Unlikely hero Errol Kruger, SA banking’s saviour, coming home from Qatar

South Africa boasted one of only three sophisticated financial sectors in the world whose banks didn’t require a taxpayer funded bail-out in the wake of the Global Financial Crisis. This was due entirely to the tight but unpopular application of his strict rules by SA’s then Banking Regulator, Errol Kruger. He won numerous awards, but probably the most valuable was when Finance Minister Trevor Manuel told Parliament the nation owed a huge debt to Kruger. He stood firm in the face of criticism, undeterred by the laxness of counterparts elsewhere and applied agreed reserve requirements, saving SA banks from shooting themselves in the foot. In 2011, Kruger retired as Banking Regulator after 34 years at the SA Reserve Bank and was snapped up on a five year contract by oil-rich Qatar – headhunted after a global search. When his contract in the Middle East ends next month, Kruger will head home to Pretoria, swimming against a tide which is seeing most in his skills category migrating the other way. Biznews.com’s Alec Hogg caught up with the unlikely national hero in London, to discover what is behind his counter-cyclical decision; and hear how Kruger is preparing for his first banking directorship since leaving the SARB.

Alec Hogg is with Errol Kruger who’s well known in South Africa for being the man who avoided, or prevented South African banks becoming collateral damage in the global financial crisis. Goodness me that seems like a lifetime ago Errol.

Yes Alec that does seem like quite a while ago but we don’t forget those issues. I think they stay very much in the forefront of our minds and we take the lessons learnt from that time to make sure that we continue along that basis.

Yes I remember at the time you were serving on the Basel Committee. There were rules but not everybody was applying them. Fortunately, as a Registrar of banks in South Africa you took a different approach.

I think there was quite a bit of euphoria taking place in the global village at the time and we were in the throes of reviewing all our legislation in South Africa and we had just become full members of the Basel Committee. Hence, very intent on full compliance and we were quite insistent on our banks complying with the relevant Basel core principles and we implemented that in our regulatory framework, much to our advantage. I think whilst we were implementing it we were obviously not very well liked by the industry but it is something that did help and did really contribute a lot. We also mustn’t forget that we had, and do still have top management in our South African banking system.

Yes, you’d have got a very good understanding of that because since 2011 you’ve been in Qatar which is a country not well known to South Africans. How did you land there in the first place?

An interesting story Alec, what really happened was Qatar were looking to revamp their regulatory framework and they actually had head hunters looking for either someone from South Africa, Canada, or Australia, which were the three countries which largely escaped the global financial crisis, and that’s how it really happened.

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So you got to a point in your career where you were retiring, I think you were only 54 at the time, from the South African Reserve Bank and after many years as the Banking Regulator, so you were leaving anyway? Or did Qatar come along and you decided to go for the, what would be called, Middle East Dollars or Petro Dollars?

No as you correctly say I had been with the Registrar for eight years and I think it was very clear to me that we had been through all the issues that needed to be done and sometimes people have to move on, for fresh thinking to come. I think the most important issue was we were at a very important juncture that with Basel III just beginning to surface, it was a good time for a fresh pair of eyes to take over and to then take it forward in the next phase. Yes, I had announced my retirement from the Reserve Bank and it was after that that I was then approached by the Qatar Financial Centre Regulatory Authority to have a look at revamping their regulatory framework.

It was a five year contract, which is coming to an end very soon. What are you going to do next?

Well, as you correctly say it comes to an end at the end of July. I left South Africa on the 31st July 2011, and I’ll be flying out of Doha on the evening of the 31st July 2016, and back to our home in Pretoria. I will then be joining the board of Nedbank, as a non executive director, and I’ll be taking that up during the month of August and hoping to ply my trade to the best advantage for Nedbank.

Banking directorships are pretty difficult jobs. You need to know a lot about what’s going on inside the bank. Are you doing anything particular or special to prepare yourself for that first board meeting?

