SOUTH AFRICAN RESERVE BANKBANK SUPERVISION DEPARTMENTANNUAL REPORT2000 Issued by Authority MISSION TO PROMOTE THE SOUNDNESS OF BANKS THROUGH THE EFFECTIVE APPLICATION OF INTERNATIONAL REGULATORY AND SUPERVISORY STANDARDS PHILOSOPHYMarket principles underlie all activities and decisions, and we strive to project an image of professionalism, integrity, credibility and impartiality at all times. We subscribe to a service-oriented approach, which entails accessibility and integrity, and a high premium is placed on ethical behaviour at all levels of activity. A relationship of mutual trust between this Department and all other key players is regarded as essential and is built up through regular open communication. FINANCIAL STABILITYIn the wake of the Asian financial crises in the late 20th century, financial stability continues to be an important area of focus worldwide. In a constantly changing financial environment, driven by ongoing technological developments and increasing use of the Internet, it may be apt to quote some of the views on the resultant challenges expressed by an eminent central banker, William J McDonough, who is currently also the Chairman of the Basel Committee on Banking Supervision: " ... the greatest challenge to the long-term goal of financial stability, both locally and globally, is the accelerating pace of change and financial innovation, driven by the steady march of technological advancement. To be sure, such rapid change has created unprecedented opportunities for both producers and consumers of financial products and services. But it must also be acknowledged that with such remarkable progress has come new, more complex and potentially far-reaching risks. ... But with this progress has also come new and difficult challenges. The rapid pace of technological advancement and financial innovation has introduced new, highly complex elements of risk, increased the speed and volatility of the markets, and blurred the barriers between previously distinct sectors of the financial marketplace.Even as supervisors confront change, the fundamental questions remain the same. Where is the risk in banks' activities, and how effectively are they managing it? Where are banks extending credit and in what form? Who are banks' customers, and how are those customers changing? To what extent are credit risks being transformed into liquidity and operational risks?The difference today is that the timeframe for answering these fundamental questions is dramatically shortened. As supervisors, we must be able to look at rapidly changing financial institutions and assess whether their strategies make sense and whether they are effectively evaluating the risks ...In a world of instantaneous communication, interconnected markets, and more complex instruments and risks, effective supervision is more important than ever to maintaining financial stability, both locally and globally. To remain effective and relevant, supervisors must understand how and to what extent the 'wired' economy and other technologies are changing banking and finance. At the same time, we must take care that our efforts to ensure the safe and sound operation of the financial markets do not stifle the innovation and creative energy that is changing banking and finance indeed, the world for the better." Keynote speech: Remarks by William J McDonough, President and Chief Executive Officer, Federal Reserve Bank of New York, before the Eleventh International Conference of Banking Supervisors, Basel, Switzerland, 20 September 2000, 11 p. BANK SUPERVISION DEPARTMENT Annual report for the calendar year ended 31 December 2000in terms of section 10 of the Banks Act, 1990, andsection 8 of the Mutual Banks Act, 1993 The purpose of this report is to present an overview of the objectives and activities of the Bank Supervision Department of the South African Reserve Bank, with particular reference to the period 1 January 2000 to 31 December 2000.