BANKS AMENDMENT BILL, 2003

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BANKS AMENDMENT BILL,2003

• PRESENTATION TO THE PORTFOLIO COMMITTEE ON
  FINANCE
• 31 MARCH 2003
• NKOSANA MASHIYA
• DIRECTOR OF BANKING DEVELOPMENT
• NATIONAL TREASURY

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BANKS AMENDMENT BILL,2003

• OVERVIEW
• 1. Profile of the South African Banking Industry
• 2. Current state of the South African Banking
  Industry
• 3. The Nature of the Regulatory Framework
• 4. The rationale for the current amendments to
  the Banks Act, i.e purpose of the Banks
  Amendment Bill, 2003
• 5. Key Amendments to the Bill
• 6. Conclusion

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PROFILE OF THE SOUTH AFRICANBANKING INDUSTRY

• Financial stability and growth
• Stable banking system compared with most emerging
  markets.
• Banks are well managed and most have
  sophisticated risk-management systems and
  corporate-governance structures in place.
• As at 31 December 2002, the banking system in
  South Africa consisted of 31 registered banks and
  mutual banks, 14 local bank branches of foreign
  banks, and 53 representative offices of foreign
  banks.
• The total assets of the banking sector amounted
  to R1 100.8 billion (134.2 billion) as at 31
  December 2002. The big four banks constituted
  74,2 percent (December 2001 69,3 percent) of the
  total banking sector.

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PROFILE OF THE SOUTH AFRICAN BANKING
INDUSTRY
SOURCE
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PROFILE OF THE SOUTH AFRICAN BANKING INDUSTRY

• Consolidation in local and international banking
  industries
• Throughout the world, the banking industry is
  undergoing a rapid and sometimes startling
  process of consolidation, spurred occasionally by
  hostile take-over bids, but more often by
  friendly mergers between institutions and South
  Africas banking sector has not been immune to
  the consolidation process.
• One direct result flowing from consolidation is a
  more concentrated banking sector. The big four
  banks market share had increased to about 74
  percent of total banking sector assets as at the
  end of 2002 compared to about 69 percent a year
  before.
• High levels of concentration in any banking
  system means less competition and could result in
  higher margins and higher prices for banking
  services.

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PROFILE OF THE SOUTH AFRICANBANKING SECTOR

• A before-tax return equivalent to approximately
  0,8 percent of total assets (2001 1,1 percent)
  were reported for 2002.
• An after-tax return equivalent to approximately
  0,5 percent of total assets (2001 0,8 percent)
  were reported for 2002.
• An after-tax return equivalent to approximately
  5,6 percent were reported on net qualifying
  capital and reserves (2001 9,0 percent).
• The banking system in South Africa is also well
  capitalised.
• As at the end of December 2002, the average
  capital and reserves held by the banking sector
  amounted to R97.8 billion (December 2001 89.7
  billion), R84.4 billion (December 2001 77.6
  billion) of which constituted qualifying capital
  and reserves for purposes of statutory capital
  adequacy.

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PROFILE OF THE SOUTH AFRICAN BANKING SECTOR

• As at of the end of December 2002 , the average
  capital and reserve held by the banking sector
  amounted to R97.8 Million ( December 2001 89.4
  billion ), 84.4 billion (December 2001 77.6
  billion ) of which constitution qualifies capital
  and reserves for purpose of statutory adequacy
  

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PROFILE OF THE SOUTH AFRICANBANKING SECTOR

• The average adequacy ratio for the year ended
  December 2002 was 12,6 percent (2001 11,4
  percent).
• An analysis of the percentage distribution of
  banks in terms of capital adequacy at the end of
  December 2002 reveals that 39,5 percent of
  banking institutions (2001 34,6 percent) had
  capital adequacy rations that exceeded 20
  percent.

