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Basel IIBasel IIRegistrar of BanksRegistrar of Banks

Bank Supervision DepartmentBank Supervision DepartmentSouth African Reserve BankSouth African Reserve Bank

12 June 200712 June 2007

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Agenda

Introduction Introduction

Strategic imperativesStrategic imperatives

Basel IBasel I

Basel IIBasel II

In a nutshellIn a nutshell

In South AfricaIn South Africa

BenefitsBenefits

ConclusionConclusion

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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

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Introduction: Role of capital in banking

Capital is a buffer against losses, and gives Capital is a buffer against losses, and gives confidence and trust to depositors and rating confidence and trust to depositors and rating agenciesagencies

Determination of extent of required capital is thus Determination of extent of required capital is thus of vital importanceof vital importance

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Introduction: Basel I - Strengths

Strengthens international banking system

Enhances competitiveness - level playing field

Provides a ‘capital discipline’

Constitutes an international standard

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Introduction: Changes since Basel I

Globalisation Globalisation » Physical geography not an impediment to movement Physical geography not an impediment to movement

of moneyof money» Growth in cross-border trade, finance, investment Growth in cross-border trade, finance, investment

Technological advancesTechnological advances» Computing power and storageComputing power and storage» Networks and communicationsNetworks and communications

Financial engineering (development of highly Financial engineering (development of highly sophisticated and complex products)sophisticated and complex products)

The above were the causes that precipitated the need for change

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Introduction: Outcomes of developments

RiskRisk» Evolving methodologies for managing/measuring riskEvolving methodologies for managing/measuring risk» New ways to un-bundle and transfer riskNew ways to un-bundle and transfer risk

• Financial derivative instrumentsFinancial derivative instruments• SecuritisationSecuritisation

Data - improvements in technology and Data - improvements in technology and telecommunications speed up collection and analysistelecommunications speed up collection and analysis

Operational risk management as new discipline Operational risk management as new discipline [Quantifying the risk of losses from failure of internal [Quantifying the risk of losses from failure of internal processes, people and systems as well as losses from processes, people and systems as well as losses from external disruptions]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

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Introduction: Basel I – Development areas

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

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Agenda

IntroductionIntroduction

Rationale for Banking RegulationRationale for Banking Regulation

Strategic imperativesStrategic imperatives

Basel IBasel I

Basel IIBasel II

In a nutshellIn a nutshell

In South AfricaIn South Africa

BenefitsBenefits

ConclusionConclusion

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Basel II - Objectives OverarchingOverarching

GeneralGeneral

Pillar IPillar I

Pillar IIPillar II

Pillar IIIPillar III

Strengthen financial systemStrengthen financial system Level playing fields & limit regulatory arbitrageLevel playing fields & limit regulatory arbitrage Foster sound risk management through the following Foster sound risk management through the following

incentivesincentives

» Regulatory capitalRegulatory capital• Risk sensitivity improvedRisk sensitivity improved• Better alignment of capital with riskBetter alignment of capital with risk• Menu of approaches offeredMenu of approaches offered• Operational risk coveredOperational risk covered• Maintain level of capitalisationMaintain level of capitalisation

» Economic capital vs RisksEconomic capital vs Risks» Supervisory ProcessesSupervisory Processes

» Market discipline by improved disclosureMarket discipline by improved disclosure

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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

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Agenda

IntroductionIntroduction

Rationale for Banking RegulationRationale for Banking Regulation

Strategic imperativesStrategic imperatives

Basel IBasel I

Basel IIBasel II

In a nutshellIn a nutshell

In South AfricaIn South Africa

BenefitsBenefits

ConclusionConclusion

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Basel II - Stages in implementation

Familiarisation Familiarisation with Basel IIwith Basel II

Establishment of a Establishment of a focused BII team in BSDfocused BII team in BSD

Establishment of Establishment of the AIF structurethe AIF structure

Gap analysis and Gap analysis and readiness assessmentreadiness assessment

Impact studiesImpact studies

Decision on Basel II Decision on Basel II ApproachesApproaches

Drafting of new Drafting of new legislationlegislation

Implementation Implementation plansplans

On-site visitsOn-site visitsInitial policy Initial policy

decisionsdecisions

““Home straight”Home straight”

06/2007 – 12/200706/2007 – 12/2007

TrainingTraining

WHERE WE STARTED:WHERE WE STARTED:DECISION IN 2002 TO IMPLEMENT B IIDECISION IN 2002 TO IMPLEMENT B II

GOAL :GOAL :Implementation of B Implementation of B II by 2008 - 01 - 01II by 2008 - 01 - 01

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Basel II - Timelines

ImplementationImplementation

Impl

emen

tati

on –

All

app

roac

hes

(1 J

an)

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

PlanningEvaluation and assessment

Discovery phase

Par

alle

l run

Solo run

Supervi-sory Process

QIS 4

QIS 5

QIS 5.5

Field tests

Regula-tions

Gap analysis

Readiness assessment

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Basel II - Accord Implementation ForumBasel 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

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Basel II – AIF meetingsBasel II – AIF meetings

RepresentationRepresentation• BanksBanks

• SAICA (South African Institute of Chartered SAICA (South African Institute of Chartered Accountants)Accountants)

• National TreasuryNational Treasury

• SARBSARB

• BSDBSD

• The Banking AssociationThe Banking Association

More than 240 meetings were heldMore than 240 meetings were held Attendance: Average: 12 to 14 peopleAttendance: Average: 12 to 14 people

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Basel II - Key milestones achieved

QIS 3,4 & 5 completed.

Proposed amendments to Banks Act » Approved by cabinet during February 2007

» Tabled in Parliament during April 2007

Proposed amendments to Regulations» Draft 4

• Approved by Standing Committee (February 2007)

• Published for public comment (30 April 2007)

» 2nd formal field tests by banks underway

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Agenda

IntroductionIntroduction

Rationale for Banking RegulationRationale for Banking Regulation

Strategic imperativesStrategic imperatives

Basel IBasel I

Basel IIBasel II

In a nutshellIn a nutshell

In South AfricaIn South Africa

BenefitsBenefits

ConclusionsConclusions

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Basel II – Benefits FlexibleFlexible

» Menu of approaches per riskMenu of approaches per risk» Supervisory reviewSupervisory review

Improved corporate governance, including improved risk Improved corporate governance, including improved risk managementmanagement

Improved capital management and stronger capital Improved capital management and stronger capital structuresstructures

Improved transparencyImproved transparency

Improved regulatory framework and supervisory policies, Improved regulatory framework and supervisory policies, practices and processespractices and processes

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Agenda

IntroductionIntroduction

Rationale for Banking RegulationRationale for Banking Regulation

Strategic imperativesStrategic imperatives

Basel IBasel I

Basel IIBasel II

In a nutshellIn a nutshell

In South AfricaIn South Africa

BenefitsBenefits

ConclusionsConclusions

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Conclusions

Overarching goal of Basel IIOverarching goal of Basel II

Promotion of improved financial sector stabilityPromotion 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

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Thank you for your attentionThank you for your attention