There is a misconception that government guarantees deposits in bank accounts should the bank fail.
The reality is that in South Africa there is no deposit insurance, although the SA Reserve Bank (Sarb) is reviewing this.
In a discussion document entitled Designing a deposit insurance scheme for South Africa, the Sarb explains that there are “currently no explicit arrangements in place to protect depositors in the event of a bank failure”.
“In the past, government compensated depositors for their losses on a case-by-case basis, which meant that taxpayers had to bear the cost of the failure of individual commercial enterprises.”
The failure of African Bank would be a case in point, where government supported smaller depositors, while larger institutions took a haircut and lost some of their deposits.
According to the document, government is less willing and able to pay for the cost of bank failures.
This means there is uncertainty about “which depositors should be compensated in the event of a bank failure, the amount such compensation should be, and where the funding should come from”.
This means savers will be more cautious about where they place their deposits, irrespective of potentially higher interest rates offered by second-tier banks such as African Bank or mutual banks such as VBS, which was recently placed under curatorship.
In order to bring more stability into the banking sector and to protect less financially sophisticated depositors in the case of a bank failure, Treasury and Sarb have agreed, in principle, to establish a deposit insurance scheme.
Providing certainty around the protection of depositors’ funds will create an opportunity for new banks to emerge, ensure competition in the major banking sector and support financial inclusion.
According to the discussion document, deposit insurance provides a “mechanism to ensure a pre-planned, orderly and efficient provision of protection, rather than an unprepared scrambling for funds, haphazard policy decisions made under pressure and/or disorderly and non-transparent compensation arrangements”.
The document compares good household financial management to managing the deposits of a bank.
Just as an individual should make provision for unexpected expenses or losses with emergency savings and insurance, so the financial system should, in good times, put buffers and mechanisms in place to deal with unexpected costs, failures and disruptions.
Based on the current proposals, the deposit insurance would only cover deposits of up to R100 000.
It would not cover deposits by other banks or by the private financial sector, such as money market unit trusts, pension funds or fund managers.
It would not cover deposits by local, provincial and national government.