## _cr1555 ## Source details **Canonical URL:** [_cr1555](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1555.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1555.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1555.pdf.json) --- ### Introduction and overall findings - High level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - Supervisory regime based on strong relationships with bank Boards and senior management and with banks’ internal and external auditors, supported by intensive qualitative and quantitative analysis. - Registrar of Banks and Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) hold banks to very high standards of corporate governance and risk management. - Banking system highly concentrated: more than 90 percent of banking assets controlled by the five largest banks. - SARB, as BCBS member, committed to adoption of BCBS standards and has implemented or is implementing Basel II, 2.5 and Basel III-related standards. - Assessment completed as part of IMF FSAP update in 2014 using the Revised Core Principles Methodology (September 2012); graded against Essential Criteria with four-part grading: compliant; largely compliant; materially noncompliant; noncompliant. ### Institutional structure, legal framework and reform plans - Responsibility for bank regulation and supervision: SARB via the Registrar of Banks and BSD; Banks Act of 1990 (BA) provides main legal framework. - Planned transition to a twin peaks model: - Prudential Authority to be a department within SARB; current BSD staff to become part of Prudential Authority. - Market Conduct Authority to be situated in the FSB. - National Treasury published relevant bill for public consultation; revisions expected. - Remaining legal/regulatory shortcomings noted: - Lack of legally defined objectives for the supervisor in BA and related legislation. - Appointment and removal provisions for the Registrar lack fixed term and publication of removal reasons. - Power to suspend or limit a bank’s registration expeditiously constrained by BA Sections 23, 24 and 26 (30-day notice requirement). - Supervisory tools to address risks from non-banking activities of financial groups need strengthening. - Assessors’ repeated recommendation: amend laws and regulations expeditiously, including enactment of bank resolution legislation. ### Banking sector structure and key statistics (exact figures preserved) - Total financial sector assets: about 298 percent of GDP. - Commercial banks’ assets: slightly more than 112 percent of GDP. - Banks’ share in total financial assets: less than 40 percent of the total. - Close to 95 percent of banking assets is domestic. - Number of banks and foreign bank branches (end-2013): 31. - Five large banks (ABSA Bank, FirstRand Bank, Nedbank, Standard Bank of South Africa, Investec Bank) account for more than 90 percent of total banking assets. - Sector composition (end-2013): 7 locally owned banks, 5 subsidiaries of foreign banks, 14 branches of foreign banks. - Four of the top five banks have 39 subsidiaries in 17 sub-Saharan countries. - Non-performing loans (NPLs): rose to 6 percent in late 2009; average NPL ratio declined to 3.6 percent in 2013. - Regulatory tier one ratio: 13.4 percent in 2013. - Return on equity (ROE) of the four largest banks: close to 20 percent. - SARB systemic risk surcharge: 1 percent applied to the large banks in addition to minimum capital requirements. - Deposit funding share: deposits make up 87.5 percent of bank funding. - Wholesale funding share: about 60 percent of deposits are wholesale funding from non-bank financial institutions and corporations with maturities of six months or less. - Short-term deposits (6 months in maturity) rose to 63.3 percent of total deposits from 60.3 percent in 2008. - Liquid asset to short-term liabilities ratio: around 16 percent. - Average loan-to-deposit ratio: 127 percent. - Household debt: rose to 82.4 percent of disposable income in 2008, declining to 75.2 percent in 2013. - At end 2013, total bank lending to households: 56 percent of bank total loans and advances. - Bank lending to corporate sector: 31 percent of banking sector assets. - Total corporate debt: 62 percent of GDP in 2013, up from 57.6 percent in 2010. - Macroeconomic environment indicators: - Economy contracted by 0.6 percent of GDP in 2014Q1. - Projected growth of 1.4 percent this year, down from 2 percent in 2013. - Pre-crisis high growth: 5.6 percent in 2006. - Unemployment rate: 25 percent. - Inflation: 6 percent. - Fiscal deficits averaging 4 ½ percent of GDP for the past five years led to government debt increasing from 27 percent of GDP to 46 percent in 2014. - Exchange controls: in place for residents but gradually relaxed. ### Supervisory resources, governance and independence (Principles 2 and 3) - BSD staffing and resourcing: - Staff grew from approximately 100 in 2011 to 150 in 2014 (excluding Financial Stability Unit). - Staff breakdown: 54 in supervision, 34 risk specialists, 9 policy/regulation/legal, 7 IT, 17 on-site reviews and AML; Financial Stability Unit ~25 staff separated April 2014. - Frontline analysts manage bank relationships; no more than two smaller banks per frontline analyst; large bank teams may consist of close to 10 staff. - BSD budget more than doubled from 2009/10 FY to 2013/14 FY; SARB benchmarks staff remuneration at 60 percent of private sector comparable levels; turnover rate for BSD was 4.47 percent in 2013. - Legal independence and accountability issues: - BA Section 4 indicates Registrar “shall perform, under the control of the said Bank (SARB) and in accordance with the directions issued by the Bank…”, with no statutory enshrinement of operational independence for the Registrar and BSD. - Appointment/removal of Registrar: Registrar not appointed for a specific term; laws do not define minimum term or specific removal reasons; recommendation to introduce fixed term, specific removal grounds and publication of reasons. - Accountability: BA Section 10 requires annual report to Minister and Parliament transfer but no Parliamentary discussion mandated. - Cooperation frameworks: - MOUs exist with FSB and STRATE; BA Section 4(3) allows Registrar to enter cooperation arrangements with host/ consolidating supervisors; as of end-2013, 25 MOUs in place. ### Supervisory approach, SREP and tools (Principles 8–10) - SREP cycle overview: - Stage 1 “Develop supervisory plan”: annual supervisory plan formulated Oct–Dec, communicated before year start, continuously updated. - Stage 2 “Gather information”: continuous collection from BA returns, audits, meetings, market data, ratings, analyst reports. - Stage 3 “Form a view”: assemble and synthesize information focusing on materiality and risk. - Stage 4 “Focused review”: targeted specialist or on-site reviews by frontline analysts, risk specialists, on-site teams or external experts. - Stage 5 “Review panel”: senior BSD panel including Registrar and Deputy Registrars reviews SREP outputs and may recommend remedial actions and ICR adjustments. - Stage 6 “Feedback to senior management and Board”: conclusions and remedial actions fed back; feedback letter summarizes main points. - Risk rating framework: - Dual rating: sector impact rating (1–5, with 5 most systemically relevant) and risk rating (components 1–5). - Component risk categories include: Balance sheet; Off-balance sheet; Capital adequacy; Profitability; Liquidity risk; Interest rate risk; Market risk; Credit risk; Currency risk; Operational risk; Money laundering and terrorist financing risk; Corporate governance. - Component scale: 1 “strong”; 2 “satisfactory”; 3 “fair (watch category)”; 4 “marginal (some risk of failure)”; 5 “unsatisfactory (high degree of failure evident).” - Composite rating is weighted average; composite rating >3 warrants supervisory attention; rating of 4 and higher regarded as a problem bank. - Supervisory intensity: - Frequency and intensity determined by MIR and Risk Review; five big banks rated sector impact 5 and receive deeper coverage; on-site reviews more frequent for big banks. - Information systems and reporting: - Statutory returns: BA 100, BA 110, BA120, BA 700, BA 300, BA 200/210/220, BA 330, BA 320, BA 600 (consolidated quarterly), BA 610 (branches/subs abroad quarterly). - Validation and analytics: Financial Management System (FMS); Oracle Financial Analyser (OFA); EGIS Papertrail. - Section 91(6) fine power: BA Section 91(6) allows fine not exceeding ZAR1000 for every day of non-submission; Section 91(6A) allows similar fine where information provided is materially incorrect. - Form BA099 certification required by CEO, Chief Accounting Officer, FICA Officer. - Assessment summaries: - Principle 8: Largely Compliant (SREP and risk rating adequate; shortfalls in resolution planning and recovery/resolution tools). - Principle 9: Compliant (mix of on-site and off-site, thematic reviews, specialist teams). - Principle 10: Compliant (strong reporting regime, independent validation, external auditor integration). ### Corrective powers, enforcement and resolution (Principles 11, 12) - Corrective and sanctioning powers: - Legal powers include: BA Section 6(6) directives; Section 60 (oppose appointments); Section 69 (recommend curator); Section 74(2) action for prudential non-compliance; Section 91A fines; Sections 23–26 suspension/cancellation with 30-day notice; Regulation 38(4) individual capital requirements. - Limitations identified: - BA Sections 23, 24 and 26 require minimum 30 days prior notice for suspension of registration or restriction of activities, creating potential delays in severe cases. - Registrar cannot directly impose administrative fines on Board members or senior management (gap vs EC5). - No explicit power to appoint temporary management. - Assessment of Principle 11: Materially non-compliant (due primarily to 30-day prior notice requirement and inability to fine individuals). - Consolidated supervision: - BA Section 4(4), Regulation 36, Section 52, Section 55 provide consolidated supervision framework; Form BA 600 and BA 610 capture group and foreign operations. - Dedicated consolidated supervision analyst assigned for every large banking group; biannual detailed organizational charts required. - Assessment of Principle 12: Compliant (framework adequate but monitoring of non-banking activities and group-wide stress testing should be strengthened). - Recovery and resolution: - Current regime: curator appointed by Minister on Registrar recommendation when bank close to insolvency; curator has broad powers but some powers require Minister approval. - No mandatory recovery plans historically; BSD announced phased introduction of recovery and resolution planning via Guidance Notes. - Authorities committed to reform resolution regime to be compliant with Key Attributes by end 2015; draft Resolution Bill and Financial Sector Regulation Bill work in progress. - Formal systemic protection limited: no depositor protection scheme; SARB provided capital/liquidity injections historically; CLF established to support Basel III LCR from 2015. - Recommendation: enact bank resolution bill expeditiously and develop resolution plans. ### Capital, liquidity, and prudential metrics (Principles 16, 24) - Capital framework: - BA Sections 70 and 70A, Regulation 38 implement minimum capital requirements and phase-in that are more onerous than Basel. - Regulation 38(17)(b)(iv) prescribes minimum leverage ratio of 4 percent. - Regulation 38(8) prescribes base minimum, systemic capital requirements, domestically systemic important banks, conservation buffer, countercyclical buffer, idiosyncratic risk requirement and Board buffer. - Directive 5/2013 prescribes components of capital emphasizing permanence. - Assessment of Principle 16: Compliant. - Liquidity framework: - Cash reserve and liquid asset requirements apply; SARB committed to implementing LCR and NSFR; LCR effective 1 January 2015. - Regulation 26 and Form BA 300/BA 325 provide liquidity reporting; Directive 2/2013 and Guidance Note 6/2013 address LCR and CLF; banks required to meet 60% minimum LCR without CLF when phased-in in 2015. - Market constraints noted: limited supply of government bonds, illiquid/small corporate debt market, disintermediation via money market funds. - Assessment of Principle 24: Compliant. ### Risk management, credit risk, provisioning and market/interest risks (Principles 15, 17, 18, 22, 23) - Risk management: - Regulation 39 specifies risk management processes and 27 types of risk; stress testing required; Guidance Note 3 on risk data aggregation issued in early 2014. - Model validation and IRB approvals require prior Registrar approval; ongoing challenge finding qualified model validation staff. - Assessments: Principle 15 Compliant. - Credit risk and provisioning: - Regulation 23 and Regulation 39 require comprehensive credit risk policies and ICAAP processes; BA 200/210 reporting; Form BA200 monthly, BA210 quarterly. - Classification rule: Regulation 67 defines default as overdue more than 90 days. - Proposed directive: restructured credit exposures to be classified as in default until a minimum of three full consecutive payments under revised terms have been received. - Assessment of Principle 18: Compliant. - Market risk: - Internal VaR and Stressed VaR limits reported daily/monthly via BA 325 and BA 320; IMA banks submit market risk limits and stress test results. - Assessment of Principle 22: Compliant. - Interest rate risk in the banking book (IRRBB): - Regulation 39 and BA 330 reporting; BSD applies 200bp parallel shift shock and encourages banks’ own scenarios. - Assessment of Principle 23: Compliant. ### Internal controls, external audit, disclosure and AML/CFT (Principles 26, 27, 28, 29) - Internal control and internal audit: - BA Sections 60A, 60B, 64, Regulations 48 and 49 require independent internal audit and compliance functions; BSD conducts annual meetings and reviews. - Assessment of Principle 26: Compliant. - External audit and reporting: - Regulation 46 requires external auditor report to the Registrar within 120 days of financial year-end on significant weaknesses in internal controls relating to loans, investments and management of portfolios. - Regulation 46(9) requires preliminary discussions between auditors and BSD; trilateral meetings occur annually. - Rotations and appointment powers: Companies Act and BA Sections 61–63 apply; SARB may refuse or appoint auditors. - Assessment of Principle 27: Compliant. - Disclosure and transparency: - Regulation 43 requires Pillar 3 disclosures and IFRS-based financial statements; Registrar fully implemented Pillar 3 requirements. - Pillar 3 disclosures not currently audited; BSD reviews sporadically. - Assessment of Principle 28: Largely Compliant. - AML/CFT framework and supervisory practice: - FICA and Money Laundering and Terrorist Financing Control Regulations provide obligations; FICA assigns SARB/BSD supervisory roles under Schedule 2 and Sections 42–45. - BSD established a specialized AML/CFT team in 2011/2012; on-site AML/CFT inspections conducted (large banks: ~10 staff, 6–8 weeks; small banks: ~5 staff, ~3 weeks). - BSD has imposed administrative fines on large banks for FICA failures (April 2014). - Weakness: FIC Guidance Notes (including Guidance Note 3) contain essential requirements and the risk-based approach but Guidance Notes lack direct legal enforceability under FICA; BSD applies them via BA supervisory powers though enforceability not formally tested. - Court ruling (2014 Constitutional Court) suspended power for warrantless non-routine inspections 18 months after ruling; amendments to FICA are being prepared. - Assessment of Principle 29: Largely Compliant. - Recommendations: revise FICA to incorporate and make enforceable the risk-based approach elements in Guidance Notes; complete on-site inspections covering all banks. ### Selected consolidated recommendations (as stated in source) - Principle 1: - Define objectives of the supervisor in the legal framework. - Review delegation of powers in the Banks Act to transfer granular requirements from tier 2 rules (regulations) to tier 3 rules (circulars, directives). - Review Standing Committee composition to avoid current industry representation. - Principle 2: - Revise legal framework to include (A) a fixed term of appointment for the head of supervisor, (B) specific reasons for removal, and (C) requirement to publish reasons for removal. - Limit Minister’s involvement to absolutely necessary cases and clarify objectives for intervention. - Review adequacy of resources reflecting twin peaks transition. - Principle 3: - Review BA provisions to ensure confidential information used only for supervisory purposes unless court-ordered or required by law. - Principle 8 / 11: - Enact resolution legislation expeditiously to provide supervisor powers for resolution and to enable development of resolution plans. - Strengthen laws to provide Registrar power to suspend or limit a bank’s activities without delay and to fine individuals where warranted. - Principle 9 / 12: - Continue to enhance deep-dive on-site review capability and tools to assess spill-over risks from non-banking activities; strengthen group-wide stress testing and recovery/resolution planning for large groups. - Principle 13: - Enhance cooperation with African host supervisors; support capacity building; finalize policies for cross-border on-site reviews and cross-border recovery/resolution planning. - Principle 18 & 20: - Finalize Directive on restructured credit exposures promptly; amend regulations to give Registrar ability to set limits on exposures to any related parties. - Principle 23 & 28: - Further strengthen review of banks’ internal IRRBB measurement systems. - Assign consistent responsibility for Pillar 3 disclosure review or require external auditors to review Pillar 3 reports. - Principle 29: - Proceed with planned revision of FICA to incorporate risk-based approach and ensure enforceability of Guidance Note elements. - Continue AML/CFT on-site inspections to cover all banks expeditiously and improve techniques based on lessons learned. *Source: _cr1555 - INTRODUCTION and IMF staff assessment excerpts contained in the supplied PDF content unit.* ### INTRODUCTION __________________________________________________________________________________ 5 ### _cr1555 - INTRODUCTION ### Introduction - South Africa has a high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - The 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. - 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; under a risk-based system, supervisory focus and resources naturally center more on the largest institutions. - The SARB, as a member of the Basel Committee on Banking Supervision (BCBS), is committed to adoption of international standards and sound practices promulgated by the BCBS and 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 commended for ongoing commitment to high supervisory standards and for encouraging/supporting supervisory counterparts in neighboring countries to implement key standards to ensure adequate oversight of South African banks’ cross-border operations. ### Developments since the 2010 assessment - The BSD has made several significant improvements to its supervisory framework since 2010: - Supervisory staff increased by almost 50 percent. - The department now includes a corps of risk specialists to complement analysis teams. - Added on-site inspectors enabling more direct interaction with banks and reduced reliance on external auditors. - Several shortcomings in bank regulations have been addressed since 2010. - Cooperation with relevant domestic and foreign supervisors has been strengthened. - Remaining areas warranting improvement in legal and regulatory frameworks and powers include: - 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. - Supervisory techniques to address risks stemming from the non-banking activities of a financial group. - BSD has generally worked around these weaknesses, but amendments to laws and regulations should be made as soon as possible. - The SARB anticipates laws and regulations will be further strengthened in the next round of amendments expected to take place as part of restructuring the financial regulatory system in South Africa. ### Transition to a twin peaks structure - In 2011, the National Treasury announced intention to adopt the twin peaks model of financial regulation. - The new Prudential Authority will be a department within the SARB; 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). - Potential benefits: - Contribute to safeguarding banking system stability given banks’ substantial involvement in insurance and other financial activities as groups. - Key caution: - The new prudential supervisor needs to establish an appropriate framework and improve tools to supervise diversified entities without undermining the current high quality oversight of banks. ### Background information and methodology - This assessment of implementation of the Basel Core Principles (BCPs) in South Africa was completed as part of a Financial Sector Assessment Program (FSAP) update undertaken by the International Monetary Fund (IMF) during 2014. - The assessment reflects the regulatory and supervisory framework in place as of the date of completion of the assessment. - 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 (covered by other FSAP assessments). - The South African authorities agreed to be assessed according to the Revised Core Principles Methodology issued by the BCBS in September 2012. - The revised methodology is significantly different from the previous 2010 assessment and raises the bar by focusing more on risk management and supervisory practice. - This assessment should not be compared to the previous 2010 assessment. - The authorities chose to be assessed against both the Essential and Additional Criteria but rated against only the Essential Criteria. - The BCP Methodology uses essential and additional assessment criteria for each principle. - Only the essential criteria (EC) are used to gauge full compliance with a Core Principle (CP). - The additional criteria (AC) are recommended best practices; the authorities agreed to be assessed but not rated on AC. - A four-part grading system was used: compliant; largely compliant; materially noncompliant; and noncompliant. - The assessment of compliance with each CP is qualitative and assesses effective application of relevant laws and regulations. ### Box: The 2012 Revised Core Principles (summary) - Motivations and focus: - Reflect market and regulatory developments since the last revision, incorporating lessons from the 2008/2009 financial crisis, FSAP experiences, and recommendations from the G-20 and Financial Stability Board. - Increased emphasis on: (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 microprudential supervision to identify, analyze and pre-emptively address systemic risk; (iii) effective crisis preparation and management, recovery and resolution measures; and (iv) fostering robust market discipline through corporate governance, disclosure and transparency. - Supervisory expectations: - Supervisors are required to assess banks’ risk profiles both in terms of risks they run and the risks they pose to the banking and financial systems. - Supervisors must consider macroeconomic environment, business trends, and buildup/concentration of risk inside and outside the banking sector. - Heightened focus on actual use of supervisory powers in a forward-looking approach through early intervention. - Structural changes in the BCPs: - Number of principles increased from 25 to 29. - Number of essential criteria expanded from 196 to 231 (including 35 new essential criteria). - For countries choosing to be assessed against additional criteria, there are 16 additional criteria. - Proportionality: - The methodology reinforces proportionality in expectations on supervisors and standards imposed on banks, allowing assessments commensurate with the risk profile and systemic importance of banks. ### Assessment process and context - The assessors reviewed laws, rules, and materials provided and held extensive meetings with SARB BSD officials, National Treasury, auditing firms, and banking sector participants. - Authorities provided a self-assessment of the CPs, responses to additional questionnaires, and access to supervisory documents, files, staff and systems. - The assessors appreciated cooperation from authorities, noting staff were burdened by initiatives related to global regulatory changes and reforms in financial sector oversight. - The assessment evaluated standards in the context of South Africa’s financial system structure and complexity, applying the concept of proportionality. - The assessment is not an exact science; judgments were required, but adherence to a common methodology provides an internationally consistent measure of the quality of banking supervision relative to the BCPs. ### Compliance grading categories (definitions) - Compliant: all ECs are met without significant deficiencies; principle achieved by other means is acceptable. - Largely compliant: only minor shortcomings that do not raise serious concerns about ability to achieve the objective; clear intent to achieve full compliance within a prescribed period. - Materially noncompliant: severe shortcomings despite formal rules and procedures; evidence that supervision has not been effective or practical implementation is weak. - Noncompliant: not substantially implemented; several ECs not complied with; supervision manifestly ineffective. - Non-applicable: criteria do not relate to the country’s circumstances. *Source: _cr1555 - INTRODUCTION (IMF assessment document).