I think as you correctly say it is a difficult job but before I really start I will be having quite a long period, at least a month, of spending time with management, finding out what the key issues are and what the core issues are. Finding out how their governance frameworks hang together and how they interact with the board and then being in the right position to ask the right questions.

Is that the only directorship you’re taking up?

Indeed.

Tell us a bit more about Qatar though. Sasol have obviously got a big operation there and it does account for quite a significant part of the group’s profits now, the GTL Gas-to-Liquids business. It’s not that South Africa isn’t represented in the area but do you bump into other South Africans, or did you, during your five years?

I think in Qatar we are approximately seven-and-a-half thousand South Africans, so a very active community. In fact, the influence of South African businessmen in Qatar is quite great. We have in the medical field we have people who are heading up the dental faculty at the university in Qatar, at the biggest hospital, is a South African who is handling the implementation of the expansion of the dental sciences. In private enterprise we have a very big operation out of Johannesburg, which is privately owned, which is doing all the shop fitting, all the concierge facilities, etcetera. We have our friends from Nando’s. We have Spar, who have just put their man on the ground, and so the list goes on. Ocean Basket I do believe is on its way, so we have a South African Businessman’s Club actually, in Doha and we meet once a month where experiences are shared. I think it is also important to say that the South African Embassy in Doha is very active amongst promoting South African business. They act as a strong catalyst for South African businessmen.

It’s an interesting country in the context of the Middle East, where you have a global independent news network in Al Jazeera, as we saw recently with that rather embarrassing interview with South Africa’s International Affairs Minister, but that would suggest, if the governance of the country as such, that you have such a strongly independent news channel that it’s not quite the same as you might find in other Middle Eastern countries.

Absolutely correct and I think where one really sees it is that over weekends, long weekends, or school holidays there’s quite an influx from the other Middle Eastern countries of people visiting Doha. One sees it in business as well. It’s a lot different to some of the other Middle Eastern countries. There’s a lot more private enterprise which takes place but we shouldn’t forget, at the end of the day that it is an oil and gas country and that actually a lot of the ownership and a lot of the business emanates from the resources and that’s the wealth of the country.

It must have been an interesting time particularly in the job that you were doing, watching the oil price from well over $100 a barrel to under $30 a barrel. It’s recovered somewhat now but does that influence the mood of people in the nation?

It absolutely influences. If we get a bit closer to our area of expertise one sees the liquidity and the funding issues in the banking system, which is directly related to the squeeze on the price. That really comes from the fact that a number of government related entities who have their deposits with the banking system, are obviously now not as cash flush, so they are withdrawing their deposits from the banking system. One now sees that a lot of that funding is being replenished and replaced with foreign funding, so the whole risk scenario has been changing over the last five years, as you correctly say. I arrived at $110. We saw $29 back in December and back up to $49/$50 today, and this really creates quite a bit of volatility with the funding, the liquidity, and the interest rates cycle.

Errol, your official title was Managing Director of Supervision and Authorisation at the QFC Regulatory Authority. That’s a mouthful. What are you actually doing until the end of next month?

The function, which I fulfilled there was really twofold, as it says ‘supervision and authorisation’, so that’s really looking at the applications for new banks and new insurance companies that would be coming into the Qatar financial centre. I was also responsible for the supervision of that but a lot of my time went into building a new Regulatory framework for the QFC. That really revolved around designing the new risk based returns, how to collate the information (the data), implementing systems (XPRL), sensitising the banking community to a risk based approach to reporting, and on the other side looking more at financial stability issues. I was appointed to the Financial Stability Committee of the Central Bank and, from that perspective, looked at macro prudential issues and building a really fit-for-purpose financial stability report, which can be used to inform what happens on the micro prudential side.

That’s a really big job and clearly anybody in the world would have been a possible candidate for it. Was it the stuff you did in South Africa, on the one hand, and secondly the ranking of South Africa’s financial services sector that perhaps brought them to you?

