Sarb fires a broadside at Viceroy
Strategy has the potential to create financial instability, says the Financial Stability Report
THE SA RESERVE Bank (Sarb) in its latest Financial Stability Report hit out at the short-selling strategy of Viceroy Research, saying the strategy had the potential to create financial instability.
The central bank said the common traits of a short selling strategy include influencing market participants’ perceptions by extensive use of social media platforms, sensationalist language and an ongoing campaign against the targeted entity. Deputy Governor of the Sarb, Francois Groepe, said last week that this type of “short selling” strategy had the potential to create financial instability, especially if the targeted company is a deposit taking institution.
“Although a decline in a bank’s share price does not necessarily create systemic risk, there may be a risk to financial stability. The negative feedback loop can exacerbate the circumstances, even if the trigger event was based on inaccurate information,” Groepe said.
“In the Capitec case, statements by the Sarb and appropriate responses by Capitec calmed fears and led to a recovery in Capitec’s share price.” Capitec’s share price tanked in January after Viceroy released a scathing report into the bank’s business model labelling it “a wolf in sheep’s skin”.
Viceroy in the report said: “Based on our research and due diligence, we believe that Capitec is a loan shark with massively understated defaults masquerading as a community micro finance provider. We believe that the South African Reserve Bank & Minister of Finance should immediately place Capitec into curatorship.”
Both the central bank and the Treasury have turned down this request, saying the bank was well run.
Viceroy has published research reports on companies including MiMedx Group and Syrah Resources. But it was Viceroy’s work on Steinhoff that established the firm’s stature among short sellers. However, its report on Capitec was not well received and lambasted for being short on detail. The firm had not responded to questions by the time we went to print. The central bank also said other event risks with potential systemic implications that occurred last year included the announcement of an investigation of accounting irregularities into Steinhoff International Holdings.
Groepe said any potential financial implications arising from this event would most likely be as a result of a default on its debt obligations and the financial sector’s exposure thereto. “While such a default could cause losses for banks, lenders and investors, this is unlikely to result in financial instability. Developments relating to this event are, nevertheless, continually monitored.”
Capitec’s share price rose 3.09 percent on the JSE on Thursday to close at R872.13.
The central bank and the Treasury have turned down this (curatorship) request, saying the bank was well run.