* ### 16. The responsibility for the regulation and supervision of banks lies with the SARB. As ### The responsibility for the regulation and supervision of banks lies with the SARB. As ### Regulatory framework and supervisory authorities - The South African Reserve Bank (SARB) is responsible for the regulation and supervision of banks as provided by the Banks Act of 1990 (BA). - Authority is exercised through the Registrar of Banks and the Office for Banks (BSD), which falls under the Registrar’s direction. - Some powers formally rest with the Minister of Finance, such as issuing regulations and formally making important supervisory actions. - The BSD, as an internal department of the SARB, follows central bank organizational governance rules applicable to the SARB. - The Banks Act provides a comprehensive legal framework for banking regulation and supervision. - The SARB and BSD are also responsible for the regulation and supervision of mutual banks as provided by the Mutual Banks Act of 1993. - The National Credit Regulator (NCR), reporting to the Minister of Trade & Industry, has regulatory power over lending activity for consumer protection. - The Financial Intelligence Center (FIC) acts as the country’s Financial Intelligence Unit (FIU). - The Financial Services Board (FSB) has broad regulatory authority over other financial activities, including: - Regulates and supervises insurance companies (some insurance lending activities also fall under the NCR). - Supervises fund managers and exchanges; supervisory responsibility for market intermediaries is divided between the FSB and the Johannesburg Stock Exchange (JSE). - Does not supervise issuers: issuer supervision is undertaken by the JSE for listed companies and by the Department of Trade and Industry (DTI) for unlisted companies. - Regulates the JSE (including SAFCOM), Strate Limited, and pension funds. ### International standards and capital/liquidity implementation - The regulatory framework follows international standards; implementation of Basel III has started since 2013. - BSD emphasizes adoption of international standards established by the BCBS, Financial Stability Board, and International Accounting Standard Board (IASB). - South Africa was among 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. - An additional capital requirement of one percent is required for all banks. - Authorities intend to introduce the Liquidity coverage ratio (LCR) and the Net stable funding ratio (NSFR) according to the internationally-agreed timeframe. ### Twin Peaks reform and institutional reorganization - The regulatory and supervisory framework is expected to transform through adoption of the Twin Peaks structure: - 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, called the Prudential Authority. - 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 statutory entity to be situated in the FSB, called the Market Conduct Authority. - The National Treasury published the relevant bill for public consultation early this year; revisions are expected. - Amendments to acts regulating financial industries, such as the Banks Act, are expected following completion of the reorganization. ### Banking sector structure and key statistics - Total financial sector assets are about 298 percent of GDP. - Commercial banks’ assets are slightly more than 112 percent of GDP. - Banks’ share in total financial assets has declined and currently comprises less than 40 percent of the total. - Close to 95 percent of banking assets is domestic. - The banking sector comprises 31 banks and foreign bank branches (end-2013). - Five large banks—ABSA Bank, FirstRand Bank, Nedbank, Standard Bank of South Africa, and Investec Bank—account for more than 90 percent of total banking assets. - Four of the five provide full-scale nationwide banking; Investec focuses on corporate and private banking. - Sector composition (end-2013): 7 locally owned banks, 5 subsidiaries of foreign banks, and 14 branches of foreign banks. - Four of the top five banks have 39 subsidiaries in 17 sub-Saharan countries. ### Concentration, cross-border linkages, and affiliations - 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 U.K. holding company overseeing non-African operations. - Major banks are affiliated with insurance companies and some own asset management companies offering unit trusts. - Bank-affiliated insurance companies underwrite a substantial proportion of private pension fund assets. - Standard Bank and Barclays Africa Group have led expansion into other Sub-Saharan African countries. ### Soundness, profitability, and capital buffers - Non-performing loans (NPLs) rose from 2 percent of total loans at the onset of the crisis to 6 percent in late 2009; average NPL ratio declined to 3.6 percent in 2013. - Regulatory tier one ratio was 13.4 percent in 2013. - Return on equity (ROE) of the four largest banks is close to 20 percent. - SARB applies a 1 percent systemic risk surcharge to the large banks in addition to minimum capital requirements. - South African banks have accumulated a sizable net foreign asset position with no evidence of large-scale unreported borrowing from abroad. ### Funding structure and liquidity metrics - Deposits make up 87.5 percent of bank funding. - About 60 percent of deposits are wholesale funding from non-bank financial institutions and corporations with maturities of six months or less. - Short-term deposits (6 months in maturity) rose to 63.3 percent of total deposits from 60.3 percent in 2008. - Liquid asset to short-term liabilities ratio is around 16 percent. - Average loan-to-deposit ratio is 127 percent. ### Macro environment and risks - The economy contracted by 0.6 percent of GDP in 2014Q1. - Projected growth of 1.4 percent this year, down from 2 percent in 2013. - Pre-crisis high growth was 5.6 percent in 2006. - Unemployment rate rose to 25 percent. - Inflation remained at 6 percent. - Fiscal deficits averaging 4 ½ percent of GDP for the past five years led to government debt increasing from 27 percent of GDP to 46 percent in 2014. - An international rating agency recently downgraded the sovereign foreign and local currency ratings. - Exchange controls on capital transactions by residents are in place but have been gradually relaxed. ### Household and corporate indebtedness - Household debt rose to 82.4 percent of disposable income in 2008, declining to 75.2 percent in 2013. - 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. - Total corporate debt was 62 percent of GDP in 2013, up from 57.6 percent in 2010; increase mainly from external borrowing by public sector corporations which doubled their external debt between 2010 and 2012. ### Financial stability oversight, crisis management, and systemic protection - SARB’s financial stability mandate was added by the Minister of Finance in 2010. - SARB established the Financial Stability Committee and separated the Financial Stability Department from BSD. - SARB’s macroprudential tasks include: assessing system-wide risks; sharing risk assessment with other agencies/the public; contributing to development of macroprudential instruments and policies; and implementing discretionary policy actions to mitigate risks. - SARB publishes Financial Stability Review twice a year. - Under Twin Peaks, a Financial Stability Oversight Committee (FSOC), chaired by the SARB Governor, will be created; it includes the Prudential Authority and the Market Conduct Authority as members and a National Treasury representative as an observer. FSOC will monitor and assess systemic risks and play a central role in crisis management and resolution. - Current bank resolution regime: - Powers assigned to a curator appointed by the Minister based on the Registrar’s recommendation when a bank is close to insolvency. - Curator has broad powers to take control of the bank and its assets; some powers require Ministerial approval. - Regime lacks critical features necessary to deal with systemic cases and to minimize risks to public funds. - Existing legal framework does not require mandatory recovery plans for banks. - BSD announced phased introduction of recovery and resolution planning via Guidance Notes. - Authorities committed to reforming the resolution regime to be compliant with the Key Attributes of Effective Resolution by end 2015. - Formal systemic protection is limited: - No depositor protection scheme or framework for systemic liquidity provision exists formally. - In past bank failures, capital and liquidity injections were made mostly by the SARB. - Authorities have considered introducing a deposit insurance scheme but no decision has been made. - SARB set up a committed liquidity facility (CLF) to support banks to meet the Basel III LCR requirement from 2015; CLF does not prevent SARB from providing emergency liquidity assistance on different terms. - No formal legal framework for crisis management; Financial Sector Contingency Forum established (chaired by a Deputy Governor of SARB with members from National Treasury, SARB, and FSB) to coordinate contingency planning. ### Legal, accounting, and auditing infrastructures - South Africa has a well-developed system of laws including an updated Companies Act addressing bankruptcy/insolvency. - King Report III sets corporate governance best practice for companies listed on the main board of the JSE. - Consumer protection is addressed in the Consumer Protection Act and supplemented by the National Credit Act (NCA). - Companies Act Regulations permit use of IFRS, IFRS for SMEs, or South African GAAP in specific instances. - Accounting and auditing: - South Africa has implemented International Financial Reporting Standards (IFRS) and International Standards on Auditing since 2005. - JSE required listed companies to use IFRS since January 1, 2005. - Financial Reporting Standards Council (FRSC), formed in 2011, advises the Minister of Trade and Industry on financial reporting standards. - Independent Regulatory Board for Auditors (IRBA) oversees registered auditors. - South African Institute of Chartered Accountants (SAICA) has more than 36,000 members and participates in international accounting bodies including the trustees of the IFRS Foundation and the IASB. - Auditing and Assurance Standards Board (AASB), which includes SAICA and other business bodies, ensures consistency between South African auditing pronouncements and IAASB standards. - The Consultative Advisory Group advises the IAASB on technical issues and includes representatives from SARB, FSB, JSE, Strate, and Institute of Internal Auditors. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 33. South Africa also has a developed financial infrastructure, including a stock exchange, ### _cr1555 - 33. South Africa also has a developed financial infrastructure, including a stock exchange, ### Financial infrastructure overview - 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 — Principle 1: Responsibilities, objectives and powers - Assessment summary: Largely Compliant. - Legal framework and registration powers: - The Banks Act of 1990 (BA) Section 3 establishes “the Office for Banks” as part of the Reserve Bank and designates a Registrar of Banks, giving the South African Reserve Bank (SARB) Bank Supervision Department (BSD) and the Registrar powers for registration and related matters. - BA lists Registrar powers including registration of banks and supervisory review processes (on- and off-site supervision). - The BA and other legislation do not provide the objectives of the BSD or the Registrar; instead the BSD’s annual report describes its mission as “to promote the soundness of banking system and to contribute to financial stability.” - Prudential framework and supervisory instruments: - BA Chapter VI provides 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 failing to comply with quantitative requirements, including imposing administrative fines. - BA Chapter V sets out organizational requirements such as on corporate governance. - The Finance Minister can issue regulations under the BA; “Regulations relating to Banks” contain reporting requirements (BA returns) and qualitative requirements on corporate governance and internal control. Regulations are generally drafted by the BSD with consultation with the National Treasury. - Registrar can issue circulars and guidance notes (not laws) and, under BA Section 6(6), may issue directives that are directly enforceable. - Regulation 38 (4) gives the Registrar power to increase prudential requirements for a bank, including to maintain additional capital, deduct amounts from the eligible capital, strengthen risk management and other bank policies. - Legislative update and consultation processes: - The BA (promulgated in 1990) has been updated 8 times to make it compliant with Basel II and III and to ratify issues detected during previous BCP assessments. - Standing Committee for the Revision of the Banks Act (BA Section 92) is chaired by a SARB Deputy Governor and includes members representing the Banking Association of South Africa, National Treasury, the BSD and other SARB representatives. First draft prepared by BSD; Standing Committee approval followed by public comment; final approval leads to Minister and Cabinet permission for Bill submission to Parliament. - Standing Committee members are appointed for the term of 3 to 4 years when a need arises; at time of assessment, no member was appointed. - Regulations follow the same route through the Standing Committee and public comment; circulars and guidance notes require no consultation; directives require consultation with relevant banks. - Scope of supervisory access and consolidated supervision: - BA Section 6(3) provides the Registrar power to have discussions with CEOs, executive officers or staff members and BA Section 7(1) power to direct a bank to supply any information required. - BA Section 1(1) defines “banking groups” to include natural and judicial persons associated with and connected to a bank irrespective of domicile; Regulations 36, 37 prescribe consolidated reporting requirements. - Foreign bank subsidiaries are treated as domestically incorporated banks; foreign bank branches are subject to the same regulation and supervision as domestically-incorporated banks (BA section 18A). - Powers for corrective actions, sanctions and resolution: - BA Section 6(6) (recently added) allows the Registrar to issue bank-specific directives after consultation. - BA Section 74 permits measures when a bank fails to comply with quantitative prudential requirements without consultation. - BA Section 91A provides power to impose a monetary penalty not exceeding 10 million ZAR for every day during which contravention or non-compliance with the Act continues. - BA Section 26 provides Registrar power to restrict activities of a bank; a 30-day notice period is required; alternatively supervisor can apply to a court to cancel or suspend registration. - BA Section 69 provides for recommendation to the Minister for curatorship where a bank is or will be unable to repay depositors; curator appointed by the Minister. - Powers over parent and affiliated entities: - BA Section 4(4) requires the supervisory review process to cover “a bank or controlling company and its respective branches, subsidiaries, joint ventures or related entities, within or outside the Republic.” BA Section 6(3) and Section 7 powers extend to controlling companies and subsidiaries to enable consolidated supervision. - Assessors’ comments and recommendations (Principle 1): - Shortcoming: lack of legally defined objectives of the supervisor in the BA and related legislation. Authorities plan to address via expected twin peaks reform. - Recommendations: - Review extent of delegation of powers in the Banks Act to transfer granular requirements from tier 2 rules (regulations) to tier 3 rules (circulars, directives) to increase flexibility (e.g., templates, reporting forms, technical regulatory details). - Review composition of the Standing Committee for the Revision of the Banks Act to require members not currently involved in regulated entities or bodies representing regulated entities; consider retired industry officials or academics as technical experts. ### Detailed assessment — Principle 2: Independence, accountability, resourcing and legal protection - Assessment summary: Largely Compliant. - Operational independence and governance: - BA Section 3 establishes BSD as part of SARB; BA Section 4 provides 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.” No legally stipulated operational independence of the Registrar and the BSD per se; some supervisory actions require the Minister’s decision. - The Constitution of the Republic of South Africa prescribes SARB independence, interpreted to cover BSD activities; SARB must consult regularly with the Cabinet member responsible for national financial matters. - SARB Board approves budget and corporate governance; Board includes government and industry representatives but is not involved in regulatory and supervisory work of BSD. SARBA Section 4 (4) prohibits directors and employees of banks and controlling companies from becoming SARB Board members. - Appointment and removal of Registrar: - BA Section 4 (2) requires the Reserve Bank, subject to Minister approval, to designate an officer or employee as Registrar. The Registrar is not appointed for a specific term; laws do not define a minimum term nor specific reasons for removal; removal subject to general employment laws and SARB employment contracts. No requirement to publish reasons for removal. - Governor and Deputy Governors have five-year terms under SARBA, though reasons for dismissal are not specified in law. - Accountability and transparency: - BA Section 10 requires the Registrar to submit an annual report to the Minister, which is transferred to Parliament; no Parliamentary discussion follows. The annual report describes BSD vision and mission, Registrar’s review, banking sector developments and BSD activities. - Internal governance and decision-making processes: - BSD is managed by a Registrar’s Committee and a management committee (ManCo) chaired by the Registrar. Delegation of powers is permitted by a legal services document approved by the Governor’s Executive Committee. BSD subject to SARB risk management and internal audit. - Staff professionalism, conflicts and confidentiality: - All SARB staff subject to a Code of Conduct and staff policies; BSD has its own Code of Conduct. Confidentiality of information is set out in SARBA Section 33. - Banks and external auditors regard BSD highly for professionalism and integrity; some senior staff expected to leave in near future. - Resources, staffing and remuneration: - BSD budget forms part of SARB budget; SARB is self-financed via central banking revenues. BSD’s budget not supported by levy on supervised entities, though registration fees are charged. - BSD staff number grew from approximately 100 in 2011 to 150 in 2014 (excluding the Financial Stability Unit). Staff breakdown: 54 in supervision, 34 risk specialists, 9 policy/regulation/legal, 7 in IT, 17 for on-site reviews and AML. Financial Stability Unit ~25 staff separated from BSD in April 2014. - Frontline analysts manage relationships; no more than two banks allocated to one frontline analyst for smaller banks; large bank teams may consist of close to 10 staff including managers and senior managers. Risk specialists validate and review internal risk models and conduct on-site reviews. On-site and AML teams focus on deep-dive reviews mostly on credit risk to date. - SARB benchmarks staff remuneration at 60 percent of the salary level of comparable private sector employees, excluding other benefits. Turnover rate for the BSD was 4.47 percent in 2013. - Cooling-off periods required for senior staff (Registrar and Deputy Registrars). Two expert career-paths (bank analyst and risk analyst) implemented from April 2014. - BSD budget more than doubled from 2009/10 FY to 2013/14 FY. Department moved from a paper-based system in 2012 with adequate budgetary support. - Training emphasizes On-the-Job and in-house peer-to-peer training; active participation in international work, particularly BCBS subgroups. - Resource planning and allocation: - Annual budget cycle requires BSD senior management to consider resource and skill gaps for budget requests; BSD submits strategy document describing necessary resourcing. Medium-term assessments conducted periodically (e.g., 2011 assessment concluded need to increase risk specialists and AML/On-site resources). BSD engaging in longer-term resourcing assessment as part of transition to Twin Peaks framework. - Annual supervisory plan established for each bank taking into account risk profile and systemic relevance; specialist resources allocated based on supervisory need and supervisory plan is continuously revised. - Legal protection: - BA Section 88 stipulates no liability attached to SARB, Board members, Registrar, officers and employees for loss or damage resulting from their performance in good faith under the BA. SARB employment contracts cover litigation costs arising from work-related conduct. - Assessors’ comments and recommendations (Principle 2): - BSD has appropriate level of resources and specialist skills though some staff need more experience; legal protection adequate. - Framework lacks statutory enshrinement of operational independence and needs enhancement for full compliance, especially appointment/removal of the Registrar. Recommended legal revisions to include (A) a fixed term of appointment, (B) specific reasons for removal, and (C) requirement to publish reasons for removal as required in EC2. - Recommend review of legislation to limit Minister’s involvement to absolutely necessary cases and clarify objectives for intervention, including clarifying the concept of a “prudential veto” preventing the Minister from overriding supervisor recommendations on prudential grounds. - Authorities should review adequacy of resources reflecting expected changes under the twin peaks structure and recommended supervisory approach improvements in CP 8, 9 and 12. ### Detailed assessment — Principle 3: Cooperation and collaboration - Assessment summary: Compliant. - Domestic cooperation: - MOUs exist between BSD and the Financial Services Board (FSB) and STRATE, including arrangements for exchange of information and mutual assistance. - Quarterly meetings with the FSB discuss issues related to large banks and insurance firms; meetings with National Treasury and National Credit Regulator (NCR) occur as needed. Frequent informal technical contacts exist. - Close cooperation between BSD and the Financial Stability Department of SARB; the latter separated from BSD in April 2014. - International cooperation: - BA Section 4(3) allows Registrar to enter into written cooperation arrangements with host or consolidating supervisors. As of end-2013, 25 MOUs were in place and others under negotiation for jurisdictions where South African banks operate or originate. - MOUs provide frameworks for information exchange, confidentiality, supervisory meetings, on-site visits to foreign operations, and crisis management. - Since 2009 BSD policy permits acquisition or establishment of local (inward) and cross-border banking operations only where an MOU with the cross-border banking supervisor has been concluded. - SADC Protocol on Finance and Investment (PFI) provides regional cooperation and coordination framework; SADC member countries listed. - Confidentiality and information sharing: - SARBA Section 33 provides that all information gathered by SARB is confidential and may not be shared with third parties except for the Minister and Director General of National Treasury. - BA Section 89 permits Registrar to share information with persons who have functions by laws in South Africa or with foreign supervisors provided recipient authorities can keep information confidential. MOUs include confidentiality clauses and require prior written consent before disclosure. - MOUs reviewed by assessors include provisions that information provided shall be used only for lawful supervisory purposes and remain confidential; supervisors must notify counterparts if required to release information and obtain prior written consent before acting on received information. - Assessors note legal framework provides reasonable assurance of protecting confidentiality but recommend reviewing BA provisions to ensure confidential information shall only be used for supervisory purposes unless specifically required by court order or other laws. - Support for recovery and resolution: - Registrar and BSD are the resolution authority for banks; on-going supervision expected to support recovery and resolution planning and actions (see CP 9). - Assessors’ comments (Principle 3): - Legal provisions and operational frameworks for cooperation domestically and internationally are in place. - Recommendation to review relevant provisions of the BA to ensure confidential information is used only for supervisory purposes unless court-ordered or required by other laws. ### Detailed assessment — Principle 4: Permissible activities - EC1 — Definition of “bank”: - BA Section 11 stipulates “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 defined in BA 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 given in the same subsection. - EC2 — Permissible activities: - BA Section 1(1) covers activities such as accepting deposits from the general public, soliciting or advertising for deposits, and lending or investing those funds accepted as deposits. - 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. BSD policy requires non-banking business to be conducted by a controlling company as its subsidiary rather than directly by a bank; this is enforced as a condition for registration. - EC3 — Use of the word “bank”: - BA Section 22 (5) prohibits the use of a name or description including 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 — Deposit-taking reserved: - 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. *International Monetary Fund — detailed assessment excerpt from the South Africa country supervisory assessment (document content as provided).