Edward West
4 November 2009
Johannesburg — THE Reserve Bank is investigating what regulatory measures to recommend to better assess the strengths and vulnerabilities of SA's banking system in the wake of the global credit crunch.
This emerged from the Bank's Financial Stability Review yesterday which showed that credit impairments at SA's banks rose 37,5% to R124,9bn in the six months to June this year, due to the deteriorating economy - this was an indirect effect of the financial crisis.
The weakening asset quality at SA's banks has not posed a systemic threat to the financial system, and the situation is likely to improve gradually in an environment of less tight monetary policy combined with the bottoming of the economic downturn, the review said.
Local banks have maintained high levels of capital and continue to be profitable, albeit at a lower rate, through the financial crisis.
Hendrik Nel, of the Bank's financial stability division, said the international financial system remains vulnerable to event and confidence risks despite signs of global economic recovery.
There was a risk of rising unemployment feeding through to financial systems, causing uncertainty and instability. Constrained bank lending, impaired securitisation markets and further deleveraging were among the other global risks.
Local banks have been shielded from the direct effects of the global financial crisis because they had not invested heavily in high- risk, complex products and their foreign exposure was limited.
In SA, the analysis of systemic risk of the financial system is conducted by the Reserve Bank and the Financial Services Board (FSB). But "additional work needs to be done to ensure a more holistic approach to the inclusion of macroprudential analysis in the broader regulatory framework", the review said.
Specific areas of greater control over the financial system being researched globally include monitoring large and rapidly increasing exposures and risks, analysis of spill-overs between firms and markets through mutual exposures and interconnectedness, and oversight of each systemically important firm.
There was broad consensus regulation should be expanded to cover institutions such as hedge funds and credit rating agencies, as well as financial products like over-the-counter derivatives. The FSB was investigating how to regulate credit rating agencies and moves were afoot in SA to better regulate hedge funds.
Bank executive pay and bonuses were also under scrutiny globally, as was the convergence of accounting standards.
Bank share prices recovered gradually in the first part of this year and rose markedly in June. Factors that affected the decline in headline earnings in banks' interim earnings included a slowdown in economic activity, rising credit impairments, falling interest rate margins and a reduction in the value of investment portfolios.
Banks had been reluctant to relax lending criteria in the first six months due to deteriorating asset quality, falling house prices, contracting economic growth and rising unemployment, thus reinforcing "acute pro-cyclic behaviour", but fewer banks maintained their strict lending criteria in the second quarter compared with the first quarter.
Banks have since begun to ease their lending criteria, especially on mortgages.
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