Deposit insurance good news for savers
The Reserve Bank is hoping that SA’s new deposit insurance scheme will help to drive an increase in the interest rates banks pay on deposits and enhance smaller banks’ ability to compete, at the same time as it underpins trust in the banking system.
The Bank on Thursday launched the new scheme, which was first mooted during SA’s 2002 small-banks crisis and is designed to protect customers losing deposits if a bank fails. The new Corporation for Deposit Insurance (Codi) will protect the deposits of individual and non-financial business customers up to R100,000.
SA’s retail banking customers have not lost money as a result of banks going bust for many decades, because the Bank and the government have stepped in with help from SA’s commercial banks to backstop depositors. But the establishment of a formal deposit insurance system is in line with international practice.
And Reserve Bank governor Lesetja Kganyago said on Thursday that the guarantee that the scheme provided would help to prevent runs on vulnerable banks even before they began. Bank runs can bring down even healthy institutions, because banks don’t usually keep all their assets as liquid as their liabilities. Customers withdraw deposits if they have any reason to fear they might not be able to access their funds later, with runs often spreading to other banks.
“A bank run is one of the great nightmares of the central banker. However, by guaranteeing deposits, you remove the incentive to run,” Kganyago said.
A further benefit could be better competition for deposits, he said. “The interest rates on chequing accounts are famously low … If someone is eyeing a better rate at another bank but they aren’t switching because they are worried about the safety of that bank, they no longer need to worry.”
The Bank’s research has found chequing accounts are paying an average of 4.64%, compared with the policy rate of 8.25% set by the Bank’s monetary policy committee. Though banks bundle other services, such as overdrafts and payment cards with those accounts, the gap was still “a big deal”, Kganyago said.
It would be good for SA if Codi caused a bit more competition for deposits. “We would be happy to see deposit rates move a bit closer to the policy rate.”
About 40-million South Africans hold a bank account, and Codi MD Sabihah Mohamed said bank failures were rare in SA thanks to robust prudential regulation. However, she noted: “You may recall the snaking queues of mostly elderly people, braving the cold and sleeping outside the branches of VBS Mutual Bank when it collapsed in 2018.”
Nedbank took over the accounts and safeguarded the deposits of customers of VBS, which collapsed amid allegations of severe fraud, which have yet to come to court.
Mohamed also pointed to the more recent failure of Habib Overseas Bank, which was placed under curatorship, affecting 3,000 accounts, as well as the failures over the past year of banks in the US and Europe.
Finance minister Enoch Godongwana said at the launch on Thursday that the Codi Bill was part of a focus on preventing bank failures from broadly affecting the financial system and economy and was a “testament to our proactive regulatory approach, preventing crises that have historically had devastating socioeconomic effects”.
Banking Association SA MD Bongiwe Kunene, who sits on the board of Codi, said banks were participating in the deposit insurance scheme because it helped to strengthen business and consumer trust and confidence in the banks.
“The strength, stability and responsible management of SA banks is an essential business and economic asset, which helps to attract and facilitate domestic and foreign investment,” she said.
All registered banks will have to be members of the scheme unless they have an exemption from the regulator. They will fund the Deposit Insurance Fund, which Codi has established, through monthly premi
ums and loan contributions, with each bank’s contribution based on the total deposits it has that are covered by the insurance scheme. They will also pay a deposit insurance levy to cover Codi’s operational costs, which Mohamed said were kept affordable thanks to the support services provided by the Bank.
Codi specifies which deposits will be covered, for which customers, and in what time frame.
Oversight of Codi is one of the responsibilities of the Bank’s new deputy governor, Mampho Modise, who started her fiveyear term at the Bank at the beginning of April. She takes on a portfolio which includes financial stability, currency and many of the Bank’s core administrative functions as well as Codi.
Her fellow deputy governors, Rashad Cassim and Fundi Tshazibana, have been appointed for further five-year terms of office that will start once their current terms end in August. President Cyril Ramaphosa has also renewed Kganyago for five more years after his term ends in November.