The impact of the proposed new capital adequacy framework on credit risk management practices of South African banks

[摘要] English: In the current environment of globalization and increasing competition in the financial services industry, risks are larger in scope and scale than ever before. Keeping pace with the changes in the risk environment, as well as with the latest developments in risk management practices, poses significant challenges to regulators and banks alike. For supervisors, the most important challenge involves developing an approach to capital regulation that works in a world of diversity and near-constant change. Financial institutions face the challenge of implementing advances in risk modeling in a coherent and systematic fashion, and of coping with conceptual difficulties regarding model specification and data limitations. The New Capital Adequacy Framework proposed by the Basel Committee is an attempt to address these challenges.The proposed new Basel Capital Accord is one of the key initiatives for strengthening bank soundness, and thus financial sector stability. This is both a wide-ranging and ambitious reform that seeks to better align regulatory capital with economic risk. It represents a real advance on the 1988 Capital Accord, and the proposals mark a decisive step away from a 'one size fits all supervisory approach to capital. Rather than imposing a single method for calculating capital requirements, institutions will be able to select from a range of approaches for capturing, measuring, and controlling credit and operational risks. More sophisticated control structures will be rewarded by lower capital charges. If the Basel proposals are implemented as planned, they will have important effects both on individual banks and on financial markets as a whole.However, implementation of the proposed Accord creates additional challenges, especially in an emerging market context. The main aim of the study is to identify the challenges posed by the implementation of the proposed capital adequacy framework to South African banks and bank supervisors, and to see how prepared they are for these challenges. This study is mainly concerned with the credit risk proposals of the new Accord, and the impact of the proposed new Accord on the credit risk management practices of South African banks.Against the background of South Africa∗s sophisticated and efficient financial markets, and yet its vulnerability as an emerging market, an overview is given of the structure of the South African banking sector. This includes quantitative indicators of financial system soundness, like various indicators of credit risk and capital adequacy. An overview is given of the risk management practices of South African banks, as well as of the supervisory approach of the South African Reserve Bank. All of this is compared to international 'best practice policy guidelines.Although a review of annual reports of South African banks suggests a relatively sophisticated approach to credit risk management and the use of internal credit risk ratings, the rating systems of South African banks do not meet all the requirements set out by the Basel Committee for the internal ratings-based approach to setting regulatory capital requirements.Several observers warn that the preconditions for implementing important components of the Basel Accord are absent in most emerging market economies. The findings of this study suggest that this is not the case in the South African situation. South African bank supervisors are efficient, as evident in the findings of the FSAP. The factors that seemingly cause minimum capital requirements to be an inefficient tool in enhancing bank system soundness in many emerging market countries do not seem to be present in the South African banking sector. These factors are the lack of a sufficiently deep and liquid capital market that makes the raising of 'low quality capital possible, and the lack of policy measures such as loan-loss provision regulations that complement minimum capital requirements. Indeed, the regulatory framework in South Africa was recently amended so as to be in line with international best practice standards, and to address any limitations pointed out by the FSAP.However, the new Accord does represent new ground for South African supervisors in several aspects, such as with the evaluation of banks' internal credit risk rating systems. South African bank supervisors have already started with specific measures to address challenges posed by the implementation of the new Accord. South African banks have also started with preparations for the implementation of the Accord. All the surveyed banks indicated that they want to adopt the advanced IRB approach. The current sophisticated approach to credit risk management and the use of sophisticated models in this regard, constitute a useful platform for this to take place from. However, current practice does not conform to all the requirements set by the Basel Committee, and substantial logistical challenges remain.In general, the credit risk management practices of South African banks seem to be sophisticated and in line with international best practice. The survey has shown that the large South African banks have recognized this challenge and have been working for some time on identifying, modifying, developing and implementing sophisticated credit risk models and the organizational context for a portfolio-orientated credit risk management. The survey also outlined the current state of play regarding credit risk rating among South African banks, and provided some international comparisons. Generally speaking, South African banks' credit risk rating practices appear to be in line with those of their international peers.A key challenge faced worldwide by virtually all developers and users of internal credit risk rating systems, including prudential supervisors looking to utilize banks' internal ratings for regulatory capital and other purposes, is the widespread lack of good long-run data on the performance of banks' loans. The lack of such data can impact on the ability of an institution to develop effective rating tools. It can also impede efforts to verify the accuracy and robustness of institutions' rating systems, to assign reliable quantitative loss estimates to risk grades, and to make reliable comparisons of ratings from different institutions: all important tasks, not only from the perspective of the banks themselves, but also from the point of view of their prudential supervisors (particularly in the context of proposals to utilize banks' internal ratings for regulatory capital purposes).The survey highlighted one important aspect where current South African practice lags behind Basel requirements: disclosure regarding credit risk modeling and specifically rating systems. This would be one of the key areas that need to be addressed before the IRB approach can be implemented.Apart from implementation challenges in individual countries, there is concern over the impact of the proposed new Basel Accord on global financial system stability. This includes questions about its impact on capital flows to emerging market countries and the potential pro-cyclical impact of the new Accord. These concerns highlight the need for greater coordination within the international community on the reform agenda in an increasingly integrated international financial system.

[发布机构] University of the Free State