MyNews24 is a user-generated section of The stories here come from users.

Comments: 12
Article views: 3448
Latest Badges:

View all TheWay's badges.

Lifeboats: A best kept South African scandal

31 December 2013, 14:47

For most of us, understanding the global financial market is a bewildering affair. With increases in consumer spending and lending during the festive season, being clued up on exactly how money moves from a central bank, to a commercial bank and to the public purse, becomes essential.

What is a lifeboat?

Let's explore the concept of a Lifeboat, as a form of financial assistance

from a central bank, to a commercial bank and how this relationship potentially affects the financial system and the public sector. The term ‘Lifeboat’ was first incorporated into financial jargon by the Bank of England in 1973. To put it quite simply, according to QFinance, a Lifeboat is “a measure designed to protect or rescue a failing business or fund”. 

Fundamental forms of assistance

To help us understand the implications of a Lifeboat as a “lender-of-last-resort activity” within the banking sector, let’s review some key differences between two fundamental forms of assistance available. First up, we have Liquidity Support. This is a short-term loan, with a high interest rate given to a bank which remains solvent, but faces a liquidity problem.  Solvency support is the provision of capital to a bank at the shareholders expense with the intention of resolving a solvency crisis. The latter could also involve a grant of public funds through a central bank with the aim of protecting the depositors. The distinction between the two terms becomes important since they have different effects on you and what happens to your hard earned cash.

What are the risks?

A principle condition of Lifeboats is to ensure the support is structured so that any risks fall on the shareholders. A Lifeboat, in the form of liquidity support, needs to ensure the repayment terms are as penal as possible, without leading to a financial collapse that is trying to be avoided. In the form of solvency support, a lifeboat needs to ensure that bank’s depositors are protected while the shareholders remain accountable for interest accrued.

Since most central banks are not well poised for credit assessment, Lifeboats become morally questionable and potentially risky for the public purse once the issue of transparency is brought into question. If they are not transparent and a veil of secrecy is maintained regarding the lending of public funds or funds secured from the central bank then they – the bank and its shareholders – are able to continue operations without the need to pay the penal rates for the funding. Of course the bill needs to be footed by someone and that’s where the public, tax rates and higher credit interest rates come in. As the old saying goes “what you don’t know, can’t hurt you”. In this case it can.  

A lack of transparency increases the likelihood for the banks to conceal the true extent of operational assistance received from the central bank and as a result there is provision for large concealed re-distributions, with terms that do not appropriately compensate the public for the risks.

In other words…

Let’s consider the declaration found at the top of The South African Reserve Bank’s homepage: “The primary purpose of the Bank is to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa. Together with other institutions, it also plays a pivotal role in ensuring financial stability”. In conjunction with a statement such as; “The Constitution of the Republic mandates the National Treasury to ensure transparency, accountability and sound financial controls in the management of public finances”, found on the National Treasury’s homepage, it becomes obvious how a Lifeboat may possibly affect public finances. Given such a dynamic relationship between the two bodies, it’s important to distinguish between the justification for a central bank assisting a distressed bank and the practices of the intervention; between the legitimacy of the ends and the means undertaken.   

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.

Read News24’s Comments Policy publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Add your comment
Comment 0 characters remaining

Read more from our Users

Submitted by
The ANC constitution does not off...

The official ANC constitution does not forbid or punish corruption. The term corruption is not listed or defined as a key term in the latest version of the official constitution of the ANC. Read more...

3 comments 31 views
Submitted by
LeboDang Macman
Why using race as a proxy doesnt ...

I am not an academic nor do I profess to be, so everything I write will be based purely on experience. Read more...

6 comments 220 views
Submitted by
Themba Simelane
Lost in my creative maze

Of all the projects that I excelled in and ultimately got to complete, it was those that I had done so in my self-enclosed space. Read more...

0 comments 47 views
Submitted by
God vs Evil Loo-Shin

I would like to present a few comparisons between these two unequal opponents so that those ‘on the fence’ can choose wisely. Read more...

117 comments 694 views
Submitted by
Don't be so yesterday! Wake-up an...

I urge the youth to inform their fathers, mothers and old relatives about the current state of our country. Read more...

4 comments 117 views
Submitted by
One fine Day at Nkandla

Sometime in February 2014 at Nkandla. A leader and two ex-members of a political party are having a quick chat over a cup of tea. Read more...

0 comments 207 views

Jobs in Cape Town [change area]

Property [change area]

Travel - Look, Book, Go!

Escape winter, head to Mauritius

Escape winter by spending 7 nights in Mauritius' tropical bliss from R13 215 per person sharing. Includes return flights, airport transfers and accommodation. Book now! - shop online today

Get many eggs in one basket!

Gaming bundles: 2 Super Hits games for R99, 3 Disney games for R99 and more + exclusive accessory bundles only available on While stocks last. Shop now!

25% off bestselling books!

The Real Meal Revolution by Tim Noakes, Jeffrey Archer’s Be Careful What You Wish for, Man’s Search for Meaning by Victor E. Frank and many more titles. Shop now!

Up to 25% off electronics

Buy top electronics and save up to 25%. Such as’s 1# selling product the gobii eReader, Patriot X Porter flash drive, Asus Nexus 7” 3G tablet, Samsung Galaxy SIII, Lenovo G580 Notebook and many more. Shop now!

DStv HD PVR Decoder now R949

The DStv HD PVR Decoder has further revolutionised the television experience with lifelike viewing, sharper images, more vibrant colours and precision picture quality. Now R949, save R550. Offer valid while stocks last. Shop now!

Up to 30% off appliances & homeware

Save up to 30% on appliances and homeware this Easter! Offer valid while stocks last. Shop now.

OLX Free Classifieds [change area]

Samsung Galaxy s4

Mobile, Cell Phones in South Africa, Western Cape, Cape Town. Date October 24

Best bargain in big bay

Real Estate, Houses - Apartments for Sale in South Africa, Western Cape, Cape Town. Date October 25

VW Golf 6, 1.6 Trendline (Excellent condition)

Vehicles, Cars in South Africa, Western Cape, Cape Town. Date October 25



E-mail Alerts The latest headlines in your inbox

RSS feeds News delivered really simply.

Mobile News24 on your mobile or PDA

E-mail Newsletters You choose what you want

News24 on your iPhone Get News24 headlines on your iPhone.

SMS Alerts Get breaking news stories via SMS.

Blogs Your opinion on you, me and everyone.

Calais Website keywords automated by OpenCalais.

Digital Media & Marketing Association
© 2014 All rights reserved.
There are new stories on the homepage. Click here to see them.


Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.

Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire network.


Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.

Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.