South Africa's implementation of Basel II
The Department’s effort to implement Basel II – the Basel Committee’s revised capital framework – on 1 January 2008 was a major exercise undertaken over several years.
Accordingly, the discussions in the Annual Report 2007 as detailed in chapter 2, describe a holistic view of Basel II implementation from the start of the process, shortly after the millennium change, up to the date of implementation.
The discussion covers the process of incorporating Basel II into the regulatory framework, along with the development, implementation and embedding of the following elements of Basel II:
- Pillar 1, relating to the determination of the minimum required regulatory capital in respect of credit, market and operational risk, including the application and approval processes that were followed in respect of credit and operational risk, where banks targeted approaches other than the base approaches, the quantitative impact studies, field tests and parallel runs, and the recognition of eligible external credit assessment institutions.
- Pillar 2, relating to capital management, including the initial internal capital adequacy assessment process (ICAAP) assessments and the updating of the supervisory review and evaluation process (SREP).
- Pillar 3, relating to market discipline, which included industry training.
South Africa's ongoing implementation of Basel III and global regulatory reforms
On 1 January 2013 South Africa implemented amended Regulations which, in line with the Basel III framework, essentially address both bank-specific and broader, systemic risks by:
- raising the quality of capital, with a focus on common equity and the quantity of capital to ensure banks are better able to absorb losses;
- enhancing the risk coverage of the regulatory framework, including exposures related to counterparty credit risk;
- introducing capital buffers which should be built up in prosperous times so that they can be drawn down during periods of stress;
- introducing a leverage ratio to serve as a backstop to the risk-based capital requirement and to prevent the build-up of excessive leverage in the financial system;
- raising standards for supervision and risk management (Pillar 2) and public disclosures (Pillar 3);
- introducing the monitoring of proposed minimum liquidity standards to improve banks’ resilience to acute short-term stress and to improve longer-term funding; and
- introducing additional capital buffers for the most systemically important institutions to address the issue of such institutions being ‘too big to fail’.
The implementation period for several of the Basel III requirements that were incorporated into the Regulations commenced on 1 January 2013 and includes transitional arrangements which will be phased in until 1 January 2019. The transitional arrangements are available to give banks time to meet the higher standards while still supporting lending to the economy. For further details please refer to Directive 5 of 2013.
Subsequent to the implementation of Basel III in South Africa, the Basel Committee issued various further or revised requirements in respect of a wide range of matters that required amendments to local Regulations, including:
- capital disclosure requirements
- revisions to the Liquidity coverage ratio (LCR)
- requirements related to a restricted version of a CLF (RCLF)
- liquidity disclosure requirements (LCR-related disclosures)
- requirements related to intraday liquidity management
- public disclosure requirements related to the leverage ratio
In addition, amendments to the Regulations were required as a result of the 2015 RCAP process and the supervisory review processes and participation in various international forums.