The New World of Banks, The New World of Banks,

Governments, Regulation Governments, Regulation

and Supervision and Supervision –– Viewpoints Viewpoints

from African Central from African Central

BankersBankers

Keith JefferisKeith Jefferis

Department for International Development Department for International Development (DFID), October 14, 2009(DFID), October 14, 2009

Chatham House Seminar on Financial Systems Chatham House Seminar on Financial Systems Reforms: The Implications for NonReforms: The Implications for Non--G20 G20

Countries, October 15, 2009Countries, October 15, 2009

ONGOING Developments in ONGOING Developments in

African Finance & BankingAfrican Finance & Banking

•• Financial sector reform over Financial sector reform over past two decades:past two decades:

•• Elimination of direct state Elimination of direct state control over financecontrol over finance

•• MarketMarket--based monetary / based monetary / exchange rate policyexchange rate policy

•• Development of financial & Development of financial &

•• ResultsResults

•• Financial deepening and Financial deepening and broadening (institutions, broadening (institutions, products, markets)products, markets)

•• Capital inflows and FDI in Capital inflows and FDI in banking sectorbanking sector

•• Enhanced financial sector Enhanced financial sector •• Development of financial & Development of financial & capital marketscapital markets

•• Privatisation and liberalisationPrivatisation and liberalisation

•• Modernisation of regulatory and Modernisation of regulatory and supervisory frameworks supervisory frameworks

•• An integral part of broader An integral part of broader macroeconomic & structural macroeconomic & structural reformsreforms

•• Enhanced financial sector Enhanced financial sector efficiencyefficiency

•• Improved incentives for savings Improved incentives for savings & investment& investment

•• Enhanced soundness & stability Enhanced soundness & stability of financial institutionsof financial institutions

•• Higher and more consistent GDP Higher and more consistent GDP growth growth

Banking Regulation Banking Regulation

and Supervisionand Supervision

•• Nature of finance makes Nature of finance makes regulation and supervision regulation and supervision essential:essential:

•• Information asymmetry & Information asymmetry & misaligned incentivesmisaligned incentives

•• KnockKnock--on (systemic) risks of on (systemic) risks of

•• Main componentsMain components

•• Capital adequacyCapital adequacy

•• Risk management, e.g.Risk management, e.g.

•• Asset/liability maturity Asset/liability maturity mismatchmismatch

•• KnockKnock--on (systemic) risks of on (systemic) risks of banking failurebanking failure

•• Macroeconomic role of Macroeconomic role of bankingbanking

•• Key objectivesKey objectives

•• Protection of depositorsProtection of depositors

•• Systemic stabilitySystemic stability

•• Consumer protectionConsumer protection

mismatchmismatch

•• Forex exposureForex exposure

•• Large exposuresLarge exposures

•• Off balance sheet Off balance sheet exposures & contingent exposures & contingent liabilitiesliabilities

•• Management quality, fitManagement quality, fit--andand--proper, systems, DRP proper, systems, DRP etc.etc.

Ongoing Global Ongoing Global

Developments Developments –– G20G20

•• Regulatory failings Regulatory failings contributed to recent crisiscontributed to recent crisis

•• Regulatory gapsRegulatory gaps

•• Regulated vs. unregulated Regulated vs. unregulated institutionsinstitutions

•• Agency responsibilitiesAgency responsibilities

•• Proposed regulatory reformsProposed regulatory reforms

•• Extend reach of regulation Extend reach of regulation (e.g. hedge funds & rating (e.g. hedge funds & rating agencies)agencies)

•• Higher capital requirementsHigher capital requirements

•• CounterCounter--cyclical capital cyclical capital •• Agency responsibilitiesAgency responsibilities

•• Insufficient capitalInsufficient capital

•• ProPro--cyclical capitalcyclical capital

•• InstitutionInstitution--basedbased

•• Weak risk assessmentWeak risk assessment

•• CounterCounter--cyclical capital cyclical capital requirementsrequirements

•• MacroMacro--prudential prudential supervision (the big picture)supervision (the big picture)

•• Review riskReview risk--rating rating methodology under Basel IImethodology under Basel II

•• Improved coImproved co--ordination ordination between regulators, both between regulators, both nationally and nationally and internationally internationally

