Deposit guarantee scheme coming:
National Treasury and the South African Reserve Bank have decided to establish a formal structure that will pay out depositors if a bank fails. However, as Kabelo Khumalo reports, the scheme will not insure all deposits.
SEVERAL banks have failed in South Africa, yet this country does not have an arrangement to protect depositors if a bank fails. However, a bank-deposit guarantee scheme is taking shape as part of new legislation governing how financial institutions are regulated.
You might remember when Saambou was placed under curatorship in 2002.
“Recent events pertaining to Saambou Bank have led to a situation where Saambou will evidently be unable to repay deposits made with it or will probably be unable to meet all of its obligations when legally obliged to do so,” read a statement from the Registrar of Banks that sent thousands of South Africans into a panic.
Fortunately, First National Bank (FNB) stepped in and bought Saambou’s operations and took over its housing book, which had 60 000 accounts valued at R8 billion. FNB also took over Saambou’s low-cost housing book, which comprised 20 000 accounts amounting to R1bn.
African Bank (Abil), which it did not take deposits, collapsed three years ago after needing R8.5bn to survive. The South African Reserve Bank (Sarb) stepped in to save the bank, which was split into a “good bank” and a “bad book”. At the heart of Abil’s problems was that it granted too many loans to people who could not afford to pay them back. And when borrowers failed to pay back their debts, the bank was left with a massive hole in its balance sheet.
National Treasury and the Sarb have decided that the country needs a deposit insurance scheme.
Wikipedia defines such a scheme as follows: “Deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank’s inability to pay its debts when due. Deposit insurance institutions are for the most part government-run or established, and may or may not be a part of a country’s central bank, while some are private entities with government backing or completely private entities.”
In May, the Sarb published a discussion paper, “Designing a deposit insurance scheme for South Africa”, which is available on its website (www.resbank.co.za/Lists/News%20and%20Publications/Attachments/7818/DIS%20paper.pdf). The public has until the end of this month to comment on the paper.
The Sarb says: “The [South African] scheme is intended to ensure that the cost of a bank failure, in particular, does not fall disproportionately on the most vulnerable consumers, or those who are least able to protect themselves through diversification, hedging, financial structuring or other sophisticated risk-management measures.”
Dr Co-Pierre Georg, a senior lecturer at the University of Cape Town’s African Institute of Financial Markets and Risk Management, says the country needs a sufficiently capitalised bailout fund to prevent runs on banks, and banks must pay their fair share in capitalising it.
“Deposit insurance is a necessary complement to capital regulation, because banks take on substantial risks when they are leveraged. Hence it is mainly the banks that must contribute to deposit insurance,” Georg says.
Leverage is the use of borrowed funds to buy an asset, with the expectation that the after tax-income from the asset and the appreciation in the price of the asset will exceed the borrowing costs.
Cas Coovadia, the managing director of the Banking Association South Africa, says the organisation recognises the need for a deposit insurance scheme. It is satisfied that the draft document goes some way to ensuring that the scheme will not result in further costs to the banking industry.
“The [deposit] threshold of R100 000 ensures those most susceptible will be protected in the event of deposits being threatened because of bank failure. Having said that, we emphasise that our banks are stable, well capitalised and liquid, and past failures have been adequately and appropriately resolved without dilution of depositor funds,” Coovadia says.
Comments on the discussion paper should be sent to SARBDIS@resbank.co.za for the attention of the Head: Financial Stability Department.
kabelo.khumalo@inl.co.za
Deposit insurance is a necessary complement to capital regulation, because banks take on substantial risks when they are leveraged.