Scheme to guar­an­tee bank de­posits will pro­tect you

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 reports, the scheme will not in­sure all de­posits. NORTH­ERN ROCK

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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 NORTH­ERN Rock, a small Bri­tish mort­gage bank, was con­sid­ered too small to be im­por­tant to the bank­ing sys­tem. How­ever, when its mort­gage book failed in 2007, pho­tographs of long queues at the bank re­in­forced a grow­ing fear about the strength of many of the 13 banks in the United King­dom. The UK au­thor­i­ties re­sponded by im­ple­ment­ing a full guar­an­tee of de­posits. 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% 20 Pub­li­ca­tions/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 THE key fea­tures of the pro­posed de­posit in­surance scheme are:

• The scheme will be a sep­a­rate le­gal en­tity with its own leg­isla­tive frame­work and gov­er­nance re­quire­ments, but it will be phys­i­cally lo­cated in the Sarb.

• The scheme will cover bank de­posits up to R100 000 per de­pos­i­tor per bank.

• If the scheme does not have suf­fi­cient funds to cover de­posits, the Sarb will pro­vide a fund­ing line to the scheme for emer­gency fund­ing pur­poses. This emer­gency fund­ing will be re­cov­ered from liq­ui­da­tion pro­ceeds and con­tri­bu­tions by the re­main­ing banks.

• Where the owner of an ac­count the amount to be paid to a de­pos­i­tor, in­ter­est earned will be added, but bank charges will not be de­ducted.

– De­posits at for­eign branches and sub­sidiaries of South African banks abroad will not be cov­ered.

– Pooled ac­counts will be treated as a sin­gle ac­count, ex­cept in the case of pooled ac­counts where pro­fes­sional prac­ti­tion­ers hold de­posits on be­half of clients.

– In the case of a joint ac­count, each ac­count holder will be cov­ered separately, up to the cover limit. The de­posit bal­ance will be split equally be­tween the ac­count hold­ers, un­less the un­der­ly­ing doc­u­men­ta­tion spec­i­fies a dif­fer­ent ar­range­ment.

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