The Twin Peaks con­tra­dic­tion

Malusi Gi­gaba flagged the new reg­u­la­tory regime as one way to bring down bank­ing costs — but it will do ex­actly the op­po­site of what he says

Financial Mail - - EDITOR’S NOTE BY ROB ROSE - @ro­brose_za

Per­haps it’s fit­ting that in a so­ci­ety with so much am­bi­gu­ity, SA is a world leader in un­self­con­sciously trum­pet­ing mixed mes­sages. Take Malusi Gi­gaba. A few days ago our dap­per fi­nance min­is­ter railed against the profli­gacy of SA Air­ways (“I want that air­line off my list of top pri­or­i­ties,” he grum­bled) when it was he who in­stalled the wreck­ing ball that was Dudu Myeni as the air­line’s chair in 2012.

Last week, in his 14-point pol­icy plan, Gi­gaba spoke of his plans for the bank­ing sec­tor, which in­cluded the goal of “bring­ing down bank­ing costs by im­ple­ment­ing Twin Peaks” from Fe­bru­ary 2018. It’s not that all his points were bad: it’s just that they were generic and safe — all hat, no rab­bit, de­liv­ered by an empty suit.

Still, it all sounded so warm and fuzzy, you’d al­most gloss over the con­tra­dic­tions.

Take “Twin Peaks” — the new reg­u­la­tory regime which will bring down the cost of bank­ing for av­er­age South Africans in the same way that scoff­ing that ex­tra Aero will help you lose those ex­tra ki­los.

Twin Peaks might share a name with David Lynch’s sur­real cult TV se­ries from the 1990s, but it’s nowhere near as much fun. Es­sen­tially, it will cre­ate two brand­new reg­u­la­tors — a “pru­den­tial” reg­u­la­tor to en­sure in­sti­tu­tions re­main safe and sound, and a “con­duct” reg­u­la­tor, to pro­tect cus­tomers and make sure com­pa­nies are do­ing what they’re meant to do.

Speak­ing to jour­nal­ists this week, Bank­ing As­so­ci­a­tion MD Cas Coova­dia ques­tioned the need for the over­whelm­ing raft of new rules — es­pe­cially since many of them, in­clud­ing Basel 3, were “put in place to deal with what was es­sen­tially a cri­sis in Europe and Amer­ica. It’s the way the world works, un­for­tu­nately.”

The grim news for cus­tomers, how­ever, is that

Twin Peaks will make it­self felt in your bank costs.

The Bank­ing As­so­ci­a­tion’s Mark Brits says that, as it stands, banks are reg­u­lated by the Re­serve Bank’s bank su­per­vi­sion depart­ment, for a pal­try R300,000 a year. “But to­mor­row we will be reg­u­lated by a sep­a­rate pru­den­tial au­thor­ity sit­ting out­side the Re­serve Bank, which needs to be funded,” he says.

Un­der Twin Peaks, large banks will, ev­ery year, each have to pay R45m to the “pru­den­tial au­thor­ity” and R15m to the “con­duct au­thor­ity”. Like magic, a R300,000 an­nual bill has turned into a quick R60m. Even the City of Johannesburg’s billing depart­ment would strug­gle to repli­cate that trick.

To be fair, th­ese levies aren’t as high for smaller banks, who’ll pay pro­por­tion­ately less. It’s not that our banks don’t need reg­u­la­tion — but it shouldn’t be a thinly veiled ex­cuse to tap them for more money which will, ul­ti­mately, be re­cov­ered from bank fees.

Last Novem­ber, par­lia­ment’s stand­ing com­mit­tee on fi­nance said it was “par­tic­u­larly con­cerned” about the im­pact Twin Peaks would have on “the fees fi­nan­cial in­sti­tu­tions will charge cus­tomers, and the dis­pro­por­tion­ate im­pact this would have on the poor and those with low in­comes.” It said the banks will prob­a­bly pass th­ese costs to their cus­tomers.

If the losers are bank cus­tomers and in­vestors, the win­ner will be Gi­gaba’s trea­sury, which will be the ac­count­able au­thor­ity for the new reg­u­la­tors.

But Twin Peaks doesn’t just ap­ply to banks. It’ll cost SA’S wider fi­nan­cial sec­tor a whole lot more than R60m apiece ev­ery year.

Robert Vivian, a pro­fes­sor of fi­nance at Wits Univer­sity, es­ti­mates that the new model will ac­tu­ally cost R6bn/year — R2bn for the new reg­u­la­tors, and R4bn on in­ter­nal com­pli­ance for th­ese com­pa­nies. This is sharply higher than the R3bn com­pli­ance bill to­day.

Says Vivian: “Un­til now, the banks paid very low reg­u­la­tory fees and it was all cov­ered by tax money. But th­ese new reg­u­la­tors will have the right to in­sti­tute what­ever levies they want. I be­lieve it’s a new tax, and should be sub­ject to par­lia­men­tary con­trol.”

It stings, ar­gues Vivian, par­tic­u­larly since the new model doesn’t spec­ify how it’ll make SA bank­ing a safer place or even pro­tect cus­tomers. What is worse, the new rules will harm gov­ern­ment’s much-touted trans­for­ma­tion goal of “open­ing up the sec­tor”.

“It ac­tu­ally pro­hibits trans­for­ma­tion be­cause the smaller play­ers don’t have the ex­per­tise or re­sources to fi­nance th­ese rules,” he says. “When sim­i­lar rules were re­cently put in place for in­ter­me­di­aries in Eng­land, it knocked out the lower end of the mar­ket.”

Again, it’s a case of mixed mes­sages. In Fe­bru­ary, Pres­i­dent Ja­cob Zuma said the “banks that dom­i­nate ev­ery­thing are just four . . . we want to change this”. Only, rather than break­ing down ex­actly those bar­ri­ers, his gov­ern­ment has just put up an­other one.

The new Twin Peaks regime could cost up to R6bn a year — and it’ll act as a bar­rier to prospec­tive new banks

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