Pretoria - Placing the troubled VBS Mutual Bank under curatorship - as announced by South African Reserve Bank (SARB) governor Lesetja Kganyago on Sunday afternoon - is intended, ultimately, to turn the bank around, the National Treasury said.

Finance Minister Nhlanhla Nene had approved the recommendation of the Registrar of Banks to place VBS Mutual Bank under curatorship to nurse the bank back to health, the Treasury said in a statement after Kganyago's announcement.

The registrar fulfilled a critical role in the regulatory framework to protect depositors, customers, and the shareholders of a mutual bank. The aim of curatorship was ultimately to turn the mutual bank around. This was in contrast with liquidation, where the mutual bank was closed down, the Treasury said.

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The curator was given the legal means to create the necessary mechanisms to implement a resolution plan which would ensure the long-run sustainability of VBS. The recent example of African Bank which emerged as a stronger bank after curatorship should be noted.

The rationale for restricting municipalities and their entities from placing funds into mutual banks was consistent with the objective of ensuring that funds meant for service delivery were managed as responsibly as possible. 

The list of permitted investments therefore did not include any equity or equity-like instruments, ie shares in an institution. Mutual Banks were very different to commercial banks, the Treasury said. Some of the notable differences were:

- They tended to be smaller in size compared to commercial banks. At the time VBS started accepting deposits from municipalities, they had a balance sheet of only about R200 million. Even today, their total balance sheet was R2 billion. One of the problems the registrar had raised related to the relative dependence of the bank business model on municipal deposits, even if these were allowed by the law;

- Some types of deposits in mutual banks qualified as an ownership stake in the mutual bank; and

- They were not regulated to the same standard. Commercial banks had to comply with Basel 3, and the attendant 1200 pages of regulations. Mutual banks by their nature did not have as many risks, and the regulatory framework was substantially thinner.

Being highly regulated entities, all banks needed to not only set aside large capital reserves, but take care not to break the law in all their activities, and hence fully comply with laws, such as the Public Finance Management Act (PFMA), the Municipal Finance Management Act (MFMA), and the Financial Intelligence Centre Act (Fica), the Treasury said.

The MFMA did not allow municipalities to bank with a mutual bank, only with a fully registered bank.

"Any bank must ensure that at all stages it takes deposits in line with our laws. While sensitive to the need to prevent a bank from failing, the National Treasury cannot and will not do so by breaking any laws. To the extent that any bank is experiencing any prudential challenges, it is between the Reserve Bank and that bank to consider how best to ensure the bank is safe for all its depositors.

"The board of any bank must at all times operate within the law and must take full responsibility for its business model and the risks that go with such a business model," the Treasury said.

Since late 2016, the Treasury had been working to try and find an orderly resolution to the problem of municipalities placing deposits in contravention of the MFMA. The matter of municipalities investing in mutual banks was also raised in a series of parliamentary questions during the course of 2016 and 2017. 

Over six months ago, in August 2017, the National Treasury issued a communication to selected municipalities drawing attention to legal requirements as part of its monitoring and compliance functions. Since then, no circular was issued to municipalities.

Municipalities made their own decisions on banking and investment, as long as it was within the framework of the law. The Treasury would engage with affected municipalities to determine the extent of their potential loss and ensure that service delivery was not affected.

"In the past few weeks, National Treasury and the Reserve Bank have been working closely to try and save the bank so as to protect ordinary depositors. 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," the statement said.

African News Agency/ANA