* ### Section 2, which includes public institutions governed by separate acts and guaranteed by ### Section 2, which includes public institutions governed by separate acts and guaranteed by ### Scope and regulatory context - Public institutions governed by separate acts and guaranteed by Government include the Land Bank, the Development Bank of Southern Africa, and the Public Investment Cooperation Limited; mutual banks are covered by the Mutual Bank Act and supervised by the Registrar. - Other entities and activities can be exempted from “the business of banks” by designation by the Minister by notice in the Gazette. - Except for mutual banks, these entities in practice do not collect retail deposits from the public. - A list of all registered banks (including foreign bank branches and representative offices) is published in the annual report issued by the Registrar, is available on SARB’s website and is updated whenever changes occur. *Assessment of Principle 4: Compliant* - Comment: 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 framework and practice - The licensing authority has power to set criteria and reject applications; licensing assesses ownership structure and governance (including fitness and propriety of Board members and senior management), 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, prior consent of its home supervisor is obtained. Description and findings (EC1–EC11) - Licensing process (two-step, Registrar has power for both steps): - Authorization to establish a bank: BA Section 12 (1). - Granting/refusing authorization or granting subject to conditions: BA Section 13. - Registration as a bank after authorization: Section 16; grant/refuse registration: Section 17; Registrar can attach conditions to registration: Section 18. - Revocation of authorization if application based on false or misleading information or a bank cannot be formed within 12 months: Section 14. - Revocation/cancellation/suspension of registration: - If the bank has not started any business as a bank in the first six months after the registration, the Registrar can cancel or suspend the registration with the consent of the Governor and after consultation with the Minister. - If registration/authorization was gained based on untrue or misleading information, the bank’s foreign parent bank’s license is revoked by the home authority, or the bank failed to comply with conditions prescribed by the Registrar, the Registrar can cancel or suspend the registration after consultation with the Minister. - If the bank ceased to conduct the business of a bank or is no longer in operation, the Registrar can cancel the registration after consultation with the Minister. (Section 23) - Registrar can apply to a court for an order of cancelling or suspending the registration if grounds exist other than those described above. (Section 25) - In practice: only a handful of foreign bank branches registered in recent years; no domestically incorporated bank registered for more than 10 years. - EC2 licensing criteria (BA Section 13 (2) and Section 17; Regulations 52, 53): - Qualitative criteria for authorization include: - The establishment of the bank will be in the public interest; - The bank will be successfully established; - The bank’s business will be conducted in a prudent manner; - Proposed directors and executive officers are fit and proper persons; - The proposed executive officers have sufficient managerial experiences; - The proposed composition of the board of directors will be appropriate. - Additional registration criteria include not proposing undesirable methods of conducting business and memorandum of incorporation consistent with BA. - Foreign bank branch additional criteria (Regulation on Conditions for branch): - Parent institution’s total assets must be at least USD 1 billion; - Parent bank needs a long-term investment grade credit rating by an internationally recognized rating agency. - Registrar may revoke authorization/registration when based on false or misleading information. - EC3: Criteria for issuing licenses are consistent with ongoing supervision. - EC4: Licensing authority determines that legal, managerial, operational and ownership structures will not hinder effective supervision; Form BA 002 requires detailed corporate governance, risk management, internal controls, and group schematic; foreign parent must provide organizational structure and comfort letter confirming adherence to BCPs and consolidated supervision standards. - EC5: Licensing authority identifies and determines suitability of major shareholders and UBOs: - Regulations (Form BA125) require information on shareholders owning more than 1 percent of total shares; written confirmation by a public accountant when designated share capital is held in a trust account. - For foreign bank branch, parent bank comfort letter undertakes to safeguard financial soundness and stability of the branch. - EC6: Minimum initial capital amount: - BA Section 70 prescribes minimum share capital and unimpaired reserve funds currently ZAR 250 million. - EC7: Fit and proper assessment of Board members and senior management: - BA Section 13 (2) criteria include fit and proper, sufficient managerial experience, appropriate board composition. - Prospective directors and executive officers submit Form BA 020 statements certifying past criminal, regulatory, and financial records; for new banks these statements must be confirmed by an external auditor. - Regulation 40 provides guidelines on Board conduct and required competence. - EC8: Review of strategic and operating plans, corporate governance, risk management, internal controls, AML/CFT detection and prevention, oversight of outsourced functions: - Form BA 002 requires outline of proposed strategic and operating plans (short, medium, long term) including detailed information on governance, risk management, internal controls, AML/CFT, and scope/sophistication of proposed activities. - BSD analysts review and often require adjustments. - EC9: Review of pro forma financial statements and projections: - Form BA 002 requires financial statements—the balance sheet, income statement, and others—for 3 years after start of operation. - Frontline analyst and dedicated registration analyst conduct assessment. - Financial information on principal shareholders is not required or assessed, though public accountant confirmation of funds held in trust is required. - For foreign parents, assessment uses parent country requirements, investment grade rating requirement, and home supervisor no-objection letter. - EC10: Foreign banks — home supervisor no-objection and consolidated supervision: - For subsidiaries: BA Section 13(2)(i) requires that proposed subsidiary establishment has been authorized by the home supervisor, that home supervisor accepts BCBS proposals/guidelines and responsibilities as consolidated supervisor. - For branches: applicant must provide nature and extent of home supervision; Regulation requires similar criteria and home supervisor authorization. - In practice: a letter is sent to home supervisor requiring a no-objection letter; authorization not granted until received; MOU with home supervisor usually required; example where branch registration waited for MOU conclusion. - EC11: Monitoring progress of new entrants: - Newly established banks are subject to monthly reporting requirements as with all banks; BSD monitors progress, compliance with conditions. *Assessment of Principle 5: Compliant* - Comments: Laws, regulations and BSD practices provide comprehensive framework; BSD adequately assesses applications in practice. ### Principle 6 — Transfer of significant ownership - Supervisor has power to review, reject and impose prudential conditions on proposals to transfer significant ownership or controlling interests. EC1 — Definitions and thresholds - BA Section 37 (1) prohibits shareholding beyond 15 percent of total nominal value or voting rights unless approval granted. - BA Section 37 (7) defines “associate” broadly including close relatives, persons with arrangements relating to shareholding, subsidiaries, parent or sister companies, directors, trusts controlled or administered. - BA Section 42 prohibits exercising control over a bank except where shareholding is approved, or exercised by a domestic/foreign bank or registered controlling company (with prior approvals/registrations). - BA Section 42 (2) defines control as holding more than 50 percent of nominal value or voting rights, or having power to appoint majority of directors. - Section 43 requires registration as a controlling company to exercise control. EC2 — Notification and approval thresholds - BA Section 37 (1) and (2) prescribe shareholding thresholds requiring application for acquisition: - 15 percent; - 24 percent (which gives power to negate a super-majority required, for example, to enter the special resolution process provided in the Companies Act); - 49 percent; and, - 74 percent (which forms a super-majority). - Holders exceeding 15 percent or 24 percent: permission granted by the Registrar. - Holders exceeding 49 percent or 74 percent: permission granted by the Minister through the Registrar (Registrar provides recommendations to the Minister). - Practice: Minister generally follows Registrar recommendations though on one occasion Minister objected to an acquisition on competition grounds. - Changes in ownership infrequent; past four years: four applications approved, none declined. - BA Section 38 prohibits allotting or registering shares in name of any person other than intended beneficial shareholder without written approval of Registrar (approval never granted). EC3 — Power to reject or reverse changes - BA Section 37 (4): approval only if Registrar/Minister satisfied proposed acquisition not contrary to (a) public interest and (b) interests of bank, its depositors, or controlling company. - BA Section 37 (5): Registrar or Minister may apply to court to compel shareholder to reduce shareholding to not more than 15 percent if deemed detrimental. EC4 — Reporting of significant shareholders and beneficial owners - BA Section 39 requires shareholders to furnish information as required. - Regulation 21 and Form BA 125 require banks to submit annually list of shareholders with more than 1 percent of total shares including addresses, number and value of shares; applies to groups of persons with more than 1 percent. - Less detailed information required for shareholders with less than 1 percent. - Frontline analysts monitor ownership changes through these reports and other information. EC5 — Remedial powers for unauthorized changes - BA Section 37 (5) provides power to apply to court to compel reduction of shareholding (see EC3). EC6 — Notification of material adverse information on shareholders - BSD requires banks to inform it of any material changes related to significant shareholders; included as a condition for approval of shareholdings over 15 percent. *Assessment of Principle 6: Compliant* - Comments: Legal powers and supervisory practices provide adequate control and oversight regarding significant ownership. Authorities should clarify the principle of “prudential veto” in regard to approval of changes in significant ownership (see CP2). ### Principle 7 — Major acquisitions (EC1 summary) - BA Section 52 prohibits banks from carrying out the following major acquisitions or investments without prior approval of the Registrar: - Establish or acquire a subsidiary both inside and outside South Africa; - Invest in a joint venture that results in the bank being exposed to an amount representing more than five percent of its capital and reserves; - Open or acquire a branch office outside South Africa; - Acquire an interest in undertaking outside South Africa, unless only notification to the Registrar is required; - Create or acquire a trust, or establish or acquire any financial or other business undertaking under its direct or indirect control outside South Africa; - Establish or acquire a representative office outside South Africa; - Create or acquire a division for any person so that that person can conduct his/her business through the division. - Controlling companies are prohibited from carrying out the above operations except opening branches, representative offices, and creating or acquiring a division. These restrictions apply to subsidiaries of banks and controlling companies. *Italic source attribution: IMF staff assessment excerpt from Section 2 of the provided PDF.* ### Section 52 supersedes Section 76 (2), which gives the power to the Minister to approve ### _cr1555 - Section 52 supersedes Section 76 (2), which gives the power to the Minister to approve ### Regulatory authority and approval criteria - 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 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. ### Documentation and supervisory assessments for prior approval (BA Section 52 / Regulation 56) - Regulation 56 provides a list of documents that an applicant must submit for a prior approval under BA Section 52, which includes: - 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, including: - impact of the acquisition or establishment on the bank’s profitability, capital adequacy and overall risk profile; - 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 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. ### Objective criteria and prohibition powers (EC3–EC5) - EC3: Among the objective criteria that the supervisor uses is that any new acquisitions and investments: - do not expose the bank to undue risks; and - do not hinder effective supervision. - The supervisor also determines, where appropriate, that new acquisitions and investments will not hinder effective implementation of corrective measures in the future. - 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 considers: - the effectiveness of supervision in the host country; and - its own ability to exercise supervision on a consolidated basis. - EC4: The supervisor determines that the bank has, from the outset, adequate financial, managerial and organizational resources to handle the acquisition/investment (see EC3 for details). - 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. - BA Section 76 requires banks to limit investments in real estate and shares of companies to a prescribed amount, including those through subsidiaries. - BA Section 50 requires a controlling company to limit investments in: - Undertakings other than banks, entities engaging in activities similar to banks outside south Africa, controlling companies, and entities or companies for holding or development property for conducting the business of a bank; and - Fixed property not for the purpose of conducting the business of a bank, to a prescribed amount. - 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, 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. ### Assessment of Principle 7 - 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 has well established supervisory practices to limit and monitor risks arising from such activities. ### Supervisory approach and SREP cycle (Principle 8, EC1) - Principle 8: Supervisory approach requires: - a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; - identification, assessment and addressing of risks emanating from banks and the banking system as a whole; - a framework for early intervention; and - plans, 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 risks: - which banks or banking groups are exposed to, including risks posed by entities in the wider group; and - which banks or banking groups present a risk to the safety and soundness of the banking system. - The methodology addresses business focus, group structure, risk profile, internal control environment and the resolvability of banks, and permits relevant comparisons between banks. Frequency and intensity of supervision reflect the outcome of this analysis. - 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 stages and information sources - The SREP cycle is described in the BSD’s internal SREP manual and applies on a consolidated basis to both a bank and a banking group under a controlling company. - Stage 1 “Develop supervisory plan”: - An annual supervisory plan for each bank, including the branch of a foreign bank, covers a whole calendar year and is formulated during October to December. - The supervisory plan includes a schedule of meetings and supervisory activities (including on-site reviews) to be held during the calendar year. - The plan takes into account systemic relevance and key risk areas, relying on risk ratings and previous years’ assessments. - The annual supervisory plan is communicated to the bank prior to the start of a calendar year and is continuously updated as new information becomes available. - Stage 2 “Gather information”: - Sources include various returns required by the BA (financial statements, risk matrices, ICAAP reports), reports by internal and external auditors, regular meetings with the bank (Board meetings, CEO meetings, trilateral meetings, prudential meetings, graph discussions), bilateral meetings with external auditors, financial media, vendor-supplied market data (examples listed in source), ratings’ reports, and investment analyst reports. - Stage 2 is a continuous ongoing process. - Stage 3 “Form a view”: - Information gathered in Stage 2 is assembled, analyzed and synthesized to form a view of the bank with focus on materiality and risk. *Source: _cr1555 - Section 52 supersedes Section 76 (2), which gives the power to the Minister to approve* ### conclusions and recommendations in a constructive manner. This is again a continuous ### _cr1555 - conclusions and recommendations in a constructive manner. This is again a continuous ### SREP cycle: stages, outputs, and review process - SREP is a continuous process with key stages and recurring outputs: - Management Information Report (MIR) for each bank/banking group: - Updated monthly. - Contains various information regarding a bank as well as a composite risk rating and component risk ratings. - Discussed and reviewed quarterly by the ManCo. - Semi-annually, information is fed into a more detailed Risk Review for each bank/banking group. - A “pre-panel” review panel meeting may be called by frontline analyst teams to seek guidance (See stage 5). - Stage 4 “Focused review”: - Frontline analysts and risk specialists identify areas requiring detailed or specialist review. - Reviews may be carried out by frontline analysts, risk specialists, on-site review teams, internal auditors, external auditors, or other experts. - Results feed into the SREP cycle and supervisory plans; some reviews occur after supervisory plans are modified. - Stage 5 “Review panel”: - Review of procedural and substantive correctness of the SREP, conclusions and recommendations. - Panel consists of senior members of the BSD, including the Registrar and Deputy Registrars. - Panel recommendations may include remedial actions and adjustments to the individual capital requirement (ICR) and non-ICR measures (e.g., strengthening internal controls or risk management). - Stage 6 “Feedback to senior management and Board”: - Conclusions and recommendations from stage 5 are fed back to the bank’s Board, risk committee, audit committee and senior management, typically during regular meetings. - A feedback letter summarizes main points and includes remedial actions, if any. - Industry lessons are fed into macro-surveillance and may lead to ad hoc sector reviews. ### Rating system and risk assessment - BSD’s two-dimensional risk-based supervision approach: - Dimension 1: methodology to decide where to focus supervision across the banking system. - Dimension 2: supervision within a particular bank/banking group focusing on high-risk areas and controls. - Dual rating system: - Sector impact rating (systemic relevance) and risk rating (risks bank is facing). - Ratings included in MIRs and updated monthly; initially given by frontline analyst, discussed by managers, signed off by one of two Assistant General Managers; consistency checked through process. - Sector impact rating: - Given as a number between 1 and 5; 5 indicates 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: - All the large banks are rated as 5. - Other banks are rated between 1 and 3, based mostly on size of operations. - Ratings generally stable; can be raised if contagion risk increases. - Risk rating: - Composite rating and component ratings across specific financial and non-financial risk categories: - Balance sheet - Off-balance sheet - Capital adequacy - Profitability - Liquidity risk - Interest rate risk - Market risk - Credit risk - Currency risk - Operational risk - Money laundering and terrorist financing risk - Corporate governance - Component ratings on a scale of 1 to 5 where: - 1 “strong;” - 2 “satisfactory;” - 3 “fair (watch category);” - 4 “marginal (some risk of failure);” - 5 “unsatisfactory (high degree of failure evident).” - Composite rating is a