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PROFILE OF THE SOUTH AFRICANBANKING SECTOR

• The IMF and the World Bank identified South
  Africa, amongst other countries, to form part of
  the pilot Financial Sector Assessment Program
  (FSAP).
• One of the main objectives of FSAP was to
  evaluate countries level of compliance with
  international standards.
• Basle Core Principle - set by Basel Committee
  on Bank SupervisionAccord for prudential and
  risk- sensitive supervisor

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PROFILE OF THE SOUTH AFRICANBANKING SECTOR

• The assessment indicated South Africa is
  compliant with 22 of the 25 Basel Core Principles
  for Effective Banking Supervision. Since that
  assessment, further work has been done to effect
  full compliance.
• BSD is currently undertaking a detailed study of
  the new Capital Accord to determine the changes
  required to the current banking-supervisory
  process.
• It is expected that a comprehensive project plan
  will be in place by the time the final Accord is
  released.
• On 1 October 2002 the Base Committee on Banking
  Supervision launched the third Quantitative
  Impact Study (QIS 3). South Africa participated
  alongside a number of countries in this study.

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PROFILE OF THE SOUTH AFRICANBANKING SECTOR

• QIS 3 is a comprehensive assessment of the
  proposed capital requirements for the three
  approaches under the New Basel Capital Accord as
  well as the capital charges for operational risk
  and securitisation.

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NATURE OF THE REGULATORY INFRASTRUCTURE

• Background on Regulation
• The Registrar of Banks is responsible for the
  regulation and supervision of banks in SA.
• The Registrar is the Head of the Bank Supervision
  Department (BSD) of the South African Reserve
  Bank (SARB) and applies a risk-based approach to
  supervision.
• A combination of on- and off-site supervision
  characterises the supervision process.
• The off-site component regularly analyses and
  revues monthly returns (from banks), covering a
  comprehensive range of risk information.
• The on-site component does the actual
  verification of the data supplied to the BSD and
  runs an audit to ensure that the banks
  policies are implemented as prescribed by their
  own Board of Directors and as per regulations.

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NATURE OF THE REGULATORY INFRASTRUCTURE

• BSD implemented new regulations with regard to
  consolidated supervision with effect from 1
  January 2001.
• The new regulations provide, amongst others, for
  a standardised approach to the calculation of a
  measure of group capital adequacy.
• The new consolidated-supervision regulations
  incorporate the latest international
  developments.
• These regulations are regarded as being at the
  forefront of worldwide banking supervision
  standards.
• Besides having been received favourably by the
  industry, the regulations have achieved the Bank
  supervision Departments objective of complying
  with the Core Principles for Effective Banking
  Supervision.

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NATURE OF THE REGULATORY INFRASTRUCTURE

• As regulator, the Bank Supervision Department is
  now in a position to assess the financial
  condition of individual banking groups. Banking
  groups will also reap benefits, particularly when
  they wish to expand their international
  operations.
• Consolidated supervision is now applied to all
  South African banking groups, which have to
  ensure that they are adequately capitalised in
  order to sustain both their banking and
  non-banking operations.
• At present, the minimum capital-adequacy ration
  for a banking group is set at 10 percent of risk
  exposure. The entities subject to consolidated
  supervision are the bank controlling company, it
  subsidiaries, joint ventures and companies in
  which the bank controlling company or its
  subsidiaries have a participation.

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NATURE OF THE REGULATORY INFRASTRUCTURE

• As mentioned before, these regulations assists
  with the compliance of the Core Principles for
  Effective Banking Supervision.

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Improving access to financial service

• South Africa faces an enormous challenge in the
  provision of banking services to the majority of
  its population.
• Seventeen million adult South Africans are
  unbanked today (Finmark Trust, 2002).
• Currently only about 40 of the nation's 27
  million adult population, about 10 million, have
  access to transactions and savings products.
• There is a clear need in South Africa to expand
  simple banking services, as a means to improving
  access to financial services to the poor.

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Improving access to financial service

• Difficulties to expanding banking services to the
  low-income population
• High cost of the products relative to their
  utility to the low-income population
• The high fee structure charged by the private
  banks for access to their infrastructure
  effectively sidelines the poor, given their low
  incomes and minimal transaction values.
• Formal banking sector consider uneconomical to
  create infrastructure in rural areas because

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Improving access to financial service

• cash handling and face-to-face service from
  bricks and mortar outlets (Task Group on Standing
  Committee for the Revision of the Banks Act 200.
• lack of convenient access points.
• The current banking infrastructure, composed of
  private bank branches and ATMs, and traditional
  online retailers (e.g. Pick 'n Pay) do not reach
  the rural and township areas where the majority
  of the unbanked reside.

