-site review, which are shared with the bank by means of a letter or a report. The bank would have the option to respond to issues raised, which could be subject to further meetings being held with a bank or further correspondence with the bank. If violations of regulations or laws are identified during on-site reviews, they are formally communicated to banks in a close-out meeting following the on-site review. Banks are then normally afforded the opportunity to respond to the issues raised by BSD. The bank’s response will be considered in preparing the final report that will be sent to the bank. Similarly, queries may be sent to a bank for follow-up subsequent to off-site analysis of statutory returns or a report submitted by the bank. |
| EC9 | The supervisor undertakes appropriate and timely follow-up to check that banks have addressed supervisory concerns or implemented requirements communicated to them. This includes early escalation to the appropriate level of the supervisory authority and to the bank’s Board if action points are not addressed in an adequate or timely manner. |
| Description and findings re EC9 | See EC 8. The issues that need to be followed up are considered during the supervisory planning process and included in the topics for various meetings between the supervisor and the bank. Major issues are followed-up with the Board or the chairperson of the Board. Also, supervisory concerns may be communicated to internal or external auditors for follow-up. The assessors saw evidence that these issues are raised and followed up by a bank’s Board or internal/external auditors. |
| EC10 | The supervisor requires banks to notify it in advance of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements. |
| Description and findings re EC10 | The BA provides a number of requirements for prior notification or approval from the BSD, including cases such as:
Regulation 47 also requires banks to report offences to the BSD that come to the attention of banks, such as breaches in fiduciary duties, market abuse and any other material irregularities. |
| EC11 | The supervisor may make use of independent third parties, such as auditors, provided there is a clear and detailed mandate for the work. However, the supervisor cannot outsource its prudential responsibilities to third parties. When using third parties, the supervisor assesses whether the output can be relied upon to the degree intended and takes into consideration the biases that may influence third parties. |
| Description and findings re EC11 | BA Section 6 stipulates that third parties may be appointed, with specific terms of reference, to conduct an inspection on behalf of the Registrar. Similarly, BA Section 7 allows the Registrar to direct a bank or any other appropriately skilled person to perform a review and to submit a report in respect of any matter that is reasonably necessary to enable the BSD to perform its supervisory functions and duties. Such a request will be subject to specified terms or reference. As described in EC1, in cases where an extensive review of certain issues are deemed to be necessary, the BSD requires banks to be reviewed by independent audit firms under BA Section 7. In these cases, clear and detailed terms of reference are provided. |
| EC12 | The supervisor has an adequate information system which facilitates the processing, monitoring and analysis of prudential information. The system aids the identification of areas requiring follow-up action. |
| Description and findings re EC12 | The BSD uses three main software packages to manage information submitted by banks, namely:
Various key statistical and trigger reports as well as graphs are produced and saved in OFA to aid frontline analysts and specialist risk units in identifying and monitoring key risk areas and areas requiring follow-up actions. Various reports, such as MIRs and risk specific heat maps are also produced periodically within frontline analysis and specialist risk units to assist analysts and management to identify, analyze and monitor key risk areas. |
| AC1 | The supervisor has a framework for periodic independent review, for example by an internal audit function or third party assessor, of the adequacy and effectiveness of the range of its available supervisory tools and their use, and makes changes as appropriate. |
| Description and findings re AC1 | The BSD as a department is subject to periodic review/audit by the SARB’s Internal Audit Division. The audit findings are shared with management and the Governor’s Executive Committee, and used to guide ongoing improvements and refinements of the various supervisory tools and processes applied by BSD. |
| Assessment of Principle 9 | Compliant |
