SARB’s new plan to keep your money safe if your bank and the economy tanks
In the group’s latest financial stability review, released on Thursday, the central bank detailed plans to introduce a new “deposit insurance scheme” for South Africa.
According to the SARB, South Africa currently has a well-regulated and stable banking sector but one that is also quite concentrated. This means that bank failures in the country are rare, although when they do occur, they are typically more disruptive.
“Bank failures in South Africa seldom occur, and in the past, these failures involved relatively small banks or banks with a limited retail client base, which made it possible for government to at least compensate the retail depositors,” said SARB.
“Over time, this practice has led many South Africans to believe that their bank deposits are fully insured,” it said.
However, the bank said that this was not necessarily the case, and that compensation was largely dependent on the size of the failing bank and the fiscal strength of government at the time of such failure.
Under the current implicit system:
- There are no upfront assurances that government will bail the bank out;
- In an implicit scheme, compensation of depositors is funded from taxpayer funds, and depends on the ability of government to fund such payouts at the time;
- Even if government decides to compensate depositors of a failed bank it can be a lengthy process to actually execute the payments;
- Compensation that depends on government funding at the time of failure tends to be pro-cyclical because support is usually required at a time when the economy and the financial system may already be vulnerable as a result of wide-spread banking distress.
Moving towards an explicit deposit insurance
An explicit deposit insurance scheme sets out clear payment arrangements and ensures there is adequate funding available.
This funding is built up by the banking sector in good times rather than at the point of failure.
It is also a well-established system as South Africa is currently the only G20 country that does not have an explicit deposit insurance scheme, the SARB said.
“Although the proposed deposit insurance scheme will be partially prefunded, the SARB and National Treasury endeavour to avoid excessive costs on the banking system that could distort competitiveness in the banking sector, or cause moral hazard to the extent that it may become a threat to financial stability.”
Key proposals for a deposit insurance scheme for South Africa
On 31 May 2017 the SARB and National Treasury published a discussion paper that contains the proposals for the establishment of a deposit insurance scheme for South Africa.
The main features are summarised below:
- The deposit insurance scheme would be housed in a separate legal entity established as a subsidiary of the SARB to ensure independence, but with the backing of the SARB for good governance and operational support.
- All deposits (except those by other financial institutions and government, listed in the paper) would be covered, irrespective of the type or term of the deposits.
- Deposits at all banks – small, medium and large – would be covered to the same limit of R100,000. Based on a survey of the deposits at all banks, coverage of R100,000 would be sufficient to fully cover the deposits of about 98% of the retail depositors in South Africa. The envisaged deposit insurance scheme would be funded by the banks themselves, and all registered banks would be obliged to contribute to the fund.
- Emergency funding arrangements should include prearranged and guaranteed sources of liquidity funding and should be legislated. This is, however, subject to the proviso that such emergency funding is subsequently recovered from the remaining banks after the failure event.
- The build-up of a fund is but one aspect of the deposit insurance scheme. Equally important is the availability of accurate depositor information as well as information technology systems and mechanisms to enable prompt payout of deposits, supported by a sound legal framework, effective operational controls, and a strong governance framework.
“There will be extensive work for both the deposit insurance scheme and the banks once the legislation is in place,” the SARB said.
“In this regard, the International Association of Deposit Insurers, of which South Africa is currently an associate member, has developed a set of tried and tested Core Principles as a guide in the development of scheme with world-class features.”
There are also some more detailed areas that will require further research and deliberation, for example, how exactly should pooled accounts be treated, and how the small cooperative financial institutions should fit into the deposit insurance scheme framework, the bank said.
“A major part of the success of the deposit insurance scheme will depend on the public’s awareness of the scheme and knowledge about how it works. Enhancing such awareness will be an ongoing task of the deposit insurance scheme.”