I have a philosophy in life and that is that we should never forget where we come from and very clearly. I think the opportunities, which the South African Reserve Bank had presented in terms of allowing supervision in South Africa to be independent, helped. That was also from the side of the Ministry of Finance, at the time headed up by Minister Manuel, where we were allowed to develop a proper independent regulatory framework within which our banks could operate. As I said earlier, we must also not forget the quality of the management of our banks. So to come back to your question, absolutely that played a very big role. I think also that we had become members of the Basel Committee, back in 2008/2009. Previously we had been observers but then to be active members and contributing also played a big role in being able to put the QFCRA onto the world stage.

It is interesting given this high rating of the banking regulation, the way the banks are run in South Africa, the management of the banks as well. Yet the ratings by the investment community don’t quite reflect that. There was a piece in the Financial Times of London this morning saying how Investec is rated far worse than its peers in the London market, even those who have a similar exposure to Africa. Why do you think that is?

I’m not quite sure what’s going through the minds of the rating agencies but obviously there’s a lot of noise at the moment around sovereign ratings and I would imagine that the ratings of the banking system cannot exceed that of the sovereign and probably that plays a role, even though the banks are extremely sound.

All right, so it’s got quite a lot to do with this ‘flirting with junk’ status that South Africa is moving towards. Sitting in Doha when Nenegate happened in December, were the shockwaves internationally as big as we perceived them to have been?

I think at the time with the oil price also doing what it was doing, I don’t know if we can call it ‘Oilgate’ but there was an ‘Oilgate’ and a ‘Nenegate’, so there were two things happening simultaneously. Obviously yes, it did receive a lot of prominence. It received a lot of coverage but it wasn’t really seen to be that everything is falling out of bed at the same time. I think the broader spectrum, in Doha is not only just South Africa. It goes a lot wider than that, so it was one of the issues which were going on in the world at the time.

Just take us through a little bit of your background. You spent nearly three decades in serving the country through the Reserve Bank. You come from Pretoria. What took you into that line of work in the first place, and perhaps more importantly, why did you stay?

I finished my articles in Pretoria. I studied part-time at the University of Pretoria and in fact the bank, the Reserve Bank subsidised my studies and I just felt the loyalty to them. That was in the immediate period after having finished my studies but it was very clearly the opportunities, which it was granting me from a career perspective, the intellectual challenge. I think I was very fortunate to be given opportunities at various junctures in my career, in the Reserve Bank, which excited me and kept me absolutely intellectually stimulated and, also one felt that one was really making a contribution to broader society in what we were achieving.

The Governors during your period, would have been rather different personalities, no doubt?

If I cast my mind back there was Dr Gerard de Kock, there was Dr Stals, then there was Mr Mboweni, and then there was Miss Marcus, so that is really the span of Governors that I served under. Obviously, the latter two were the ones that I was more intimately involved with. I was a lot more junior during the reigns of Dr Stals and Dr de Kock. Yes I think very different people but one thing that really stood out was the level of excellence in each of them.

And the integrity.

Absolutely.

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If you don’t have integrity, as a Central Bank Governor, I guess the country would suffer.

Indeed, and I think it was the respect as well with which they conducted their operations, so always the issue of total mutual respect, both internally and to external parties.

What makes a good Central Bank Governor? You had the opportunity to see two of them close up, two of them from a little further and of course in Qatar you’ve had that exposure too. What is it that is going to make the model person to run the Government’s Central of Operations?

That’s quite a difficult question Alec, but from what I’ve seen it’s really the ability not to have knee-jerk reaction. It’s the ability to assess the situations and they’re really, at times, don’t have to be the master of everything but really to have good, sound, and basic knowledge of not having the knee-jerk reactions when things go wrong in the markets and to have good people around them, to be able to interact with their people and to guide their people, in terms of advice.

How much more do you know within a Reserve Bank than externally because clearly, from a media perspective you’re always picking up stompies, as we would call it in South Africa? You get the tail end of lots of stories and you have to try and decipher the jigsaw puzzle within the bank. Presumably there’s a lot more information flow and a lot more understanding of what’s really going on.