| Comments | The BSD has improved its supervisory techniques and tools significantly. In particular, it has moved from a model relying substantially on external auditors for on-site work to one where the BSD’s own staff conducts a number of on-site reviews to complement the work of external auditors, including deep-dive reviews that verify banks’ actual practices through such means as extensive review of loan files. It has also added a number of risk specialists who conduct on-site reviews on particular risk areas including model validations, but also other topics related to particular risk areas. These improvements, in addition to detailed and intensive off-site analysis and frequent interactions with various levels of banks/banking groups, including their Boards, equip the BSD with wide-ranging high quality techniques and tools that are appropriate for providing oversight of risk profiles and operations of banks and banking groups in South Africa. The assessors encourage the BSD to further continue its effort to enhance its ability to conduct deep-dive on-site reviews and improve tools and technique to assess and monitor spill over risks to the banks from non banking activities in their financial groups. |
| Principle 10 | Supervisory reporting. The supervisor collects, reviews and analyses prudential reports and statistical returns20 from banks on both a solo and a consolidated basis, and independently verifies these reports through either on-site examinations or use of external experts. |
| EC1 | The supervisor has the power21 to require banks to submit information, on both a solo and a consolidated basis, on their financial condition, performance, and risks, on demand and at regular intervals. These reports provide information such as on- and off-balance sheet assets and liabilities, profit and loss, capital adequacy, liquidity, large exposures, risk concentrations (including by economic sector, geography and currency), asset quality, loan loss provisioning, related party transactions, interest rate risk, and market risk. |
| Description and findings re EC1 | BA Section 6 provides powers of inspection as stipulated in the Inspection of Financial Institutions Act, which includes access to any person related to the inspected institution or any document of the institution. Section 7 also provides powers to the Registrar to request banks, controlling companies or a subsidiary of a bank or controlling company to furnish information. Section 75 then requires banks and controlling companies to submit their returns in conformity with financial reporting standards. Based on these provisions in the BA, the Regulations then require banks to periodically report to the BSD a broad range of detailed information, which includes their balance sheets (BA 100), off-balance sheet activities (BA 110), income statement (BA120), capital adequacy and leverage (BA 700), liquidity risk (BA 300), credit risk—including large exposures, risk concentrations, asset quality, loan loss provisioning and related party transactions (BA 200, 210, 220), interest rate risk (BA 330), and market risk (BA 320). Returns related to financial statements are usually required for a bank’s South African operations and the bank as a legal entity including foreign branches as well as at the consolidated level from the bank and below and from its controlling company and below, but with less frequency. For other returns, they are usually required only for the bank’s South African operations, but key information is required by form BA 600, Consolidated return. Also, individual branches and subsidiaries abroad are required to submit similar information quarterly by form BA 610. In addition, as described in CPs 8 and 9, the BSD requires a number of reports by banks on demand through its SREP cycle. |
| EC2 | The supervisor provides reporting instructions that clearly describe the accounting standards to be used in preparing supervisory reports. Such standards are based on accounting principles and rules that are widely accepted internationally. |
| Description and findings re EC2 | BA Section 75(3A) provides that the returns shall be prepared in conformity with financial reporting standards in terms of the Companies Act and shall be furnished to the Registrar in respect of such period, at such times and on such a form as may be prescribed. Regulation 3, Financial Reporting Standards, then provides that all the relevant prescribed returns shall be prepared in accordance with International Financial Reporting Standards. In terms of auditing, Regulation 46 requires a bank’s external auditor to report to the Registrar the adequacy of returns on the year-end results. |
| EC3 | The supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations. The measurement of fair values maximizes the use of relevant and reliable inputs and are consistently applied for risk management and reporting purposes. The valuation framework and control procedures are subject to adequate independent validation and verification, either internally or by an external expert. The supervisor assesses whether the valuation used for regulatory purposes is reliable and prudent. Where the supervisor determines that valuations are not sufficiently prudent, the supervisor requires the bank to make adjustments to its reporting for capital adequacy or regulatory reporting purposes. |
| Description and findings re EC3 | Regarding valuation of assets and liabilities, Regulation 3 (4) requires a bank to:
