T Mboweni: South African Institute of Chartered Accountants

2 October 2006

Honoured guests
Ladies and gentlemen

1. Introduction

Thank you for the invitation to address you today. Financial markets have
become increasingly globalised and our markets are no exception. Within this
context, regulation according to international best practice has a big part to
play in ensuring the stability of the financial sector. You may be aware the
international community has adopted some measures to harmonise the regulation
of banks.

Today, I will provide a brief overview of two of these initiatives namely,
the new Capital Accord and the Basel Core Principles, which have been adopted
under the auspices of the Bank for International Settlements (BIS). I will pay
particular attention to how these initiatives impact on the regulation of banks
in South Africa. As future chartered accountants, these developments will have
an important impact on your working lives. I will conclude by making some
observations on the performance of the South African banking sector.

2. The Bank for International Settlements

Many industries and businesses have established associations, whose aims are
to conduct research, review important issues and promote the development of
these industries or businesses. The BIS, established in 1930, could be
described as a club or association for central bankers. The BIS was established
in the context of the Young Plan, which dealt with the issue of the reparation
payments imposed on Germany by the Treaty of Versailles following the First
World War. The name of the BIS is derived from this original role, and was also
created to promote central bank co-operation in general.

The reparations issue quickly faded, focusing the activities of the BIS
entirely on world-wide co-operation among central banks and increasingly, other
multi-lateral agencies in pursuit of monetary and financial stability. Today,
central banks from 55 countries are members of the BIS. The BIS fulfils its
mandate by acting as a forum to promote discussion and policy analysis among
central banks and within the international financial community. It is also a
centre for economic and monetary research; a prime counterpart for central
banks in their financial transactions, and acts as an agent or trustee in
connection with international financial operations.

The most important meetings held at the BIS are the regular meetings of
Governors and senior officials of member central banks. I regularly attend
these meetings which are held every two months in Basel. These gatherings
provide an opportunity for participants to discuss the world economy and
financial markets, and to exchange views on topical issues of central bank
interest or concern. Other meetings of senior central bank officials focus on
the conduct of monetary policy, the surveillance of international financial
markets and central bank governance issues.

The growth of international financial markets and cross-border money flows
in the 1970s highlighted the lack of efficient banking supervision at an
international level. National banking supervisory authorities basically
regulated domestic banks and the domestic activities of international banks,
while the international activities of these banks were not always closely
supervised. The collapse in 1974 of Bankhaus Herstatt in Germany and of the
Franklin National Bank in the United States prompted the G10 central bank
Governors to set up the Basel Committee on Banking Supervision. This committee,
known as the Basel Committee, concerns itself with guidelines for international
co-operation in bank supervision. The committee, which includes representatives
from the major supervisory agencies as well as from central banks, provides a
forum for regular co-operation on banking supervisory matters. Over the years,
the committee has developed increasingly into a standard-setting body on all
aspects of banking supervision.

3. The Basel Capital Accord

No bank can maintain the public's trust for long if it lacks sufficient
capital, so supervisors impose capital requirements to safeguard the banking
system. Since capital is the last line of defence against bank insolvency,
regulatory capital requirements are one of the fundamental elements of banking
supervision. In 1988 the Basel Committee issued the Basel Capital Accord. This
introduced a credit risk measurement framework for banks which became a
globally accepted standard. South Africa complies with the Basel Capital
Accord.

A revision of this Capital Accord, known as Basel II, is due to be
implemented worldwide from the end of 2006. Such standards aim to achieve a
better and more transparent measurement of the various risks incurred by
internationally active banks, limiting the possibility of contagion in cases of
a crisis and strengthening the global financial infrastructure overall.

The new Capital Accord is based on three pillars, namely, minimum capital
requirements, a supervisory review process, and effective use of market
discipline through minimum disclosure standards. With regard to the first
pillar, a material development was the internal rating-based approach to credit
risk. Since the board of directors and management of a bank have, or ought to
have, the most complete understanding of the risks that their bank faces, the
board and management have primary responsibility for the management of these
risks.

Internal ratings are intended to become an integral part of a bank's
risk-management process and its own assessment of capital adequacy before such
ratings may be applied in the determination of the bank's statutory capital
requirement. Supervisory review of capital, the second pillar of the new
Accord, will be a critical complement to minimum capital requirements.
Supervisors will have to evaluate how well banks are assessing their capital
needs relative to their risks, including whether banks are appropriately
addressing the relationship between different types of risk.

