SA’s first deposit insurance body, which was set up by the Reserve Bank last month, is expected to provide just R100,000 in cover for each depositor whether they be retail banking clients or large corporates.
The Corporation for Deposit Insurance (Codi) became a legal entity on March 24, as set out in the commencement schedule published by finance minister Enoch Godongwana. Its primary responsibility will be to establish and administer a deposit insurance fund to protect depositors in the event that a bank is placed into resolution.
A bank resolution occurs when a failing bank has no prospect of recovery and authorities determine that it cannot go through the normal insolvency proceedings without causing financial instability. The Reserve Bank is setting up a bank resolution framework that is scheduled to come into effect on June 1 that will replace curatorship.
While Codi is developing secondary legislation that will specify the cover limit for depositors before the insurance fund becomes fully operational in 2024. The Reserve Bank says cover is expected to be capped at R100,000 per depositor for both retail clients and corporates. Financial sector depositors such as interbank deposits and government deposits will be excluded from the cover.
“Codi’s protection will be up to R100,000 per qualifying depositor per bank,” the Reserve Bank told Business Day in response to questions.
Codi will cover both Systemically Important Financial Institutions (SIFI) and non-Systemically Important Financial Institutions (non-SIFI). In other words, depositors at large banks and small banks, including co-operative banks, mutual banks and local branches of foreign banks will be covered.
The new deposit insurance fund forms part of the so-called Twin Peaks regulatory reform process introduced in the wake of the 2008 global financial crisis. The launch of Codi also comes in the wake of Silicon Valley Bank’s (SVB) collapse in the US as well as the Swiss government-brokered merger between UBS and Credit Suisse after the latter lender found itself teetering on the brink of bankruptcy.
One potential concern about the launch of Codi is that it could create moral hazard: banks, or even their depositors, could potentially relax the stringency of their oversight in an environment where their deposits are insured. However, the Reserve Bank says there is little such risk, given that the insurance cover will be limited to R100,000 per depositor while also excluding financial firms.
“Deposit insurance aims to protect the smaller more vulnerable depositor,” the Bank said. “More than 90% of depositors are fully covered by a limit of R100,000.”
The Reserve Bank says that’s because the majority of deposits held in SA are less than R10,000, according to a survey conducted in 2021.
However, the picture changes dramatically once deposits are looked at in terms of their rand value rather than the number of individual depositors. That’s because a small proportion of depositors might hold a high value of deposits in terms of rand value.
The Bank says that in terms of rand value only about 23% of total deposits would be insured given the envisaged cover limit of R100,000. Nevertheless, it says this is in line with international best practice.
However, not everyone is convinced that regulators will be able to restrict their deposit insurance cover to a limit of R100,000 in the event that an SIFI runs into trouble.
“When you have a bank fail of any reasonable size it’s difficult for them to basically only bail out the R100,000,” said Rashaad Tayob, a portfolio manager at Foord Asset Management. “Our big four banks are so systemically important that they will be forced to bail out depositors above R100,000. For systemic entities you actually just need to make sure that all senior depositors don’t take any losses.”
In the US, the Federal Deposit Insurance Corporation (FDIC) is meant to limit deposit insurance to $250,000 per depositor. However, federal regulators made exceptions for SVB and Signature Bank by agreeing to cover customer deposits in full.
“Inevitably because of the systemic risks you’ve seen repeatedly they get together over the weekend and they end up backstopping all senior depositors,” said Tayob.
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