The regulation of deposit-taking financial institutions : a comparative analysis of the United Kingdom, Germany and South Africa

Thesis (PhD)--Stellenbosch University, 1997.ENGLISH ABSTRACT: Standard financial literature contains various explanations for the unique role of deposit-taking intermediaries in an economy. None of these reasons adequately explains the extensive degree of banking regulation evident in practice. The nature of a deposit, which guarantees capital repayment independent of bank performance, uniquely incentivises banks to be exposed to financial risks. In the absence of appropriate regulation, banks may be tempted to assume an unacceptably high level of risk that could ultimately result in bank failure. Thus, the regulation of banking risks is justified in terms of the public interest theory whereby banking regulation seeks to avoid the market imperfections arising from informational asymmetries and "domino" externalities associated with bank failure. Accordingly, the rationale of banking regulation lies in the protection of consumers and in preserving the stability of the financial system. Direct monetary controls, on the other hand, impact adversely on the risk-management activities of banks. The framework utilised to analyse and compare banking regulation consists of three broad categories namely: preventative regulation, protective regulation and monetary requirements. Preventative or prudential regulation is aimed at managing the levels of risks assumed by banks. This form of regulation relates to entry requirements; limitations on certain business activities; the disclosure of risk-related information; the adequacy of capital resources; portfolio restrictions on risk assets; and the sufficiency of liquidity. Protective regulation is concerned with the immediate protection of depositors and maintenance of overall financial stability once a bank has failed. lt consists of crisis management measures and deposit insurance schemes. Direct, and hence inappropriate, monetary requirements are variations in reserve asset requirements, as well as interest rate and credit controls. The banking systems of South Africa, the United Kingdom and Germany were chosen to perform a comparative analysis of financial regulation. The London financial markets are mature and a large variety of banks are regulated in a flexible manner by the Bank of England. By contrast, the strictly regulated German banks dominate their domestic financial system. South Africa is a hybrid of the former systems with a modern banking industry operating in well developed financial markets and supervised according to advanced risk-management considerations. The analysis of preventative and protective regulation in all three financial systems indicates that banking regulation is indeed concerned with the regulation of banking risks. The efforts of the Bank for International Settlements to harmonise regulation across domestic financial systems has contributed significantly to improved regulatory techniques for the management of these risks. None of the three systems make use of direct monetary requirements which suggest awareness of the costs associated with such regulation. A number of recommendations are made to improve financial regulation in South Africa: extension of regulatory coverage to include other types of financial intermediaries who also engage in risky activities; further relaxation of exchange control regulations which restrict the foreign exchange risk management; the adoption of a formal deposit protection scheme; increased consolidated supervision by a single regulatory authority with executive powers; further deregulatory measures in instances where regulations are not appropriate from a risk-management perspective; and re-regulation to the extent that the risk-management activities can be regulated more efficiently.AFRIKAANSE OPSOMMING: Die finansiele literatuur bevat verskeie verklarings vir die unieke rol wat depositonemende instellings in 'n ekonomie vervul. Geeneen van die redes verskaf 'n bevredigende verklaring vir die wye omvang van bankregulasies in die praktyk nie. Die aard van 'n deposita is sodanig dat die terugbetaling van die kapitaalsom deur 'n bank gewaarborg word, onafhanklik van die winsprestasie van die bank. Gevolglik het banke die unieke eienskap om hulself aan finansiele risikos bloat te stel. Sander gepaste regulering sou banke moontlik daartoe geneigd wees om oormatige hoe risikovlakke na te streef wat tot bankmislukking kan lei. Die regulering van bankrisikos vind dus bestaansreg in die teorie van openbare belang, d.w.s. dat regulering die potensiele markmislukkings, wat voortspruit uit asimmetriese inligting en "domino" eksternaliteite, kan voorkom. Die rasionaal van bankregulering is die beskerming van verbruikers, asook die handhawing van 'n stabiele finansiele stelsel. Direkte monetere beheermaatreels, daarenteen, het 'n ongunstige uitwerking op die bestuur van risikos deur banke. Die raamwerk waarbinne bankregulering ontleed en vergelyk word, bestaan uit drie kategoriee, naamlik voorkomende regulering, beskermende regulering en monetere vereistes. Voorkomende regulering is daarop gemik om die risikos waaraan banke blootgestel is te bestuur. Sodanige regulering verwys na toelatingsvereistes, beperkings op sekere sake-aktiwiteite, die openbaarmaking van risiko-verwante inligting, die toereikendheid van kapitaalhulpbronne, beperkings ten opsigte van baterisikos en voldoende likiditeit. Beskermende regulering is gemoeid met die beskerming van deposante en bestaan uit krisisbeheermaatreels en depositoversekeringskemas. Direkte (en gevolglik ontoepaslike) monetere vereistes bestaan uit veranderlike reserwebatevereistes, asook rentekoers- en kredietbeheermaatreels. Die bankstelsels van Suid Afrika, die Verenigde Koningkryk en Duitsland is gekies vir 'n vergelykende analise van finansiele regulering. Die finansiele markte in Londen is hoogs ontwikkeld en 'n groat verskeidenheid en aantal banke word op 'n pragmatiese wyse deur die Bank of England gereguleer. In direkte teenstelling daarmee word die Duitse banke, wat hul binnelandse finansiele markte domineer, onderwerp aan 'n streng formele toesighoudingstelsel. Die SuidAfrikaanse finansiele stelsel bevat elemente van beide bogenoemde stelsels, by wyse van 'n moderne banksektor, wat funksioneer in goed ontwikkelde finansiele markte en gereguleer word ooreenkomstig gevorderde risikobestuursbeginsels. Die analise van voorkomende en beskermende regulering in die drie finansiele stelsels, bevestig dat bankregulering inderdaad afgestem is op die regulering van finansiele risikos. Die pogings van die Bank van lnternasiona~e Vereffeninge om die regulasies in finansiele stelsels internasionaal met mekaar in orreenstemming te bring het wesenlik hiertoe bygedra. Die vermyding van direkte monetere vereistes dui verder daarop dat toesighoudende owerhede bewus is van die nadele van sodanige regulering. 'n Aantal aanbevelings word gemaak, naamlik: meer omvattende regulering ten einde ander finansiele instellings wat ook finansiele risikos bestuur, te dek; verdere verslappings van valutabeheermaatreels wat tans die bestuur van wisselkoersrisiko beperk; die totstandkoming van 'n formele depositoversekeringstelsel; 'n groter mate van gekonsolideerde toesighouding; verdere deregulering in gevalle waar regulasies vanuit 'n risikobestuursoogpunt nie wenslik is nie; en her-regulering in die mate waartoe die risikobestuurspraktyke meer effektief gereguleer kan word