Bank has a tried-and-tested model for dealing with financial blowouts

SA’s central bankers have used caution and innovation to create a system that handles and avoids meltdowns

If Bankorp still existed, it would probably be classed as a “systemically important financial institution” under the new global and local rules on banks that are deemed too big to fail. It would have to have a “living will” in place detailing a resolution plan if it gets into severe distress, and its finances would be structured to ensure its shareholders and bondholders would take the pain, while depositors would be protected.

If it did have to be rescued, regulators might look to its competitors to help, on the grounds that it would be in everyone’s interests to protect the whole financial system from the contagion of a big bank failure.

It’s all there in comprehensive new frameworks, global and local, on how to prevent financial institutions getting into distress and how to minimise the damage to the economy and cost to taxpayers if they fail. The policy makers, regulators and bankers who have spent thousands of hours since the global financial crisis working to ensure that SA has a regulatory regime that is in line with best international practice might be forgiven if they feel slight annoyance when the public protector appears to be blissfully unaware of any of it.

In the leaked draft report on the 1986-1995 Bankorp lifeboat, the public protector seeks to give the Treasury and Reserve Bank 90 days to put systems, regulations and policies in place to “prevent this anomaly in providing loans/lifeboat to banks in future” and suggests the Bank consider reviewing its lending policies to avoid such a situation.

The draft remedies seem quite irrelevant in a world in which bank rescue regimes have been the subject of so much attention. Whether they could be implemented at all is a question, given that SA provides in its banking and central bank legislation for a “lender of last resort” role for our central bank, just as other countries do.

Yet whatever the dodgy politics around the release of the draft Bankorp report or its factual flaws, it is a useful reminder of how far SA has come and how our history of dealing with banks in distress has shaped our present.

Often, but not always, banks get into distress because of bad management and bad lending practices. But they do so in a political and economic context. And while in the late 1980s the South African economy was being closed off from the world because of the imposition of financial sanctions and the liquidity pressures that created, in the late 1990s and early 2000s SA had opened up to the world and to competition — with the strains that created.

Seen through today’s lenses, the Bankorp bailout extended in 1985-86 by then Reserve Bank governor Gerhard de Kock was a regulatory horror story. This was less because of the soft loans or the secrecy, which were not uncommon then, than because the assistance initially came with no conditions. No management changes or restructuring were required, and Bankorp carried on ramping up its lending. The bailout didn’t meet the criteria set out later by Chris Stals, who took over as Reserve Bank governor in 1989, and though conditions were added in the later phases it was only once Absa bought Bankorp in 1992 that the dodgy loan book was sorted. It was never clear whether the banking system was at risk — though, at a time of financial sanctions and total onslaught, the authorities weren’t asking many questions.

The lifeboat and its critics did, however, influence the way regulators dealt with bank rescues next time round. What became known as SA’s mini-banking crisis came after many new licences were granted after 1994, to incoming foreign banks and new small banks. It made for a fiercely competitive environment in a tough time and by the time the crisis ended in 2003, 22 banks had exited the system.

Two banks were put under curatorship in 1999 and a few more were bailed out or bought out by larger firms. Then came the fraud and failure at Regal Bank, which was put under curatorship in 2001.

The crisis year, 2002, began with Absa forced to rescue its microlending subsidiary Unifer, while troubles escalated at Saambou, whose share price plummeted on profit warnings and speculation that directors were taking part in insider trading, causing a run on the bank’s deposits. The government, controversially, declined to provide liquidity assistance and in February 2002 Saambou was put under curatorship.

It raised questions in the market about whether SA’s authorities were committed to backing the banking system. The crisis of confidence climbed the scale from Saambou, which was the seventh-largest bank, to the sixth-largest bank, BOE, which faced a run on deposits even though there were no issues with its management. This time, the government stepped in smartly, extending a R46bn guarantee for BOE’s loan book, which was lifted when BOE was sold to Nedbank.

Those bank rescues were much closer to the principles regulators would follow now: there were strict conditions attached to any assistance, banks were allowed to fail and regulators looked to the private sector to step in where possible, though the Reserve Bank did provide lender of last resort assistance and taxpayers did take a significant part of the risk.

But the lessons of the mini crisis fed into an ultra-careful approach to banking regulation that stood SA in good stead during the global 2008-09 financial crisis.

The next rescue — of African Bank — came a dozen years after the mini-crisis. It was a failure that was specific to African Bank’s business model, and management and governance flaws, but because much of its funding came from the bond market and many of those bondholders were foreign, there was concern about what it might do to foreign investor perceptions in an era in which foreign investment matters a lot.

This time, SA implemented a model that was ahead of global best practice. It included a “bail-in” — where creditors, not just shareholders, took pain — as well as roping all SA’s big banks into a consortium to recapitalise the “good bank”. The structure did include Bank guarantees and the bank could have had liquidity assistance had it been needed.

The new framework for resolution entrenches the kind of principles that were used to rescue African Bank, but, crucially, it builds in more rules aimed at preventing banks from needing to be rescued in the first place.

Looking back, it is not too hard to see why SA’s banking regulators have learned to be so cautious about which banks they license and whether they are prudently managed, as well as who owns banks and how financially and ethically robust their owners are. It’s not hard to see either why our central bank watches for any impact that changes to SA’s macroeconomic fortunes might have on the big banks — and vice versa. They have learned the lessons of SA’s bank rescues, then and now.