Yes, I think the level of communication, as I experienced it in the Central Bank, was really very much one of coordination, cooperation, and sharing between the various departments in the bank. I think there are a number of departments which are really mutually reinforcing to each other. It’s not by accident one has the National Payment System being administered, supervised, and regulated within the Reserve Bank that one has bank supervision in the Central Bank. That one also has the international foreign exchange markets being handled from within the Central Bank, and the coordination, cooperation, and the reinforcement between these people are always very important.

Things like bitcoin and cryptocurrencies must be making life for Central Bank a little more difficult?

I think now we’re starting to move into these different regimes and obviously the whole Fintech debate is very much to the forefront now and I think it takes operational risk to another level and we’ll need to see where those debates really go. Certainly it does open up a new sort of mindset as to the past, the future, and the present.

Is South Africa’s Reserve Bank up to it, from your understanding?

I obviously, would not be privy to what they are doing at the moment in all that but if the past is anything to go by, they’ll certainly be at the leading and the cutting edge of what the developments are.

Talking of the past, it was ten years ago when you were the Registrar of banks that Barclays came into South Africa with a trumpet fanfare to acquire what was then Absa. They’ve subsequently announced that they are in the process of withdrawing. Clearly things have happened and changed at Barclays but allowing them to come in, in the first place, must have been quite a big decision and it must have almost carried some, if not absolute guarantees, some moral guarantees that now might have changed.

Alec, yes I’m also obviously not privy to anything that has happened. All I can say is at the time they were very specific as to what their objectives were. I can’t even remember the date anymore. I think it was probably roundabout 2008 that that happened, so we’re eight years down the line and I think the only thing that we know in life that is certain is change. I believe that if one also looks at the regulatory changes, which have taken place in the last while, in terms of consolidated capital charges, etcetera. It makes life fairly difficult for big, global banks and they obviously need to deploy capital quite carefully. From what I’ve read in the press that seems to be an issue for Barclays and that is why they are carefully planning how they’re going to allocate their capital going forward.

I guess there’s always a rebalancing of the pendulum. At one stage the creation of the global financial crisis the pendulum was way out of kilter there. Is there not a danger that it’s swung too far back in the other way and that banks have now really become more like utilities, with all these huge capital requirements that they have to retain?

Yes, I think there’s been a very strong move on the regulatory front, in terms of capital requirements, liquidity requirements, operational risk requirements, etcetera and the terminology coming out of Basel is regulatory pause. I must say I’ve heard this for the last three years. The pause seems to be finding difficulty in finding the pause button but I do think that we have probably seen more or less the end of big changes, from the Regulatory side, which is coming out of Basel and hopefully it settles down somewhat now.

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You’ve mentioned Basel a few times. For the uninitiated, what actually happens there?

The Basel Committee on banking supervision is really the standard setting body for banking supervision and banking regulations around the world. There’s a number of members, and a number of countries that belong to the committee and this is where the committee is situated, in Basel, at the BIS, the Bank for International Settlements, and there’s a very well staff Secretariat for the Committee, which is I think at the moment it’s grown to probably 25 people, who are all experts on the various disciplines and sciences, which have crept into banking regulation. It’s a vast amount of work and drafting, which actually takes place there which gets coordinated by all the member countries. The idea being that if everybody is pulling together on this, hopefully it makes the banking sectors a safer and sounder place to do business in.

Linked with that we should not forget there’s also the Financial Stability Board, which is based in the BIS, which really looks more at the macro picture but also very focussed on regulation. Also looking at issues like shadow banking and what’s happening on the fringes. I think we’ve seen a lot of the shadow banking issues coming out in China.

Shadow banking?

Shadow banking being those areas of activity, which find themselves moving out of the so called regulated space, so disintermediation taking place between two parties, but not in the regulated space. Personally, I think it’s quite a big risk systemically but you do find a lot of the big corporate players have moved out, so they’re basically not using the banks to disinter mediate or to intermediate, so it’s disintermediation outside the sector without any of the prudential requirements and let’s hope this is not where the next crisis comes from.

You mentioned China. Is it happening a lot there?

