1. 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

2. 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

3. 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

4. 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

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

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

7. 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
: 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

8. International experience
Internationally, concentration in the banking sector is prevalent
World Bank, Bank Asset Concentration, retrieved from FRED, Federal Reserve Bank of St. Louis; March 16, 2017.

9. International experience – United Kingdom
Source : PWC

10. 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)

11. 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

12. 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

13. Selected banking sector data
Licenses:
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

14. 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)

15. 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

16. 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.

17. 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