weighted average of component ratings with fixed weights per component. - Generally: composite rating greater than 3 warrants supervisory attention; rating of 4 and higher regarded as a problem bank. - Observed clustering: most component ratings clustered around 3, few outliers at 4 or higher. ### Frequency and intensity of supervision - Determined by the entity’s risk assessment (MIR and Risk Review) and feeds into stage 1 of SREP: - Number of meetings and number of analysts allocated to a bank/banking group adjusted according to ratings. - Practical application: - Five big banks receive more depth and broader coverage commensurate with activities and risks. - On-site reviews more frequently conducted with big banks. - Supervisory intensity increased for relatively small banks when exposed to substantial risks. ### Forward-looking assessment and tools (EC2 summary) - Forward-looking elements integrated at various SREP stages: - Stage 2: - CEO meetings provide business plans, new activities, financial forecasts. - Graph discussions on selected risk areas; bank provides views on risk profile and appetite. - Prudential meetings with Head of Compliance and Internal Audit to discuss plans and focus areas. - Stress testing framework in place delineating responsibilities of supervisors, banks and banking groups. - Stage 3: - Banks required to have robust ICAAP with financial and capital projections; BSD conducts ICAAP on-site reviews on risk-based approach. - Pillar 2b add-on considered at Review Panel (Stage 5) to ensure commensurateness with risk profile. - Frontline analysts required to form views on risk levels based on available information. - Stage 6: - BSD requires Board chair presentations on short and long-term strategy and projections for next 12 months; BSD discusses its views. ### Compliance assessment tools (EC3 summary) - Tools used to assess compliance with BA and Regulations within SREP: - Internal compliance checklist prepared monthly by frontline analyst. - Monthly reports: capital adequacy (Form BA 700) and liquidity (Form BA 300). - Regulation 4 requires sign-off on Form BA 099 by CEO, Chief Accounting Officer, Executive Officer responsible for FICA reporting, and officials responsible for each relevant risk. - Meetings with internal audit and compliance functions per BA Section 60 A and Regulations 49 (compliance) and 48 (internal audit). - Regulation 46(3)(b): external auditors to annually report to Registrar on significant weaknesses in internal controls relating to compliance with BA and Regulations. ### Macro and cross-sectoral risk integration (EC4 and EC5 summary) - Monthly banking sector overview (BSO) by BSD’s research division; quarterly full review of banking sector data informing quarterly MIR reviews by ManCo. - SARB Financial Stability Department (FSD): - Prepares six-monthly Financial Stability Reviews (FSRs) and conducts common scenario stress testing (latest in 2012 covering 8 banks including the 5 largest, limited to South African operations). - Research department shares quarterly bulletin on global and South African environment. - “Flavor of the year” topics: - Staff propose topics; topics chosen by votes and incorporated into supervisory plans and discussions with Boards and external auditors. - Recent topics: unsecured lending, banks’ African strategies, recovery plans, IT projects, conduct of business. - Risk sections produce high-risk focus area reports (e.g., monthly report on retail unsecured lending distributed to frontline teams). - Cross-sectoral interaction: - Quarterly high-level bilateral meetings with Financial Services Board (FSB) under MOU; working-level relationship with FSB. - Ad-hoc meetings with Banking Association of South Africa, National Treasury, Johannesburg Stock Exchange, National Credit Regulator, Financial Intelligence Centre. - Transition to “twin-peaks model”: - Establish a prudential regulator housed in SARB merging insurance supervisors from FSB with BSD; expected to improve cross-sectoral supervision. ### Resolvability and recovery planning (EC6 and EC7 summary) - BA tools for going-concern supervisory actions include: - Issuing directives (BA Section 6(6)(a)); - Raising individual capital requirements or requiring risk management/internal control strengthening (Regulation 38(4)); - Declaring officers no longer fit and proper (BA Section 60(6)(a)); - Imposing fines (BA section 91A); - Seeking court decisions; initiating cancellation or suspension of registration. - Interaction with FSB under MOU to inform of material information and remedial actions for groups with FSB-supervised entities. - Recovery plans: - All banks, excluding branches of foreign banks, requested to develop recovery plans (Guidance Note 3/2012, 4/2012 and 10/2012). - 2013: systemically significant bank recovery plans reviewed; further guidance provided. - 2014: plan to conduct further review of systemically significant banks’ recovery plans. - Recovery plans expected to identify barriers to smooth recovery and address them. - Resolution framework: - SARB identified as resolution authority under BA; draft Resolution Bill underway to provide additional powers to planned Prudential Authority to resolve a financial entity prior to failure. - Work on resolution plans to commence once bill enacted. - Factors considered when a bank is in distress: - Systemic significance; - Viability (temporary vs. permanent problem); - Nature of stress: capital or liquidity problem. - Possible SARB responses in stress: - Emergency liquidity assistance against pledged collateral or government guarantee. - National Treasury can provide public funds in resolution of a systemically significant bank. - SARB powers include acquiring shares in a limited company (SARBA Section 10d) requiring Minister approval for a bank (SARBA Section 13b), facilitating private-sector solutions, appointing a curator (section 69), forcing liquidation/winding up (section 68). - Current gap: - Present laws do not provide SARB broad power to handle banks in stress; Resolution Bill and Financial Sector Regulation Bill expect Minister of Finance involvement for systemic entity resolution when public funds are used. ### Perimeter issues and enforcement (EC8 summary) - BA Sections 81 to 84 empower the Registrar regarding bank-like activities: - Power to apply to court for orders to prohibit activities. - Ability to report matters to South African Police Services or National Prosecuting Authority. - BSD cooperates annually with law enforcement authorities on reviewed cases. - Restructuring that would avoid the regulatory perimeter: - Establishment of subsidiaries or joint ventures requires prior approval by Registrar; BSD will not approve if it results in perimeter avoidance. ### Assessment, supervisory techniques and tools (Principles 8–10, Principle 9 assessment) - Assessment of Principle 8: Largely Compliant. - SREP cycle and risk rating system provide adequate general supervisory framework; complemented by sector-wide approaches (“flavor of the year”) and thematic on-site reviews. - Shortfalls: resolution approaches in EC6 and EC7 are still developing; recovery plans started but resolution plans not yet begun. - Recommendation: authorities urged to enact resolution legislation expeditiously. - Transition to twin peaks should include review of supervisory approach to enable monitoring of prudential risk across entire financial system and financial conglomerates; may require formalized framework, common scenario stress testing across sectors, and integrated risk rating framework for financial groups; close cooperation with Financial Stability Oversight Committee and secretariat essential. - Principle 9 (Supervisory techniques and tools) — Assessment: Compliant. - Supervisor uses a mix of on-site and off-site supervision: - BA Section 4(4) empowers supervisory review process including on-site examination, off-site review, discussions with management and Board, review of external auditors’ work and bank submissions. - Off-site work: - Ongoing analysis of statutory data, internal and external audit reports, Board minutes, published financial statements, media coverage, analyst reports. - Specialized risk units review external auditors’ work and risk-specific assessment. - Outputs feed into MIR and supervisory plans. - Supervisory meetings: - Periodic meetings with Boards, Board subcommittees, CEOs, CROs, compliance and internal audit, and external auditors; at least annually for large banks. - On-site work: - Focused on-site reviews by specialist risk teams or on-site review team with frontline participation. - Horizontal and thematic inspections: recent/planned topics include counterparty credit risk, asset and liability management, equity risk in the banking book, investment risk. - Deep-dive reviews and AML/CFT inspections; example: core teams of around 6 staff (deep-dive) and up to 10 staff for large bank AML/CFT reviews; final report typically sent within 6 to 8 weeks of completion. - No mandated frequency for on-site inspections. - Planning: - Annual supervisory plan compiled during SREP Stage 1, communicated to bank before year start; SREP cycle continuous and plans updated as new information arrives. - Annual strategic planning identifies strategic risks; BSD preparing a policy on forward-looking supervisory approach. - Improvements since 2010: - Shift from reliance on external auditors to BSD-led on-site deep-dive reviews and increased specialist risk teams for model validations and other topics. - Recommendation: continue to enhance deep-dive on-site capacity and tools to assess spill-over risks from non-banking activities in financial groups. ### Supervisory reporting and information systems (Principle 10 summary) - EC1 (powers and returns): - BA Section 6 and Section 7 provide inspection and information request powers; Section 75 requires returns in conformity with financial reporting standards. - Regulations require detailed periodic reporting: BA 100 (balance sheet), BA 110 (off-balance sheet), BA120 (income statement), BA 700 (capital adequacy and leverage), BA 300 (liquidity risk), BA 200/210/220 (credit risk, large exposures, concentrations, asset quality, loan loss provisioning, related party transactions), BA 330 (interest rate risk), BA 320 (market risk). - Returns required for South African operations and legal entities including foreign branches; BA 600 for consolidated return; BA 610 for branches/subs abroad quarterly. - EC2 (accounting standards): - BA Section 75(3A) and Regulation 3 require returns prepared in accordance with International Financial Reporting Standards (IFRS); Regulation 46 requires external auditor reporting to Registrar on adequacy of returns. - EC3 (valuation governance): - Regulation 3(4) and Regulation 39(13) require robust risk management, Board-approved policies, documentation of fair value approaches, independent verification of valuations, periodic internal audit reviews; BSD discusses valuation issues with external auditors and Board audit committees and can require adjustments. - EC4 (frequency commensurate with risk): - Regulation 4 sets frequencies; most financial statements and basic risk information required monthly; more detailed credit risk and consolidated returns quarterly; some biannual. - Ad-hoc information requests made depending on risk profile/systemic importance. - Validation rules prevent incorrect submissions; monthly queries performed by frontline analysts. - Analytical tools: graph discussions, monthly trigger reports, MIRs, semi-annual risk reviews, ad hoc consolidated prudential meetings. - EC5 (comparable data across banks): - Regulatory returns apply to all banks and controlling companies equally in content and frequency; consolidated reporting arrangements in place. - EC6 and EC7 (powers to request information and access records): - BA Sections 6 and 7 powers include access to persons and documents; Registrar can request information from entities in wider group; BSD has in past requested BA returns from non-banking subsidiaries on a quarterly basis. - EC8 (enforcement for timely and accurate reporting): - BA Section 91(6) allows Registrar to impose a fine not exceeding ZAR1000 for every day of non-submission or non-furnishing of required returns, statements, reports or other documents within the period determined. ### Information systems and independent review - BSD information systems: - Financial Management System/database (FMS) — receiving statutory data, automated validation, storage. - Oracle Financial Analyser (OFA) — pulls data from FMS to create graphs, trigger reports, summary reports, management information; accessible by BSD analysts for bank solo, consolidated, peer group, industry analyses. - EGIS Papertrail — departmental document management and tracking system; captures all documents received/sent and serves as audit trail. - OFA produces key statistical and trigger reports, MIRs, risk-specific heat maps for analysts and management. - Independent review: - BSD is subject to periodic review/audit by SARB’s Internal Audit Division; findings shared with management and Governor’s Executive Committee to guide improvements. *Source: _cr1555 - conclusions and recommendations in a constructive manner. This is again a continuous.* ### Section 91 (6A) also provides the same power to impose a fine in case where information ### _cr1555 - Section 91 (6A) also provides the same power to impose a fine in case where information ### Supervisory information: validation, reporting, and verification (EC9–EC12) - Section 91 (6A) allows imposing a fine where information or returns provided are materially incorrect or inaccurate. - No fines have been imposed on banks under these provisions to date; BSD focuses on banks’ ability to furnish appropriate returns. - Form BA099 requires certification by the CEO, the Chief Accounting Officer and the FICA Officer; re-submissions require an updated BA099 with the same sign-offs. - External auditor involvement: - BA Section 75 (3C) requires, for returns coinciding with the end of the financial year, the bank’s external auditor to report to the Registrar whether those returns present the condition of the bank fairly and conform with financial reporting standards; Registrar may require such reports for other returns. - Regulation 46 requires the bank’s external auditor to annually report on the bank’s financial position and completeness and accuracy of year-end materials, and to report whether other returns reflect management accounts using the same accounting policies and BA/Regulations. - Based on Regulation 46(9), BSD meets at least annually with external auditors; BSD holds annual trilateral discussions (BSD, bank’s Audit Committee and senior management, external auditors). - BSD controls and processes: - BSD has implemented validation rules preventing incorrect submissions. - Monthly queries by BSD analysts follow review of statutory returns (e.g., large or unexpected movements); banks’ responses are reviewed and followed up. - BSD provides clear terms of reference when commissioning external experts under BA Section 7(1)(b); typically requires an audit firm that is not the statutory auditor. - External experts/auditors are required to report material shortcomings to BSD per TOR. - BSD reviews reporting forms at the annual policy meeting; forms were last revised substantially when Basel III was introduced. - Assessment for Principle 10: Compliant. - Comment: Strong regulatory and supervisory processes exist to ensure accuracy and comparability of returns; well-developed procedures for analyzing collected information and feeding into supervisory actions. ### Corrective and sanctioning powers of supervisors (Principle 11; EC1–EC7, AC1–AC2) - Objectives: early stage action to address unsafe or unsound practices; range of supervisory tools including license revocation or recommendation. - Legal powers and instruments (selected): - BA Section 6(6)—issuing a directive to a bank or to banks collectively; may impose non-financial sanctions. - Section 60—opposing appointment of a Board member or a CEO. - Section 69—recommending to the Minister to appoint a curator if a bank will be unable to repay deposits and other obligations. - Section 74(2)—taking action against a bank or controlling company for failure to comply with prudential requirements. - Section 91A—imposing fines regarding contravention of a provision of the BA. - Sections 23 to 26—power to suspend registration or restrict activities, subject to limitations (see below). - Regulation 38(4)—power to increase prudential requirements commensurate with a bank’s risk profile. - BA Section 26 and BA Section 25—Registrar may suspend/cancel registration or apply to court for order of cancellation/suspension (30-day notice applies to some measures; court process possible without 30-day notice). - BA Section 60(6)—Registrar can object to appointment/continued employment of CEO, director or executive officer if not fit and proper. - Supervisory practice: - SREP cycle and Step 6 ensure feedback to Boards and senior management; key findings documented in feedback letters and followed up. - Supervisory concerns are typically raised early and followed up; BSD often prefers cooperative/informal measures but issues directives (BA Section 6(6)) and requests independent reviews under BA Section 7. - Administrative fines have been applied under BA Section 91A for AML/CFT related issues. - Limitations and gaps: - BA Sections 23, 24 and 26 require a minimum 30 days prior notice for suspension of registration or restricting activities, creating potential delays; court application is untested and may be time-consuming. - Registrar does not have power to impose administrative fines directly on Board members, senior management or other employees of banks (gap relevant to EC5). - BA does not provide power to impose temporary management. - Other corrective tools and remedies listed in EC4: - Restrict or suspend payments to shareholders/share repurchases; restrict asset transfers; bar individuals from sector; replace/restrict powers of managers/Board; facilitate takeover/merger; interim management; revoke banking license or recommend revocation. - Assessments: - EC1–EC6 findings indicate robust processes for raising concerns and a broad legal toolbox. - AC1: no statutory deadlines for taking corrective actions; reliance on common law principles for timeliness. - AC2: BSD coordinates with FSB; informs FSB promptly if formal corrective action affects FSB-supervised entities substantially. - Assessment re Principle 11: Materially non-compliant. - Comments and rationale for rating: - Major issue: 30-day prior notice requirement for suspending registration or restricting activities has not been changed; directives under Section 6(6) and court applications partially address issue but have limitations (consultation requirement, bank challenges, untested court route). - Concern: potential delays or uncertainty in severe, imminent-risk cases where cooperative measures may fail. - Lack of power to fine individuals (Board/senior management) contributes to the lower rating. - Recommendation implied by assessors: strengthen laws to provide Registrar power to suspend or limit bank activities without delay and grant ability to fine individuals where warranted. ### Consolidated supervision (Principle 12; EC1–EC7, AC1) - Legal and supervisory framework: - BA Section 4(4) mandates supervisory review process including on-site and off-site work on bank or controlling company and branches/subsidiaries/joint ventures/related entities. - Section 52 requires prior approval for establishment of subsidiaries, branch offices, other interests and representative offices. - Section 55 requires prior written approval for reconstruction (restructuring) within group. - Regulation 36 (consolidated return) objectives include capturing all material risks (credit, market, operational) and preserving integrity of group capital and reserve funds by eliminating double or multiple gearing of capital and reserve funds. - Consolidated supervision scope (Regulation 36) includes: - All banks in the relevant banking group; - All related regulated or unregulated financial entities or financial activities conducted by such banks or relevant subsidiaries/joint ventures/associates; - The controlling companies of such banks; - All related regulated or unregulated financial entities or activities conducted by controlling companies or relevant subsidiaries/joint ventures/associates; - Any other entity designated if its distress/insolvency could be a material risk to the banking group (no designation made to date). - BA Section 70a subjects controlling companies to minimum capital requirement; Section 73 applies large exposure limits to controlling companies. - Regulation 36(2): directives/instructions/requirements applying to a bank on a solo basis mutatis mutandis apply to bank or controlling company on consolidated basis. - Reporting and analysis: - Form BA 600 (quarterly) includes group capital adequacy, intragroup exposures, group large exposures, group currency risk, and group liquidity. - Form BA 600 includes consolidated balance sheet (BA 100), off-balance-sheet activities (BA 110), income statement (BA 120), and group risk areas. - Form BA 610 (Regulation 37) for foreign operations covers 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; operational risk. - BSD assigns a dedicated consolidated supervision analyst for every large banking group and requires biannual detailed organizational charts. - Supervisory coverage and gaps: - BSD is aware of and monitors non-banking activities in groups; discussions with Boards and senior management and file reviews confirm monitoring. - Tools for monitoring risks from non-banking activities are not yet highly developed: - ICAAP stress testing requirements not yet applied to impact from insurance activities or reputational spill-over from a parent group. - SARB common scenario stress testing only applied to South African banking operations. - Recovery and resolution planning for large banking groups needs improvement and further development once necessary legal powers are provided by expected new legislation. - Assessment for Principle 12: Compliant. - Comments: Adequate supervisory and reporting framework exists, but authorities should strengthen monitoring of risks from non-banking activities (e.g., group-wide stress testing) and improve recovery and resolution planning for large banking groups when legal powers are in place. ### Home-host relationships and cross-border supervision (Principle 13; EC1–EC10) - Supervisory colleges and cooperation: - BSD has started organizing supervisory colleges for large banking groups with host country supervisors in Africa; BSD also attends colleges as host supervisor for foreign banks. - Example: BSD hosted a supervisory college in May 2013 for a large group with African operations; 15 African countries attended; next college meeting for the group is scheduled in 2015. - BSD plans supervisory colleges for other large banks with African host supervisors. - Information sharing and MOUs: - For cross-border establishment/acquisition under BA Section 52, BSD requires MOUs with host supervisors to assure information flow; MOUs and other formal/informal arrangements facilitate confidential information exchange. - BSD has various arrangements with the UK’s PRA and holds frequent meetings (annual meetings for certain dual-listed banks; trilateral discussions with banking group representatives). - Cross-border supervisory activities and limitations: - BSD visits host supervisors and foreign banking operations on an ad-hoc basis driven by material supervisory concerns and MOUs; regular visits to host supervisors are limited except in the UK. - BSD can require additional reporting on foreign operations (BA Section 7). - BSD reviews oversight of foreign operations by management; Regulation 36(17) provides corporate governance requirements for head office oversight of overseas operations. - Form BA 610 is required quarterly for each foreign subsidiary and branch; off-shore analyst reviews these. - Foreign supervisors permitted to conduct on-site visits to entities in South Africa arranged in conjunction with BSD and subject to MOUs (prior notice and “no objection”). - BSD does not permit shell banks or booking offices that perform banking; representative offices may not do banking business. - Crisis cooperation and resolution planning: - BSD participates in crisis management groups and supervisory colleges of G-SIFIs where South African entities have roles. - Draft Resolution Bill being worked on and expected delivery timeline in text (work in progress in 2014; planned promulgation in 2015 per source). - BSD requires banks to prepare recovery plans covering the entire group; coverage of non-banking activities and beyond controlling company is sporadic. - BSD plans to address group resolution planning once necessary mandates are granted by planned new legislation. - Assessments: - Principle 13: Largely Compliant. - Comments and recommended enhancements: - Cooperation with supervisors in other African countries needs further enhancement as South African banks expand in these jurisdictions. - Consider increasing frequency of supervisory college interactions (e.g., conference calls between physical meetings). - Enhance capacity building support for African host supervisors. - Finalize policies/processes for on-site reviews of cross-border operations and evolve practices to incorporate joint supervisory activities with host supervisors. - Enhance cross-border recovery and resolution planning, particularly for groups with strong ties to UK and operations that are systemically important in host jurisdictions; close collaboration with UK and other host authorities is necessary. ### Corporate governance (Principle 14; EC1) - Legal framework elements addressing corporate governance: - BA Section 60 - Directors and officers of a bank/controlling company. - BA Section 60A - Compliance function. - BA Section 60B - Corporate governance. - BA Section 64 - Audit committee. - BA Section 64A - Risk and capital management committee. - BA Section 64B - Directors’ affairs committee. - BSD supervisory approach: - BSD monitors corporate governance through supervisory meetings, reporting requirements, and regulatory provisions cited above. - (Further ECs for Principle 14 continue beyond provided excerpt.) *Source: Extracted content from the IMF assessment document contained in the supplied PDF content unit.