It further requires regular verification of valuations by independent and qualified units and periodic reviews by the bank’s internal audit function. Regulation 39(13) also provides detailed key elements of the required robust governance structures and control processes to ensure prudent valuation. The BSD discusses these issues in the annual bilateral meetings with external auditors or in the annual trilateral meetings that also include Board audit committees as necessary and internal audit functions. The BSD can require banks to make adjustments if needed. |
| EC4 | The supervisor collects and analyses information from banks at a frequency commensurate with the nature of the information requested, and the risk profile and systemic importance of the bank. |
| Description and findings re EC4 | Based on the provisions of the BA as described in EC1, Regulation 4 stipulates frequencies for different types of returns. For example, most of the financial statements as well as basic information regarding credit, liquidity and other risks are required monthly. Some of the more detailed credit risk related information as well as consolidated returns are required quarterly. Some information is required biannually. The frequencies stipulated in the Regulation do not differ among banks; ad-hoc information requests may be made depending on the risk profile and systemic importance of the bank, however. In the past, for example, frequent liquidity monitoring reports were requested of certain troubled banks. In on-going supervision, the SREP cycle includes a review of data submitted by banks, e.g., by utilizing time series analysis, automated key stats, trigger reports and automated graphical analysis. The BSD has also implemented validation rules that prevent banks from submitting incorrect data. Based on such a framework, monthly queries are performed by frontline analysts, following a review of statutory returns on, for example, large or unexpected movements in data. Queries are sent to the banks, and their responses are reviewed, and followed up if necessary. Other tools being used in analyzing data submitted by banks include:
These provide an opportunity to conduct in-depth, focused reviews of the risks that banks face at a point in time. The results of these analyses are discussed internally in the BSD. They are also discussed in various meetings, including those with the banks’ Boards and senior management. In addition, ad hoc consolidated supervision prudential meetings are held with banking groups to discuss, amongst other things, the data submitted on the group. The files reviewed by assessors show these analyses and discussions are taking place regularly with sufficient depth. |
| EC5 | In order to make meaningful comparisons between banks and banking groups, the supervisor collects data from all banks and all relevant entities covered by consolidated supervision on a comparable basis and related to the same dates (stock data) and periods (flow data). |
| Description and findings re EC5 | See above ECs. The requirement of returns stipulated in the Regulations applies to all banks and controlling companies established in South Africa in the same manner in terms of the content and frequency. |
| EC6 | The supervisor has the power to request and receive any relevant information from banks, as well as any entities in the wider group, irrespective of their activities, where the supervisor believes that it is material to the condition of the bank or banking group, or to the assessment of the risks of the bank or banking group or is needed to support resolution planning. This includes internal management information. |
| Description and findings re EC6 | As described in EC 1, BA Section 6 provides powers of inspection as stipulated in the Inspection of Financial Institutions Act, which includes access to any person related to the inspected institution or any document of the institution “for the purposes of the performance of his or her functions under this Act.” Section 7 also provides powers to the Registrar to request banks, controlling companies or a subsidiary of a bank or controlling company to furnish information. Section 75 then requires banks and controlling companies to submit their returns in conformity with financial reporting standards. This requirement can cover internal management information as long as it is related to the BSD’s responsibility. The assessors were informed that the BSD in the past requested, for example, a non-banking subsidiary of a controlling company to submit a number of BA returns on a quarterly basis. |
| EC7 | The supervisor has the power to access22 all bank records for the furtherance of supervisory work. The supervisor also has similar access to the bank’s Board, management and staff, when required. |
| Description and findings re EC7 | The Registrar has the power to access all bank records as well as a bank’s Board, management and staff. (See EC1 and EC6) |
| EC8 | The supervisor has a means of enforcing compliance with the requirement that the information be submitted on a timely and accurate basis. The supervisor determines-the appropriate level of the bank’s senior management is responsible for the accuracy of supervisory returns, imposes sanctions for misreporting and persistent errors, and requires that inaccurate information be amended. |
