Bank failure rocks battling municipalities
precipitating the VBS crash, because the treasury had notified six municipalities in August last year that they were contravening the law by depositing money with VBS. The municipalities began withdrawing their money, which caused a run on the bank, he claimed.
The Municipal Finance Management Act permits a municipality to open a bank account only with a bank registered in terms of the Banks Act. Mutual banks such as VBS are typically smaller, not regulated as strenuously and are not covered by the Act.
When asked why West Rand invested money with VBS, Mokebe said it had invested the money in terms of section 13 of the Act, which states that any bank, insurance company or financial institution may hold municipal investments. The municipality had also “duly submitted” the appropriate disclosures to the national treasury.
But the Reserve Bank has refuted Matodzi’s accusations, arguing that VBS’s business model, which increasingly relied on unlawful municipal deposits, was flawed and, for some time, has seen the bank run into liquidity problems.
Municipalities began depositing money with VBS in 2015, according to the Reserve Bank. Until then, the bank relied heavily on deposits, predominantly from retail clients, which were seasonal and therefore volatile. According to the Reserve Bank, the VBS business model had been to take short-term retail deposits and lend them out long term, mainly for home loans.
But, from 2015, the bank began to look for alternative sources of funding, including municipal deposits. The term of these varied, ranging from call deposits, money market placements and notice deposits to six-month fixed deposits, the Reserve Bank said.
But it was “highly risky” for VBS to take sizeable municipal deposits that were short term and lend them out long term.
The bank’s current liquidity problems emanated from the maturity of a large concentration of municipal deposits and it was “exacerbated by the termination of other sizeable deposits, as well as VBS’s inability to source sufficient funding timeously”.
The Reserve Bank said it began discussions with VBS in 2015 about its reliance on large municipal deposits. VBS’s liquidity difficulties resulted in it being unable to settle its obligations to the National Payments System on several occasions, the bank said.
The growth in deposits cannot be underestimated. According to the treasury, the VBS balance sheet soared from R200-million a few years ago to R2-billion.
Until fairly recently, VBS was a little-known entity.
But, in 2016, it came to public prominence after it lent Jacob Zuma almost R8-million to pay for controversial upgrades to his Nkandla estate.
In his letter, Matodzi said VBS was being punished by a system that did not want a black-owned bank to succeed.
The treasury denied this. “It is never the intention of treasury for any bank to be liquidated, particularly a small black-owned bank. National treasury’s actions are trying to balance the need for a more diversified small banking sector against the need for well-run and well-governed municipalities.”
On Thursday, Cas Coovadia, the managing director the Banking Association South Africa, stressed the need for transformation in the sector.
“However, this must be done in a way that creates sustainable businesses that can offer communities safe and secure financial services.
“All South African banks must adhere to the letter and spirit of the law and be able to fulfil their legal duty of care to those who entrust their earnings to them,” he said.