* ### Section 64C - Remuneration committee ### Section 64C - Remuneration committee ### Regulatory framework and governance responsibilities - Regulation 39 (Process of corporate governance): Board of directors is ultimately responsible for ensuring an adequate and effective process of corporate governance consistent with the nature, complexity and risk inherent in the bank’s on-balance sheet and off-balance sheet activities; Board may appoint supporting committees. - Other specific regulations related to corporate governance: Regulation 40, Regulation 41, Regulation 42, Regulation 43, Regulation 46, Regulation 48. - BA Section 64B: Board must appoint a directors’ affairs committee to: - review performance of and plan successors to executive directors; - ensure continuity of non-executive directors; - regularly review Board composition of skills, experience and other qualities; - conduct an annual self-assessment of the Board as a whole and of each individual director. - BA prohibits more than 49 percent of directors from being employees of the bank or controlling company or their subsidiaries. - The Act requires establishment of: an audit committee; a risk and capital management committee; a remuneration committee. - Regulation 41: composition of the Board and prohibition of chairperson being an employee or serving on the Board’s audit committee. - Regulation 39(18) and (19): annual Board assessment and external auditors’ annual review of the Board’s assessment; external auditors to provide assessment to the Registrar within 120 days of the bank’s financial year end. ### Supervisory engagement and oversight practices - BSD supervisory interactions: - Minimum annual bilateral meeting with the Board of directors and with the CEO. - Annual trilateral meeting with the Board’s Audit Committee and external auditors. - Corporate governance practices at individual banks are analyzed as part of the SREP. - BSD actions when deficiencies identified: - Keeps issues open until resolved to BSD’s satisfaction. - Provided an example where a bank with insufficient independent directors rectified the situation to BSD’s satisfaction. - BSD issues an annual guidance note for Board meetings outlining system-wide and bank-specific issues. ### Fit and proper, appointment and removal powers - Regulation 42 and form BA 020 (“fit and proper” questionnaire): - BA 020 contains 40 questions, final question asks directors/prospective directors if they understand their responsibilities and duties. - Form BA020 required for executive officers; Board chair must declare they have studied the information and concluded the individual is fit and proper. - BA section 60(6): Registrar may object to the appointment or continued employment of a CEO, director or executive officer if not fit and proper or not in the public interest. - Termination notification procedure: Registrar must notify in writing specified parties of intention and grounds for proposed termination. - Regulation 47: banks must report an offence in writing to the Registrar within 30 days after becoming aware; reportable offences include breaches of fiduciary duty, acts likely to harm reputation, contraventions of codes of conduct, and reportable irregularities under the Auditing Profession Act, 2005 (Act 26 of 2005), as amended. ### Board composition, qualifications and duties (EC3–EC6) - EC3: Board nomination and appointment processes: - BA Section 64B requires directors’ affairs committee and continuity planning. - Restrictions ensure appropriate non-executive representation. - BSD verifies sufficiency of independent directors and follows up if inadequate. - EC4: Board members must possess sufficient knowledge and expertise (Regulation 39(6)(a); Regulation 40 requires diligence, care and competence). - EC5: Board approves and oversees strategic direction, risk appetite and corporate culture (BA Section 60B(2); BSD uses SREP, annual Board meetings, reviews of minutes and regulatory reports to assess oversight). - EC6: Fit and proper standards for senior management, succession planning and oversight (Regulation 36(8)(b)(v); BA020; BSD assesses through meetings and SREP). ### Remuneration and alignment with risk (EC7) - EC7: BSD subscribes to Financial Stability Board Principles for Sound Compensation Practices and their Implementation Standards. - 2010: banks in South Africa undertook a self-assessment on the Principles. - 2011: topic included in “flavor of the year” Board discussions; shortcomings discussed and actions taken; further actions followed through normal supervisory process. - BSD monitors developments (including EU CRD IV) and will implement as necessary. ### Operational structure, information and new products (EC8–EC10) - EC8: Board and senior management knowledge of operational structure and risks (Regulation 39(6)(a)(i); Regulation 36(8)(b) qualitative group structure and business activities reporting requirements). BSD assesses via annual Board meetings and SREP. - EC9: BSD power to review and require independent risk management functions; BA Section 64A(2) requires risk and capital management committee to assist in establishing independent risk management and internal controls. BSD reviews risk functions in SREP, prudential meetings and on-site reviews. - EC10: Larger and more complex banks assessed for independent and adequately resourced risk and audit functions; BSD assesses requirement for dedicated risk management unit/CRO as part of SREP. ### Risk management framework and supervisory assessments (Principle 15; EC1–EC14) - Regulation 39: specifies risk management process, cites 27 specific types of risk; Regulation 39(5)(a-b) requires processes to be: - adequate for size and nature of activities and periodically adjusted; - aligned with business strategy and risk appetite; - specify relevant limits and allocated capital. - BSD practices to determine adequacy: - SREP assessments, prudential meetings, bi-annual graph discussions, ICAAP reviews, on-site reviews, meetings with Boards, committees and external auditors. - Analysis division prepares closing summary per risk area. - Stress testing and contingency planning: - Regulation 39(5) requires regular stress-testing or scenario analysis and maintenance of sufficient liquidity and capital buffers. - Regulation 23 focuses on credit risk stress testing; Regulation 28 on market risk stress testing. - BSD reviewed recovery plans in 2012 and 2013; liquidity simulation exercises conducted with banks, BSD and external auditors. - Model use and validation: - BSD assesses independent validation/testing; IRB banks subject to specific annual reviews and external auditors produce a “long form report”; banks submit “annual validation report” on selected asset classes. - Information systems and risk data aggregation: - Regulation 23 requires sufficiently robust information systems. - BSD issued Guidance Note 3 in early 2014 based on the Basel Committee’s Principles for Effective Risk Data Aggregation and Risk Reporting (January 2013); included a detailed questionnaire for banks to report implementation status of the eleven principles. ### Specific regulations addressing risk categories (EC11–EC12) - Regulations by risk category: - Regulations 23-25 - Credit risk - Regulation 26 - Liquidity risk - Regulation 28 - Market risk - Regulation 30 - Interest-rate risk - Regulation 31 - Equity risk in the banking book - Regulation 33 - Operational risk - Contingency planning requirements: - Regulation 36(8) requires submission of qualitative information on contingency planning strategy, including centralization or entity-level management. - BSD assesses contingency arrangements via SREP, ALM reviews, IMA applications/renewals, thematic reviews and liquidity simulations. ### Capital adequacy (Principle 16; EC1) - BA Section 70 and Regulation 38 (Capital adequacy and leverage) implement minimum capital requirements. - BSD has fully implemented Basel II, 2.5 and is in the process of fully implementing Basel III. - Capital is calculated on a consolidated and solo basis for all South African banks and foreign branches. - Capital measured in the following tiers: CET 1, Tier 1 and Total Capital. ### Assessment and supervisory conclusion - Assessment of Principle 14: Compliant. - Assessment of Principle 15: Compliant. - Comments: - SARB’s SREP cycle places emphasis on verifying robust risk management policies and procedures. - Recent significant increase in supervisory staff has allowed BSD to form specialized teams to review major risk categories; newer members are strengthening skills through on-the-job experience and have enhanced BSD’s understanding of risks faced by South African banks, especially at the largest institutions. *Section 64C - Remuneration committee* ### Section 1 defines “additional tier 1 capital,” “additional tier 1 unimpaired reserve funds,” ### _cr1555 - Section 1 defines “additional tier 1 capital,” “additional tier 1 unimpaired reserve funds,” ### Definitions and scope - Section 1 defines: - “additional tier 1 capital” - “additional tier 1 unimpaired reserve funds” - “common equity tier 1 capital” - “common equity tier 1 unimpaired reserve funds” - “tier 2 capital” - “tier 2 unimpaired reserve funds” - BA Sections 70 and 70A prescribe minimum capital requirements based on risk-weighted assets for banks and groups respectively. - Regulation 38(8) prescribes capital requirements (base minimum, systemic capital requirements, domestically systemic important banks, conservation buffer, countercyclical buffer, idiosyncratic risk requirement and the Board buffer). - Regulation 38(9)(a)(i) prescribes the minimum capital set per tier of capital. - Directive 5/2013 prescribes the components of capital with emphasis on those that are permanently available to absorb losses. ### Basel framework and phase-in - The Core Principles do not require a jurisdiction to comply with the capital adequacy regimes of Basel I, Basel II and/or Basel III. - The Committee does not consider implementation of the Basel-based framework a prerequisite for compliance with the Core Principles, and compliance with one of the regimes is only required of those jurisdictions that have declared that they have voluntarily implemented it. - For the plan for the phase-in of Basel III, see below (reference in source). - EC2: At least for internationally active banks, the definition of capital, the risk coverage, the method of calculation and thresholds for the prescribed requirements are not lower than those established in the applicable Basel standards. Description and findings re EC2 - Regulations 38(9)(a)(i), 38(9)(a)(ii) and 38(9)(a)(iii) prescribe the phase-in of the South African base minimum requirements that are more onerous than Basel. - Directive 5/2013 prescribes minimum capital requirements, and the phase-in thereof, that are higher than the Basel standards. ### Supervisor powers and capital adequacy (EC3, EC4) EC3 — supervisor power over capital for material risks - The supervisor has the power to impose a specific capital charge and/or limits on all material risk exposures, including risks not adequately transferred or mitigated through transactions (e.g., securitization transactions). - Both on-balance sheet and off-balance sheet risks are included in the calculation of prescribed capital requirements. Description and findings re EC3 - Regulation 38(4) empowers the Registrar to prescribe additional capital requirements in respect of any risk type or risk exposure. - Regulation 38(8)(e)(iii) prescribes a bank-specific additional capital requirement for idiosyncratic risk. EC4 — capital reflects risk profile and systemic importance - The prescribed capital requirements reflect the risk profile and systemic importance of banks in the context of the markets and macroeconomic conditions in which they operate and constrain the build-up of leverage in banks and the banking sector. - Laws and regulations in a particular jurisdiction may set higher overall capital adequacy standards than the applicable Basel requirements. Description and findings re EC4 - BA Section 4(7)(ii) prescribes that the Registrar may disclose factors relating to the setting of capital adequacy ratios in excess of the minimum. - Regulation 38(4) empowers the Registrar to impose additional capital if the aggregated risk exposure of a bank does not reflect its risk profile (and the Registrar applies this Pillar 2 surcharge in practice). - Regulation 38(8)(e)(ii) prescribes an additional minimum capital requirement for systemic risk. - Regulation 38(8)(e)(vi) prescribes an additional capital requirement for the largest banks (systemically important). - Regulation 38(8)(e)(vii) prescribes a Board buffer that is based on stress testing and macro-economic conditions. - Regulation 38(8)(g) prescribes a countercyclical capital buffer in the event of excessive credit growth or the buildup of system-wide risks. - Regulation 38(17)(a) prescribes a leverage ratio to prevent the build-up of excessive on- and off-balance sheet leverage. - Regulation 38(17)(b)(iv) prescribes a minimum leverage ratio of 4 percent. ### Internal models, approvals and supervisory review (EC5, EC6) EC5 — use of banks’ internal assessments and models - The supervisor approves the use of banks’ internal assessments of risk as inputs to the calculation of regulatory capital, subject to qualifying standards, approval for cessation or material modification, supervisory capacity to evaluate, power to impose conditions, and power to revoke approval. Description and findings re EC5 - Regulation 23(3)(b) prescribes that prior approval is required from the Registrar to apply the IRB approach for credit risk and Regulation 23(10)(a) requires continuous compliance with the qualifying conditions. - Regulation 23(10)(b)(v11) requires banks applying internal models for equity risk in the banking book to obtain prior written approval of the Registrar and also sets out quantitative and qualitative requirements. - Regulation 28(4)(b) and (c) requires banks applying internal models to measure market risk to obtain prior written approval from the Registrar, subject to certain conditions. - The Registrar has the authority to impose additional conditions on a bank and approval for use of an internal model can be revoked if conditions cease to be met. In practice, there is an example of a bank’s approval having been revoked. - As part of the SREP, BSD staff regularly reviews banks’ internal assessment processes and internal models approaches. - BSD acknowledged an ongoing challenge finding qualified staff for models validation due to a shortage of individuals with highly technical quantitative skills. The SARB has addressed this issue, in part, through in-house training initiatives. EC6 — forward-looking capital management and stress testing - The supervisor has the power to require banks to adopt a forward-looking approach to capital management (including the conduct of appropriate stress testing) and to require feasible contingency arrangements to maintain or strengthen capital positions in times of stress. Description and findings re EC6 - Regulation 23(11(b)(ix) sets out a stress testing requirement for banks that have adopted the IRB approach for credit risk. - Regulation 39(6) requires the Board and senior management to have in place an MIS system that can generate forward looking scenario analysis that captures stressed conditions and requires senior management to conduct stress tests on a periodic basis. - The BSD issued a guidance note in 2008 on stress testing requirements. - Regulation 39(8)(h) requires the incorporation of stress testing in the ICAAP and further requires stress testing to be compared against the impact of capital. - Regulation 39(16)(a)(v)(B) requires senior management to ensure the ICAAP incorporates stress testing and measures to ensure the bank builds and maintains capital buffers that would ensure the bank could withstand severe market downturns. It also requires that the ICAAP examines future capital resources under adverse conditions and analyses capital instruments during stress. - Regulation 39(16)(b)(v) requires that the ICAAP incorporate stress testing the result of which shall be considered in evaluating the adequacy of capital buffers. - Regulation 39(5)(d) states that risk management processes shall regularly conduct stress testing or scenario analysis and should ensure the bank maintains adequate liquidity and capital during prolonged periods of market stress. - In practice, BSD staff discusses stress testing and management actions during on-site ICAAP meetings. Projected capital adequacy ratios are calculated to show the impact of stresses on banks before and after management actions on a forward-looking basis (for the upcoming three years). ### Application to non-internationally active banks and group capital allocation (AC1, AC2) AC1 — non-internationally active banks - For non-internationally active banks, capital requirements (including definition of capital, risk coverage, method of calculation, scope of application and the capital required) are broadly consistent with the principles of the applicable Basel standards relevant to internationally active banks. Description and findings re AC1 - The BSD applies the Basel capital requirements to all banks in South Africa, irrespective of whether they are internationally active. AC2 — distribution of capital within group entities - The supervisor requires adequate distribution of capital within different entities of a banking group according to the allocation of risks. Description and findings re AC2 - It is up to a bank to determine how it distributes capital within different entities of the banking group; however, certain regulations apply. - Regulation 36(8)(b)(ix) requires banks to submit in writing to the Registrar qualitative information relating to the bank’s strategy to monitor capital in relation to risks incurred by entities and the allocation of capital amongst various entities within the banking group. ### Assessment and supervisory conclusions (Principle 16 and related) - Assessment of Principle 16: Compliant. - Comments: The SARB has adopted or is in the process of adopting the various components of Basel II, 2.5 and III according to or in advance of the schedule established by the Basel Committee. - Capital is calculated on a consolidated and solo basis for all banks and the BSD has the authority to impose additional capital requirements on individual banks, as deemed necessary. - The BSD has applied the three Basel ratios (common equity tier 1, tier 1 and total capital) as well as systemic capital requirements, large bank capital add-ons and a “Board buffer” that ensures that banks do not fall below the minimum requirements. - BSD staff regularly assesses banks’ capital management and planning, most intensely at the largest (IRB) banks. ### Credit risk (Principle 17) — EC1 to EC3 (summary) EC1 — comprehensive credit risk management processes required - Laws, regulations or the supervisor require banks to have appropriate credit risk management processes that provide a comprehensive bank-wide view of credit risk exposures and are consistent with risk appetite, risk profile, systemic importance and capital strength. Description and findings re EC1 - Regulation 39(4)-(6) states that a bank shall have in place a comprehensive risk management process, practices and procedures and Board approved policies for credit risk and counterparty credit risk. - Regulation 23(11)(b)(iii)(A) provides that, for IRB banks, there should be a duly documented credit policy applied consistently over time for internal risk management purposes. - Regulation 39(7)(a)(ii)(D) requires that an IRB bank shall bring to the attention of senior management and the Board matters such as credit concentration or violations of specific risk or appetite limits. - Regulation 39(5)(b) requires risk management policies, processes and procedures to be aligned with business strategy goals and objectives and risk appetite or tolerance of risk of the bank. - ICAAP meetings are held annually to calculate, understand, monitor and manage economic capital as it relates to credit and other risks; stress testing using macroeconomic simulations is part of this process. EC2 — Board approval and senior management implementation - The supervisor determines that a bank’s Board approves and regularly reviews the credit risk management strategy and that senior management implements it. Description and findings re EC2 - Regulation 39(18) requires a bank’s Board to assess at least once a year whether processes relating to corporate governance, internal controls, risk management (including credit risk management) successfully achieve objectives specified by the Board; this assessment must be documented and reviewed by external auditors, who would report to the Registrar if they did not concur. - The BSD relationship team discusses credit risk management strategies and significant policies during prudential meetings; BA200 reporting series provide monthly quantitative information for peer comparisons and trend analysis. - For IRB banks, separate on-site visits focus on retail and wholesale portfolios. - During 2013, banks completed a counterparty credit risk questionnaire and counterparty credit risk on-site meetings were held with certain banks. EC3 — elements of a controlled credit risk environment - The supervisor requires policies and processes that establish an appropriate and properly controlled credit risk environment, including documented strategy, underwriting standards, credit administration, information systems, prudent limits, exception tracking, and controls around the use of models. Description and findings re EC3 - Regulation 23 requires banks to have a duly documented credit policy. - Regulation 39 requires the Board to ensure the bank establishes and maintains an independent credit risk control unit reporting directly to the CEO and Board or to an independent chief risk officer. - The BSD places some reliance on external auditors under Regulation 46 (Audit reports) to confirm the quality of the bank’s