LONDIWE BUTHELEZI: How the Prudential Authority will make banking safer

In 2013 the soundness of SA banks was ranked third in the world. Five years later it fell to number 62 out of 142 countries, the 2018 World Economic Forum Global Competitiveness Survey shows. Following recent collapses of African Bank and VBS, it is understandable why we’ve fallen so hard.

Is the Prudential Authority, which was established in 2018 to regulate and supervise banks and other financial institutions, going to return SA to its former glory? Business Day spoke to Suzette Vogelsang, head of banking, insurance, co-operative financial institutions and financial market institutions supervision during the launch of the regulator’s first annual report on Thursday.

Q: Prudential Authority CEO Kuben Naidoo said your job is to give all South Africans peace of mind that their money is safe. Given the liquidation of small institutions and the collapse of VBS, how can we still have that peace of mind? What are you doing differently?

A: We are doing a few things. First, we are looking at what happened to these institutions and we are seeing where we need to adapt or change our regulatory framework or our supervisory approach. The other thing is as the Prudential Authority we were given more capacity than we had in the past, both in the banking supervision department and in the insurance prudential side. We’ve also developed a risk-based supervisory framework that identifies the risk within the entities and then monitor how they are mitigating those risks. We are more forward-looking now on what can go wrong in these institutions. 

Q: In your annual report, you said you are in the process of assessing the regulatory framework for mutual banks and co-operatives. How different is the new framework going to be compared to the current one?

A: The regulatory framework for mutual banks is very dated. If you look at VBS and Finbond, they are not large institutions but they have relatively large balance sheets. So we are looking at updating the framework to bring it more in line with what commercial banks need to adhere to, but it will be on a proportional basis. For example in the insurance space we introduced a micro-insurance framework. It has prudential requirements but lighter than those of mainstream insurers. So that’s what we want to try in the banking sector particularly for the co-operative financial institutions, co-operative banks and mutual banks.

Q: You say the mutual banks' framework is outdated. How differently does it look compared to that of commercial banks? And how close is it going to be once you’ve updated it?

A: It’s still work in progress. But to give an example; the solvency calculation is very basic. The capital requirements are also basic. They don’t take into account the risks on the balance sheet. There is no formal liquidity testing that’s in the legislation. So it’s those types of things that we want to align with the banking sector but keeping proportionality and type of business in mind.

Q: There is a trust deficit, which might even affect the smaller banks coming to the market now, after VBS. Given the supervision steps you are taking now, can you as the Prudential Authority assure South Africans that those are things of the past?

A: It’s a loaded question. We’ve put measures in place to ensure that we quickly pick up problems and deal with them. VBS in particular had peculiarities with fraud which is very difficult for a supervisor to pick up. But with the lessons learnt, not only locally but also internationally, we try to update and better our processes internally to pick up problems early enough and to intervene quickly enough to prevent or limit losses to investors.

Q: Lastly, the Financial Sector Conduct Authority (FSCA) regulates market conduct. How can you simply define what the Prudential Authority does?

A: We look at the balance sheets of these institutions and the FSCA looks at their attitudes, specifically how they treat their customers.