Profile: Standard Bank CRO on rogue trading, liquid...

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Profile: Standard Bank CRO on rogue trading, liquidity and lending

Original headline: We do not have a liquidity issue Author: Alex Monro Source: Risk magazine | 03 Oct 2011 Categories: Risk Management, Basel Committee Topics: South Africa, South African rand, Standard Bank Group, Basel III, Kweku Adoboli, UBS, Rogue traders, Liquidity, Liquidity risk, Liquidity ratios, Liquidity coverage ratio (LCR), Net stable funding ratio (NSFR), South Africa Reserve Bank (Sarb)

Basel IIIs liquidity ratios do not make sense in South Africa, says Paul Hartwell, chief risk officer of Standard Bank. Hes hoping the countrys regulator will exercise some discretion. By Alex Monro Since news broke of a $2.3 billion rogue trading loss at UBS on September 15, senior executives at banks around the world will have had one question in common: could the same thing happen here? South Africas Standard Bank is no different. Related articles Criticism of Basel III liquidity ratios continues Revised Basel III liquidity rules force Asia into uncharted territory Hong Kong hoping for LCR work-around, says HKMAs Kemp Basel liquidity ratios continue to worry South African banks Following the UBS case, we are going to be reviewing our controls and checks, says Paul Hartwell, group chief risk officer at the bank in London Although this particular loss appears to have occurred on the delta one desk, the cause is not specific to that type of business. It could happen in any trading environment. So we are going to review our controls and checks from end to end, to make sure they are fit for purpose because one of our board members could turn around and say Can this happen to us and if not, why not? and we need to be in a position to explain why we are relatively relaxed that the controls we have in place are appropriate. If thats the near-term focus, theres plenty on the to-do list further down the line for example, ensuring compliance with the new liquidity and capital standards set to be imposed on South Africas banks by Basel III. Satisfying the capital rules should be straightforward the countrys banks have a surplus of around 85 billion rand relative to Basel IIIs minimum requirements, with Standard Bank holding 11 billion of that excess capital, Hartwell says. Behaviourally, retail deposits in South Africa are very sticky. There are not many other banks where they can place their liquidity and exchange controls prevent that liquidity from leaving the country anyway. The two liquidity ratios are a different matter, despite changes made to the rules prior to their publication in December last year. The first of these the liquidity coverage ratio (LCR) requires banks to hold a buffer of liquid assets that can be sold to generate enough cash to see an institution through a period of severe stress, with regulatory formulas determining

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Profile: Standard Bank CRO on rogue trading, liquid...

http://www.risk.net/risk-magazine/profile/2112601/pr...

see an institution through a period of severe stress, with regulatory formulas determining how rapidly the banks liabilities would run off. But its designed to solve a risk Hartwell believes a South African bank would never have to face. The top four banks control 98% of the South African market for retail deposits, whereas in the US the top banks controlled about 35% at the end of 2010, he says. Behaviourally, retail deposits in South Africa are very sticky. There are not many other banks where depositors can place their liquidity, and exchange controls prevent that liquidity from leaving the country anyway. So we do not really have a short-term liquidity issue. To compound the problem, complying with the ratio will be tricky for South African banks ( Risk October 2010, pages 76-78). As with other countries that have a large banking sector relative to its domestic government bond market the main source of acceptable liquid assets in the first iteration of Basel III South African banks would not be able to comply with the LCR by buying South African bonds. The rules were amended to introduce a second pool of eligible assets, including corporate bonds and covered bonds, but Hartwell says that doesnt go far enough for South African banks partly because local rules prevent them issuing covered bonds, a decision taken by the South African Reserve Bank (Sarb) in May this year. The second of the two standards the net stable funding ratio is also a problem. It requires banks to use a higher proportion of term funding, but there may be a need for some structural reform of South Africas funding markets to enable the banking sector to meet the enhanced liquidity requirements, says Hartwell. His hope is that Sarb will exercise some restraint in its implementation of the rules domestically: They have quite a lot of flexibility with respect to national discretion when it comes to finalising the rules. But banks have got to start planning now for the worst, so we are doing all we can as are other South African banks to prepare for this, he says. Many of these gripes will be shared by banks outside the country, but some of the challenges Hartwell raises are more specific to South Africa for example, the threat that foreign investors will be deterred by talk of nationalisation and land right reforms, or the credit risks associated with some social lending programmes. Clearly, there has been a social and political imperative for South African banks to support the creation and redistribution of wealth; banks have therefore been encouraged to lend into certain structures that otherwise may not be deemed traditional banking structures, like the black economic empowerment structures or high loan-to-value mortgages. We are mindful of the risk profile of those kinds of assets and calibrate our risk appetite accordingly. These risks are manageable for banks at the moment, but clearly strain may come if there is a sustained economic downturn, he says. Topics: South Africa, South African rand, Standard Bank Group, Basel III, Kweku Adoboli, UBS, Rogue traders, Liquidity, Liquidity risk, Liquidity ratios, Liquidity coverage ratio (LCR), Net stable funding ratio (NSFR), South Africa Reserve Bank (Sarb)

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