| Description and findings re EC8 | BA Section 91(6) provides that if any person fails to submit to the Registrar or to furnish the Registrar with any return, statement, report or other document or information in accordance with a requirement of the BA within the period determined, the Registrar may impose a fine not exceeding ZAR1000 for every day during which such failure continues. BA Section 91 (6A) also provides the same power to impose a fine in case where information or returns provided are materially incorrect or inaccurate information. To date, no fines have been imposed on banks based on these provisions but a bank’s ability to furnish appropriate returns has been one of the issues where BSD has been focusing. If a bank is seen as problematic in furnishing BA returns, the concern is conveyed to the bank’s senior management or the Board and the bank is required to take corrective actions which are then followed up by the BSD in the supervisory cycle. In addition, according to Form BA099, the CEO, the Chief Accounting Officer and the FICA Officer have to sign and certify the form. For re-submissions of data, an updated form BA099 has to be completed and sent prior to re-submission of data, with appropriate sign-off by management responsible for each specific risk areas, and the 3 officers mentioned above also need to sign and certify the BA099. Discussions with banks and audit firms confirmed that the BSD is continuously making efforts to ensure correct reporting by banks. |
| EC9 | The supervisor utilizes policies and procedures to determine the validity and integrity of supervisory information. This includes a programme for the periodic verification of supervisory returns by means either of the supervisor’s own staff or of external experts.23 |
| Description and findings re EC9 | As described in EC3, BA Section 75 (3C) provides that, for those returns that most nearly coincide with the end of the financial year of the bank, the bank’s external auditor is required to report to the Registrar whether or not those returns present the condition of the bank fairly and are in conformity with financial reporting standards. The Registrar also has the power to require submission of such a report for other returns. Regulation 46 also provides that the bank’s external auditor shall annually report on the bank’s financial position and the results of its operations at the financial year-end as well as the completeness and accuracy of year-end materials. It also requires the external auditors to report on whether other returns reflect the information of the management accounts, using the same accounting policies as those applied in the management and statutory accounts, and following BA and the Regulations. In addition to the use of external auditors, as described in EC3, the BSD has implemented validation rules that prevent banks from submitting incorrect data and therefore ensuring the quality of reporting. Monthly queries are performed by the BSD analysts, following a review of statutory returns on, for example, large or unexpected movements. Queries are sent to the banks, and their responses are reviewed, and followed up if necessary. Based on Regulation 46(9), the BSD meets at least annually with the external auditors to discuss, amongst other things, the quality of reporting, financial condition of the bank, major risk areas and management. The BSD also holds annual trilateral discussions (with representatives from BSD, the Bank’s Audit Committee and senior management and the external auditors) to discuss the findings and reports issued by the external auditors in terms of Regulation 46. The result of monitoring of submitted information by BSD staff feeds into these discussions. |
| EC10 | The supervisor clearly defines and documents the roles and responsibilities of external experts,24 including the scope of the work, when they are appointed to conduct supervisory tasks. The supervisor assesses the suitability of experts for the designated task(s) and the quality of the work and takes into consideration conflicts of interest that could influence the output/recommendations by external experts. External experts may be utilized for routine validation or to examine specific aspects of banks’ operations. |
| Description and findings re EC10 | BA Section 7(1)(b) provides the Registrar with the power to direct banks, controlling companies or subsidiaries to provide a report by a public accountant or any other person with appropriate skill on any matter about which the Registrar has directed or may direct the bank, controlling company or subsidiary to furnish information. In this case, the person needs to be designated or approved by the Registrar. The BSD provides a clear terms of reference for these works. In practice, the BSD usually requires the bank to be assessed by an audit firm which is not its statutory auditor. |
| EC11 | The supervisor requires that external experts bring to its attention promptly any material shortcomings identified during the course of any work undertaken by them for supervisory purposes. |
