Perspectives on the South African Banking Sector

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Perspectives on the South African Banking Sector
Tim Store
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Agenda

• Overview of the sector
• Bank failures 1991 2002
• Small banks good or bad for the system ?
• Protections for depositors
• Our failure management model
• Conclusion

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Perspectives on the SA Banking Sector

• Overview of the sector
• Assets
• R Billion
• Number of Banks
• Registered Banks 39 965
• Registered Mutual Banks 2 1
• Foreign Banks Local Branches 15
• 56
• Foreign Banks Representative Offices 56
• 112
• Distribution of Assets
• Big Four 4 770 80
• Medium Two 2 121 12
• The Rest 33 74 8
• 39 965 100

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Perspectives on the SA Banking Sector

• Overview of the sector contd.
• All banks are regulated by Banking Supervision
  Department of South African Reserve Bank (BSD)
• Regulation conforms with current international
  best practice
• All figures per 2001 annual report of BSD

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Perspectives on the SA Banking Sector

• Bank Failures 1991 - 2002

Institute Year Cause of failure Alpha
Bank 1990 Credit risk Operational
risk Cape Investment Bank 1991 Credit
risk Market risk Operational
risk Pretoria Bank 1991 Credit
risk Operational risk Prima
Bank 1993 Credit risk Market
risk African Bank 1995 Credit
risk Operational risk
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Perspectives on the SA Banking Sector

• Bank Failures 1991 2002 contd

Institute Year Cause of failure Community
Bank 1996 Credit risk Islamic
Bank 1997 Credit risk New Republic
Bank 1998 Reputational risk Credit
risk FBC Fidelity Bank 1999 Reputational
risk Credit risk Regal Bank 2001 Credit
risk Operational risk Saambou 2002 Reput
ational risk Liquidity risk
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Small Banks good or bad for the system ?

• FOR
• Stimulate competition
• Facilitate new players
• All big banks were once small

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Small Banks good or bad for the system ?

• AGAINST
• Competition in the wrong areas
• New players pose new risks
• Vulnerable to hard times

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Small Banks good or bad for the system ?

• ON BALANCE
• Free entry and free exit are free market
  principles
• A healthy banking system does not mean zero
  failure rate
• Experimentation is necessary
• Not large enough to pose systemic risk

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What kind of experimentation ?

• We need banks that
• Focus on retail banking needs
• For those who are currently under-serviced
• But who represent potentially profitable
  customers
• Are private sector initiatives
• Which also address community objectives
• Do not represent systemic risk

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What kind of experimentation ?

• The difficulties which must be overcome are
• Sourcing the necessary capital
• Attracting the deposit base
• Making (and recovering) loans which will provide
  security for depositors and a reasonable return
  on capital

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Protections for Depositors

• Curatorship
• Public Sector Solution (bail out)
• Implicit deposit insurance
• Explicit deposit insurance

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Failure Management Model

• THE BANK OF ENGLAND APPROACH
• We see it as our task to provide a regime in
  which the users of financial services can benefit
  from robust competition among financial firms,
  which will not happen unless each individual firm
  takes on some risk.
• Banks can fail and depositors can lose some of
  their money. Otherwise, if depositors were
  relieved of all responsibility, deposits would
  simply flow to the highest bidder regardless of
  risk, which would undermine market disciplines.
• We do not see it as our job to prevent each and
  every bank from failing. But when a bank does
  seem likely to fail, the central bank must at
  least consider the option of supporting it.
• In reaching a decision on support, we take care
  not to be predictable. It is essential that no
  one, and I mean no one, should expect support as
  a matter of course. Size is an important factor,
  but there is nothing automatic.

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Failure Management Model

• THE BANK OF ENGLAND APPROACH
• The only issues are
• What effect the failure of the institution would
  have on the system as a whole .
• What should be done to protect the system from
  contagion.

Eddie George, Governor of the Bank of
England, November 1993
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Our Failure Management Model
PRE-CONDITIONS MONITOR EVALUATE
Yes
No
identify weak bank ?
Yes
Yes
Yes
Assess solvency
No
Is Insolvency imminent ?
Is Insolvency imminent ?
Effective ?
Consider corrective action
No
Yes
Private sector resolution MA or PA Combined
temporarily with a public sector resolution
Is private resolution possible ?
Effective ?
Yes
No
No
Is the bank of systemic importance ?
Consider public sector resolution Temporary
bridge bank Open-ended assistance Long term
nationalisation
Effective ?
Yes
No
Exit bank system
No
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Conclusion

• System in sound hands
• Controlled experimentation should continue
• Better understanding of banks and banking
  regulations would help