Why fewer large banks are good (and bad) for SA - SARB

Cape Town – There are particular advantages to having a small number of large banks, such as in South Africa, said Kuben Naidoo, deputy governor of the South African Reserve Bank (SARB) on Wednesday.

The SARB is one of the stakeholders making submissions to Parliament during public hearings on transformation in the financial services sector.

“One of the advantages to having four large banks is that there’s more resilience in the event of a financial crisis,” Naidoo said. “It also means these banks are well capitalised, and they didn’t suffer to the same extent as other financial institutions during the 2008 financial crisis.”

Naidoo acknowledged though that the dominance of the biggest banks – Absa [JSE:ABSP], Nedbank [JSE:NED], FirstRand [JSE:FSR], Standard Bank [JSE:SBK], Capitec [JSE:CPI] and Investec [JSE:INP] – pose “competition risks”, such as anti-competitive behaviour.

He added that concentration also creates a situation where the banks are “too big to fail”, which poses a risk of contagion. “If they do then fail, governments can’t bail them out,” Naidoo said.

Naidoo explained there has been a significant drop in the number of banks in South Africa since 1994, when there were 40. “Today there are only 16 and the five biggest banks in South Africa hold a 91% market share.”

According to Naidoo, there’s a “dichotomy” between stability and competition. “Although concentration brings about financial stability, it can also lead to less competition.”

Naidoo said the SARB plays an important role as an effective and prudential supervisor that has ensured stability in the banking system.

He also pointed out that though market dominance is relevant for competition, it is not necessarily indicative of the “absence” of competition in a particular sector.

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