| Description and findings re EC11 | In case of the assessment under BA Section 7, the audit firm is required to report all material information they find during the assessment to the BSD according to the TOR. |
| EC12 | The supervisor has a process in place to periodically review the information collected to determine that it satisfies a supervisory need. |
| Description and findings re EC12 | The BSD reviews reporting forms at the annual policy meeting. The forms were last revised substantially at the time when Basel III was introduced. |
| Assessment re Principle 10 | Compliant |
| Comments | The regulatory framework requires banks and controlling companies to periodically submit a broad range of information. Strong regulatory and supervisory processes exist to ensure accuracy and comparability of submitted returns. Well developed procedures for analyzing collected information and feeding into supervisory actions are in place. |
| Principle 11 | Corrective and sanctioning powers of supervisors. The supervisor acts at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system. The supervisor has at its disposal an adequate range of supervisory tools to bring about timely corrective actions. This includes the ability to revoke the banking license or to recommend its revocation. |
| EC1 | The supervisor raises supervisory concerns with the bank’s management or, where appropriate, the bank’s Board, at an early stage, and requires that these concerns be addressed in a timely manner. Where the supervisor requires the bank to take significant corrective actions, these are addressed in a written document to the bank’s Board. The supervisor requires the bank to submit regular written progress reports and checks that corrective actions are completed satisfactorily. The supervisor follows through conclusively and in a timely manner on matters that are identified. |
| Description and findings re EC1 | The SREP cycle provides in Step 6 that feedback to the Board and senior management of a bank is to take place. More generally, key/material findings or issues identified through off-site or on-site activities, such as meetings with banks’ Boards and senior management as well as on-site reviews, will be documented and shared with the bank in the form of feedback letters. These are followed up in subsequent meetings with the bank and other supervisory actions. See CPs 8 and 9, particularly CP 8 EC1 on the SREP cycle and CP9 EC8. The review of supervisory files, including MIRs and feedback letters, as well as discussion with banks by the assessors confirmed that in practice such process is applied forcibly by the BSD. The discussion on supervisory concerns, including follow-up on the banks’ progress in addressing shortcomings communicated in the past, is one of the main topics in the supervisory meetings with the Boards or senior management of banks. |
| EC2 | The supervisor has available25 an appropriate range of supervisory tools for use when, in the supervisor’s judgment, a bank is not complying with laws, regulations or supervisory actions, is engaged in unsafe or unsound practices or in activities that could pose risks to the bank or the banking system, or when the interests of depositors are otherwise threatened. |
| Description and findings re EC2 | See CP1 EC3 and 5. The BA provides the Registrar a range of tools, including:
Moreover, Sections 23 to 26 of the BA provide the power to the Registrar to suspend registration of a bank or controlling company or to restrict its activities, but a number of limitations apply. In the case of a bank that does not comply with conditions attached to the registration, the Registrar can, after consultation with the Minister, suspend or cancel the registration. Similarly, the Registrar can restrict a bank’s activities for various broad reasons including cases where: the bank does not carry on satisfactorily the business of a bank; the bank has failed to comply with a requirement of the BA; or the bank continues to employ an undesirable practice. However, the Registrar must notify the bank at a minimum 30 days in advance to give an opportunity to the bank to refute the claim and during that time cancellation or suspension of registration or restriction of activities does not become effective. Alternatively, the Registrar can apply to the court for an order of cancellation or suspension of the registration. In this case, the 30-day notice period does not apply. The BSD explains that this court process can be processed expeditiously, possibly in a matter of days, but it has not been tested. In addition, Regulation 38(4) affords the Registrar the power to increase prudential requirements commensurate with a bank’s risk profile. |
| EC3 | The supervisor has the power to act where a bank falls below established regulatory threshold requirements, including prescribed regulatory ratios or measurements. The supervisor also has the power to intervene at an early stage to require a bank to take action to prevent it from reaching its regulatory threshold requirements. The supervisor has a range of options to address such scenarios. |
