South Africa’s banking system remains sound, the South African Reserve Bank (SARB) said on Tuesday.
The liquidity problems experienced by smaller banks and the eventual erosion of the deposit base of some of the bigger banks in the first half of 2002 were resolved in a satisfactory manner during the past year, the SARB said in its annual economic review on Tuesday.
The activities of two of the larger banks, Saambou Bank Limited and BoE Bank Limited, were merged with those of the big domestic banks. In addition, the reluctance of depositors to place funds with smaller banks caused some of these banks to cancel their banking registrations, while others redesigned their ownership structures and downsized their balance sheets.
The turbulence experienced in the banking sector therefore resulted in a consolidation of activities before a return to stability was achieved, the SARB said.
At the end of June 2003, approximately 83% of total deposits by the public landed in the vaults of the big four banks. These changes have also made it more difficult to start new banks or for small banks to remain in business.
“This could affect the availability of operational capital for new entrepreneurs, which is highly essential for economic development. Small banks are often more willing than bigger banks to finance high-risk ventures because they are more versatile and can more easily target niche markets,” the SARB said.
Banks operating in the country are well capitalised, with an average risk-weighted capital adequacy ratio of 12,4% at the end of June 2003. Moreover, 35 banks holding 98% of total banking assets have capital adequacy ratios exceeding the statutory minimum of 10%.
The liquidity of the banking sector was also generally adequate. The average daily amount of liquid assets held in June 2003 exceeded the minimum requirement by about 20%.
Growth in the total assets of banks moderated appreciably during 2002, but grew rapidly in the first six months of 2003 because of changes in regulatory and accounting practices that require many off-balance sheet items to be included in balance sheets. However, the quality of assets remained high.
Non-performing loans amounted to nearly R25-billion at the end of June 2003, which represented only 2,6% of total loans and advances. The provisions made by banks for non-performing loans were also adequate, the SARB added.
Although household debt to disposable income rose in the first half of 2003, this ratio is still well below the average of the preceding five years. The ratio of corporate debt to profits, which is an indication of the debt-servicing capacity of businesses, increased from 5,4% in the second quarter of 2002 to 6,4% in the second quarter of 2003. This ratio is above the average of the past five years, probably because of a decline in corporate profits as well as an increase in corporate debt.
Banks continue to be managed well. The average efficiency ratio improved in the past year, as did the return on equity and assets. A special independent investigation concerning corporate governance has confirmed that South Africa’s leading banks are committed to high standards of management, the Bank said.
“The banks adhere broadly to international best practice. Certain suggestions were nevertheless made to improve the functioning of banks.
The major deficiency that the investigation encountered was that some of the boards of banks are too big to operate cohesively. It was therefore suggested that the size of boards should preferably be restricted to 16 members and that the number of executive directors should ideally not exceed four,” it said.
Although continued vigilance is required to ensure that banks comply with evolving standards, there are no major concerns in this regard. Banks are well on course to bringing their risk-management systems and data models in line with what could be required for compliance with Basel II in 2007.
This new capital accord is a radical reform of the previous one and will have an impact on banks in areas such as regulatory capital, credit and operational risk management, and data and disclosure requirements.
Banks are positive about complying with the new accord and regard it as a strategic challenge.
The application of the new framework will require the re-engineering of supervision processes and organisational structures. In collaboration with other supervisors, the Bank is developing an implementation strategy for Basel II.
Following international corporate failures, accounting and auditing standards have been revised or are being overhauled. As part of the ongoing endeavours to ensure the quality and transparency of financial reporting, a shift was made during the past year away from historical cost to fair value accounting of financial instruments, i.e. the application of Accounting Statement AC 133.
This led to a substantial increase in the reported total assets of banks. A Ministerial Panel for the Review of the Accounting Professions’ Bill is revising the regulations applicable to auditors and accountants.
Although all these standards are aimed at promoting the integrity of financial markets and institutions and ensuring stability, there is some concern about the management of the transition and the ultimate cost of complying with the increase in legislation that affects banks.
Preparing for Basel II is in itself a considerable task. Combined with the onerous requirements of new anti-money laundering and anti-terrorist funding legislation, corporate governance standards and impending community reinvestment legislation, it increases the risk that banks could lose sight of their main business objectives, said the statement. Non-bank financial institutions may also not escape this burden. South Africa’s recent accession to the Financial Action Task Force (FATF) on money laundering will affect the operations of almost all financial firms.
Another challenge facing the banking sector is to provide broader access to affordable financial services. A large portion of the population still does not have access to banking facilities. The challenge of broadening access to finance has to be addressed with deference to the regulatory objective of achieving a high degree of economic efficiency and consumer protection in the economy. This will require a balance between the introduction of changes to achieve the objective of greater
participation and the maintenance of financial stability.
The financial sector is in the process of developing a financial sector black economic empowerment charter to promote increased black ownership of and access to financial firms. As in the case of the mining charter, the key elements of the financial sector charter are likely to include ownership, career and procurement opportunities, and human resources development.
Moreover, since the attacks on the World Trade Centre on 11 September 2001, the need for multilateral co-ordination to ensure continuity in financial systems has been high on the agenda of the banking sector. The Bank has assisted in the establishment of a Financial Sector Contingency Forum for such contingency planning. A key objective of the forum is to identify crisis events that may threaten the stability of the South African financial sector and to develop appropriate plans,
mechanisms and structures to mitigate such potential threats and manage crisis events, the Bank said. – I-Net Bridge