Bucking rules led VBS into a crisis
TOUTING FOR MUNICIPAL DEPOSITS
Reserve Bank (Sarb) deputy governor Kuben Naidoo told parliament’s standing committee on finance on Tuesday that Sarb had engaged with VBS Mutual Bank for 18 months before it was placed under curatorship on March 11.
“Over this time the bank had four liquidity events. The most recent was on February 16, when they effectively didn’t have money in the overnight settlement system to make a payment.”
This ultimately culminated in the finance minister putting VBS under curatorship. Sarb and National Treasury explained the primary issue was that VBS had, since 2015, taken very large deposits from a small number of municipalities. This created a mis-match between the deposits (typically short-term) and the loans granted to clients (mostly longer term).
Furthermore, municipalities are expected to spend their annual budgets and therefore to have withdrawn all their money by the end of the financial year, so the deposits were very transient.
“The constitution doesn’t allow municipalities to run an operational deficit,” explained Treasury’s Ismail Momoniat.
National Credit Regulator figures suggest how quickly this escalated. At the start of 2016, VBS had a R240.3 million mortgage loan book and R48.8 million in secured credit. At end-September 2017, its books showed mortgages to the value of R425.3 million and R211.7 million secured credit: over 120% growth in 21 months. It also increasingly took deposits from a few municipalities, even as Sarb warned of the risks.
Over the last few months, municipal deposits grew from R1.063 billion at September 5, 2017 to R1.580 billion at March 2, 2018. The number of municipalities holding such deposits increased from 12 to 16.
This mismatch between a small number of very large, shortterm deposits, and a large number of smaller, longer-term loans, led to the bank’s liquidity crisis.
After the latest liquidity event on February 28, Sarb requested an action plan from VBS. Sarb had requested a liquidity injection from its two major shareholders – Vele Investments and the Public Investment Corporation. By March 8, this funding had still not come.
Sarb told VBS that if it didn’t have written confirmation the funds would be committed by March 12 it would recommend the finance minister place it under curatorship. On March 10, VBS chair Tshifhiwa Matodzi made this public, forcing Sarb to act immediately to prevent a run on the bank.
VBS remains open, but withdrawals are limited to R1 000 per client per day. Sarb has guaranteed retail deposits up to R50 000/ depositor. This doesn’t protect the millions deposited by municipalities, but they should never have been placed with VBS. Under the Municipal Finance Management Act, municipalities must bank with a registered bank. Treasury indicated that mutual banks don’t meet the requirements. “Even when VBS knew it was wrong for municipalities to invest, they were still touting for deposits from them. That seemed to be their business model,” Momoniat said.