Banks not keen on deposit insurance plan

2011-08-27 15:28

Bickering between commercial banks and the national Treasury over the introduction of a deposit insurance scheme could stifle the development
of South Africa’s small banks and cooperative banks.

It emerged at a banking summit this week that Treasury wanted to introduce the scheme to safeguard depositors in the event that local banks went bankrupt.

But big banks appeared to be reluctant about the scheme, arguing that it would push up their already high costs, which have led to some lenders restructuring their operations or retrenching staff.

If implemented they wanted the scheme’s premiums to be charged on the basis of the risk carried by individual lenders instead of a flat rate, which Treasury might propose.

Around the globe regulators charged a flat premium of between 1% and 5% of lenders’ deposits base. If a flat rate was introduced, big banks such as
Standard Bank, Absa, Nedbank and FNB could end up paying higher premiums than smaller rivals such as Capitec and Ubank.

But if banks were charged premiums based on their individual risk profiles then smaller lenders and cooperative banks could pay higher premiums than larger banks.

Sim Tshabalala, Standard Bank’s deputy chief executive, warned that the deposit insurance scheme could encourage riskier lending
over prudential lending as banks knew they would be covered by the scheme in the event they suffer losses.

“The problem with these schemes internationally is that they don’t prevent banks from taking on more risk; in fact they encourage banks to take on more risk,” Tshabalala said.

“In the case of South Africa you could end up with prudent banks subsidising riskier lenders. This will have the effect of increasing costs for prudent banks instead of lowering costs.”

However, this view was dismissed by Nkosana Mashiya, acting managing director for Co-operative Banks Development Agency, a
unit in the Treasury.

“Banks cannot make the argument that the deposit insurance scheme will result in an increase in reckless lending,” he said.

“Implicitly there is already a deposit insurance scheme in South Africa but it is paid by the state and not the banks. When Saambou failed, the government stepped in to guarantee the deposits and bail out the bank.”

Nearly a decade ago the government had to step in to guarantee the deposits in now-defunct lenders Saambou and BoE as it sought to prevent a run by depositors on other smaller local banks.

Attempts by the Treasury to introduce the deposit insurance scheme could backfire on its plans to grow co-operative banks as they might find it difficult to absorb the costs of the scheme as most of them would be startups.

Since 2009 the Treasury had registered two co-operative banks and it was currently considering applications from 19 potential co-operative banks, which would compete with major banks, especially in the area of deposit taking and granting loans.

In South Africa there were more than 121 cooperative financial institutions with about 59 000 members and more than R175 million in savings.

In the wake of the failure of banks in the US and Europe due to reckless lending and poor regulation the South African government was introducing the deposit insurance to avoid having to use taxpayers’ funds to bail out failing banks.

The failure of Saambou, BoE and Unifer led to the downsizing of the local banking sector. In 2001 there were 40 locally controlled retail banks. Today there are only 14.

Despite having a credit insurance scheme the US was hit by a credit crisis in 2008.

In 2008 25 banks failed and were taken over by the Federal Deposit Insurance Corporation while 140 failed in 2009. In the five years before 2008 only 11 banks had failed.

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