1 BANKS AMENDMENT BILL (2007) BRIEFING TO THE PORTFOLIO COMMITTEE ON FINANCE NATIONAL TREASURY AND THE BANK SUPERVISION DEPARTMENT OF THE SOUTH AFRICAN RESERVE BANK 12 June 2007

2 BACKGROUND Key considerations that necessitated the amendments:  Compliance with Basel II (International standard)  Clarifications / legal certainty  Industry developments  Basel Core Principles for effective banking supervision

3 PROCESS In respect of current Bill: Consultative process (National Treasury, SARB, Banks and SAICA) Approved by the Standing Committee for the Revision of the Banks Act during December 2006 Approved by Cabinet on 7 February 2007 Published for public comment during February/March no comments received from the public Introduced into Parliamentary process: Bill reviewed and certified by State Law Advisors in April 2007.

4 OVERVIEW OF PROPOSED AMENDMENTS

5 SIGNIFICANT PROPOSED AMENDMENTS 1.Co-operation between supervisors (section 4(3)) 2.Increased duties of the Registrar (sections 4(5)-4(7)) 3.Formal communication with banks (sections 6(4) – 6(6)) 4.Capital adequacy (sections 1 & 70) 5.Consolidated supervision (sections 30, 50, 70A, 74) 6.Concentration risk (section 73) 7.Approval of rating agencies (section 85A) 8.Shareholding in banks & controlling co’s (section 37) 9.Subsidiaries and other interests (section 52) 10.Transfer of assets & liabilities of banks (section 54) 11.Control the activities of unregistered persons (section 84) 12.Imposing penalties on banks (section 91A)

6 Co-operation between supervisors Current law: The Act does not prohibit co-operation or MOU’s But it does not specifically provide for it Motivation: Basel II requires co-operation between supervisors:- –Home- and consolidating (Host) supervisors –Exchange information on on-site examinations –Avoid duplication of supervisory tasks –Key to effective consolidated supervision Proposed amendment (Section 4(3)): To specifically provide for a formal written co-operation agreement to facilitate the exchange of information, on-site investigation and to minimise the duplication of supervisory tasks Section 1 defines “home-” and “consolidating supervisor”

7 Increased duties of the supervisor Current law: New provisions Motivation: Basel II requires supervisors to:- –implement and maintain a supervisory review process; –assign assessment by rating agencies to risk weights; –implement various items of national discretion; and –publicly disclose certain information. Proposed insertions (Sections 4(4)-4(7)): Provide for the Registrar to implement and maintain supervisory review process, including on-site & off-site examinations, discussions with board and executive management of banks, controlling co’s, subsidiaries & branches Provide for the Registrar to assign risk weights to assessments by rating agencies, the details to be prescribed by regulation Provide for the Registrar to implement certain national discretion items after consultation with banks and to disclose such implementation Provide for the Registrar to publicly disclose criteria relating to capital assessments, factors relating to setting capital adequacy ratios in excess of norm, process and criteria for recognising rating agencies.

8 Formal communication with banks Current law: The Act provides that a circular may be issued furnishing banks with guidelines regarding the application and interpretation of the provisions of the Act Motivation: Basel II requires supervisory duties in respect of banks, controlling co’s, rating agencies and auditors Technical complexities of Basel II will require mandatory directives by the supervisor from time to time Proposed amendments (Sections 6(4)-6(6)): Distinguish between:- –Circulars = guidelines regarding the application and interpretation of the provisions of the Act (not mandatory) –Guidance notes = information in respect of market practices or developments (not mandatory) –Directives = orders/instructions (mandatory) after consultation with the affected parties, to prescribe processes or procedures to be followed necessary in the administration of the Act.