| Description and findings re EC3 | See EC2. In particular, BA Section 74(2) provides that the Registrar may take action against a bank or controlling company if there is a failure to comply with prudential requirements. Unlike directives stipulated in BA Section 6(6), no consultation with the relevant bank is required in this case. Regarding early interventions, as described in CPs 8 and 9, the SREP cycle emphasizes early identification of problems in banks. Once problems are identified in a bank, the bank is requested to submit action/remedial plans and provide regular feedback/updates on the progress made in addressing identified issues, which is followed by the BSD closely. These are often carried out without issuing directives stipulated in BA Section 6(6). The BSD explains such an approach can be applied to prevent a bank from breaching the regulatory minimum requirements. |
| EC4 | The supervisor has available a broad range of possible measures to address, at an early stage, such scenarios as described in essential criterion 2 above. These measures include the ability to require a bank to take timely corrective action or to impose sanctions expeditiously. In practice, the range of measures is applied in accordance with the gravity of a situation. The supervisor provides clear prudential objectives or sets out the actions to be taken, which may include restricting the current activities of the bank, imposing more stringent prudential limits and requirements, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from the banking sector, replacing or restricting the powers of managers, Board members or controlling owners, facilitating a takeover by or merger with a healthier institution, providing for the interim management of the bank, and revoking or recommending the revocation of the banking license. |
| Description and findings re EC4 | See above, particularly EC2, as well as CP1. BA section 6 (6) gives the Registrar power to issue directives which include non-financial sanctions or require banks, controlling companies, or their auditors to cease or refrain from engaging in any act, perform certain acts, and providing information to the Registrar. This provision is interpreted as enabling the Registrar to, among others: require banks to restrict or suspend payments to shareholders or share repurchases; restricting asset transfers; restricting the powers of managers, Board members or controlling owners; or facilitating takeover by or merger with a healthier institution. While a consultation with the relevant bank is required, the agreement with the bank is not required. As explained in EC2, BA Section 26 provides the power to the Registrar to restrict the activities of a bank for a number of reasons including if the bank does not carry out satisfactorily the business of a bank or fails to comply with a requirement of the BA, subject to the 30 days advance notice. BA Section 25 also provides the Registrar to apply to a court for an order of cancelling or suspending the registration of a bank. The bank’s registration lapses on the date that order comes into force. BA Section 60 (6) provides the power to the Registrar to object to the appointment or continued employment of a CEO, director or executive officer of a bank if the Registrar believes that these persons are not or no longer a fit and proper person or it is not in the public interest for these persons to hold or to continue to hold these positions. However, the Registrar does not have power to impose temporary management. In addition to the above, the BA and the Regulations give the supervisor power to impose more stringent prudential requirements (Regulation 38 (4)) and subject most new activities and acquisitions to prior approval (BA Section 52). In practice, most supervisory concerns are addressed without resorting to particular powers given by the laws described above. In some cases, directives under BA Section 6 (6) are issued. The request of review by independent audit firms under BA Section 7 is also seen by the BSD as a strong corrective action. Furthermore, administrative fines have been applied under BA section 91 A for AML/CFT related issues. |
| EC5 | The supervisor applies sanctions not only to the bank but, when and if necessary, also to management and/or the Board, or individuals therein. |
| Description and findings re EC5 | As described in EC4, the Registrar has the power to remove senior managers or Board members of a bank. In addition, BA Section 60(1B) provides that the Registrar may, according to the provisions in the Company Act, order restitution against a director, CEO or executive officer of a bank who was knowingly carrying on the business of the bank “recklessly.” The BA, however, does not provide the supervisor the power to impose administrative fines on members of the Board, senior management or other employees of banks. |
| EC6 | The supervisor has the power to take corrective actions, including ring-fencing of the bank from the actions of parent companies, subsidiaries, parallel-owned banking structures and other related entities in matters that could impair the safety and soundness of the bank or the banking system. |