Market discipline, the third pillar, performs an essential role in ensuring
that the capital of banking institutions is maintained at adequate levels.
Since effective public disclosure enhances market discipline and allows market
participants to assess a bank's capital adequacy, disclosure can be a strong
incentive for banks to conduct their business in a safe, sound and efficient
manner. South Africa has made good progress with preparations for the
implementation of Basel II on 1 January 2008.

The South African Reserve Bank remains committed to providing a regulatory
environment that will allow South African banks to adopt international best
practice. South Africa's financial sector is held in high regard and the
introduction of Basel II will enable South African banks to maintain, if not
strengthen, their international standing, to the benefit of the economy.

4. The Basel Core Principles

Countries use the Basel Core Principles as a benchmark for assessing the
quality of their supervisory systems and for identifying future work needed to
ensure sound supervisory practices. The core principles have also been used by
the International Monetary Fund and the World Bank in the context of the
Financial Sector Assessment Program. Changes have occurred in banking
regulation over the years, however, and much experience has been gained with
implementing the Core Principles in individual countries. Subsequently, the
Basel Committee established the Core Principles Liaison group to update the
core principles to reflect these changes.

This is to ensure their continued validity, usefulness and relevance as a
flexible, globally applicable standard. The updated principles remain focused
on banking supervision. Issues related to the necessary infrastructure for
effective banking supervision are discussed as preconditions and provide
background for the assessment. The review also stresses the importance of the
independence, accountability and transparency of bank supervisory authorities.
Recently, an exercise benchmarking the bank supervisory framework of South
Africa against the revised core principles was conducted and areas of
non-compliance identified. An action plan has been initiated to implement the
changes, thereby ensuring that the South African bank supervisory framework
meets international standards.

5. The global financial sector

According to the 76th Annual Report of the BIS, the main risks confronting
the global financial sector are of a macroeconomic nature. These relate to the
potential effects of higher interest rates, a turn in the credit cycle and,
possibly, associated declines in real estate prices and aggregate expenditure.
The current global environment places a premium on system-wide risk management.
The report highlights the importance of making available information about risk
as well as the interplay, and need for consistency, between financial reporting
standards, risk management practices and the overall prudential framework. The
South African financial sector is also exposed to these risks and the planned
implementation of Basel II by South African banks will strengthen reporting
standards and market discipline.

6. The South African banking industry

The South African banking system is sound and stable. Banks are well
capitalised and the average risk-weighted capital-adequacy ratio for the
banking system as a whole was 12,3 percent at the end of July 2006. Growth in
the total balance sheet of banks remained strong during the past year and by
the end of July 2006, the total assets of banks comprising, amongst other
things, money, loans and advances, investment and trading position and
non-financial assets had increased by 20 percent year-on-year, to a level of R1
939,5 billion.

By the end of July 2006, the South African banking sector had recorded
year-on-year mortgage-lending growth of 30,8 percent to a level of R608,9
billion. This growth was due to a number of factors including lower
mortgage-interest rates, a lower level of inflation, lower income-tax rates and
an increase in the real disposable income of households. There was also an
increase in speculative buying, known as the 'buy-to-let' boom. Real estate
prices are currently experiencing a slow-down in growth, which suggests some
strong resistance from consumers.

Consumer spending through credit card lending has recorded year-on-year
growth of 38,6 per cent to a level of R36,9 billion at the end of July 2006,
while the growth in instalment-sales debtors has also continued unabated,
growing by 18,8 percent, to a level of R201,6 billion over the same period. As
the regulator of banks, the Bank Supervision Department of the South African
Reserve Bank will continue to ensure that banks' risk-management processes are
appropriate for monitoring these activities in the light of increasing
household sector indebtedness and the increasing cost of credit.

This high rate of credit extension has become a major cause for concern for
the Bank. The high levels of credit extension have resulted in record levels of
household debt, which have reached levels of almost 70 percent of household
disposable income. The high levels of consumer expenditure have also
contributed to the expanding deficit on the current account of the balance of
payments. These developments pose a threat to the inflation outlook, and have
prompted the Monetary Policy Committee (MPC) to raise the repo rate by 50 basis
points at each of the past two MPC meetings.

7. Conclusion

In conclusion, there are three points which I would like to emphasise.
Firstly, the implementation of the new Capital Accord by our banks will result
in the adoption of a globally accepted standard, which will lead to a more
transparent risk measurement and better corporate governance practices.
Secondly, complying with the Basel Core Principles will ensure that banks are
regulated according to international standards. Finally, it will be in
consumers' own interests to take note of local economic trends, such as the
recent increases in the repo rate of the Bank, prior to incurring new debt.

I thank you.

Issued by: South African Reserve Bank
2 October 2006
Source: South African Reserve Bank (http://www.reservebank.co.za)