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Improving access to financial service

• Postbank as an affordable, wide-reach solution
• Postbank is the possible low-cost financial
  services provider for the low-income.
• The postbank (through post office network) has
  wide reach and infrastructure that can guarantee
  it comparative cost advantage over the existing
  banking industry.
• We are mindful the post office/post bank,
  insufficient technical banking systems capacity
  and has a relatively small ATM network

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Improving access to financial service

• Largely structured to serve the population in an
  over-the-counter mode.
• Possible operational risk and systemic risk.
• Risks minimised if Postbank undertakes limited
  banking services, deposits (and loans on a small
  scale)
• Deposits invested in liquid assets

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Rationale for the Amendments

• During the public hearings of the Banks Amendment
  Act, 2000 inOctober 2000, the Finance Committee
  of the National Council ofProvinces directed
  that the gender insensitive provisions of the
  BanksAct, be amended in order to reflect the
  constitutional imperative in thisregard.
• The vast majority of the amendments to the
  principal Act, in the present Bill, have,
  therefore, been drafted in order to comply with
  the above-mentioned directive.

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Rationale for the Amendments

• Certain further issues have emerged as a result
  of recent bank failures and the report pertaining
  to the affairs of Regal Treasury Private Bank
  Limited delivered by Adv. J Myburgh SC. These
  issues have also been addressed by means of the
  legislative amendments proposed in the Bill.
• Further amendments proposed in this Bill seek to
  improve the Principal Act to comply with the Core
  principles of the Basel Committee.

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KEY AMENDMENTS TO THE BILL

• The majority of the amendments to the principal
  Act, in the present Bill, have been drafted to
  comply with the directive from the Portfolio
  Committee to correct gender-insensitive provision
  of the Banks Act.
• Clause 40 Appointment of directors chief
  Executive Officer and executive officers of a
  bank of controlling company.
• Gives legal clarification for fiduciary duties
  and responsibilities of directors CE's and
  Managers of Banks.
• Enables Registrar to object to appointment of
  Directors.
• Introduce an objective test for both the duty of
  skill and the duty of care of management.

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KEY AMENDMENTS TO THE BILL

• Modern chief executive officers and managers
  command wide powers.
• Important to extended corporate governance
  measures developed by common law in respect of
  directors, to chief executive officers and
  executive officers of banks ( management").
• The proposed amendment, in contradistinction to
  the existing provisions of the Banks Act, which
  refer to a "fiduciary relationship" only,
  codifies the generally accepted common law
  principles of a fiduciary duty and a duty of care
  and skill owed to the company.
• Proposed amendment also clearly defines the
  parameters of such a duty.

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KEY AMENDMENTS TO THE BILL

• Cause 42 Appointment of more than one auditor
  and the rotation of audit firms
• Enables Registrar to appoint an auditor for the
  bank controlling company as well, (currently can
  appoint only for the bank consistent with
  principle of consolidated supervision)
• Principal Act provides that the Registrar may
  prescribe that a bank with total assets exceeding
  R10 000 000 appoint not less than two auditors.
  This requirement has proved to be somewhat rigid
  and it is proposed to prescribe the amount by
  regulation.
• Aims to ensure the independence of a bank's
  auditor at all times by means of a system of
  compulsory rotation under such conditions as may
  be prescribed by regulation.

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KEY AMENDMENTS TO THE BILL

• Clause 41 and Clause 1(b) Corporate
  Governance
• Requires greater degree of care and skill from
  the directors and executive managers of a bank
  than is normally required in respect of duties
  of directors of other companies.
• Enables Registrar to issue regulations in this
  regard from time to time.
• Certain regulations pertaining to corporate
  governance have already been incorporated in the
  Regulations relating to Banks.
• Creates legal certainty in this regard.

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KEY AMENDMENTS TO THE BILL

• Summary
• Proposed Bill largely corrects gender insensitive
  provisions
• Gives legal clarification for fiduciary duties
  and responsibilities of directors CE's and
  Managers of Banks.
• Introduces a system of compulsory rotation under
  such conditions as may be prescribed by
  regulation.
• Requires greater degree of care and skill from
  the directors and executive managers of a bank
  than is normally required in respect of duties of
  directors of other companies.
• Creates legal clarification in less than clear
  provisions.

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QUESTIONS?