Impact of the Global Impact of the Global

CrisisCrisis

•• No Africa banking sector crises No Africa banking sector crises –– except Nigeriaexcept Nigeria

•• No known institutional problems outside NigeriaNo known institutional problems outside Nigeria

•• Limited exposure to balance sheet problemsLimited exposure to balance sheet problems

•• Little or no direct exposure to toxic assetsLittle or no direct exposure to toxic assets•• Little or no direct exposure to toxic assetsLittle or no direct exposure to toxic assets

•• Limited reliance on wholesale fundingLimited reliance on wholesale funding

•• Good quality regulation and well capitalisedGood quality regulation and well capitalised

•• But still an impact:But still an impact:

•• Constrained access to global capital marketsConstrained access to global capital markets

•• Risk aversion in lendingRisk aversion in lending

IMPACT OF REGULATORY AND IMPACT OF REGULATORY AND

SUPERVISORY CHANGESSUPERVISORY CHANGES

•• Survey commissioned by African Development Bank Survey commissioned by African Development Bank

and GTZ, of selected African Central Banks in Eastern and GTZ, of selected African Central Banks in Eastern

& Southern Africa, focusing on:& Southern Africa, focusing on:

•• Impact of changing international supervisory Impact of changing international supervisory

environmentenvironmentenvironmentenvironment

•• New challenges New challenges –– macromacro--prudential supervisionprudential supervision

•• Role of GovernmentsRole of Governments

•• Adequacy of voiceAdequacy of voice

•• CrossCross--border supervisory issuesborder supervisory issues

•• Capital account liberalisationCapital account liberalisation

The Changing International The Changing International

Regulatory FrameworkRegulatory Framework

•• Basel II is being adopted in Africa:Basel II is being adopted in Africa:

•• but slowly, due to resource constraints & data requirementsbut slowly, due to resource constraints & data requirements

•• not obligatory not obligatory –– but pressurebut pressure

•• immediate challenge is full compliance with Basel Core Principlesimmediate challenge is full compliance with Basel Core Principles

•• Basel II already complex; Africa faces major challenges in moving beyond Basel II already complex; Africa faces major challenges in moving beyond standardised approach:standardised approach:standardised approach:standardised approach:

•• demands on models, data & regulators very challengingdemands on models, data & regulators very challenging

•• no credit rating agencies outside of Nigeria and South Africano credit rating agencies outside of Nigeria and South Africa

•• Major concerns for Africa stemming from global regulatory changes:Major concerns for Africa stemming from global regulatory changes:

•• higher risk weights internationally will reduce lending to Africahigher risk weights internationally will reduce lending to Africa

•• more complex regulatory regime (e.g. countermore complex regulatory regime (e.g. counter--cyclical capital requirements ) cyclical capital requirements ) would make Basel II adoption even more challengingwould make Basel II adoption even more challenging

•• Higher capital requirements for African banks not a major concern Higher capital requirements for African banks not a major concern -- most most regulators already apply capital requirements in excess of Basel Iregulators already apply capital requirements in excess of Basel I

•• South Africa alone can easily cope South Africa alone can easily cope -- much more advancedmuch more advanced

The Role of Government The Role of Government

in Financial Marketsin Financial Markets

•• Is there a risk that financial market failures and increased role for Is there a risk that financial market failures and increased role for governments in OECD banking systems might lead to reaction governments in OECD banking systems might lead to reaction against liberalisation & privatisation?against liberalisation & privatisation?

•• No evidence for this:No evidence for this:

•• Widespread appreciation by both policymakers and public of Widespread appreciation by both policymakers and public of •• Widespread appreciation by both policymakers and public of Widespread appreciation by both policymakers and public of benefits of privatisation and liberalisationbenefits of privatisation and liberalisation

•• Improved quality and quantity of financial services compared Improved quality and quantity of financial services compared to old stateto old state--owned banksowned banks

•• Lack of financial sector stress means no new demands on Lack of financial sector stress means no new demands on governmentsgovernments

•• Concerns are more with limited access to financeConcerns are more with limited access to finance

••

Adequacy of Voice?Adequacy of Voice?

