Johannesburg - The South African banking system
faces long-standing structural risks, including the reliance of its
funding base on short-term wholesale corporate deposits, the International
Monetary Fund (IMF) said on Thursday.
Releasing its 2009 Article IV Consultation Staff Report and the Public
Information Notice on South Africa, the IMF said retail deposits represent
only about 25% of total deposits, while deposits with less than one
year maturity represent close to 80% of total deposits.
"The FSAP Update recommended implementing a deposit insurance system to
counter such risks. Such a system could also have the added benefit of
inducing household saving to migrate from unguaranteed liquid financial
instruments to competing bank deposits, thus strengthening the retail base
of banks," the world body said.
The dominance of the financial system by a few large financial
conglomerates with cross-border share holdings and cross-sector activities
poses another structural risk, it said.
"These conglomerates combine banking, securities trading, and insurance
in a single organisation. As the recent global crisis has illustrated, even
when banks are well managed as in the South African case there is a risk
that the sectoral supervisory arrangements could miss potentially systemic
linkages.
"Therefore, in line with FSAP Update recommendations, it would be
important to seek to identify potential information and regulatory gaps
relating to conglomerate activity," the IMF added.
It noted that the authorities had indicated - and the banks had
confirmed - that they have stepped up bank supervision since late 2008, in
response to rising financial sector risks.
"They have intensified on site supervision, including assessing the
stress testing, risk models and risk management practices of banks, while
also conducting, twice a year, off-site stress testing using supervisory
data, in line with the recommendations of the 2008 FSAP Update.
"They indicated that the end-2008 exercise showed that, even under a
severely unfavorable macroeconomic scenario, none of the systemically-
important banks would see their capital ratios fall below the regulatory
minimum.
"Overall, the authorities were of the view that banks were
provisioning adequately against rising impaired loans and that banks'
capital - which comprised mostly Tier 1 capital - remained at comfortable
levels to meet the increasing risks," the IMF noted.
Despite its resilience, South Africa's financial system has a number
of longstanding structural risks that were also reviewed during the 2008
FSAP Update: the dominance of financial conglomerates, the reliance of banks
on short-term wholesale deposits, and the governance framework for pension
funds.
In this regard:
1. The authorities noted that in line with FSAP Update recommendations, and
as a complement to the existing high-level SARB- FSB committee,11 they have
established a working-level joint Sarb-FSB committee to help guide the work
of supervisory colleges covering individual financial conglomerates. Staff
suggested regular reporting of the work of these committees to senior policy
makers in order to assess whether further action, including possible changes
to legislation, would be needed to minimize regulatory gaps and strengthen
consolidated supervision.
It also suggested formal analysis of systemic
linkages based on a matrix of exposures within and across financial
conglomerates.
2. It would be useful for the SARB and the FSB jointly to explore ways to
reduce the risks associated with banks' reliance on short-term wholesale
deposits. Staff also suggested analyzing the extent to which deposit
insurance could provide incentives for increasing the scale of retail bank
deposits.
3. Staff urged the speedy completion of the work of the interministerial task
force on pension system reform, so that the FSAP Update recommendations on
strengthening governance and risk management in this sector could be
implemented without delay. The authorities noted that pension reform was
likely to be lengthy process and that they were looking into measures that
could be taken in the meantime to strengthen the governance and supervision
of this sector.
"The recession and resulting pressures on macroeconomic policies and the
policy framework underscore the urgency of pressing ahead with structural
reform and improving public services in order to achieve stronger and more
inclusive growth," the IMF added.
- I-Net Bridge