The year under review was somewhat less turbulent for the South African financial system and banking sector than the preceding two years. Whereas the latter part of 2001 was characterised by a significant depreciation of the South African currency, and the main feature of 2002 was consolidation in the country’s banking sector, following a liquidity crisis among small and mid-sized banks, 2003 was marked by greater stability. This made possible a number of cuts in interest rates as a result of a decline in the inflation rate in South Africa. The Bank Supervision Department saw a changing of the guard. Mr Christo Wiese, who had been the Registrar of Banks since November 1994, retired at the end of October 2003, and my appointment as Registrar became effective on 1 November 2003. Among the issues reviewed are a modification of the Department’s supervisory approach and the charter developed by the South African financial sector to advance black economic empowerment. Other issues highlighted include the findings of a review of corporate governance in large South African banks. During the year under review, South African banks remained well capitalised. Although the average risk-weighted capital-adequacy ratio for the sector decreased marginally to 12,2 per cent at the end of December 2003, compared to 12,6 per cent in 2002, it remained above the statutorily required level of 10 per cent. Growth in the total balance sheet increased during 2003. By the end of December 2003, the total funds of banks – comprising capital, reserves, deposits and loans – had increased by 25,2 per cent (measured over a period of twelve months), to a level of R1 377,6 billion. During 2003, the four biggest banks represented about 81 per cent of the total banking sector, and the five largest banks constituted 87 per cent of the banking sector. The participation of foreign banks in the local banking industry increased from 6,9 per cent in 2002 to 8,7 per cent of total banking-sector assets by the end of December 2003. Total non-bank deposits had increased by 14,1 per cent (measured over a 12-month period) in December 2003, from 12,5 per cent in December 2002. The composition of non-bank deposits remained largely unchanged during the past year. Both the return on equity and the return on assets of the total banking sector increased during the year under review. By the end of December 2003, the average return on equity was 10,9 per cent, up from 5,6 per cent in December 2002, whereas the return on assets increased from 0,5 per cent in December 2002 to 0,7 per cent in December 2003. The interest margin decreased to 3,3 per cent in December 2003, from 3,8 per cent in 2002. The efficiency of the banking sector saw some improvement, from 67 per cent in 2002 to 65,8 per cent in 2003. South African banks maintained adequate levels of liquidity during 2003. In December 2003, banks’ liquid assets amounted to 114,7 per cent of liquid assets required to be held, compared to a level of 118,1 per cent in December 2002. Total gross overdues of the banking sector decreased by R2,4 billion, to a level of R23,8 billion at the end of December 2003. Provisioning by banks against these non-performing loans was adequate, even when benchmarked against international requirements. The Bank Supervision Department’s continuing focus areas will remain: Banks’ operational riskAbility of information technology to maintain pace with product innovation.Succession planning. Banks’ credit risk“Bad loans are made in good times”.Reliance on the valuation of security.  Inculcation and maintenance of compliance culture