credit environment. *Source: _cr1555 - Section 1 defines “additional tier 1 capital,” “additional tier 1 unimpaired reserve funds,”* ### Section 4 requires the external auditor of a bank to report to the Registrar within 120 days ### _cr1555 - Section 4 requires the external auditor of a bank to report to the Registrar within 120 days ### Regulation 46 — External auditor reporting requirement - Section 4 requires the external auditor of a bank to report to the Registrar within 120 days of the bank’s financial year-end any significant weaknesses in the system of internal controls that came to the auditor’s attention while performing auditing procedures in respect of the bank’s policies, practices and procedures relating to: - granting of loans; - making of investments; and - ongoing management of loan and investment portfolios. - Regulation 46(9) requires the external auditor to hold preliminary discussions with the BSD prior to the annual audit. - Interpretive matters arising from external audits are sent to the BSD to obtain clarity on interpretation. - The external auditor will review the quantitative information submitted to the BSD via the BA 200 series and comment on the underlying processes and systems supporting the generation of the series. - The external auditor’s Regulation 46 report is reviewed, assessed and discussed with the auditors and the bank’s audit committee as part of the SREP. ### BSD reliance on external auditor work and supervisory follow-up - In most cases, the BSD relies on work by external auditors to determine the adequacy of a bank’s policies and processes for grading and classifying assets and establishing provisioning levels. - If external auditors identify significant weaknesses, BSD staff follow up during routine supervisory engagement with the bank. - BSD held extensive discussions with the South African Institute of Chartered Accountants (SAICA) to ensure the appropriateness of Regulation 46 reports relative to applicable audit standards and BSD requirements. - In September 2013 a revised audit matrix was approved by BSD management specifying the level of assurance to be given by external auditors. ### Application to IRB and model review - For IRB banks, estimates and models used for regulatory reporting and supervisory assessment are subject to specific additional review as specified by the BSD on an annual basis. - External auditors will produce the ‘long form report’ on such models; the BSD reviews this report as part of the SREP. - The approval process for PD and LGD models includes evaluation of whether models apply the definition of default correctly. ### Supervisory coverage, reporting and evidence requirements - The BSD requests and reviews quantitative submissions (e.g., BA 200 series, Form BA200, Form BA210) and may request copies of bank internal reports submitted to committees (e.g., Credit Risk Committee). - Form BA200 contains details of classification and provisioning and is submitted monthly; Form BA210 provides additional quarterly detail including restructured credit exposures and specific impairments related to large exposures, industry sectors and watch list clients. - Banks are required to have Board-approved, documented credit policies and to keep evidence supporting restructures and impairment assessments (proposed directive on restructured credit exposures). - External auditors are required to report annually any significant weaknesses in internal controls relevant to credit impairments, loan loss provisions and reserves. ### Key regulatory thresholds and classification rules referenced - By law, a bank may not make investments or grant loans or other credit to any person in an aggregate amount exceeding 10 percent of its capital and reserves without the permission of its board of directors or a committee appointed for such purpose. - A bank may not make an investment or grant any form of credit that exceeds 25% of the bank’s capital and reserves without the prior written approval of the Registrar. - Regulation 67 (Definitions) stipulates that an exposure that is overdue more than 90 days shall be classified as in default. - Classification categories for Standardised Approach retail exposures: - Overdue between 60 and 90 days – Special mention - Overdue between 91 and 180 days – Substandard (unless sufficient security is held) - Overdue between 181 and 365 days – Doubtful (unless sufficient security is held) - Overdue for more than one year – Loss - Proposed directive: restructured credit exposures to be classified as in default until a minimum of three full consecutive payments under revised terms have been received before reclassification to performing. ### Supervisory findings, assessments and recommendations - Assessment of Principle 18 (Problem assets, provisions and reserves): Compliant. - BSD monitors problem assets via regular reports, review of external auditor reports and selected on-site examinations; supervisory staff evaluates provisioning adequacy at individual bank and peer group levels. - The assessors encourage the BSD to finalize promptly the draft Directive on restructured credit exposures to prevent restructuring being used to conceal problem loans. - Assessment of Principle 20 (Transactions with related parties): Compliant. - The assessors recommend that the SARB amend regulations to give the Registrar the ability to set limits on exposures to any related parties (currently the Registrar can set limits only on intragroup transactions and exposures). *Source: Section excerpt from the IMF PDF chapter titled "_cr1555 - Section 4 requires the external auditor of a bank to report to the Registrar within 120 days".* ### 1. smaller banks and or branches that may trade some FX products. These banks do ### _cr1555 - 1. smaller banks and or branches that may trade some FX products. These banks do ### Key point - 1. smaller banks and or branches that may trade some FX products. These banks do not have quarterly on-site reviews; however due to the trading business in some, Treasury reviews will be conducted at these banks and branches; *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1555.pdf* ### 2. the remaining standardized banks in South Africa have limited trading exposure in ### _cr1555 - 2. the remaining standardized banks in South Africa have limited trading exposure in ### Market risk (Principle 22 / EC3–EC6) - Supervisor expectations (EC3): - Banks must have policies and processes establishing an appropriate and properly controlled market risk environment including: - (a) effective information systems for accurate and timely identification, aggregation, monitoring and reporting of market risk exposure to the bank’s Board and senior management; - (b) appropriate market risk limits consistent with the bank’s risk appetite, risk profile and capital strength, and with the management’s ability to manage market risk; - (c) exception tracking and reporting processes that ensure prompt action at the appropriate level of senior management or Board; - (d) effective controls around the use of models to identify and measure market risk, and set limits; and - (e) sound policies and processes for allocation of exposures to the trading book. - Findings and supervisory implementation: - Regulations prescribe information systems capable of risk management use; banks with IMA approval provide quarterly updates on system changes. - Internal VaR and Stressed VaR limits reported daily and monthly via BA 325 (line items 24-35) and BA 320 (100-110). - IMA banks submit annual approved market risk limits as part of the IMA renewal questionnaire; internal committee packs sent to BSD monthly. - Policies on model use and trading/banking book split must be provided to BSD annually; model use reviewed at least annually. - Valuation and marked-to-market (EC4): - Supervisor determines positions are revalued frequently; transactions captured timely; valuation uses consistent/prudent practices and reliable market data verified by an independent function. - Banks relying on models must ensure independent validation; policies on valuation adjustments for concentrated, less liquid, and stale positions required. - Banks were encouraged to review the EBA document on prudent valuation adjustments; many local banks have undertaken work. - Capital and valuation adjustments (EC5): - Regulation 39 requires capital based on nature, complexity and risk and procedures for valuation adjustments for (i) uncertainty due to liquidity in the markets and (ii) model risk for complex products. - SREP includes quarterly on-site discussions with systemically important banks; supervisory questionnaire requires pricing and valuation methods for all products; banks expected to adhere to IFRS rules at a minimum. - Stress testing (EC6): - Regulation 39 requires regular stress testing and scenario analysis; IMA banks required to have rigorous and comprehensive stress testing. - IMA banks send stress testing results monthly to BSD; ad hoc exercises conducted. - Assessment summary: - Assessment of Principle 22: Compliant. - Comment: SARB has comprehensive supervision for market risk at largest banks; for most banks market risk remains modest. ### Interest rate risk in the banking book (Principle 23 / EC1–AC2) - Regulatory framework and requirements (EC1–EC3): - Regulation 39(3) and 39(4) identify and require comprehensive risk-management processes and Board-approved policies to identify, measure, monitor, control, price, mitigate and report interest rate risk in the banking book. - Banks file IRRBB information monthly on Report BA 330 – Interest Rate Risk: Banking Book. - ALM reviews (off-site and on-site), SREP questionnaires, and ICAAP processes are used to assess policies and implementation. - For systemically relevant banks, on-site visits occur irrespective of initial analysis. - Stress testing and scenarios (EC4): - BSD applies a shock scenario of a 200bp parallel shift; banks submit their own specific stress test scenarios; results discussed during on-site visits. - Supervisory access and assessment (AC1–AC2): - Banks report impact on their economic capital periodically to the BSD; BSD strengthening review and follow-up program. - IRRBB is part of ICAAP; BSD discusses bank approaches and may make recommendations and follow-up. - Assessment summary: - Assessment of Principle 23: Compliant. - Comments: - Banks deal with minimal interest rate risk in the banking book due to a large percentage of lending on a floating rate basis. - BSD giving IRRBB more focus in 2014 and providing additional training; assessors encourage continued strengthening of review of internal interest rate risk measurement systems. ### Liquidity risk (Principle 24 / EC1–AC1) - Prudential requirements and reporting (EC1): - Banks subject to cash reserve requirement and a liquid assets requirement (both based on a percentage of adjusted external liabilities). - SARB committed to implementing LCR and NSFR; LCR effective 1 January 2015. - Regulation 26 requires on- and off-balance sheet information on liquidity risk filed on Form BA 300; Regulation 29 requires daily reporting of liquid asset position and daily LCR on Form BA 325. - Directive 2/2013 and Guidance Note 6/2013 address LCR calculation and the Committed Liquidity Facility (CLF); banks required to meet 60% minimum LCR without CLF when phased-in implementation starts in 2015. - Reflection of market conditions (EC2): - Implementation difficulties noted due to limited supply of government bonds, illiquid and small corporate debt market, and disintermediation of retail funding through money market funds. - BSD monitoring bank data on progress meeting new requirements. - Liquidity management framework and governance (EC3–EC4): - Regulation 39(3) and 39(4) require Board-approved comprehensive liquidity risk management processes proportionate to bank size/nature. - BSD conducts on-site and off-site ALM reviews, issues questionnaires (typically every two years for larger banks), conducts on-site work, meets bank management, and issues formal letters with findings and recommendations. - Funding strategy, cushions and contingency (EC5–EC6): - Regulation 39(5)(i) requires: - comprehensive cash flow forecasting; - limits on funding sources (products, counterparties, markets); - robust liquidity scenario stress testing (including bank-specific/sector-specific scenarios); - multifaceted contingency funding plans; and - maintenance of a sufficient cushion of liquid assets. - Regulation 26(13) requires a liquidity cushion of unencumbered liquid assets and Regulation 36 requires submission of qualitative contingency planning information. - BSD reviews contingency plans in ALM reviews and assesses how banks determine the amount needed to “survive” in a crisis. - Stress testing and foreign currency liquidity (EC7–EC8): - Regulations 26 and 39 set out requirements for liquidity stress scenarios; BSD reviews assumptions and peer compares idiosyncratic scenarios. - Four largest banks conduct liquidity simulation exercises facilitated by a third party observed by BSD. - Regulation 26 and Form BA 300 contain requirements for foreign currency liquidity monitoring; Regulation 26(12)(a)(vi) requires continuous meeting of liquidity needs in each relevant currency; BSD monitors via ALM reviews. - Encumbrance monitoring (AC1): - Regulations addressing unencumbered assets include Regulation 26(12)(a), Regulation 26(12)(a)(iv), Regulation 26(13), Regulation 26(14)(c), Regulation 26(14)(c)(ii)(C), and Regulation 27(6). - BSD determines compliance through off-site and on-site ALM reviews. - Assessment summary: - Assessment of Principle 24: Compliant. - Comment: BSD has initiated adoption of the LCR and intends to implement the NSFR on schedule despite market structure constraints. ### Operational risk (Principle 25 / EC1–AC1) - Framework and guidance (EC1–EC3): - Regulation 39(3) and 39(4) require banks to have comprehensive operational risk management processes; Guidance Note 2/2013 instructs banks to implement Basel Committee’s Principles for the Sound Management of Operational Risk. - Regulation 39(15) prescribes criteria for an independent operational risk management function for banks adopting an AMA. - BSD uses SREP, annual on-site reviews (two-year cycle for five largest banks as of 2014), and off-site analysis to assess operational risk management. - Disaster recovery and business continuity (EC4): - Regulation 36(8)(b)(xi) requires submission of qualitative contingency planning information; SREP used to review disaster recovery and business continuity plans. - IT risk and capacity (EC5–EC6): - Regulation 67 defines operational risk to include failed internal systems; IT risk included in operational risk reporting (Forms BA 400 and BA 410). - Guidance Notes highlight IT project governance; BSD has increased IT risk staff (now two, excluding manager) to enhance reviews. - Regulation 39(15) requires operational risk measurement methodology and reporting systems, internal measurement systems and regular validation, capital allocation techniques, and regular reporting of exposures including material losses. - Outsourcing and systemic exposures (EC8 / AC1): - Regulation 39(3), Regulation 36(8), Regulation 48 and Guidance Note 3/2008 address outsourcing governance, due diligence, contracts/SLA, contingency planning and internal audit oversight. - BSD monitors common service providers (example: Telkom) and participates in FSCF Operational Risk Subcommittee alongside market participants and the five largest banks to identify systemic operational risk threats. - Reporting and data collection (EC7): - Form BA 400 and Form BA 410 used to collect operational risk information (six-monthly) including loss event types and recorded losses; Standardized Approach banks have been requested bilaterally to complete BA 410. - Assessment summary: - Assessment of Principle 25: Compliant. - Comment: SARB has a robust program combining on-site and off-site analysis; BSD has enhanced the specialist operational risk team including IT experts. ### Internal control and internal audit (Principle 26 / EC1–EC5) - Legal and regulatory requirements (EC1): - Banks Act provisions: Section 60A (compliance), Section 60B (corporate governance), Section 64 (audit committee). - Relevant regulations: Regulation 39 (corporate governance), Regulation 40 (conduct of directors), Regulation 41 (Board composition), Regulation 46 (external auditors’ assessment of internal controls), Regulation 48 (internal audit), Regulation 49 (compliance). - SREP stages 2–4 include interactions with banks and external auditors to assess internal control frameworks; material weaknesses documented and tracked. - Back office and resourcing (EC2): - Annual meetings with CEO, head internal audit, head compliance and external auditors include human resources discussions (staff numbers, skills, turnover, segregation of duties). - Compliance function (EC3): - BA Section 60A and Regulation 49 require an independent compliance function headed by a senior executive with authority to communicate directly with Board/audit committee/external auditor and adequate resources and stature. - BSD holds annual meetings with heads of compliance; periodic reviews of internal/external audit reports support assessment. - Internal audit function (EC4–EC5): - Regulation 48 requires an independent and objective internal audit function with specific duties, reporting lines, resources, independence, standards, follow-up processes and regular reporting to senior management and Board/audit committee. - BSD receives internal audit plans annually and holds meetings with heads of internal audit and audit committees; periodic reviews performed on internal and external audit reports. - Internal audit requirements address sufficiency of resources, independence, timely information on material changes, full access to staff/records, risk-based methodology and audit plans, and authority to assess outsourced functions. - Assessment summary: - Assessment of Principle 26: Compliant. - Comment: BSD closely monitors adequacy of internal controls and audit using off-site review of internal reports and regular meetings with governance, internal audit and compliance functions. ### Financial reporting and external audit (Principle 27 / EC1) - Responsibility and standards (EC1): - Management and Boards responsible for preparing financial statements in accordance with internationally accepted accounting policies and recordkeeping. - IFRS accounting standards are applied to all banks and controlling companies in South Africa without deviations. - BA Section 75 and Regulations 3(1), 4(1) and 44(1) place onus on management to prepare IFRS-compliant financial statements. - Companies Act Sections 24, 28, and 29 reference recordkeeping and financial statement conformity to reporting standards. - Assessment summary: - Supervisor holds Boards and management accountable for IFRS-based financial reporting; regulatory framework and reporting obligations in place. *Source: SOUTH AFRICA — INTERNATIONAL MONETARY FUND* ### Section 30(1) further requires that the financial statements be prepared annually. ### _cr1555 - Section 30(1) further requires that the financial statements be prepared annually. ### Audit and financial statement requirements (EC2, EC3) - Section 30(1) further requires that the financial statements be prepared annually. - BA Section 85 places the responsibility on the management of the bank to certify the returns or any other documents (which would therefore include financial statements) submitted to the Registrar as correct. - The supervisor holds the bank’s Board and management responsible for ensuring that the financial statements issued annually to the public bear an independent external auditor’s opinion as a result of an audit conducted in accordance with internationally accepted auditing practices and standards. - Section 30(2) of the Companies Act requires that annual financial statements be audited and section 30(3) requires that they include an auditor’s report. - Section 90 of the Companies Act details the requirements for an auditor of a company (bank), including the independence requirement (Section 90(2)(b)) and registration with the Independent Regulatory Board for Auditors (Section 90(2)(a)). - BA Section 65 places the duty on the bank to furnish the Registrar with copies of the financial statements. - Regulation 46 (1) requires that annual returns submitted to the Registrar be audited. - Regulation 3(1) specifies that all returns shall be prepared in accordance with Financial Reporting Standards and regulation 3(2) states that the same accounting policy shall apply to both the annual financial statements and the regulatory returns, unless otherwise provided. - Regulations 2 and 3(3) address the need for returns submitted to the Registrar to be reconcilable to the bank’s management accounts and/or Board reports and annual financial statements. - Regulation 3(4) addresses the requirement for banks adopting the fair value option to have robust risk management policies, procedures and controls in place, to comply with the requirements of the relevant Financial Reporting Standard, and be subject to independent verification and validation. - In practice, BSD staff makes such determinations as part of their ongoing supervisory work, supported in part through their discussions with banks’ external auditors. ### Valuation practices and independent verification (EC3) - The supervisor determines that banks use valuation practices consistent with accounting standards widely accepted internationally. - The supervisor determines that the framework, structure and processes for fair value estimation are subject to independent verification and validation. - Banks must document any significant differences between the valuations used for financial reporting purposes and for regulatory purposes. - Regulation 3(4) specifically requires independent verification and validation for banks adopting the fair value option. ### External audit scope and applicable standards (EC4, EC5) - Section 5 of the Companies Act gives prevalence to the Auditing Profession Act. - Section 2(c) of the Auditing Profession Act is aimed at improving the development and maintenance of internationally comparable ethical standards and auditing standards for auditors. - The Independent Regulatory Board for Auditors has adopted the International Standards on Auditing issued by the International Auditing and Assurance Standards Board as the applicable auditing standards to be applied by registered auditors (responsible for the audit of banks). - The ISAs (ISA 300, 315 and 320) include requirements for audits to be conducted following a risk and materiality based approach in planning and performing an external audit. - Regulation 46 deals with the additional scoping requirements for auditors in relation to the audits of banks. - International Standards on Auditing (ISAs) determine that a risk and materiality based approach be followed when planning and conducting audits. - Audits of banks include areas such as: - the loan portfolio, - loan loss provisions, - non-performing assets, - asset valuations, - trading and other securities activities, - derivatives, - asset securitizations, - consolidation of and other involvement with off-balance sheet vehicles, - the adequacy of internal controls over financial reporting. - Regulation 46(4) requires that the auditor report to the Registrar specifically on the granting of loans, the making of investments, the ongoing management of the loan and investment portfolios and the relevant credit impairments, loan loss provisions and reserves. ### Auditor appointment, independence, rotation, and supervisory interaction (EC6, EC7, EC8, EC9) - BA Section 61(3) gives the power to the Registrar to either refuse the application for the appointment of an auditor or withdraw any approval of an auditor due to reasons specified in the section. - Form BA 006 is to be completed by banks for approval of appointment of an auditor. - Section 62 provides that the Registrar may appoint an auditor if for any reason the bank fails to make such appointment. - Section 92 of the Companies Act requires that auditors (specifically, the senior partner) be rotated from time to time (typically every five years). - BA Section 61(3) also states that the Registrar may refuse the re-appointment of an auditor who has already served the prescribed number of years consecutively. - Regulation 46(9) provides for discussions to be held between the auditors and the Registrar to discuss matters pertaining to the audit of a bank. - Bilateral meetings are held between the BSD and the auditors of each bank annually (refer to BA Section 4(4)(e)). - The BSD participates in various banking industry groups where interaction with external audit firms takes place. - Regulation 46 (Audit reports) Sections (2)-(4) detail the scope of the auditors’ reporting requirements to the Registrar, including requirements relating to matters of material significance, compliance with laws and regulations and significant deficiencies in internal controls. - BA Section 63(1) details the functions of the auditor in relation to the Registrar and includes the requirement for the auditor to report on matters which may: - endanger the bank’s ability to continue as a going concern, - impair the protection of depositors’ funds, - be contrary to the principles of sound management (including risk management), - amount to inadequate maintenance of internal controls. - Laws or regulations provide that auditors who make such reports in good faith cannot be held liable for breach of a duty of confidentiality. *Source: _cr1555 - Section 30(1) further requires that the financial statements be prepared annually.