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Web Exclusive: Deposit insurance scheme puts banks on edge
November 4, 2009
By Ethel Hazelhurst
Banks and the banking regulator are at odds over the introduction of deposit insurance – a scheme to provide some protection to bank depositors in the event of a banking failure.
The Reserve Bank's Financial Stability Review (FSR), released yesterday, spoke of the introduction of a deposit insurance scheme in South Africa.
Discussing a move globally to improve crisis management, the FSR said: “There is some indication that domestic and foreign banks favour the establishment of an explicit deposit insurance scheme. Consequently work has been initiated in developing a South African deposit insurance scheme with the role players currently collaborating in this regard.”
However, Cas Coovadia, MD of the Banking Association said yesterday he had no knowledge of the collaboration. “I don’t know what role players they are talking about. We certainly haven’t discussed the topic for some time.”
Deposit insurance has been on the regulator’s agenda since the late 1980s but was not favoured by the big banks because they believed they would be subsidising the risk of smaller institutions which are more vulnerable in hard times.
At present there is a perception of an implicit insurance regime because the Reserve Bank is expected to rescue troubled banks. Saambou was allowed to fail in 2002 though the central bank provided some protection for depositors. The same year the Reserve Bank stood by BoE Bank when it faced a run on deposits.
Michael Jordaan, CEO of First National Bank, said: “Bank failures inevitably result in costs which have to be borne by one party or the other. The choice from a regulatory perspective is merely who has to foot the bill of consumer protection. If the consumer is to be indemnified against certain losses, the state may wish to recompense customers based on political considerations or the task may be assumed by the regulatory authorities themselves.”
Jordaan said a scheme of this kind “should only protect smaller, less sophisticated consumers and insurance premiums should take cognisance of the risk profile of the insured banks. This system reduces the costs of introducing consumer protection and eliminates cross subsidisation of ‘bad’ banks by good banks”.
The financial crisis, which started to unfold in February 2007, reached a crisis point in September last year when US investment bank Lehman Brothers filed for bankruptcy. Many other banks in different parts of the world also collapsed while others were rescued by government bailouts.
The FSR said Reserve Bank, which is responsible for regulating and supervising banks, and the Financial Services Board, which looks after other financial institutions, are striving to "ensure a more holistic approach" in a broader regulatory framework.
Policy makers globally have agreed to extend regulation to institutions such as hedge funds and credit rating agencies as well as financial products the FRS said.
"The current financial crisis has dispelled the notion that only deposit taking institutions can cause systemic instability. Financial authorities worldwide are in agreement that plans need to be put in place to create a consolidated and more robust framework for the supervision of large and complex financial groups, such as banks, insurance and related companies."
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