•• Are the interests of (poor/small) African countries sufficiently Are the interests of (poor/small) African countries sufficiently represented in global for a where key decisions being made? represented in global for a where key decisions being made?

•• Only SA represented on BIS and Basel CommitteeOnly SA represented on BIS and Basel Committee

•• SA consults regularly within SADC (14 countries), but SA consults regularly within SADC (14 countries), but •• SA consults regularly within SADC (14 countries), but SA consults regularly within SADC (14 countries), but much less beyond thismuch less beyond this

•• C10 provides additional consultation forumC10 provides additional consultation forum

•• SA financial system much more advanced than rest of SA financial system much more advanced than rest of continent continent –– different issuesdifferent issues

•• Reliance on IMF to represent African viewpointsReliance on IMF to represent African viewpoints

MacroMacro--prudential Supervisionprudential Supervision

•• FT: “a posh word for proactive regulation that tries to join FT: “a posh word for proactive regulation that tries to join up all the dots”up all the dots”

•• Recognised to be important Recognised to be important –– but challengingbut challenging

•• Most CBs establishing macroMost CBs establishing macro--prudential supervisory units, prudential supervisory units, but need assistance with:but need assistance with:

•• Most CBs establishing macroMost CBs establishing macro--prudential supervisory units, prudential supervisory units, but need assistance with:but need assistance with:

•• Resources & TrainingResources & Training

•• Guidance on stressGuidance on stress--testing, indicators, trigger levels, and testing, indicators, trigger levels, and actionsactions

•• Combining regulation and macroeconomic functionsCombining regulation and macroeconomic functions

•• Legislative reformLegislative reform

•• Only SARB has fullyOnly SARB has fully--fledged financial stability department, fledged financial stability department, distinct from bank regulationdistinct from bank regulation

Financial Globalisation and Financial Globalisation and

CAPITAL Controls CAPITAL Controls

•• Financial globalisation seen as contributing to global crisis; Financial globalisation seen as contributing to global crisis; has drying up of capital inflows and surge in outflows has drying up of capital inflows and surge in outflows contributed to scepticism and reconsideration of capital contributed to scepticism and reconsideration of capital controls / slowing of liberalisation? controls / slowing of liberalisation?

•• Some temporary controls on outflows (Nigeria, Some temporary controls on outflows (Nigeria, •• Some temporary controls on outflows (Nigeria, Some temporary controls on outflows (Nigeria, Zambia)Zambia)

•• Commitment to progressive liberalisation intact (SA, Commitment to progressive liberalisation intact (SA, CMA)CMA)

•• No indication of desire to reconsider abolition No indication of desire to reconsider abolition (Botswana, Zambia, Uganda)(Botswana, Zambia, Uganda)

Transnational Regulatory Transnational Regulatory

IssuesIssues

•• Complexity of international banking groups combined with national Complexity of international banking groups combined with national regulatory responsibilities seen as contributing to crisis regulatory responsibilities seen as contributing to crisis –– hence focus on hence focus on crosscross--border supervision. How are African countries coping with this? border supervision. How are African countries coping with this?

•• CrossCross--border banking in Africa growing in importance:border banking in Africa growing in importance:•• Inward FDI from Europe, US, etc.Inward FDI from Europe, US, etc.

•• Growth of AfricanGrowth of African--domiciled regional banking groups (esp. SA, Nigeria)domiciled regional banking groups (esp. SA, Nigeria)•• Growth of AfricanGrowth of African--domiciled regional banking groups (esp. SA, Nigeria)domiciled regional banking groups (esp. SA, Nigeria)

•• No major problems arising, although some small countries have No major problems arising, although some small countries have limited capacity and/or are limited capacity and/or are marginalisedmarginalised

•• Legislation may inhibit information sharing and need updatingLegislation may inhibit information sharing and need updating

•• Information sharing agreements between regulators are Information sharing agreements between regulators are widespread, and work quite well; however smaller countries face widespread, and work quite well; however smaller countries face problems in securing formal problems in securing formal MoUsMoUs with larger countries with larger countries

•• Assisted by regional collaborative initiatives, e.g. SADC, East Assisted by regional collaborative initiatives, e.g. SADC, East African Community African Community

THANK YOUTHANK YOU