9 Capital adequacy Current law: The Act provides for initial capital of a bank and an enabler that the calculation of capital adequacy be prescribed by regulation Motivation: Basel II provides various options and approaches to calculate capital, subject to certain conditions The legal framework to provide for all options and approaches Proposed amendments (Sections 1 & 70): Inserts an enabler to provide for all options and approaches available under Basel II to be prescribed by regulation Section 1 defines the following terms to reflect Basel II requirements:- –“Allocated capital & reserve funds”, “Primary share capital”, “Primary unimpaired reserve funds”, “Qualifying capital and reserve funds”, “Secondary capital”, “Secondary unimpaired reserve funds”, “Tertiary capital”

10 Consolidated supervision Current law: The Act provides for the regulation and supervision of controlling co’s, banks and their various subsidiaries and branches Motivation: Basel II requires regulation and supervision on a fully consolidated basis, including:- –the bank controlling company –every tier within the banking group –capturing risks of the whole banking group Proposed amendments (Sections 30, 50, 70A & 74): Provide for disclosure of approvals of certain applications by banks, controlling co’s, branches, subsidiaries and rating agencies Controlling co’s investments and loans and advances to be restricted as prescribed by regulation Provide for capital requirements for controlling companies Provide procedure & sanctions when controlling co fails to comply

11 Concentration risk Current law: The Act provides for limits relating to large exposures, i.e loans to individual persons Motivation: Basel II requires concentration of loans to be managed by banks, including risks to counterparties, industries, sectors and geographical areas Proposed amendment (Section 73): Provides for concentration risk, incorporating Basel II requirements Also provides for the Registrar, with the consent of the Minister, to grant exemptions

12 Approval of rating agencies Current law: New provision Motivation: Basel II requires supervisors to approve eligible institutions in terms of set criteria Banks may only rely on assessment of eligible institutions in calculating capital requirement Proposed insertion (Section 85A): Provides for application and approval process Section 1 defines- –“Eligible institution” (external credit assessment institution or export credit agency) –“External credit assessment”

13 Shareholding in banks and controlling co’s Current law: The Act restricts the acquisition of shares in banks and controlling co’s. Application is required for acquisitions above 15%, 24%, 49% and 74% of the total nominal value of issued shares Problem: Various forms of hybrid instruments may be issued that qualify as capital and certain shareholder agreements – could result in: –a single shareholder owning less than threshold of nominal value of shares –but breaching the thresholds in respect of voting rights Proposed amendment (Section 37): Provides for threshold to be applicable also to voting rights

14 Subsidiaries and other interests Current law: The Act restricts the expansion policies of banks and controlling co’s. Application and approval is required to establish subsidiaries, branches and JV’s Problem: Enforcement of provisions is problematic due to unclear wording. Regulation of the establishment of divisions with third parties using the name of the bank proved ineffective Proposed amendment (Section 52): Provides for the clarification of the wording “establish or acquire” Provides for an application and approval process regarding the establishment of divisions with third parties Section 1 defines “division”

15 Transfer of assets and liabilities of banks Current law: The Act provides that any transfer of assets and liabilities of a bank requires the approval of the Minister Problem: Interpretation difficulties relating to the term “assets and liabilities” Role of the Minister to be clarified, not necessary in every case Proposed amendment (Section 54): Provides for the transfer of assets, liabilities or assets and liabilities Provides for Minister’s approval for transfer of more than 25% of assets, liabilities or assets and liabilities 25% and below requires approval by the Registrar

16 Control the activities of unregistered persons Current law: The Act provides that the Registrar may require information and inspect persons suspected of contravening the Banks Act (taking deposits from the general public) If the Registrar is satisfied that deposits were illegally taken, he/she may issue order to repay – and appoint managers to manage repayment process Problem: Liquidation/sequestration of a person whilst under investigation/management disrupts work done – results in liquidator taking control Higher fees of liquidators are detrimental to depositors Proposed amendment (Section 84): Provides that a person under investigation/management only be liquidated/sequestrated – –with the leave of the Court; and –the Registrar having been notified of the application beforehand Provides that the Registrar may apply for liquidation/sequestration The Master shall appoint person as liquidator nominated by the Registrar

17 Imposing penalties on banks Current law: New provision Motivation: The revised Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking Supervision requires that supervisors should have power to impose penalties on banks & controlling co’s Proposed insertion (Section 91A): Provides that the Registrar may impose penalties on banks & controlling co’s that have contravened the Act– –R10 million per day of non-compliance; –after due process –reviews/appeals available to banks/controlling co’s –the Registrar may publish names and penalties –not a conviction – but no prosecution competent

18 END OF PRESENTATION CONTACT DETAILS: National Treasury: Jonathan Dixon, Jo-Ann Ferreira Chief Director: Financial Sector Policy UnitChief Director: Legislation (012) (012) Bank Supervision Department: Errol KrugerMichael Blackbeard Registrar of BanksDeputy Registrar of Banks (012) (012)