The China shadow banking system is apparently quite big, yes.

Going back to South Africa at a time when many others are leaving the country, going off to try and conquer new worlds. There’s a huge outflow of capital from the country, from the private sector at the moment. Companies are not reinvesting. It sounds like you’re swimming against the tide somewhat.

Alec, my training as a bank supervisor really taught me the power of being countercyclical. I think if one gets caught up in the herd of stampede one can get run over quite quickly, so I’m probably being countercyclical and I think it’s something that’s always served me well.

So the perception that you have of developments in South Africa at the moment are not concerning?

No, I think if we look at South Africa and we benchmark it against what’s happening in the rest of the world. I think everywhere there are issues, at the moment. I think we are in a totally new, different type of world where geo political issues are of a nature that we haven’t seen before and we certainly, in South Africa are not alone in any of these spaces.

It is interesting that, isn’t it that being perhaps because of the geography or the tyranny of distance away from where the big thing are happing in Europe, or China, or even in North America. What happens in Pretoria, Johannesburg, Cape Town, and Durban seems to be so much more important and so much more isolated than trying to get perspective of a global environment, when often South Africa is just a participant in broad trends.

Absolutely, as I said, I think if one looks at what is happening in the UK, we have Brexit coming up on the 23rd June, a huge issue. We look at what’s happening in Germany. We look at Austria, where they, I can’t remember by how many percentage points, they just missed being ruled by some extremists. We go across to America, where things look quite interesting and so are they interesting in South Africa.

What would happen, now its interesting coming from Qatar, as you do, if Donald Trump were to be elected president, which is not inconceivable?

One would probably find that he would have to tone himself down a little bit and I think life would carry on.

But the reaction from the Middle East, even from Qataris, who are more moderate than most, would presumably be quite violent.

Well, I think we’ve all heard and read his utterances and one doesn’t know what is being said behind closed doors, but clearly one wouldn’t be going through life, not in exclusive or excluding people on that basis. At the end of the day probably finance and economies rule.

So the world is a difficult place at the moment. It’s quite a scary place for many people. The extremists, as you’ve mentioned are in an ascendancy in many parts of the world. How do you invest your money to offset this?

Alec, probably the best thing to do is to put it under the mattress at this stage.

Keep it in cash, and keep it in hard currencies?

Exactly.

You’re not an equity investor or perhaps bonds of more risky countries. We know South Africa’s bonds are now yielding nearly ten percent, so there are some risk adverse investors who are going there.

I think they say the shoemaker usually normally has the worst shoes, and the butcher eats the worst meat, so the best that I can hope to do is have a good fund manager or portfolio manager, who I entrust the little bit of cash that I have to them, and he looks after my Pension Fund for me.

So you’re 59. You’re going back home to South Africa. You’re going to be joining the Board of Nedbank. What are you going to be doing for the next few years?

Well I think the first thing is just to get back and get my feet under the board table at Nedbank, and then to take it from there. I think there’s enough to do in the initial stages, to make sure that one starts understanding issues to discharge your fiduciary responsibilities in a responsibility manner at Nedbank. Then we will see what happens from there.

For youngsters, who are at university, who have seen the role that you’ve played for the country, helping South Africa avoid a very difficult situation that most other countries went through in the global financial crisis. What would you advise them? If they want to follow in your footsteps how would they do it?

Hard work, I think firstly make sure that one is properly educated, study, hard work and, above all, travel and broaden one’s mind, broaden one’s knowledge. I think when we started out, when we were youngsters, the world was very much compartmentalised. It’s now a global village. What happens on the east side of town totally influences what happens on the west side. That didn’t happen before and one needs to understand that. The dynamics have changed, so I think youngsters should spread their wings and experience different cultures. Experience what different geopolitical issues are, and then employ that back into their, own environment.

So try and broaden your horizons?

Absolutely.

Errol Kruger is the former Banking Regulator in South Africa and until the end of July, the Managing Director of Supervision and Authorisation at the Qatar Financial Centre.