* ### Section 63(3) further states that an auditor acting under the Act may not under any ### _cr1555 - Section 63(3) further states that an auditor acting under the Act may not under any ### Auditor protections and supervisor access - Section 63(3) states that an auditor acting under the Act may not under any circumstances be deemed to be in contravention of the law or code of professional conduct to which the auditor may be subject. - Bilateral meetings are held between BSD staff and external auditors prior to an audit to discuss areas of concern and scoping requirements. - Trilateral meetings are held after an audit between the BSD, external auditors and the audit committee of the bank to discuss key external and internal audit findings. - AC1: The supervisor has the power to access external auditors’ working papers, where necessary. - Description: In terms of BA Section 4(4) the Registrar may review the work done by an external auditor of a bank. - Assessment of Principle 27: Compliant ### Principle 28 — Disclosure and transparency (overview and legal framework) - Principle 28: Supervisor determines banks and banking groups regularly publish consolidated and, where appropriate, solo information that fairly reflects financial condition, performance, risk exposures, risk management strategies and corporate governance. - EC1: Laws, regulations or the supervisor require periodic public disclosures64 of information by banks on a consolidated and, where appropriate, solo basis that adequately reflect the bank’s true financial condition and performance, and adhere to standards promoting comparability, relevance, reliability and timeliness. - Regulation 43 (Public disclosure) requires: - a bank shall disclose in its annual financial statements and other disclosures to the public, reliable, relevant and timely qualitative and quantitative information that enables users to make an accurate assessment of the bank’s financial condition, including its capital adequacy position, and financial performance, business activities, risk profile and risk management practices... - Regulation 43(2) details the extent of disclosures to ensure they reflect the bank’s true financial condition and performance, and adhere to standards promoting comparability, relevance, reliability and timeliness. - Regulation 43(3) subjects requirements to conditions specified in writing by the Registrar and applies requirements to controlling companies, other banks, or approved institutions conducting similar business in other countries. - Financial disclosures are made in line with IFRS as part of the annual financial statements and are audited as part of the external audit of banks. - Registrar has fully implemented Pillar 3 disclosure requirements set out in Basel II. Regulation 43(3) requires that all bank controlling companies submit the full set of Pillar 3 disclosures. ### EC2 — Scope and content of disclosures - EC2: Required disclosures include both qualitative and quantitative information on financial performance, financial position, risk management strategies and practices, risk exposures, aggregate exposures to related parties, transactions with related parties, accounting policies, and basic business, management, governance and remuneration, commensurate with risk profile and systemic importance. - Description and findings: - Regulation 43(2) requires both qualitative and quantitative disclosures and sets out detailed disclosure requirements including governance and remuneration. - Disclosures related to aggregate exposures to related parties, transactions with related parties, accounting policies, and basic business, management, governance and remuneration are included in IFRS disclosures. - Banks’ disclosures are periodically reviewed by BSD relationship teams/bank analysts as part of ongoing work. - Assessors reviewed annual reports and determined the scope of disclosure is quite extensive, including both qualitative and quantitative information. ### EC3 — Group structure disclosures - EC3: Laws, regulations or the supervisor require banks to disclose all material entities in the group structure. - Description and findings: Regulation 43(2) requires banks to disclose information relating to material entities in the group structure. ### EC4 — Review and enforcement of disclosure standards - EC4: Supervisor or another government agency effectively reviews and enforces compliance with disclosure standards. - Description and findings: - Pillar 3 Disclosure function of the BSD (with risk and analysis teams) is responsible for review and enforcement. - Pillar 3 disclosures submitted by banks are reviewed according to resource availability, reviewed for completeness and reconciled on a sample basis to supervisory returns. - Pillar 3 requirements and Regulations do not require Pillar 3 disclosures be audited; where material errors/discrepancies are noted they are communicated to the bank. - Directive 8 of 2013 communicated revised Pillar 3 disclosure requirements in line with Basel III. ### EC5 — System-wide publication of aggregate information - EC5: Supervisor or other relevant bodies regularly publish information on the banking system in aggregate. - Description and findings: - South African Reserve Bank (SARB) publishes information relating to the banking sector on a monthly basis. - Data series includes balance sheet and off-balance sheet activities, capital adequacy, large exposures and risk categories (credit, liquidity, market, interest rate risk in the banking book, counterparty and currency). ### AC1 — Disclosure of period-average exposures - AC1: Disclosure requirements promote information that helps understand a bank’s risk exposures during a financial reporting period, e.g., average exposures or turnover. - Description and findings: SARB adheres to and has fully adopted the Pillar 3 disclosure requirements as prescribed by the Basel framework. ### Assessment and comments on Principle 28 - Assessment of Principle 28: Largely Compliant - Comments: - Banks are required to disclose a wide range of information regularly. - Pillar 3 disclosures are not currently audited, as permitted under the Basel capital framework. - Important for BSD to review Pillar 3 disclosures consistently; current reviews are sporadic. - With recent staff increases, BSD should assign responsibility for reviewing Pillar 3 disclosures to analysts or skilled individuals. - Alternative: require Pillar 3 reports be reviewed by banks’ external auditors. ### Principle 29 — Abuse of financial services and AML/CFT supervisory framework (overview) - Principle 29: Supervisor determines that banks have adequate policies and processes, including strict customer due diligence (CDD) rules to promote high ethical and professional standards and prevent banks from being used for criminal activities.65 - EC1: Laws/regulations establish duties, responsibilities and powers of the supervisor related to supervision of banks’ internal controls and enforcement regarding criminal activities. - BA Sections 3, 4, 5, 6, 7, 8, 9, and 10 give powers to the Registrar to supervise banks. - Regulation 39 requires a bank to manage its risk, including “detection and prevention of criminal activities.” - Regulation 47 requires banks to report an offence in writing to the Registrar within 30 days after the bank became aware of any ML/TF activity not identified/reported as required by law, including FICA requirements. - BA Regulation 50 requires a bank to have robust structures, policies and processes to guard against market abuse, financial fraud, market manipulation, financing of terrorism and money laundering. - FICA Schedule 2 lists SARB and the Registrar as supervisory bodies; each supervisory body has primary responsibility for supervising accountable institutions for compliance with FICA and the Money Laundering and Terrorist Financing Control Regulations. - FICA Section 45 sets out supervisory responsibilities; Section 45(1A) inserts this duty into statutory mandates; Section 45B gives BSD powers to conduct routine and non-routine inspections. - Constitutional Court in 2014 ruled power of non-routine inspections unconstitutional on right to privacy and prohibition of warrantless searches; Court ordered such inspections suspended 18 months after the ruling and relevant authorities are preparing to amend the act before the deadline. - FIC (the Financial Intelligence Unit) or BSD may in terms of Section 43A issue directives regarding the application of FICA; for directives specifically applying to banks, BSD is assumed to issue such directives. ### EC2 — Policies, processes and supervisory practices for AML/CFT - EC2: Supervisor determines banks have adequate policies/processes that promote high ethical standards and prevent bank misuse for criminal activities; includes prevention, detection, and reporting. - Description and findings: - FICA Section 42 requires banks to formulate and implement internal rules concerning key FICA requirements. - Money Laundering and Terrorist Financing Control Regulations, Chapter 5, Regulations 25, 26 and 27 provide guidelines on policies, processes and working methods to demonstrate appropriate AML/CFT internal controls. - A specialized AML/CFT review team was established within the BSD in 2011. - BSD has an internal AML/CFT Supervisory Manual detailing supervisory processes and procedures for on-site and off-site supervision. - BSD mission: “to promote the soundness of the banking system and to minimize systemic risk through the effective and efficient application of international regulatory and supervisory standards.” - Off-site supervision: BSD receives monthly statistical AML returns from banks including: - Whether the bank’s policies and rules on anti-money laundering and terrorist financing control measures had been updated during the past month. - Number of suspicious transaction reports (STR’s) during the past month, including the total of amounts involved and particular mention of the highest amount involved. - Statistics and breakdown of the number of employees that received AML/CFT specific training during the past month. - On-site AML/CFT inspections assess adequacy of banks’ internal rules and working methods; inspections are risk-based and supervisory plan is informed by off-site analysis, meetings, internal/external auditors’ reports. - Since AML/CFT team establishment in 2012, priority on large banks and some foreign branches; after inspections of these, focus shifted to smaller banks though not all covered. - Inspection resourcing and duration: - Large banks: around 10 staff members and take 6-8 weeks. - Small banks: around 5 staff members and take as short as 3 weeks. - Usually inspections result in 40-50 findings. - Regulations, particularly Regulation 50, set general requirements for robust structures, policies and processes to manage ML/FT risks. - Primary AML/CFT legislation (FICA) does not provide a firm legal basis for BSD to assess adequacy of specific AML/CFT policies/procedures against international best practices and take supervisory actions accordingly. - BSD, based on broader BA powers, expects banks to apply a risk-based approach and implement non-enforceable FIC Guidance Notes (notably Guidance Note 3) and FATF standards such as enhanced CDD for high risk customers. - This interpretation is not yet officially tested; formal sanctions applied to banks so far are based on FICA and not BA. - BSD is developing preliminary risk matrix and supervisory tools to identify higher risk institutions for targeted on-site inspections. - Transformation from rules-based to risk-based supervision is at an early stage; supervisory practices have not fully adapted and supervisory expectations have not been sufficiently communicated to banks. ### EC3 — Reporting to supervisor in addition to FIU - EC3: Banks report to the financial intelligence unit and also to the banking supervisor suspicious activities and incidents of fraud when material to safety, soundness or reputation.66 - Description and findings: - Regulation 47 requires banks to report an offence in writing to the Registrar within 30 days after awareness of any ML/TF activity not identified/reported as required by law, including FICA requirements. - Reportable offences also include incidents that result in or will result in the bank losing in excess of one percent of its qualifying capital and reserve funds. - Assessors were informed this has happened before where a bank found its reporting process had not been properly followed. - FICA Sections 27, 28, 28A, 29, 30 and 31 require banks to report information that may be related to crime to authorities for further investigation and prosecution where necessary. ### EC4 — Supervisor sharing information with FIU and authorities - EC4: If the supervisor becomes aware of additional suspicious transactions, it informs the FIU and other designated authorities; supervisor shares information related to suspected or actual criminal activities with relevant authorities. - Description and findings: - FICA Section 36 requires BSD to advise the FIC and any other supervisory body and furnish all information and records if BSD knows or suspects an accountable institution has received or is about to receive proceeds of unlawful activities or may be used for money laundering. - FIC shares financial intelligence with law enforcement agencies: South African Police Services, Directorate for Priority Crime Investigation, and South African Revenue Services. - Law enforcement investigates and prosecutes based on FIC intelligence. - BSD supervisory procedures ensure banks have suspicious transaction detection systems and processes; inspection procedures include BSD review of suspicious/unusual transactions detected by automated systems or staff and whether these were analyzed and reported to the FIU. - Cases identified during onsite inspections included unreported suspicious and unusual transactions and unreported large cash transactions; BSD informed the FIC of such non-reporting. ### EC5 — CDD policies, program elements and recordkeeping - EC5: Supervisor determines banks establish well-documented and communicated CDD policies integrated into risk management; essential elements include: - (a) customer acceptance policy identifying business relationships the bank will not accept; - (b) customer identification, verification and due diligence programme on an ongoing basis including verification of beneficial ownership, understanding purpose and nature of business relationship, and risk-based reviews to ensure records are updated and relevant; - (c) policies and processes to monitor and recognize unusual or potentially suspicious transactions; - (d) enhanced due diligence on high-risk accounts with escalation to senior management for decisions on entering/maintaining relationships; - (e) enhanced due diligence on politically exposed persons with escalation to senior management for decisions; - (f) clear rules on records to be kept on CDD and individual transactions with at least a five year retention period. - Description and findings: - (a) FICA Section 21 sets out customer identification and verification requirements. - Money Laundering and Terrorist Financing Control Regulations, Chapter 5, Regulations 25 and 26 set out requirement to have documented internal rules related to establishment and verification of customer identities and record keeping rules with guidelines on policies, processes and working methods. - FIC issues guidance based on section 4(c) of the FIC Act to assist accountable institutions and supervisory bodies with practical application of FICA requirements. - FICA assigns supervisors duties to assess accountable institutions’ alignment with guidance through supervisory body inspection powers and responsibilities contained in section. *Source: _cr1555 - Section 63(3) further states that an auditor acting under the Act may not under any* ### 45. FICA Guidance note 3 sets out the client acceptance policy requirements under ### _cr1555 - 45. FICA Guidance note 3 sets out the client acceptance policy requirements under ### Client acceptance, CDD, enhanced due diligence, and record-keeping - FICA Guidance note 3 sets out the client acceptance policy requirements under paragraph 5. - Money Laundering and Terrorist Financing Control Regulations, Chapter 1: - Regulations 3 to 16 provide for the specific customer identification and verification requirements for different categories of clients. - Regulation 19 provides requirements regarding the ongoing maintenance of customer information. - Regulation 21 requires accountable institutions to obtain information that will assist in identifying proceeds of unlawful activities or money laundering activities. - Regulation 27 sets out the requirement of accountable institutions to have internal rules concerning the detection and reporting of suspicious and unusual transactions. - FICA Guidance note 3 paragraph 14 provides further details, including conduct of due diligence reviews on existing relationships at appropriate times. - FICA Guidance note 3 paragraphs 2, 3, 4 and 5 set out the due diligence processes to be followed in respect of higher risk customers: - Paragraph 4 provides a detailed list that should be considered in identifying higher risk customers. - Paragraph 5 requires a graduated customer acceptance policy for higher risk customers. - FICA Guidance note 3 paragraphs 25 to 27 set out the enhanced due diligence requirements in respect of Politically Exposed Persons, including the escalation to senior management for related decisions. - FICA Sections 22, 23, 24, 25, and 26 stipulate record-keeping requirements including records to be kept, retention period, admissibility of records and access to such records. - BSD onsite inspection procedures: - Assess whether banks comply with CDD and record-keeping requirements in the legislation and FIC Guidance notes. - Assess compliance with “internal rules” requirements, ensuring banks have policies, procedures and working methods for CDD and enhanced CDD for higher risk customers. - Assess adequacy of banks’ risk-based approach to customer acceptance and general CDD. - For bank controlling companies, assessment covers group-wide policies, although FICA requirements only apply to banks. - Assess enhanced due diligence procedures for acceptance of higher risk customers (e.g., PEPs) and higher risk transactions (e.g., money services businesses and trade finance). - Enforcement and outcomes: - BSD recently imposed administrative fines on 4 large banks for failures to comply with the FICA, detected through on-site activities. Failures in CDD practices were one of the reasons for the fines. - Legal enforceability caveat: - FICA Guidance notes themselves do not have the power of law, but BSD can take supervisory measures based on these guidelines as they are regarded to set expectations for structures, policies, processes and procedures as stipulated in BA Regulation 50. ### Correspondent banking (EC6) - EC6 requirements: - (a) Gather sufficient information about respondent banks to fully understand the nature of their business and customer base, and how they are supervised. - (b) Not establish or continue correspondent relationships with respondent banks that do not have adequate controls against criminal activities or that are not effectively supervised by relevant authorities, or with those banks that are considered to be shell banks. - FICA Guidance note 3 for Banks paragraph 28 cites EC6 and requires AML/CFT control measures for correspondent banking relationships, including gathering sufficient information about the respondent bank. - Wolfsberg group principles have been used to determine risk indicators for respondent banks and to determine commensurate levels of due diligence. - BSD inspection procedures include assessment of existence and adequacy of banks’ internal rules, policies, procedures and working methods for dealing with correspondent banks. - Correspondent banking inspection procedures were developed from FATF Recommendations and the FICA Guidance note. ### Controls, reporting obligations, and supervisory powers (EC7–EC8) - Reporting and detection legal framework: - FICA Sections 27, 28, 28A, 29 and 32 set out reporting obligations for threshold reports, property associated with terrorists and related activities, suspicious and unusual activities, and information requests from authorized persons. - Regulation 27 requires accountable institutions to have internal rules concerning detection and reporting of suspicious and unusual transactions. - Detection systems in practice: - A large number of banks utilize customer screening systems and automated suspicious and unusual transaction monitoring systems. - Manual client monitoring processes are also utilized by all banks. - BSD on-site inspection procedures: - Incorporated within the AML/CFT manual and used during supervisory interactions and inspection to determine robustness of preventative controls, based on Regulation 50 among others. - Comprehensive on-site AML/CFT inspections have been conducted since establishment of responsible teams in 2012, with inspections on all large banks completed. - Inspections led to administrative fines for large banks due to weakness in frameworks, including controls and systems over monitoring and reporting suspicious transactions. - EC8 supervisory powers: - Amendment to the FICA in 2010 empowered the BSD in terms of section 45C to impose administrative sanctions on banks non-compliant with the Act. - BSD exercised these powers very recently by fining most of the large banks in April 2014 based on on-site inspection findings. - FICA and relevant regulations are regarded as comprising requirements under the BA; the Registrar can apply measures under the BA, although no formal BA-based measures on AML/CFT issues have been taken to date. ### Governance, compliance functions, staffing, training, internal audit (EC9–EC11) - EC9 requirements: - (a) Requirements for internal audit and/or external experts to independently evaluate relevant risk management policies, processes and controls; supervisor has access to reports. - (b) Policies and processes to designate compliance officers at management level and appoint a dedicated officer to whom potential abuses (including suspicious transactions) are reported. - (c) Adequate screening policies and processes for high ethical and professional standards in hiring staff and in agency/outsourcing relationships. - (d) Ongoing training programmes for staff on CDD and methods to monitor and detect criminal and suspicious activities. - Legal and supervisory framework: - BA Regulation 48 requires banks to establish an independent and objective internal audit function; copies of internal and/or external audit reports are submitted to BSD. - FICA Section 43(b) requires accountable institutions to appoint a compliance officer