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 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. 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 SARB-DIS@resbank.co.za for the attention of the Head: Financial Stability Department.


KEY FEATURES

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 can be identified easily (for example, single accounts and joint accounts), the scheme will pay out depositors within 20 working days after a bank’s deposit accounts have been closed. It may take longer for the scheme to pay out the holders of accounts who cannot be identified easily (for example, pooled accounts). Over time, the scheme should reduce the time it takes to pay out all account-holders, and aim to pay out all covered deposits within seven working days after a bank’s accounts have been closed.

• It will be compulsory for all registered banks to belong to the scheme.

• The scheme will be consulted whenever the Sarb receives an application for a new banking licence.

• The following rules are proposed with respect to deposit coverage:

– Foreign nationals’ deposits and foreign-currency deposits held at domestic branches of South African banks will be covered.

– Deposits will be covered on a gross basis. In other words, when calculating 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. 

kabelo.khumalo@inl.co.za