SA banks boast healthy risk ratios relative to most others

While pending reforms to international banking regulations were likely to insist on higher capital requirements, South Africa’s banks were well placed to meet such requirements.

That was because they boasted healthy risk ratios, especially relative to other banks in most international jurisdictions.

This was the encouraging assessment of the domestic banking system by Andrew Brown, founder and CEO of AB Risk Management Consulting, who addressed delegates to a Basel II seminar sponsored by the South African Institute of Chartered Accountants (SAICA) in Johannesburg today.

In an overview of the global state of the industry, Brown said that banking responses to the global financial crisis had been initiated primarily by the Financial Stability Board, the International Accounting Standards Board and the Basel Committee for Banking Supervision.

“To date” says Brown, “these have focused on the appropriate definition of the minimum prudential for risk-based capital, leverage and liquidity requirements; how to reduce pro-cyclicality in minimum regulatory requirements; and on policies that encourage earlier provisioning for losses.”

Brown drew attention to the United States banking reforms proposed by President Obama in January 2010; reforms which included:

• limit the total size for each bank, proportionate to their position in the overall market;
• prohibited banks from operating or investing in hedge funds or private equity funds; and
• abolish proprietary trading.

“These proposals are currently under consideration. The ultimate outcome will certainly contain ramifications for the global banking system.”

Brown said comment on the Obama reforms by senior South African bankers at Davos was that South African banks did not warrant being subject to such punitive reforms, which were designed to punish the failings of American banks.

Dealing specifically with the Basel Committee response to the financial crisis, Brown said that the committee’s July 2009 measures to strengthen the Basel II framework involved changes to market risk and securitisation.

In December 2009 the committee had issued a consultative paper, Strengthening the Resilience of the Banking Sector, which proposed reforms to the Basel II framework.

Brown stressed that the paper did not recommend an overhaul of Basel II but, rather, reforms to address those shortcomings of the current framework; shortcomings that had become apparent during the financial crisis. An impact assessment of the reforms by the Basel Committee was scheduled for completion in July 2010.

The reforms comprised:

• raising the quality of the capital base;
• risk coverage;
• leverage ratio;
• reducing pro-cyclicality; and
• addressing systemic risk in the banking sector.

“As a result of these proposals, an increase in capital requirements is likely, though the extent of the increase can only be speculated upon for the present. The intention is to raise the quality of the capital base.

“Among South African banks the capital base quality is sound, implying that they will avoid the hardships that a great many banks the world over are likely to encounter.”

Other risk-related impacts of the proposed reforms included:

• increasing the capital requirements for counterparty credit risk and securitisation schemes; and
• encouraging the migration of derivative trading from over-the-counter markets to recognised exchanges.

Brown lauded the proposed Basel II reform designed to build up capital in good times to create a buffer to be drawn on in bad times

“Also contributing to increased long-term banking stability is the proposed global minimum liquidity standard for internationally active banks; a proposal advocating a 30-day liquidity coverage ratio and a longer term structural liquidity ratio.

“This is the change that the local banks and the SARB consider lilely to have the biggest impact on South African banks, because our banks fund themselves via short-term deposits, while their lending is longer term in nature.”

Commenting on Brown’s observations, Yusuf Dukander, Project Director: Financial Services at The South African Institute of Chartered Accountants (SAICA), said: “The Basel II framework outlines a more comprehensive and minimum capital adequacy ratio and aligns regulatory capital requirements for banks as compared to the risks they face”.

He believed that the reform of Basel II would likely materialise as financial conditions and economies improve.