The Reserve Bank is putting in place a new approach to troubled banks that will make it easier to resolve bank failures and should help to reassure retail depositors that their money is as safe with small banks as it is with larger banks.
And while regulators said the new resolution and deposit insurance framework would not have made much difference to the way the Bank intervened at Ubank, which was put into curatorship last week after its capital fell far below regulatory requirements, the framework will provide a better toolkit to deal with failing banks.
Launching its latest Financial Stability Review on Wednesday, the Bank said the new resolution and deposit insurance framework would bring SA in line with the international standards introduced after the 2008 global financial crisis. The framework, which was signed into law in January, would protect the stability of the financial system as well as protecting depositors.
The Bank also used the review to flag its concerns about continued low levels of liquidity (trading) in the government bond market, which may be increasing the cost of funding for the government and other borrowers in the economy, as well as making the market more volatile. The Bank was forced to intervene to stabilise the bond market when investors fled at the height of the Covid pandemic. The market quickly stabilised, and the Bank has not had to intervene further, but reduced interest from foreign investors and rising global interest rates have seen a decline in liquidity that has prevailed beyond the Covid shock.
The Bank’s primary mandate is price stability, but it is also tasked with safeguarding SA’s financial stability — hence the twice-a-year review, which this time had a special focus on the new bank resolution framework.
Ubank is only the third SA bank to be put under curatorship in almost two decades. In the past, the government implicitly guaranteed small retail deposits, ensuring that small depositors in failed banks such as VBS Mutual Bank or Saambou were paid out, but SA has until now been the only Group of 20 country without an explicit deposit guarantee scheme.
The Bank is working to establish the new Corporation for Deposit Insurance (CODI), which will be funded by levies from SA’s licensed banks, all of which will be required to be members of CODI. It is likely to take decades to build up the reserves that would be needed to pay out depositors in the event of a big bank failure.
However, the Reserve Bank will guarantee the CODI until reserves are built up, and deputy governor Kuben Naidoo said in an interview that SA was more likely to see failures of the magnitude of VBS or Ubank every five to 10 years and the deposit insurance scheme would be able to cover that.
CODI will cover retail deposits up to R100,000 and will pay out within a week — in contrast to VBS, where small depositors had to wait 10 weeks to get their money, with significant impacts on their welfare.
Confidence
The welfare impact of small banks going down was a key reason for the deposit insurance scheme, which is expected to give retail depositors greater confidence in small banks.
Naidoo said the new scheme would hopefully contribute to competition in SA’s R7-trillion banking sector and promote the inclusion of small banks, as well as contributing to the resilience of the banking system.
The new resolution framework gives the Bank greater powers, particularly when a bank has to be liquidated. It also entrenches the “bail in” principle, which was first applied in the African Bank curatorship — where investors in the bank’s bonds help to bail it out, rather than the equity holders or government taking all the losses.
Banks will now be required to sell a class of bonds that will count as debt as long as all is well but will be bailout money, like equity, if the bank fails. The new framework also gives the banking regulator more options for resolving a failing institution.
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