7/29/2019 Standard Bank CRO on Rogue Trading, Liquidity and Lending - Risk

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Profile: Standard Bank CRO on rogue trading,liquidity and lendingOriginal 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), Netstable funding ratio (NSFR), South Africa Reserve Bank (Sarb)

Basel IIIs liquidity ratios do not make sense in South Africa, says Paul Hartwell, chiefrisk officer of Standard Bank. Hes hoping the countrys regulator will exercise somediscretion. By Alex MonroSince news broke of a $2.3 billion rogue trading loss at UBS on September 15, senior executivesat banks around the world will have had one question in common: could the same thing happenhere? South Africas Standard Bank is no different.

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Following the UBS case, we are going to be reviewing our controls and checks, says PaulHartwell, group chief risk officer at the bank in London Although this particular lossappears to have occurred on the delta one desk, the cause is not specific to that type ofbusiness. 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 boardmembers could turn around and say Can this happen to us and if not, why not? and we need tobe in a position to explain why we are relatively relaxed that the controls we have in placeare appropriate.

If thats the near-term focus, theres plenty on the to-do list further down the line forexample, ensuring compliance with the new liquidity and capital standards set to be imposedon 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 minimumrequirements, 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 bankswhere they can place their liquidity and exchange controls prevent that liquidity fromleaving the country anyway.

The two liquidity ratios are a different matter, despite changes made to the rules prior totheir 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

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,how rapidly the banks liabilities would run off. But its designed to solve a risk Hartwellbelieves 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 theUS the top banks controlled about 35% at the end of 2010, he says. Behaviourally, retaildeposits in South Africa are very sticky. There are not many other banks where depositors canplace their liquidity, and exchange controls prevent that liquidity from leaving the countryanyway. 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 (RiskOctober 2010, pages 76-78). As with other countries that have a large banking sector relative toits domestic government bond market the main source of acceptable liquid assets in the firstiteration of Basel III South African banks would not be able to comply with the LCR bybuying South African bonds. The rules were amended to introduce a second pool of eligibleassets, including corporate bonds and covered bonds, but Hartwell says that doesnt go farenough for South African banks partly because local rules prevent them issuing coveredbonds, 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 requiresbanks to use a higher proportion of term funding, but there may be a need for some structuralreform 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 rulesdomestically: They have quite a lot of flexibility with respect to national discretion whenit comes to finalising the rules. But banks have got to start planning now for the worst, sowe 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 challengesHartwell raises are more specific to South Africa for example, the threat that foreigninvestors will be deterred by talk of nationalisation and land right reforms, or the creditrisks associated with some social lending programmes.

Clearly, there has been a social and political imperative for South African banks to supportthe creation and redistribution of wealth; banks have therefore been encouraged to lend intocertain structures that otherwise may not be deemed traditional banking structures, like theblack economic empowerment structures or high loan-to-value mortgages. We are mindful of therisk profile of those kinds of assets and calibrate our risk appetite accordingly. These risksare manageable for banks at the moment, but clearly strain may come if there is a sustainedeconomic 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), Netstable funding ratio (NSFR), South Africa Reserve Bank (Sarb)

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