TOT­TING UP THE COST

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

min­is­ter of fi­nance.

With the ex­cep­tion of bank­ing ac­tiv­i­ties reg­u­lated un­der the Fi­nan­cial Ad­vi­sory and In­ter­me­di­ary Ser­vices Act, banks have never been reg­u­lated in the greater sense from a con­duct points of view. What this im­plies is that the FSCA will need to bol­ster its ranks with reg­u­la­tors who have a deep un­der­stand­ing of the bank­ing sec­tor.

The past few years have seen im­mense changes in the reg­u­la­tions re­lat­ing to cap­i­tal hold­ing for banks. This is a di­rect con­se­quence of the 2008 fi­nan­cial cri­sis and the re­al­i­sa­tion that fi­nan­cial firms were in­suf­fi­ciently cap­i­talised to with­stand a se­ri­ous “tail risk” type cri­sis. On Jan­uary 1 2013 SA im­ple­mented amended reg­u­la­tions which, in line with the Basel 3 frame­work, es­sen­tially ad­dress both bank-spe­cific and broader, sys­temic risks by:

Rais­ing the qual­ity of cap­i­tal, with a fo­cus on com­mon eq­uity and the quan­tity of cap­i­tal to en­sure banks are bet­ter able to ab­sorb losses;

En­hanc­ing the risk cov­er­age of the reg­u­la­tory frame­work, in­clud­ing ex­po­sures re­lated to coun­ter­party credit risk;

In­tro­duc­ing cap­i­tal buf­fers which should be built up in pros­per­ous times so that they can be drawn down dur­ing pe­ri­ods of stress;

In­tro­duc­ing a lever­age ra­tio to serve as a back­stop to the risk-based cap­i­tal re­quire­ment and to pre­vent the build-up of ex­ces­sive lever­age in the fi­nan­cial sys­tem;

Rais­ing stan­dards for su­per­vi­sion and risk man­age­ment (Pil­lar 2) and public dis­clo­sures (Pil­lar 3);

In­tro­duc­ing the mon­i­tor­ing of pro­posed min­i­mum liq­uid­ity stan­dards to im­prove banks’ re­silience to acute short-term stress and to im­prove longer-term fund­ing; and

In­tro­duc­ing ad­di­tional cap­i­tal buf­fers for the most sys­tem­i­cally im­por­tant in­sti­tu­tions to ad­dress the is­sue of such in­sti­tu­tions be­ing “too big to fail”.

Ac­cord­ing to the cen­tral bank the im­ple­men­ta­tion pe­riod for sev­eral of the Basel 3 re­quire­ments in­cludes tran­si­tional ar­range­ments which will be phased in un­til Jan­uary 1 2019. The tran­si­tional ar­range­ments are aimed at giv­ing banks time to meet the higher stan­dards while still sup­port­ing lend­ing to the econ­omy.

Other mea­sures be­ing taken by cen­tral banks in­clude the re­quire­ments for fi­nan­cial firms to pro­duce

Reg­u­la­tors are get­ting sharper teeth and the risk for banks fail­ing to com­ply can be more than just a fi­nan­cial loss

Pic­ture: THINK­STOCK

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