VBS failure is no time to fight a straw man

For an institution that thrives on being opaque and inscrutable while quietly executing its oversight role, the South African Reserve Bank’s recent period under the spotlight has been most unusual.

First it was subject to an abandoned ANC parliamentary motion aimed at debating its nationalisation, which stemmed from the party’s December conference. The issue is the current ownership structure of the bank, which enables individuals — including foreigners — to own shares.

For reasons yet to be ventilated by the ANC, it seems that the prevailing sentiment is that the mere presence of individual shareholders is politically undesirable. This appears to be because shareholders are able to appoint a minority of the Bank’s board members. While no single ownership model prevails across the world, there is no doubt that all credible governments exercise full control over their central banks. In the South African case — despite individual shareholders — the core functions of the Bank remain subject to the state and the Constitution.

The government not only appoints the governors and the majority of the board directly, it also has the power to approve or reject any members proposed by the individual shareholders. In practice, such shareholders are therefore unable to influence the policy direction of the Bank by elevating rogue members to the board, since the state has a veto.

Although the parliamentary motion has been abandoned for now, it will inevitably be returned to the floor. When this happens, we will have to confront the real question of why a change in the ownership model is being pursued so vigorously when, for all practical purposes, the change would make no difference.

One possibility is that such a motion would merely be a precursor to the bigger issue of changing the Bank’s constitutional mandate.

Some political factions have expressed reservations about the Bank’s commitment to its current mandate, questioning whether this is compatible with the pressing needs of a developmental state.

Governor Lesetja Kganyago has repeatedly stated that the existing mandate is actually pro-poor and represents the most logical means to maintain the integrity of the country’s financial system. Unfortunately for the governor, such articulations often get lost in the hysteria of political populism, as witnessed in recent times. The withdrawal of the motion represents a temporary stay of execution and should be used by the governor as an opportunity to drive home his message across society and the political elites.

Days after the withdrawal of the motion the Bank found itself having to take the unpalatable step of placing VBS Mutual Bank into curatorship. For a central bank whose architecture and policy stance have been branded by radical political factions as pro-white monopoly capital, the VBS curatorship could not have arrived at a more awkward time. VBS is a blackowned small bank in a country that is desperately short of diversity in its financial services.

Curatorship is undesirable, but it should be borne in mind that, unlike a liquidation, the process is intended to revive the institution.

At the core of VBS’s problems was the reliance on short-dated municipal deposits to fund its advance book. As it stands, the Municipal Finance Management Act prohibits this.

An opportunity therefore exists for policy makers to interrogate whether such provisions should be revisited to provide traction for emerging banks. That would be a better use of the politicians’ time than having to confront the ownership structure of a central bank that is already controlled by the state.