Opening remarks by Francois Groepe,
Deputy Governor of the South African Reserve Bank,
at the public workshop on proposals to establish
a deposit insurance scheme for South Africa
South African Reserve Bank, Pretoria
23 August 2017
Introduction
Good afternoon, distinguished guests, ladies and gentlemen.
It gives me great pleasure to welcome you to this workshop on a possible deposit
insurance scheme for South Africa. We are privileged to have present here today fellow
central bankers, commercial bankers, financial market participants, regulators, public
sector representatives, academics, members of the media fraternity, and other staff
members of the South African Reserve Bank (SARB). In particular, I would like to extend
a very warm welcome to the representatives from the World Bank, which has been very
supportive over the past two to three years in the formulation of the proposals that will be
discussed today, as well as to the representatives from other central banks in the
Common Monetary Area that are present. We hope that this workshop will be the first
step in expanding our fruitful cooperation in the area of managing bank failures.
The SARB and National Treasury are currently developing new legislation to put in place
a framework that will facilitate the resolution of failing financial institutions in an orderly
and transparent way, one which seeks to minimise the use of government funding to bail
SARB's
out such institutions. This new resolution framework is an important pillar of the
expanded and explicit financial stability mandate, as contained in the Financial Sector
Regulation Bill. A key component of such a resolution framework is the establishment of
an explicit deposit insurance scheme to ensure that the depositors who are most exposed
to an asymmetry of information and thus least able to hedge themselves against financial
loss in the event of a bank failure are protected against any losses and hardship that may
enhance the public's trust in the
stem from a bank failure. This framework is expected to
banking sector, which is an important aspect of financial stability.
The implementation of a prefunded deposit insurance scheme will bring about closer
adherence to the Key Attributes of Effective Resolution Regimes and to the Core
Principles of Effective Deposit Insurance Systems issued by the Financial Stability Board
and the International Association of Deposit Insurers respectively.
South Africa has a well regulated and stable banking sector, but one that is also quite
concentrated. Where one tends to find relatively regular failures of small banks in some
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other countries, bank failures in South Africa are rare although when they do occur, they
are typically more disrupting.
Because bank failures in South Africa do not occur often and because, in the past, these
failures involved relatively small banks or banks with limited retail funding (like African
Bank), it was possible for government to compensate at least the retail depositors. Over
time, this practice has led many South Africans to believe that their bank deposits are
fully insured. However, this type of deposit protection is implicit rather than explicit, with
compensation being largely dependent on the size of the failing bank and the fiscal
strength of government at the time of such failure. There is unfortunately no clear, upfront
guarantee of deposits in place, which creates uncertainty in the event of a payout about
the deposits that will be compensated and to what amounts. Such decisions are often
arbitrary, depending on the circumstances at the time.
Furthermore, even if deposits are paid out, it can be a lengthy process to actually execute
the payments in the absence of readily available depositor information and payout
mechanisms. This can cause prolonged periods of hardship for depositors who do not
have access to their bank accounts.
Another important disadvantage of an implicit deposit guarantee system is that it relies
on government funding and tends to be procyclical; as such, support is usually required
at a time when the economy and the financial system may already be vulnerable as a
result of wider-spread bank failures.
In principle, it is not desirable that public funds are used to pay for private failures.
The main advantage of the implicit deposit insurance arrangements that South Africa has
had in place to date, and probably the reason why we have lived with them for such a
long time, is that the current framework does not put a direct cost on the banking sector
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and it hardly costs the government anything unless there is actually a bank failure.
However, we regard such arrangements as risky and acknowledge that they create a
significant contingent liability for government.
It is for all these reasons that South Africa is moving away from government-funded,
implicit deposit insurance scheme to a privately-funded, explicit deposit insurance
scheme. An explicit deposit insurance scheme sets out payment arrangements in law and
ensures there is always adequate funding available. This funding is built up by the private
banking sector in good times rather than at the point of failure. And although the proposed
deposit insurance scheme will be prefunded, we will endeavour to ensure that we avoid
placing an excessive cost on the banking system, distorting the competitiveness in the
banking sector, or causing moral hazard to the extent that it may become a threat to
financial stability.
