Category Investments

Unfasten your seatbelts

15 July 2004 Angelo Coppola

The Bank Supervision department of the SA Reserve Bank, in releasing its annual report, says that while the sector was turbulent two years ago, last year saw some stability return.

The main feature was a depreciation of the local currency, a consolidation in the banking sector, following the liquidity crisis in the mid-sized banking sector in 2002 with 2003 far more stable.

The numbers

In terms of distribution of total assets in the banking sector Kruger says that assets increased from R1 100bn in 2002 to R1 378bn, with a small shift from local A2 rated banks to their foreign compatriots, and some going to the A1 rated banks.

Capital adequacy ratios were stable again following the Nedcor issue in December – which pushed the ratio to 12.2 from 12.6 the previous year. Kruger reports that capital was pumped back into the bank (Nedcor) and the March number was up to 12.7, well above the 10% requirement.

Composition of non-bank deposits, which increased from R662bn to R756bn, showed an increase in the notice and fixed deposits arena, from 35% to 39%, while savings deposits remained static at 6%.

South African banks liquidity levels were adequate, with liquid assets amounting to 114.7% of the requirement, compared to 118.1% for the previous year.

While on the efficiency level, Kruger said that there was some improvement from 65.8% to 67%.

The issues last year

On the question of corporate governance, in the larger banks in SA, Errol Kruger – the general manager or registrar of the banking supervision department, said that the banks were committed to high levels of corporate governance, but he stressed that vigilance was required to ensure governance.

“The relationship is based on trust, something that has to be earned, and it’s essential that this is maintained.”

In terms of suggestions on board size, Kruger says that a bank’s board should consist of no more than 16 members, with four executive directors, while the majority of non-executive directors should be independent. The timeline to convert the non-independent directors to independents was set at five years.

While on the question of CEO and subsequent appointment to chairman – Kruger says that they recommend a three-year cooling off period, for a CEO to become a chairperson, and there should be some distancing.

“We did this in the case of Capitec Bank recently. This is to maintain objectivity. We are finding more increasingly that chair people are approaching us prior to making a board appointment.”

Amendments to banking legislation included the power given to the registrar to object to a senior management appointment, with appeal process in place. It was also suggested that more than one auditor is appointed and that there should be a rotation of auditors, and not simply a rotation of partners.


In fact the auditors need to report to the registrar in terms of CAR,” says Yvette Singh, “and they have 120 days in which to do that. They also need to report on whether the bank is a going concern and that the internal controls are in place.”

In terms of the financial services charter (FSC) – the department have been observers during the process. Their role is ensuring that banks move along the curve to implement the charter requirements and identifying and managing any risks in the implementation process.


Kruger also explained the ‘tweaking’ in the supervisory approach, from a previous multi-point entry one to a single point of entry, via a relationship team. From an analysis and on-site approach to one where the analysis and on-site becomes one process.
“It was slightly irritating to the banks – having to deal with two teams. Top management and risk management of the bank had to report twice. This was not very clever. There were also opportunities for the banks to arbitrage the department,” says Kruger.

The process flow starts with a quantitative analysis, qualitative analysis, initial opinions, bank review, report to management, and finally feedback to the board.

“On Basle II, there is much to talk about and will be for years,” says Kruger. “Last year the department surveyed the banks to get a sense of which they were going and accordingly adjust the department’s approach.”

“Basle I is not an option for South African banks to adhere to. There is a range of options for the banking sector to select from in the Basle II package.

Kruger says that there will be a greater reliance on the bank’s own assessments of their risk. Many of the international regulators are saying that there is no need to implement the more advanced techniques.

Quote of the day: “The super regulator is a political decision – not a regulatory call. One day the boxes will be packed.”

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