Financial institutions need our support

Alleged foreign exchange collusion is proving a handy bludgeon in the political war against SA’s banks. Temperatures and tempers are very hot after the banks’ closure of the Gupta family’s bank accounts over fears of money laundering.

Any morsel of wrongdoing is quickly leapt upon to undermine banks’ credibility, to prove that they are at least no better than the Guptas themselves. This political war on the banks is a threat to our key economic institutions. It is precisely because the banks are well regulated that they shut the Guptas’ accounts — only poorly regulated banks will truck with any client.

This attack on the banks for applying world-class oversight should be resisted. The allegations in the collusion case are serious and credible. They should be tested and, if proven, appropriate punishment should be meted out. Politically, however, it has to be done professionally and rationally, in order to clearly demarcate it from the wider Gupta-Zuma assault on the banks.

POLITICAL OPPORTUNISM

The political opportunism was on clear display last week. Within moments of the Competition Commission’s announcement that it would prosecute 17 banks for colluding in the price of dollar-rand trades, the ANC put out a statement decrying an “assault on the rand”.

The ANC Youth League also declared the collusion to have contributed to the “collapse of the rand”. That kind of phrasing might serve to whip up public anger, but is certainly not what the banks are alleged to have done. The allegations are that prices were manipulated for the WM Reuters “fix” for dollar-rand rates that is determined from trade on the Reuters platform in a 60-second window around 4pm in London. Traders forced the spread between bid and offer prices wider at that point and colluded among themselves to place or avoid placing orders, depending on what would generate the most profit.

Traders may also have been “front running”, so building up positions in advance of the fix in anticipation of exchange rate moves that would allow them to book a profit. The point that should be clear is that this did not mean the rand was systematically pushed in one direction or the other — the direction of manipulation were likely to have varied day to day, and any pricing anomaly would have disappeared quickly as normal supply and demand returned to a market that sees up to $90bn of trade every day.

The traders are also alleged to have discussed among themselves when large orders came into the market in order to fix prices that would be offered. If that is what happened, it would represent the worst kind of avaricious behaviour that bankers have become known for since the financial crisis. It is of the same ilk as the Libor scandal that saw bankers conspiring to manipulate the key London benchmark interest rates. It is almost exactly the same as the foreign exchange manipulation case against bankers in 2015 that led to fines of $5.7bn against six major banks by US and UK authorities.

It was also the Reuters fixes that were manipulated in that case. But moral outrage needs to be specific and appropriate.

CONDONATION

For one thing, major banks FirstRand and Nedbank are not mentioned in the allegations. Absa, and, according to some reports, Citibank, have assisted the commission and received condonation. For another, the collusion seems to have occurred between foreign exchange traders themselves, and not involved senior management in the banks.

The case is also far from clear. The commission will no doubt be challenged on its jurisdiction, considering the collusion was about a price set in London and concerned trade mostly in New York. It will also have to prove the collusion had a genuine effect on prices, given that its application was probably only momentary.

Also, only three of those mentioned, Standard Bank, Investec and Absa, are local banks. Some of the others on the list have operations in SA, but several have none at all.

And then there is the question of the quantum of fine it could impose. Much has been made of the commission’s statement that it wants to dock 10% of turnover for the period 2007-13. That would render most of the banks mentioned insolvent. But the tribunal’s well-established approach is to focus on “affected” turnover — that portion of revenue that was directly affected by the practice.

So, for example, the foreign exchange desk at Investec generated revenue of about R20m-R40m a year, which is a fraction of the billions in revenue the group generated. So, fines will be dramatically smaller than some of the figures that have been bandied about. That is why bank share prices last week hardly moved after the announcement.

President Jacob Zuma, who had been quiet about the banks in the state of the nation speech in Parliament, on Thursday during the follow-up debate used the collusion claims to demand that more entrants be allowed into the sector.

The matter must be effectively and decisively handled. But we should remember that the biggest threat banks face now is a political one, intimately connected to the capture of the state by the Guptas and their associates, and the proxy battle with the Treasury and the finance minister. And in that respect, we must remain firm in defending the banks for, in that case, doing the right thing.