South Africa is currently the only G201 country that does not have an explicit deposit
insurance scheme. In fact, about 125 countries have an explicit deposit insurance
scheme, of which the Federal Deposit Insurance Corporation in the US2 is probably the
best known, having been established in the 1930s just after the Great Depression. The
organisation, funding, and operations of deposit insurance schemes varies greatly
between countries; while there are a number of generic characteristics, each jurisdiction
ultimately decides on the type and structure of the deposit insurance scheme that best
suits its own financial system.
However, a common denominator of all deposit insurance schemes is that they play an
important role in the resolution of failed banks and the prevention of financial crises
emanating from institutional failures. They also facilitate the process through which poorly
managed and weak banks can leave the system in an orderly way, without causing
extreme hardship, thereby making way for efficiently managed firms that can better serve
the needs of the economy and of the population.
today's
The purpose of workshop is to discuss the proposals outlined in the discussion
paper that was published on 30 May 2017, which contains the joint views of the SARB
and National Treasury on the design features of a possible deposit insurance scheme for
South Africa. The paper deals in detail with all the aspects of the envisaged deposit
insurance scheme; these will also be covered in subsequent presentations today, which
I do not want to front-run or repeat. Let me just highlight, briefly, the key features of the
envisaged scheme.
Firstly, the deposit insurance scheme would be housed in a separate legal entity
established as a subsidiary of the SARB. This organisational structure would ensure
adequate independence for the deposit insurance scheme to pursue its objectives, but
with the backing of the SARB for good governance and operational support.
Secondly, 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 and medium and large, would be covered to the same limit of R100
000. Based on a survey of the deposits at all banks, we estimate that R100 000 would be
sufficient to fully cover the deposits of about 98% of the retail depositors in South Africa.
Among the other benefits that have been mentioned, we expect that this level of coverage
would help the small banks to expand their funding base and, over time, contribute to the
diversification of the banking sector.
Thirdly, the envisaged deposit insurance scheme would be funded by the banks
themselves, and all registered banks would be obliged to contribute to the fund. The paper
proposes two possible funding options that were considered at the time. However, the
most cost-efficient funding mechanism is still being discussed with the banking sector,
and the ultimate decision may well differ from the proposals in the paper. It is important
that the deposit insurance scheme is funded in such a way that the cost to the banking
sector does not exceed the financial stability benefits, and that there is sufficient funding
available to make the deposit insurance scheme effective. It is also important to have
emergency funding available in the event that the deposit insurance scheme experiences
a funding shortfall. Emergency funding arrangements should include prearranged and
guaranteed sources of liquidity funding and be legislated. This is, however, subject to the
proviso that such emergency funding is subsequently recovered from the remaining
banks after the failure event.
Fourthly, 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 IT3 systems and
mechanisms to enable the prompt payout of deposits, supported by a sound legal
framework, effective operational controls, and a strong governance framework. There will
be much work for both the deposit insurance scheme and the banks once the legislation
is in place. 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 to guide us in the development of a world-class scheme. There are also some
more detailed areas that will require further research and deliberation, for example how
exactly pooled accounts should be treated and how the small cooperative financial
institutions should fit into the deposit insurance scheme framework. These aspects are
important and will receive special attention in the coming months, without delaying the
legislative processes.
We appreciate your interest in this important initiative as a major part of the success of
on the public's awareness of the scheme and
the deposit insurance scheme will depend
knowledge about how it works. Enhancing such awareness will be an ongoing task of the
deposit insurance scheme, in which the media will be our close allies. The workshop
today is a good start.
Finally, we would like to remind you that there is also an opportunity to submit written
comments on the deposit insurance scheme paper until 31 August 2017. We encourage
you to make use of this opportunity as it will assist us in making the best policy choices.
Thank you.