{"id":476684,"date":"2021-03-17T14:54:38","date_gmt":"2021-03-17T12:54:38","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=476684"},"modified":"2021-03-17T14:54:38","modified_gmt":"2021-03-17T12:54:38","slug":"south-africas-banks-are-too-big-to-fail-but-government-is-drawing-up-a-plan-in-case-they-do","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/banking\/476684\/south-africas-banks-are-too-big-to-fail-but-government-is-drawing-up-a-plan-in-case-they-do\/","title":{"rendered":"South Africa&#8217;s banks are &#8216;too big to fail&#8217; &#8211; but government is drawing up a plan in case they do"},"content":{"rendered":"<p>South Africa&#8217;s major banks are currently &#8216;too big to fail&#8217; &#8211; where the collapse of just one bank would result in devastating and far-reaching problems for the entire economic system, says Ismail Momoniat, deputy director-general for Tax and Financial Sector Policy at the National Treasury.<\/p>\n<p>Momoniat presented the Financial Sector Laws Amendment Bill to parliament&#8217;s standing committee of finance on Tuesday (16 March).<\/p>\n<p>Among other changes, the bill proposes a number of additional protections for the banking sector, should there be any failures by &#8216;systematically important&#8217; financial institutions.<\/p>\n<p>&#8220;The failure of a bank has a domino effect on other banks and financial institutions because of interconnectedness, and results in devastating far-reaching problems for the entire economic system,&#8221; he said.<\/p>\n<p>Momoniat said that that governments typically do whatever they can to avoid this outcome, including bailouts. However, he warned that this often presents &#8216;moral hazards&#8217; which are a major risk in such an environment.<\/p>\n<p>With the protections offered by government-backed bailouts, banks may exhibit riskier behaviour, he said, where profits are privatised, but losses are socialised.<\/p>\n<p>He noted that it is also in the nature of banking that no bank keeps cash to pay out 100% of its depositors. So in the event of collapse, depositors are not guaranteed to get their money back.<\/p>\n<p>This leads to bank runs &#8211; depositors trying to withdraw their funds en masse &#8211; and panic. One bank&#8217;s failure then affects other banks, as they have interrelated deposits and loans.<\/p>\n<p>The Financial Sector Laws Amendment Bill aims to address these issues by minimising the use of public funds and reducing moral hazard.<\/p>\n<p>It proposes to do this through:<\/p>\n<ul>\n<li>The provision of a framework for the resolution of banks and non-bank financial institutions deemed &#8216;systematically important&#8217;;<\/li>\n<li>The designation of the Reserve Bank as resolution authority with commensurate powers;<\/li>\n<li>The introduction of a Deposit Insurance Scheme;<\/li>\n<li>The creation of a creditor hierarchy to ensure depositor protection in liquidation.<\/li>\n<\/ul>\n<hr \/>\n<p><strong>Deposit scheme\u00a0<\/strong><\/p>\n<p>The bill in its current form makes provision for the establishment of a subsidiary company of the Reserve Bank called the Corporation for Deposit Insurance.<\/p>\n<p>This company will be responsible for administering the deposit insurance scheme to protect qualifying depositors\u2019 funds up to a specified limit when a bank fails, which will be underwritten by the National Treasury.<\/p>\n<p>Treasury&#8217;s presentation pointed directly to the failures of African Bank and VBS Mutual Bank, which it said demonstrated the need for additional powers during intervention, and an explicit, privately-funded deposit insurance scheme to protect vulnerable depositors.<\/p>\n<p><a  data-lightbox=\"post-image\" href=\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2021\/03\/Deposit-Insurance.png\"><img loading=\"lazy\" decoding=\"async\" class=\" wp-image-476690 aligncenter\" src=\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2021\/03\/Deposit-Insurance.png\" alt=\"\" width=\"798\" height=\"589\" srcset=\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2021\/03\/Deposit-Insurance.png 952w, https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2021\/03\/Deposit-Insurance-300x222.png 300w, https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2021\/03\/Deposit-Insurance-768x567.png 768w\" sizes=\"auto, (max-width: 798px) 100vw, 798px\" \/><\/a><\/p>\n<p>According to the National Treasury, the deposit insurance scheme will have a number of additional advantages.<\/p>\n<p>These include:<\/p>\n<ul>\n<li>Eliminating the risk of depositors losing funds that deprive them of their livelihood;<\/li>\n<li>Promoting the competitiveness of smaller banks;<\/li>\n<li>Improving confidence and reducing the risk of a bank run during a crisis and;<\/li>\n<li>Enhancing South Africa\u2019s market integrity, which in turn ensures investor confidence.<\/li>\n<\/ul>\n<p>The Standing Committee on Finance will now process the bill.<\/p>\n<p>This will include calling on members of the public to submit written comments, holding public hearings, deliberating on the bill clause-by-clause and adopting a committee report that will be tabled in the National Assembly.<\/p>\n<hr \/>\n<p><strong>Read: <a href=\"https:\/\/businesstech.co.za\/news\/banking\/476484\/government-wants-to-enforce-new-bee-rules-at-banks-insurers-and-funds\/\" target=\"_blank\" rel=\"noopener\">Government wants to enforce new BEE rules at banks, insurers and funds<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>South Africa&#8217;s major banks are &#8216;too big to fail&#8217;, with the failure of just one bank resulting in devastating and far-reaching problems for the entire economic system, says Ismail Momoniat, deputy director-general for Tax and Financial Sector Policy at the National Treasury.<\/p>\n","protected":false},"author":10,"featured_media":476736,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[961],"tags":[26],"class_list":["post-476684","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-banking","tag-headline"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/476684","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=476684"}],"version-history":[{"count":9,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/476684\/revisions"}],"predecessor-version":[{"id":476738,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/476684\/revisions\/476738"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/476736"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=476684"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=476684"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=476684"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}