FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in South Africa

The Republic of South Africa’s financial sector is supervised by six bodies:

• The Department of Trade and Industry
• South African Reserve Bank (SARB)
• Financial Services Board (FSB)
• JSE Securities Exchange (JSE)
• Financial Intelligence Centre (FIC)
• National Credit Regulator (NCR)

FRSGlobal in South Africa

The South African economy is the largest in Africa and is looking to expand 5 percent in 2011 from an expected 3.3 percent in 2010 showing that it is beginning to recover from the recent downturn triggered by the global ‘credit crunch’, green shoots are now starting to appear with South Africa comparing well to other emerging markets on affordability and availability of capital, financial market sophistication, business tax rates and infrastructure, but doesn’t fare so well on the cost and availability of labour, education, and the use of technology and innovation.

As with all financial markets there is an increased demand for tighter regulation of banks and South Africa is no exception, there have been huge shifts in the way the entire industry is regulated and one thing we know for sure is that regulation is not going to go away, if anything there will be more stringent changes ahead for example the new reporting requirements due in July 2011 and Basel III for the banking industry.

Although South Africa has a reasonably sophisticated financial market and one of the lowest business tax rates it is falling behind other emerging markets, such as India and China. Some of the factors affecting this are: an unusually low rate of saving and investment, partly because of political uncertainties, the country is relatively small with an inadequate education system resulting in an acute shortage of skilled manpower. It also struggles with a strong and volatile currency which deters investors and makes its exports less competitive although the infrastructure in South Africa is far better than in the rest of Africa.

One of the big changes South Africa faces is the increasing amount of risk management that will be required by regulators along with the implementation of Basel III, the liquidity issues this brings along with Asset and Liability Management. The regulations will affect everyone from simple South African-based branches of overseas banks, to head offices.

This means that firms are under increasing pressure to keep up to date with regulatory reform and risk analysis which does not stop at banks, it will affect ALL financial firms from broker dealer to insurer.

Regulatory Environment — South Africa

Statutory

Financial returns reporting
Financial reports are based on International Financial Reporting Standards (IFRS) and are required on a monthly basis (consolidated) and quarterly basis (non- consolidated). These reports provide details on balance sheet concerning assets, liabilities and equity reserves (BA100), off balance sheet activities or exposures (BA110) and income statement including information on all incomes and expenses and taxation (BA 120). Also included are returns regarding shareholders of a bank/controlling company (BA 125) and investments, loans and advances (BA 130).

Prudential

Declaration of returns reporting
Form BA 099 and BA 099A cover declaration of statutory returns to be submitted on solo and consolidated basis. These reports are not prescribed financial returns, but are used as a control sheet to furnish the required declarations regarding compliance and the maintenance of prescribed minimum balances. The South African Reserve Bank (SARB) as a regulator requires these reports on an on demand basis as measures of control.

Basel II reporting
These reports are generally based on risk reporting and include information on credit risk, market risk and operational risk, which are required to be reported on monthly, quarterly and semi-annual basis. In addition it includes quarterly consolidated returns on minimum capital requirements and group capital solvency risk details (BA700).

Liquidity reporting
These are monthly returns concerning liquidity risk (BA 300) set to determine the liquidity position of banks through balance sheet mismatch, stress testing of banks, exposure related to foreign transactions etc. Additional requirements are included, these being returns concerning minimum reserve balances and liquid assets (BA310).

Large exposures reporting
These reports are required to be submitted on quarterly basis if the sum of exposures to a third party or a group of connected third parties exceeds 25 per cent of a bank's adjusted allocated capital (BA600).

Statistical

Interest rate statistics
These reports cover data of interest rates on deposits, loans and advances (BA930) and the interest rate risk associated with the banking book to be submitted on monthly basis (BA330)

Balance sheet statistics
These are monthly returns on institutional and maturity breakdown of liabilities and assets collected for economic statistics purposes (BA900).

Locational banking statistics
These are quarterly returns concerning locational banking statistics based on nationality (BA950) of banks and residence (BA940).These reports cover information on the international claims and liabilities of the banking sector broken down by residence and nationality of banks.

Securitisation reports
These reports cover information related to securitization (process promoting liquidity in the market) schemes and related exposures (BA500). These reports are required to be submitted on monthly basis.

Transactional

Direct reporting
These reports are required at the transactional level and cover analysis of instalment sale transactions, leasing transactions and selected assets to be submitted on quarterly basis (BA920). It also includes monthly reports on transactions related to derivative instruments (BA350).

What’s Coming up — South Africa

The South African Reserve Bank (SARB) recently proposed changes to their banking regulations. These amendments incorporating changes introduced as part of the enhancements to the Basel II framework will become effective on 1 January 2012.

Draft 5 of the proposed regulations has been approved and parallel test runs of the finalised data forms is planned to prepare banks for official submission of validated data in 2012. The first submission to the BSD will be on September 2011 data, and has to be submitted by the end of October 2011.

Changes include amendments to the following forms:

• Credit Risk (BA200, BA210)
• Liquidity Risk (BA300, BA310)
• Market Risk (BA320)
• Risk Exposure (BA325)
• Consolidated supervision – Foreign operations of South African Banks (BA610)
• Capital Adequacy (BA700)

Other changes related to financial risk and capital reporting:

• Balance sheet (BA 100)
• Off-balance sheet activities (BA 110)
• Income statement (BA 120)
• Return regarding shareholders (BA 125)
• Investments, loans and advances (BA 130)
• Credit risk: monthly return (BA 200)
• Securitisation schemes and related exposure (BA 500)
• Institutional and maturity breakdown of liabilities and assets (BA 900)
• Analysis of instalment sale transactions, leasing transactions and selected assets (BA920)
• Interest rates on deposits, loans and advances at month-end (BA 930)

Changes to returns on locational international banking statistics - BA940 and BA950 have already been implemented as of May 2011.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Liquidity Risk Management

With lessons learnt from the recent liquidity crunch, banks are going beyond simple static financial ratios and gap reports as measures of liquidity risk management.

Recent efforts by the European Banking Authority – EBA (formerly Committee of European Banking Supervisors- CEBS), the Basel Committee on Banking Supervision (BCBS) and the UK FSA in terms of principles and recommendations have set greater emphasis on liquidity risk management.

Since the Basel Committee on Banking Supervision issued its paper on ‘Principles for Sound Liquidity Risk Management and Supervision’, banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheets.

By modelling their liquidity contingency plans against such scenarios, the measure of a bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of its plan against such crisis.

Our liquidity reporting solution fully supports the reporting requirement of the South African Reserve Bank (SARB) which includes monthly returns on liquidity risk (BA 300) and minimum reserve balance and liquid assets (BA310). These reports assist supervisory authorities to determine the mismatch between assets and liabilities, quantity and sources of funding under various stress scenarios, and potential concentration risk due to funding sources.