1. 1 Basel II Registrar of Banks Bank Supervision Department South African Reserve Bank 12 June 2007

2. 2 Agenda  Introduction  Strategic imperatives  Basel I  Basel II  In a nutshell  In South Africa  Benefits  Conclusion

3. 3 SARB Mission The reason for the Bank’s existence or primary purpose is the achievement and maintenance of price stability in the South African economic system BSD Mission To promote the soundness of the banking system through the effective and efficient application of international regulatory and supervisory standards Introduction: Strategic imperatives

4. 4 Introduction: Role of capital in banking l Capital is a buffer against losses, and gives confidence and trust to depositors and rating agencies l Determination of extent of required capital is thus of vital importance

5. 5 Introduction: Basel I - Strengths l l Strengthens international banking system l l Enhances competitiveness - level playing field l l Provides a ‘capital discipline’ l l Constitutes an international standard

6. 6 Introduction: Changes since Basel I l Globalisation » Physical geography not an impediment to movement of money » Growth in cross-border trade, finance, investment l Technological advances » Computing power and storage » Networks and communications l Financial engineering (development of highly sophisticated and complex products) The above were the causes that precipitated the need for change

7. 7 Introduction: Outcomes of developments l Risk » Evolving methodologies for managing/measuring risk » New ways to un-bundle and transfer risk Financial derivative instruments Financial derivative instruments Securitisation Securitisation l Data - improvements in technology and telecommunications speed up collection and analysis l Operational risk management as new discipline [Quantifying the risk of losses from failure of internal processes, people and systems as well as losses from external disruptions] Cause: Barriers of time and geography have been lowered Effect: Reduced life span of existing competitive strengths Outcome: Tidal wave of structural change

8. 8 Introduction: Basel I – Development areas l l More forward looking approach as a result of a need to: » » deal with more complex risk profiles of banks » » promote sound risk management of all risks » » hold capital against not only credit, but also market and operational risk » » ensure that the framework is dynamic » » ensure that economic principles are complied with » » cater for both qualitative and quantitative aspects of sound risk management » » ensure appropriate disclosure

9. 9 Agenda

10. 10 Basel II - Objectives l Overarching l General l Pillar I l Pillar II l Pillar III l Strengthen financial system l Level playing fields & limit regulatory arbitrage l Foster sound risk management through the following incentives » Regulatory capital Risk sensitivity improved Better alignment of capital with risk Menu of approaches offered Operational risk covered Maintain level of capitalisation » Economic capital vs Risks » Supervisory Processes » Market discipline by improved disclosure

11. 11 Basel II - Approaches Basel II Pillar 1 Minimum capital requirements Pillar 2 Supervisory review process Pillar 3 Market discipline Risk weighted assets Definition of capital Core Capital Supplementary capital Credit risk Operational risk Market risk Standardised Approach Internal Ratings Based Approach Basic Indicator Approach Alternative Standardised Approach Advanced Measurement Approach Models Approach Standardised Appoach Standardised Approach

12. 12 Agenda

13. 13 Basel II - Stages in implementation Familiarisation with Basel II Establishment of a focused BII team in BSD Establishment of the AIF structure Gap analysis and readiness assessment Impact studies Decision on Basel II Approaches Drafting of new legislation Implementation plans On-site visits Initial policy decisions “Home straight” 06/2007 – 12/2007 Training WHERE WE STARTED: DECISION IN 2002 TO IMPLEMENT B II GOAL : Implementation of B II by 2008 - 01 - 01

14. 14 Basel II - Timelines Implementation Implementation – All approaches (1 Jan) Parliament Legislation 2004 2005 2006 2008 Data Capturing & Storage – Mandatory Requirement Discuss Models with IRB Banks June 2004 Issue B II 1999 - 2003 QIS 1 - QIS 3 CP1-CP3 Establish- ment of AIF 2007 Basel II - implemen- ted Field tests Planning Evaluation and assessment Discovery phase Parallel run Solo run Supervi- sory Process QIS 4 QIS 5 QIS 5.5 Field tests Regula- tions Gap analysis Readiness assessment

15. 15 Basel II - Accord Implementation Forum Steering Committee Risk Management Sub-Committee Pillar 1 & 2 Disclosure Sub- Committee Pillar 3 Economic Impact Sub-Committee Regulatory Framework Sub- Committee Credit Risk Task Group Operational Risk Task Group Market Risk Task Group Disclosure BA Return Task Group General Education Task Group Economic Study Task Group ALM Task Group Capital Adequacy Task Group Cross-border Task Group Communication Strategy Task Group Credit Risk BA Return Task Group Securitisation BA Return Task Group Credit Derivative Task Group

16. 16 Basel II – AIF meetings l Representation Banks Banks SAICA (South African Institute of Chartered Accountants) SAICA (South African Institute of Chartered Accountants) National Treasury National Treasury SARB SARB BSD BSD The Banking Association The Banking Association l More than 240 meetings were held l Attendance: Average: 12 to 14 people

17. 17 Basel II - Key milestones achieved l l QIS 3,4 & 5 completed. l l Proposed amendments to Banks Act » » Approved by cabinet during February 2007 » » Tabled in Parliament during April 2007 l l Proposed amendments to Regulations » » Draft 4 Approved by Standing Committee (February 2007) Published for public comment (30 April 2007) » » 2 nd formal field tests by banks underway

18. 18 Agenda

19. 19 Basel II – Benefits l Flexible » Menu of approaches per risk » Supervisory review l Improved corporate governance, including improved risk management l Improved capital management and stronger capital structures l Improved transparency l Improved regulatory framework and supervisory policies, practices and processes

20. 20 Agenda

21. 21 Conclusions  Overarching goal of Basel II Promotion of improved financial sector stability   Good progress facilitated by interaction between National Treasury, BSD, banks and external auditors   Focused team effort will ensure successful imlementation 1 January 2008 attainable

22. 22 Thank you for your attention