| Description and findings re EC6 | As described in EC4, directives under BA Section 6 (6) can be used to implement wide-ranging corrective actions on banks and controlling companies. For example, this could be used to restrict a subsidiary bank’s dividend payment to its controlling company, its exposure to the controlling company or to its related entities, or controlling company’s exercise of its shareholder’s right over the bank. |
| EC7 | The supervisor cooperates and collaborates with relevant authorities in deciding when and how to effect the orderly resolution of a problem bank situation (which could include closure, or assisting in restructuring, or merger with a stronger institution). |
| Description and findings re EC7 | BA Section 68 provides that:
BA Section 69 provides that if the Registrar believes a bank will be unable to repay deposits or will probably be unable to meet any other obligations, the Minister may appoint a curator to the bank, in whom the management of the bank is vested, subject to the supervision of the Registrar. The section also enables the Minister to empower the curator to take such actions as: suspending or reducing the right of creditors of the bank to claim or receive interest; making payments to creditors; canceling any agreement between the bank and other parties to advance funds or extend facilities; convening a meeting of creditors; negotiating with creditors; and, to cancel guarantees issued by the bank. The curator is required to provide reports to the Registrar monthly whether there is a reasonable probability exists that the bank will become a successful concern. The curatorship lapses when the bank is regarded as having no reasonable probability recover. The curator may be dismissed by the Minister at any time or upon application by the Registrar to that effect. |
| AC1 | Laws or regulations guard against the supervisor unduly delaying appropriate corrective actions. |
| Description and findings re AC1 | There is no provision in laws and regulations that set dates for taking corrective actions or other measures to guard against undue delay of actions, although the authorities explain the common law principles require such actions to be taken within an appropriate timeframe. |
| AC2 | When taking formal corrective action in relation to a bank, the supervisor informs the supervisor of non-bank related financial entities of its actions and, where appropriate, coordinates its actions with them. |
| Description and findings re AC2 | During the regular bilateral meeting with the FSB, information on corrective actions taken is provided and coordination is made between the two supervisors. Also, the BSD explains that it will inform the FSB promptly of a formal corrective action if the action is expected to affect entities supervised by the FSB substantially. |
| Assessment re Principle 11 | Materially non-compliant |
| Comments | While there have been a few significant improvements since the last assessment, the major problem of the need for 30 days prior notice in suspending registration or restricting activities based on BA Sections 23, 24 and 26 has not been changed. The newly introduced power of directives under BA Section 6(6) as well as the application of a motion by the court could address the issue partially. But the former still requires consultation with the relevant bank and the bank may challenge on the ground that a similar due process to that of Section 24 should be required for sanctions with similar effect. The latter is yet untested and relies on a court’s judgment, which may take a different position than that of the supervisor. Given supervisors would consider taking such drastic measures only in cases where the risk is imminent and large, impact to the public could be significant, and when the relevant bank is not cooperating with the supervisor, any possible delays in or uncertainty regarding the outcome of the process needs to be avoided. The assessors understand the strong framework for licensing and corporate governance as well as relatively stable structure of the banking industry enables the supervisor to address these issues in a cooperative manner using less formal and stringent measures in most of the cases. However, the supervisor needs to be prepared for cases where these cooperative and more informal measures may not work—the framework for corrective and enforcement actions need to cover such situations. The assessors are thus still of the view that strengthening laws to provide the Registrar with the power to suspend or limit a bank’s activities without delay is essential to improve compliance with the CP. The lack of ability for the supervisor to fine individuals related to banks, such as Board members and senior management, is another important gap in the current regulatory framework in relation to EC5, which also contributed to the above grading. |
| Principle 12 | Consolidated supervision. An essential element of banking supervision is that the supervisor supervises the banking group on a consolidated basis, adequately monitoring and, as appropriate, applying prudential standards to all aspects of the business conducted by the banking group worldwide.26 |
| EC1 | The supervisor understands the overall structure of the |