Fostering competitiveness and innovation in urban regions

A South African perspective on credit provisioning will be incomplete without explaining the current role and functions of the SARB. The SARB is mainly concerned

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with regulating banks, which excludes private providers of asset-backed finance.

However, it is important to understand the potential influence of the SARB on the concept of credit provisioning in South Africa.

Section 224 of the Constitution of the Republic of South Africa states that the primary objective of the SARB “is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic”. In pursuit of this objective, the SARB “must perform its functions independently and without fear, favour or prejudice”

(De Vos, 2010). Therefore, the SARB aims to protect the value of the currency by maintaining the stability of the financial system and aiding the enactment of financial policy. This includes bank supervision, acting as a ‘banker for banks’ in crisis situations, responsibility for the settlement of interbank claims, the supply of banknotes and coins, being banker for the state, and administering exchange control measures (Rossouw, 2009, pp. 24–44).

In order to ensure performance in terms of the financial policy, the SARB may employ certain mechanisms, which will be dealt with in the ensuing sections.

 Conduit for financial policy: The Monetary Policy Committee (MPC) of the SARB formulates monetary policy on a continuous basis. This policy is enacted by requiring banks to hold a cash reserve; which the SARB bridges on condition that banks adhere to its monetary policy (Rossouw, 2009, pp. 17–20). In addition, the SARB ensures compliance with the monetary policy by means of:

o on-site visits (SARB, 2014b, p. 22);

o scrutinising special-purpose vehicles to prevent its usage for hiding risks (SARB, 2011, pp. 718–722); and

o investigating policies regarding the payment of bonuses to executive officials (SARB, 2011, p. 715).

 Regulating for prudence (conservative lending practices) in the South African banking industry. Prudent banking stabilises the financial sector. Therefore, ensuring prudence is an important purpose of the regulatory function of the SARB, on which it annually reports to the public (SARB, 2014b).

o A measure of prudence employed by the SARB is the capital adequacy ratio (CAR). According to South African law, banks need to hold 8% of their liabilities in own capital; in other words, a minimum CAR of 8% is

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prescribed and enforced by the SARB. The Registrar of Banks (a function of the SARB) requires an additional 1.5%, to counter systemic risk, increasing the required CAR to 9.5% (SARB, 2011, p. 705). The reputation of South African banks for prudence is confirmed by the fact that their actual capital ratio is 15.56%, safely above the required minimum (SARB, 2014b, p. 6).

o Liquidity coverage ratio (LCR): This ratio requires that stock of high-quality liquid assets (HQLA)⁹ divided by total net cash outflows over the next 30 calendar day must be larger than or equal to 100%. The LCR is implemented because even a bank with adequate capital can fail if liquidity is not available for 30 days under stress conditions. The BIS in Basel issued the LCR in January 2013 (BIS, 2013, p. 13–14) and it is phased in by the SARB (SARB, 2014b, p. 2).

o South African banks are, as indicated above, regarded as prudent because their aggregate capital ratio is above 15% (see above). This means that 85% of loans issued by banks are in fact borrowed from depositors and other financial institutions. Private credit providers are significantly more prudent than banks, as they are not entitled to take deposits (see section 3.2.2.3). If only equity capital is lent out, it means that a capital ratio of 100% is maintained, if all available funds are lent out. If a buffer of available funds is retained, the ratio is even higher. It can be asserted the high level of prudence maintained by private credit providers, means that these providers pose virtually no systemic risk

9 High-quality liquid assets (HQLA) have the following characteristics:

 low risk;

 ease and certainty of valuation;

 low correlation with risky assets;

 listed on a developed and recognised exchange;

 traded on an active and sizable market;

 low volatility; and

 historically regarded as a safe asset during systemic crises (BIS, 2013, p. 13–14).

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 The strategy of the SARB for risk prevention in banks (with the emphasis on operational risk) is dealt and aligned with the detail included under section 2.3.2, and in terms of asset-backed short-term credit, in section 4.7. South African banks are required to provide information on the ways in which they deal with different types of risk. If the Registrar of Banks views these measures as insufficient, it may require the specific bank to increase its capital reserve (SARB, 2011, p. 715). Regarding a capital charge for operational risk in South Africa, a total of 12.38% of the total minimum capital requirements for the banking sector is required (SARB, 2014a, p. 28). For this purpose, banks need to appoint an operational risk management committee, explain the roles of internal and external audit, involve independent parties (if applicable), and implement regulatory and reporting structures (Van Wyk, 2014a, pp. 2–5), which all contribute to time-consuming decision-making.

 The measures used by the SARB to enforce prudence and contain risk in banking operations were discussed above. As each of these measures require the attention of high-level staff members, decisions are increasingly time-consuming. Prompt decision-making is mentioned in section 1.1 as the essential feature of asset-backed short-term finance. It can be concluded that the business model of private providers of asset-backed short-term finance (discussed in Chapter 4 of this dissertation) enables them to answer a need, which is created by the increased regulation of banks.

 The SARB as a ‘Banker for Banks’ or ‘Lender of Last Resort’:

o Failing banks can depend on the SARB to help either prevent failure or limit the harm done by such failure. Therefore, it is called a Banker for Banks’ or ‘Lender of Last Resort’. When a bank experiences a serious liquidity shortage, the SARB could advance the necessary funds on condition that sufficient collateral is offered, and the SARB is convinced that the management of the bank has the capacity and integrity to turn a short-term deficit into a long-term favourable situation (Rossouw, 2009, pp. 38–39).

o The main driver of any decision to render assistance is the systemic stability of the banking system as a whole (see section 2.3.2.1.6 on systemic risk). When the judgement of SARB is that a bank will not be

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able to recover, even with assistance, it will act as curator of such bank (Rossouw, 2009 pp. 41–44). An example played out during 2014, when the holding company of African Bank, African Bank Investments Limited (Abil) could not meet its obligations. The SARB decreed that Abil’s business interests be divided into a ‘good bank’ and ‘bad bank’. The SARB undertook to facilitate funding for the ‘good’ bank and to fund the

‘bad’ bank itself, in order to limit resulting systemic risk (Marcus, 2014).

o As part of its role as ‘Banker to Banks’, the SARB also acts as the custodian of the cash reserves that banks are legally required to hold or prefer to hold voluntarily with the SARB. The SARB has the authority to change the minimum cash reserve requirements of banks and can use such adjustments to influence bank liquidity and the amount of money in circulation (Committee on Payment and Settlement Systems [CPSS], 2012, p. 379).

Private credit providers must take note that they cannot claim similar assistance when they encounter liquidity shortages. The rigid regulatory framework for banks is mirrored by assistance available to banks. Private credit providers, on the other hand, are less subject to regulation (as they do not take deposits), and they are therefore entitled to less assistance from the SARB. Private credit providers should therefore be careful not to overextend their lending abilities. A safety net of available funds should enable them to continue operations even when an unexpected increase in loan defaults occur.

Having discussed present regulatory measures, it is also necessary to refer to potentially important regulatory developments that are already underway.