Transformation of the South African Financial Sector Presentation to the Standing Committee on Finance & Portfolio Committee on Trade and Industry 22 March 2017 Transformation of the South African Financial Sector

Overview of presentation The role of the South African Reserve Bank Market structure of the banking sector – high concentration International experience on banking concentration Policy/regulatory issues: advantages, risks and mitigating factors Licencing framework for banks Selected banking sector data : recent licenses issued Some development in the payments system – inclusion & competition Conclusions

Role of the SARB Protect the value of the currency of the Republic in the interest of balanced and sustainable economic growth in the Republic Regulate and supervise banks in SA (through its Bank Supervision Department) Responsible for management, administration, operation, regulation and supervision of the payment, clearing and settlement systems in SA Contribute towards the achievement and maintenance of financial stability

Banking Sector Data: number of licensed banks   1994 1997 2000 2003 2006 2009 2011 2014 2016 Registered banks 35 40 41 20 17 16 Mutual banks 2 4 3 Local branches of foreign banks - 9 15 14 13 Controlling companies 23 32 38 19 Co-operative Banks Representative offices 60 61 44 43 42 36 Banks R4,87 trillion in assets 112% of GDP Source : SARB bank sector data

Concentration – share of total banking assets Source : SARB bank sector data

Concentration – market share of dominant banks Source : SARB banking sector data

Concentration in banking sector - explained 2000s – Global trend towards consolidation of banking institutions 2002 – Mini banking crisis in SA → consolidation of the banking sector Liquidity pressures, loss of depositor confidence, external factors, weak corporate governance, weak risk management and fraud 2002-2003: approx. 22 small and medium-sized banks exited banking system 2003: Market share of “big 4 banks” increased to 82% Dominance of 4 banks, but new entrants gaining market share

International experience Internationally, concentration in the banking sector is prevalent World Bank, Bank Asset Concentration, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series, March 16, 2017.

International experience – United Kingdom Source : PWC

Concentration : Advantages, risks & mitigating factors (Key Observations) Systemic Advantages Risks Mitigating Factors Resilience to financial crisis (SA; Australia, Canada experience) Large firms are better diversified (monoline are less stable) Nexus btw concentration & financial stability Confidence in banking sector Compete with global players Larger banks → better capitalised → more lending → support financial inclusion Anti-competitive behaviour amongst dominant players Creating D-SIBs – Too Big to Fail Risk of contagion Build-up of systemic risks Licensing of new entrants Robust competition policy Pending introduction of a dedicated market conduct regulator Resolution framework for systemic banks Higher prudential requirements Capital add-ons on D-SIBs Greater regulatory burden on large banks (recovery & resolution plans; AML/CFT supervision)

Licencing framework for banks – Banks Act Step 1 Application to Registrar – authorisation to establish a bank - any person may apply in manner & form as prescribed Step 2 Registrar grants (with conditions) or refuses authorisation Registrar must be satisfied that: - must be in public interest - proposed business of a bank as public company -applicant has financial means to comply with the requirements of Banks Act - business of the proposed bank will be conducted in a prudent manner - every director or an executive officer of the proposed bank a fit and proper person -sufficient experience of the management of the kind of business it is intended to conduct - appropriate composition of board Step 3 Application granted – 12 months to apply for registration as a bank (conditions to registration) - Application must be in manner & form as prescribed - Be accompanied by additional information as prescribed - Registrar may request further information - Registration may be subject to conditions as determined by Registrar

Key licensing conditions Capital requirement – greater of (unencumbered) R250m or 8% of RWA. Fit & proper requirements on directors and executive officers Prudent & sustainable business model Compliance with international regulatory regimes – e.g. Basel III, AML/CFT (FATF), FSB resolution framework, etc. Public interest - considerations include transformation

Selected banking sector data Licenses: 2011 - 2016 Type Registered Registered Banks 1 Registered Mutual Banks Registered local branches of foreign banks 4 Registered controlling companies Registered Co-operative Banks 2 Representative offices 12 Source : SARB banking sector data

Developments in the payments system - types of payments Domestic Customer payments Forex payments Continuous Linked Settlement (CLS) Outside CLS Bank to bank transfers including interbank loans Repo payments Standing facility Supplementary Repo Cash Industry settlements, deposits and withdrawals Payments to settle securities transactions Equities Bonds Money Market Retail payments i.e.; cheque, card, ATM, electronic funds transfer (credit/debit)

Developments in the payments system - participants Central Bank – payment settlement Clearing participants Banks Designated non banks Settlement participants – only banks Payment clearing house operators – i.e.; Bankserv, Strate, MasterCard, Visa Central securities depositories – custody of assets used to access liquidity in the system Registered Payment System Operators – provide technical services for processing of payments Recognized third party payment providers – parties that are appointed as agents to accept or process payments on behalf of their principal i.e.; payment of utility bills at retailers and payment of salaries on behalf of employers

Developments in the payments system - future framework Regulate parties in relation to what they do rather than who they are. Define what is a “payment service” and regulate providers of these services on a level playing field. This will be realised through changes to the NPS act. Embrace the concept of a “transactional account” that may be hosted by qualifying service providers that would be regulated for that purpose. This will advance financial inclusion. Establish an appropriate regulatory framework for money remittance service providers or money transfer operators who are not necessarily banks. Review the overall access paths for service provision in the payment system.

Conclusions/Policy Considerations Market structure evolution increased concentration – stability vs competition dichotomy Market dominance is relevant for competition but is not indicative of the absence of competition SARB effective as prudential supervisor and has ensured stability of the banking system Support the licensing of new entrants to improve competition outcomes – providing similar or superior products at lower costs Multiple objectives – financial inclusion and access, competition, financial stability, transformation Opportunities – second tier banks, mutual banks, cooperative banks, payments system developments