6 July 2009
editorial
Johannesburg — WHAT does SA need to do to keep up with the reforms in financial regulation that are now being proposed internationally in the wake of the financial crisis?
Very little, judging by the latest annual report from SA's banking regulator. SA is now cited internationally as being one of only three countries whose banking sectors survived the financial crisis unscathed (Canada and Spain are the other two). And the report from the Reserve Bank's bank supervisory department confirms that our banks are well capitalised and profitable, despite higher bad debts and slower lending growth.
Not for us the "light touch regulation" that helped to get banks in the US and UK into such trouble. SA has taken seriously all of the best practice debates international regulators have been discussing and recommending in recent years at their regular get- togethers in Basel in Switzerland.
SA went ahead and implemented the new Basel 2 capital accord on January 1 last year, forcing banks to focus on measuring and managing their risks and providing the appropriate amount of capital to cushion them against these risks. Banks didn't enjoy the experience or the expense involved at the time. Now, few would query that it was the right thing to do, with the focus on risk management helping to ensure banks here didn't go overboard as their counterparts did abroad. For while SA took all the regulatory guidelines very seriously, other countries did not: the US still hasn't implemented Basel 2 while Europe has its own, diluted version.
Equally, other regulators such as the UK's Financial Services Authority are only now introducing measures that SA has long had in place -- such as the requirement that the regulator vet members of banks' boards of directors and monitor their shareholding structures.
SA was subjected (successfully) to four international reviews of its financial sector regulation last year: the US will have its first financial stability assessment only later this year.
Nor is it just the rules themselves, but the collaborative way they have been implemented, with bank executives working closely with regulator Errol Kruger to ensure the sector could innovate and expand without taking too much risk.
Clearly SA must be part of debates on the regulatory response to the crisis, and must follow where appropriate. But we must avoid knee-jerk responses or regulatory overreach.
Indeed, far from taking too much risk, the accusation now is that our banks may be taking too little, cramping the economy by a refusal to lend. The regulator's report shows growth in loans and advances slowed to 9% last year, from 19% the previous year. And by April, it was down further, to a mere 3,5% year on year.
At this level banks clearly aren't supporting any sort of growth in the economy. But the fault is hardly all theirs. Banks are, arguably, no more than the transmitters of policy. It's through the banks that interest rates impact on consumers and businesses.
There was something of a credit spree , when interest rates were low and banks were lending freely, perhaps too freely. Households and their bankers felt the effect of that by last year, when banks' bad debts more than doubled from about R40bn to nearly R90bn. Banks, rightly, responded by tightening their lending criteria. And though bad debts continue to rise, the pace has slowed and the bad debt ratio is still not at the level seen in the last debt crisis a decade ago. But it was not only interest rate policy that had an effect : the National Credit Act also forced banks to look very carefully at whether customers could afford to take on more debt. The new act has probably made bankers more paranoid about opening the credit taps because of the risks they take if they don't check affordability. But it's not just paranoia. In a real sense, consumers simply can't afford to borrow more. They've been hit by higher electricity, fuel, food and medical costs and even with lower interest rates, their budgets won't stretch. Nor will their confidence.
So until the economy recovers, banks are unlikely to be able to ramp up lending. And it makes no sense to congratulate them on the caution that helped them survive the crisis while at the same time insisting that they must be more aggressive.
It makes no sense to congratulate our banks for their recent caution while at the same time insisting that they be more aggressive now
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