responsible for ensuring compliance with FICA and internal rules. - BA Regulation 50 requires banks to have adequate structures, policies, processes and procedures to maintain high ethical standards and to provide adequate training and guidance to staff. - FICA Section 43(a) requires accountable institutions to provide training to employees to ensure compliance with FICA and internal rules. - BSD inspection and interaction: - AML/CFT Supervisory Manual prescribes onsite procedures assessing ongoing training, appointment of AML/CFT compliance officers, and review of internal audit reports on AML/CFT compliance. - Quarterly AML/CFT “prudential” meetings with banks include discussions on internal audit involvement and AML/CFT compliance; issues are discussed with banks’ internal audit and compliance functions. - EC10 requirements: - Banks have and follow clear policies/processes for staff reporting of abuse to local management or dedicated officer, and adequate management information systems for timely information to Boards, management and dedicated officers. - BSD’s AML Teams established inspection procedures to determine existence and adequacy of such policies, processes and management information systems. - EC11 protections: - Laws provide that a member of a bank’s staff who reports suspicious activity in good faith either internally or directly to the relevant authority cannot be held liable. - FICA Section 38 provides for protection of persons making reports under the FIC Act. - Protected Disclosures Act 26 of 2000 (PDA) protects persons who report suspicious activities in good faith. ### Cooperation, information sharing, specialist resources, and enforcement scope (EC12–EC13) - EC12 cooperation and information sharing: - FIC is the only institution permitted to share financial intelligence information with law enforcement agencies such as South African Police Services, Directorate for Priority Crime Investigation, and the South African Revenue Services. - Law enforcement authorities investigate, charge and prosecute based on FIC financial intelligence. - FIC shares state of compliance information with FATF, ESAAMLG, BIS, IMF, and Egmont Group where necessary. - BSD does not have discretion to share details of suspected or actual criminal activities with external third parties, except duty to report and share information with the FIC and relevant supervisory bodies related to suspected facilitation of money laundering or proceeds of crime by a bank in terms of FICA Section 36. - BSD shares issues of non-compliance with AML/CFT requirements of particular banking institutions with other domestic and international supervisory authorities with whom BSD have a MOU. - EC13 specialist expertise and resources: - FIC has AML/CFT specialists who interact with accountable institutions and bears sole responsibility for receipt and analysis of suspicious transaction reports. - BSD has AML/CFT specialists: 10 staff members dedicated to AML/CFT solely, who are also inspectors under FICA Section 45A. - BSD team is responsible to assess and enforce compliance with the FICA, and not to investigate/address criminal activities. - FIC and BSD jointly conduct AML/CFT prudential meetings to discuss money laundering controls, terrorist financing controls, suspicious transaction reports and trends, predicate crimes, and cyber-crime trends. - BSD powers under BA Sections 81 to 84 to control activities of unregistered persons suspected of illegal deposit-taking, including: - Apply to court for an order prohibiting anticipated or actual schemes involved in illegal deposit-taking. - Extract information from unregistered persons. - Inspect affairs of an unregistered person. - Direct such a person to repay money if satisfied that a person has illegally taken deposits. - Appoint a manager to manage and control repayment of unlawfully obtained money. ### Assessment, remaining weaknesses, and recommendations - Assessment summary: - Assessment of Principle 29: Largely Compliant. - Comments: The BA and associated regulations and revised FICA provide a generally adequate framework for supervising banks’ policies and processes against abuse of financial services. - BSD has significantly stepped up AML/CFT supervision: dedicated AML/CFT unit, on-site inspections with inspections on large banks completed, administrative fines imposed on some large banks, and greater attention in SREP. - Weaknesses remain: - FIC Guidance Notes contain many essential requirements and the concept of the risk-based approach but do not have legal enforceability under the FICA. - Although applied by BSD in supervision, enforceability through general supervisory power based on the BA has not been formally tested. - On-site inspections of all banks are not yet completed. - Assessors’ recommendations: - Authorities should proceed with the planned revision of the FICA to incorporate the risk-based approach to AML/CFT issues and ensure enforceability of essential elements currently included in the FICA Guidance Notes. - BSD should continue AML/CFT on-site inspections to cover all banks expeditiously and improve approaches and techniques based on lessons learned. *Source: _cr1555 - 45. FICA Guidance note 3 sets out the client acceptance policy requirements under* ### 3. Cooperation and ### 3. Cooperation and collaboration ### Cooperation and confidentiality - Grade: C - Findings: - Legal provisions and operational frameworks for cooperation and collaboration with domestic and foreign authorities are in place. - The current legal framework and its practical application provide a reasonable assurance of protecting the confidentiality of supervisory information. - Reliance on SARBA Section 33 and the manner BA Section 89 is stipulated leave room for the information to be used for non-supervisory purposes. - Recommendation: - The authorities should 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. ### Permissible activities - Grade: C - Findings: - The Banks Act provides clear definitions of activities that are only permitted to be conducted by registered banks, including taking deposits from the public. ### Licensing criteria - Grade: C - Findings: - 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. ### Transfer of significant ownership - Grade: C - Findings: - Laws, regulations, and current supervisory practices provide adequate control and oversight regarding significant ownership of a bank and a controlling company. ### Major acquisitions - Grade: C - Findings: - Major acquisitions and investments by banks and controlling companies are subject to prior approval by the Registrar. - The BSD has well established supervisory practices to limit and monitor risks arising from such activities. ### Supervisory approach - Grade: LC - Findings: - The SREP cycle and the risk rating system provide an adequate general framework of supervisory approach for the BSD, focusing on individual banks and banking groups. - Sector-wide approaches (e.g., “flavor of the year” topics) and enhanced thematic on-site reviews complement individual-focused work. - Approaches related to resolution of banks required in EC 6 and 7 are still in the process of development; work on resolution plans for systemic banks has yet to begin. - Recovery plans and contingency planning have started, but resolution planning for systemic banks awaits expected legislation on bank resolution. - Planned transition to the twin peaks supervisory structure should involve not only prudential responsibilities but improved oversight over systemic risk and wider financial groups. - Recommendations: - Enact the bank resolution bill expeditiously to provide required powers. - The new prudential supervisor should review and potentially formalize frameworks to detect and assess system-wide and cross-sectoral risks and integrate them into supervision of individual financial groups and regulated financial institutions. - Consider adding tools such as common scenario stress testing across different financial sectors and a risk rating framework that accounts for the entire risk of financial groups. - Ensure close cooperation with the planned Financial Stability Oversight Committee and its secretariat. ### Supervisory techniques and tools - Grade: C - Findings: - BSD has shifted from reliance on external auditors to conducting its own on-site reviews, including deep-dive reviews verifying banks’ actual practices (e.g., extensive review of loan files). - BSD added risk specialists who conduct on-site reviews on particular risk areas, including model validations. - Improvements are complemented by detailed off-site analysis and frequent interactions with banks and their Boards. - Recommendation: - Continue enhancing deep-dive on-site review capability and improve tools and techniques to assess and monitor spill over risks to banks from non-bank activities in their financial groups. ### Supervisory reporting - Grade: C - Findings: - Regulatory framework requires periodic submission of a broad range of information by banks and controlling companies. - Strong regulatory and supervisory processes ensure accuracy and comparability of submitted returns. - Well developed procedures exist for analyzing collected information and feeding it into supervisory actions. ### Corrective and sanctioning powers of supervisors - Grade: MNC - Findings: - Major problem: requirement for 30 days prior notice in suspending registration or restricting activities based on BA Sections 23, 24 and 26 has not been changed. - Newly introduced power of directives under BA Section 6(6) and potential court motion may partially address the issue, but limitations remain: - Directives under Section 6(6) still require consultation with the relevant bank and may be challenged on due process grounds. - Court motions are untested and rely on court judgment, which may differ from the supervisor’s position and introduce delays. - Lack of ability for the supervisor to fine individuals related to banks (e.g., Board members and senior management) is an important gap in relation to EC5. - Recommendation: - Strengthen laws to provide the Registrar with the power to suspend or limit a bank’s activities without delay to improve compliance with the CP. ### Consolidated supervision - Grade: C - Findings: - Supervisory and reporting framework provides an adequate framework for monitoring and assessing risks to banks from non-banking and foreign banking operations in banking groups. - Prevalence of conglomerate-type financial groups requires additional effort to monitor and manage risks arising from non-banking activities or parent entities (some not bank controlling companies). - Recommendations: - Strengthen techniques (e.g., group-wide stress testing) to monitor and assess those risks. - Improve recovery and resolution planning of large banking groups, particularly once necessary powers are provided by expected new legislation. - Recovery and resolution planning should consider scenarios where shocks originate from non-banking entities or parent groups. ### Home-host relationships - Grade: LC - Findings: - Current arrangements and frameworks for cooperation with foreign supervisors are broadly adequate. - Cooperation with supervisors in other African countries needs further enhancement as South African banking groups expand in these countries. - Policies and processes on conducting on-site reviews/inspections of South African banks’ cross-border operations in other African countries need finalization and enhancement. - Cross-border recovery and resolution planning is lacking. - Several big banks have strong ties with the UK; recovery and resolution plans need close collaboration with UK authorities. - Some South African banking groups’ foreign operations in other African countries have become systemically important for those host jurisdictions. - Recommendations: - Continue supporting capacity building of African host supervisors. - Develop and implement policies and processes for on-site reviews of cross-border operations, evolving toward joint supervisory activities with host supervisors. - Enhance cross-border recovery and resolution planning with due regard to impacts on host jurisdictions’ financial systems and coordinate closely with relevant supervisory authorities. ### Corporate governance - Grade: C - Findings: - SARB places strong emphasis on sound and effective corporate governance at all banks through regulations and practice. - BSD staff assess quality of corporate governance through regular meetings and review of audit reports and Board and Board committee minutes. ### Risk management process - Grade: C - Findings: - SARB’s SREP cycle emphasizes verification that banks have robust risk management policies and procedures. - Recent significant increase in supervisory staff allowed BSD to form specialized teams to review major risk categories. - Skills of some newer team members are being strengthened primarily through on-the-job experience, enhancing BSD’s understanding of risks, especially at largest institutions. ### Capital adequacy - Grade: C - Findings: - SARB has adopted or is in the process of adopting components of Basel II, 2.5 and III according to or in advance of the Basel Committee schedule. - Capital is calculated on a consolidated and solo basis for all banks. - BSD has authority to impose additional capital requirements on individual banks as necessary. - BSD applies three Basel ratios (common equity tier 1, tier 1 and total capital) as well as systemic capital requirements, large bank capital add-ons and a “Board buffer”. - BSD staff regularly assess banks’ capital management and planning, most intensely at the largest (IRB) banks. ### Credit risk - Grade: C - Findings: - Regulation 39 requires adequate policies and procedures related to credit risk management, approved by Boards and implemented by management. - BSD staff (analysts, credit specialist team, on-site review team) actively assess credit risk management quality at all banks as part of the SREP. ### Problem assets, provisions, and reserves - Grade: C - Findings: - BSD monitors problem assets using regular reports, external auditor reports and selected on-site examinations. - Supervisory staff evaluate adequacy of provisioning on individual and peer group bases. - Recommendation: - Finalize the draft Directive on restructured credit exposures as soon as possible to prevent use of restructuring to improve classified loan levels; the compliant rating for Principle 18 is based in part on expectation this directive will be issued in the very near term. ### Concentration risk and large exposure limits - Grade: C - Findings: - Regulations require Boards and senior management to establish and maintain policies and procedures related to concentration risk and large exposures. - BSD monitors large exposures and risk concentrations quarterly and reviews Board/management oversight through SREP and ICAAP. ### Transactions with related parties - Grade: C - Findings: - Regulations provide a comprehensive definition of “related person” and require arm’s-length transactions with related parties. - Regulation 39 requires monitoring and reporting of individual and aggregate exposures to related persons subject to an independent individual credit review process. - BSD receives and reviews quarterly information on transactions with related parties; concerns are discussed in prudential meetings. - Recommendation: - SARB should amend regulations so the Registrar can set limits on exposures to any related parties; currently the Registrar can only set limits on intragroup transactions and exposures. ### Country and transfer risks - Grade: C - Findings: - Regulation 39 was amended to specifically include country and transfer risks. - The BA 210 quarterly report (amended in 2011) requires more granular information on banks’ country and transfer risks. - BSD monitors such exposures on an ongoing basis through the SREP and includes the risk category in discussions with Boards, management and auditors. ### Market risk - Grade: C - Findings: - SARB has implemented a comprehensive approach to supervision of market risk, especially at largest banks approved for the IMA. - For most banks, market risk remains at rather modest levels. ### Interest rate risk in the banking book - Grade: C - Findings: - Interest rate risk in the banking book is minimal because a large percentage of lending is on a floating rate basis. - BSD reviews banks’ policies and procedures to manage such risk as part of SREP. - BSD increased focus on IRRBB in 2014 and provided additional training to analysis teams. - Recommendation: - BSD should continue plans to further strengthen review of banks’ internal interest rate risk measurement systems. ### Liquidity risk - Grade: C - Findings: - BSD has initiated adoption of the LCR and intends to implement the NSFR on schedule. - South Africa faces disadvantages such as limited supply of government bonds, an illiquid and small corporate debt market and disintermediation of retail funding through money market funds into the banking sector. ### Operational risk - Grade: C - Findings: - SARB developed a robust program for assessing operational risk management combining on-site and off-site analysis. - BSD has enhanced its specialist operational risk team, which includes IT experts. ### Internal control and audit - Grade: C - Findings: - BSD closely monitors adequacy of internal controls and compliance via review of internal reports and regular meetings with Board audit committees, internal auditors and compliance officers. ### Financial reporting and external audit - Grade: C - Findings: - Banks are required to publish financial statements based on IFRS and have the statements audited. - Supervisory process relies in part on a strong working relationship between BSD and banks’ external auditors. ### Disclosure and transparency - Grade: LC - Findings: - Banks are required to disclose a wide range of information to the public regularly. - As permitted under the Basel capital framework, Pillar 3 disclosures are not currently audited. - Pillar 3 disclosures are reviewed only sporadically by BSD staff. - Recommendation: - With recent staff increases, BSD should assign responsibility for consistent review of Pillar 3 disclosures to analysts or other qualified individuals, or alternatively require external auditors to review the reports. *Source: _cr1555 - 3. Cooperation and (IMF staff assessment chapter).* ### 29. Abuse of financial ### 29. Abuse of financial services ### Assessment of framework and supervisory implementation - The BA and associated regulations as well as the revised FICA provide a generally adequate framework for supervising banks’ policies and processes against abuse of financial services. - On the implementation front, the BSD has significantly stepped up its effort for supervision of measures against abuse of financial services, including the AML/CFT measures: - a dedicated unit for the AML/CFT issues was established and has been conducting on-site inspections with inspections on large banks completed; - administrative fines are recently imposed on some large banks on the AML/CFT issues; - more attention is being paid to these issues in the whole SREP process. ### Remaining weaknesses - The Guidance Notes issued by the FIC, which contain many essential requirements relevant to many ECs in this CP as well as the concept of risk-based approach, do not have the legal enforceability under the FICA. - Even though they are applied by the BSD in its supervision, their enforceability through the general supervisory power based on the BA has not yet been formally tested. - On-site inspections of all banks are not yet completed. ### Recommended Actions (selected from Table 4) - Principle 1 - Define objectives of the supervisor in the legal framework. - Review the extent of delegation of powers in the Banks Act, with a view to transfer the power to set granular requirements from tier 2 rules (regulations), which need to be issued by the Minister, to tier 3 rules (circulars, directives), which can be issued by the Registrar. - Review the composition of the Standing Committee for the Revision of the Banks Act, with a view to require its members to be not currently involved in not only any regulated entities but also bodies that represent interests of those regulated entities, to insulate the process from direct industry interests. Instead, as experts on financial business, the Committee could include retired officials from the industry or academics. - Principle 2 - Revise the legal framework for the head of the supervisor 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. - 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. - 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 - 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. - Principle 8 - Enact legislation to provide the supervisor power related to resolution of banks expeditiously and develop resolution plans. - The new prudential supervisor should review the supervisory approach once the organizational changes are completed in order to equip it with capacity to monitor the prudential risk of the entire financial system as well as that of financial conglomerates. - Principle 9 - Continue the effort to enhance the supervisor’s ability to conduct deep-dive on-site reviews. - Improve tools and technique to assess and monitor spill over risks to the banks from non banking activities in their financial groups. - Principle 11 - Strengthen laws to provide the supervisor with the power to suspend or limit a bank’s activities without delay. - Provide the power to fine individuals related to banks. - Principle 12 - Strengthen the supervisory technique, such as group-wide stress testing, to monitor and assess risks arising from non-banking activities or parent entities of a financial group in which a South African bank belongs to. - 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 - Continue efforts to support the capacity building of host supervisors of African operations of South African banking groups to further improve the effectiveness of cooperation and ensure adequate oversight of those operations. - Finalize policies, processes and practices to conduct on-site reviews/inspections of South African banks’ cross border operations in other African countries. - Enhance its effort in cross-border recovery and resolution planning with close collaboration with the UK authorities as well as paying due regards to the impact on financial systems of jurisdictions where South African banks’ operations are significant. This will also require close cooperation with supervisory authorities in these jurisdictions. - Principle 18 - Finalize as soon as possible the draft Directive on restructured credit exposures which will help to prevent banks from using restructuring to improve their classified loan levels. - Principle 20 - Amend the Regulations so that the Registrar has the ability to set limits on exposures to any related parties. - Principle 23 - Continue with the plans to further strengthen its review of banks’ internal interest rate risk measurement systems. - Principle 28 - Review Pillar 3 disclosures consistently either by the BSD’s internal staff or by requiring external auditors to do it. - Principle 29 - Proceed with the planned revision of the FICA to incorporate the risk-based approach to the AML/CFT issues and ensure the enforceability of a number of essential elements currently included in the FICA Guidance Notes. - Continue the current effort on the AML/CFT on-site inspections to cover all banks expeditiously and improve approaches and techniques based on the lessons learned. ### Authorities’ response - The authorities expressed appreciation to the IMF assessment team for their professionalism, guidance and insights into supervision. - The recommendations will be used as input during the establishment of the new Prudential Authority (PA) to strengthen its compliance with the BCPs and assist the PA to promote and enhance the safety and soundness of financial institutions. - The authorities found the experience valuable towards improving their understanding of the Basel Core Principles and ultimately, improving the regulatory framework and supervisory processes. *Source: _cr1555 - 29. Abuse of financial* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1555.pdf_