New policy to protect South Africans from financial crisis

Johannesburg – To protect South Africans from possible failure of banks in future, the South African Reserve Bank (SARB) and National Treasury are proposing a privately funded deposit insurance scheme (DIS).

This is according to a paper released by the SARB on Tuesday. The Reserve Bank is requesting public comment on the paper, and the deadline is August 31, 2017. It is in line with a paper by Treasury titled Strengthening South Africa’s resolution framework for financial institutions, published on August 13, 2015.

“The main policy objective of a deposit insurance scheme for South Africa is to protect the less financially sophisticated depositors in the event of a bank failure,” the reserve bank explained in a statement. This includes failures as was seen with African Bank and those to the extent of the global financial crisis in 2008.

READ: Final report says African Bank directors failed in duties – source

The DIS will contribute to consumer protection, and enhance the stability of the South African financial system, said the SARB.  The policy also promotes the protection of covered deposits in all banks. This ensures a “less concentrated” banking sector and will support financial inclusion and transformation, the paper read.

Safety net

The safety and soundness of banks is determined by management and market forces. In the paper, the SARB highlighted that when managers and investors fail to manage risks effectively, failure occurs which creates a need for a safety net to minimise the negative impact.

“There are currently no explicit arrangements in place to protect depositors in the event of a bank failure,” the paper read. Historically government would compensate depositors on a case-by-case basis, indirectly leaving the financial burden on taxpayers.

Government’s ability and willingness to compensate has diminished; leaving uncertainty on where such funding would come from, the Reserve Bank explained in the paper.

For this reason the DIS was proposed as far back as 2015. The DIS will help the financial system remain “resilient in the face of disruptive events” the paper stated.

Some of the proposed features of the DIS include that in the event of a bank failure, it protects covered deposits, or deposits up to R100 000 for each depositor. Among other proposals is that all registered banks be members of the DIS.

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