The National Treasury document a-safer-financial-sector-to-serve-south-africa-better  introduces a Twin Peaks regulatory architecture where prudential regulation is separated from market conduct regulation within the financial sector.

The Prudential Division facilitates the role of legislative and regulatory advocacy on behalf of the industry for matters pertaining to prudential regulation and policy formulation.

In layman’s terms, we consider the scope of prudential regulation to include the rules and regulations that banks and other financial institutions are supervised under, including their participation in financial markets. Prudential regulation could be explained within a banking context as what you must do to qualify for a business license to perform the business of a bank and the ongoing maintenance and reporting requirement of that license, whilst market conduct regulation would govern the how you engage your customers once you have a license to perform the business of a bank.

The Prudential Division does not address matters pertaining to bank customers using retail products but will address market conduct matters as it pertains to transacting in foreign currencies, debt markets, equity markets and other financial instruments.

The Prudential Division also includes within its scope, the broader financial stability role of the South African Reserve Bank, sometimes referred to as macro prudential or systemic risk management.

We monitor the pronouncements of the Financial Stability Board and the global standard setting bodies Bank for International Settlements (BIS) and the International Organisation of Securities Commissioners (IOSCO)amongst others, comment on their documents and work with policy makers and regulators domestically to ensure that these standards are appropriately implemented in the banking sector.

The Basel Committee on Banking Supervision (BCBS) is located at the Bank for International Settlements in Basel, Switzerland and is the global standard setting body for the prudential regulation of banks. Known as the Basel framework.

•  In July 1988 they published their first framework titled International Convergence of Capital Measurement and Capital Standards which became known as Basel I, updated in 1998.
• In June 2004, the BCBS published the International Convergence of Capital Measurement and Capital Standards a Revised Framework  that introduced a new capital framework for banking commonly known as Basel II.
• Basel III, released in June 2011 was in response to the events of the global financial crisis of 2008 and introduced a set of reforms to strengthen the regulation, supervision and risk management of the banking sector.Their publication Basel III: A global regulatory framework for more resilient banks and banking systems focused on new capital requirements whilst Basel III The Liquidity Coverage Ratio and liquidity risk monitoring tools introduced new measures for liquidity.
• In June 2015, a report outlining the findings of the BCBS’s Regulatory Consistency Assessment Programme (RCAP) on South Africa’s compliance with the Basel framework was released.  A key component of the RCAP  is to assess the consistency and completeness of a jurisdiction’s adopted standards and the significance of any deviations from the regulatory framework.  South Africa was found to be compliant in all 14 components of the capital framework in  their publication Regulatory Consistency Assessment Programme (RCAP) Assessment of Basel III risk-based capital regulations – SA and compliant with the liquidity framework including the disclosure standards in their publication Regulatory Consistency Assessment Programme (RCAP) Assessment of Basel III LCR regulations – SA. The grade compliant is the highest level of compliance that can be awarded by the BCBS and it was noted that several aspects of the domestic rules are more rigorous than required under the Basel framework.

The South African Reserve Bank is a member of the Basel Committee on Banking Supervision.

The South African banking industry has been consistently recognised amongst the top ten banking sectors in the World by the World Economic Forum.  However, these high standards come at a cost and now a model has been developed to begin explaining how the Basel regulatory costs imposed on the banking sector are translated into a selection of banking products.

The model does not attempt to provide a pricing tool as it is based on a virtual bank with no staff, no overheads and no profit maximising objective on its loan portfolio.  The objective of the model is to demonstrate the changing cost structure over time with the introduction of the Basel Committee on Banking Supervision standards Basel I, Basel II and Basel III and may be of interest to both bankers and students in finance.

A short Tutorial  is provided to introduce you to the model.

“The model is available free of charge from veronicas@banking.org.za, (currently Version 1.0)”