IMF in call for big shake-up of SA banking

SOUTH Africa needs a more competitive financial sector‚ with a number of new‚ smaller banks entering the market to help lower costs‚ according to the International Monetary Fund (IMF).

It believes this is a particular need for small businesses and poorer households.

The fund has found that South Africa's financial sector faces elevated but manageable risks as it is highly interconnected and concentrated.

Households are highly indebted‚ and remain vulnerable given the country's sluggish economic growth‚ high unemployment and inequality.

This adds to the risk‚ the IMF said following the completion of an extensive assessment of the financial regulatory system.

The assessment is intended to help countries identify risks to the financial system and implement policies to deal with financial shocks.

The fund sent a large team to South Africa from April to June to evaluate the sector. Stress-testing the major banks and insurers was carried out.

They were found to have adequate capital to be vulnerable to liquidity shortfalls.

The mission met key members of the government‚ including Finance Minister Nhlanhla Nene‚ then Reserve Bank governor Gill Marcus‚ and her successor‚ Lesetja Kganyago‚ as well as senior management from banks‚ insurance companies and money market managers.

As a member of the Group of 20‚ South Africa agrees to this IMF financial sector assessment programme every five years.

The IMF found "the financial sector remains sound but is subject to vulnerabilities".

The country's financial regulation and supervision were strong and capital adequacy was good.

Nevertheless‚ the highly concentrated and intertwined financial sector poses a risk.

South Africa's banking sector is dominated by five large players – FirstRand‚ Standard Bank‚ Barclays Africa Group‚ Nedbank and Investec – which hold more than 90% of banking assets.

The top five insurers account for 74% of the long-term insurance market‚ while the seven largest fund managers control 60% of unit trust assets. Also, the large banks are affiliated to the insurance companies.

This interconnectedness is also found in the collective investment schemes‚ with insurers underwriting a large proportion of private pension assets‚ while some banks own fund managers that offer unit trusts.

The IMF said that these vulnerabilities became apparent when African Bank ran into difficulties as its bad debt mounted and it had to be placed under curatorship in August.

"Although its small size would have suggested no systemic implications‚ its problems are a reminder that asset quality can quickly deteriorate in a weak economy and even small institutions can entail systemic risk due to high interconnectedness‚" the IMF said.

National Treasury deputy director-general Ismail Momoniat said yesterday that Nene would lead a process within the government to consider how to respond to the IMF's recommendations.

"It certainly needs more engagement as the IMF makes detailed recommendations on the banks‚ insurance companies and collective investment schemes."

Momoniat said the IMF had made some good observations.

"These are things we have to take into account‚ such as how we make our banks safer‚ and to decide if we have gone far enough in improving our regulatory system?"

The IMF recommends that South Africa's authorities cut the amount of capital needed to start a bank and close any regulatory gaps that favour the incumbent banks.

The fund also called for better coordination among regulators and the ability to supervise not just a financial institution‚ but also the group to which it belongs.

For instance‚ when African Bank floundered, the Reserve Bank was able to act only on problems in the bank‚ not those of its parent‚ African Bank Investments Ltd‚ or subsidiary Ellerines.

Under a planned twin peaks system to be introduced in the new year‚ regulators will be able to deal with groups and parent companies.

A second draft of the Financial Sector Regulation Bill‚ which gives effect to the government decision in 2011 to shift to a twin peaks model‚ was released for public comment last week. – BDLive