Recent bank failures in the United States have given rise to concerns about the safety of South African banks. Can depositors rely on banks to protect their funds? We investigate.
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How safe are South African banks?
South Africa has a robust banking system that has withstood such catastrophic events as the 2008 global financial crisis and the Covid-19 pandemic.
“Our banking regulations have been refined in the face of financial instability, and are among the best in the world,” notes quantitative analyst Jacques Bagraim.
What makes SA banks safe for customers?
Not just any financial institution can take deposits in South Africa - and obtaining a banking licence isn’t easy, says Bagraim.
“The South African Banks Act clearly defines the business of a bank, and puts overarching regulations in place relating to the types of institutions that can perform banking business,” he notes.
All licensed banks report to the Prudential Authority (PA) and must ensure that minimum regulatory requirements are met, says Cheslyn Jacobs, chief commercial officer at TymeBank.
“These cover a broad spectrum of ratios a bank needs to manage very carefully,” Jacobs says.
The role of the South African Reserve Bank
The PA, which forms part of the South African Reserve Bank (SARB), is responsible for licensing banks and ensuring they meet or exceed regulatory standards, which helps them to maintain financial stability.
Regulatory framework and governance
South African banks must adhere to a set of prudential regulations called Basel III. Prudential regulation means banks must be able to control their risks, hold enough capital to maintain bank stability, and manage financial activities as soundly as possible.
The Financial Sector Regulation Act 9 of 2017 and the Financial Markets Act 19 of 12 create stable conditions for financial markets, and banks must adhere to international standards such as the International Financial Reporting Standard (IFRS9), which helps to measure the risk of financial instruments.
Liquidity risk management in South African banks
Liquidity risk management ensures there is enough money in a bank to meet the demands of depositors and borrowers. The bank aims to honour these obligations without suffering loss itself.
“Having adequate capital allows banks to continue operating when the economy or the markets go through a downturn,” notes an Absa Bank spokesperson.
“The Liquidity Coverage Ratio and the Net Stable Funding Ratio are two requirements under Basel III, ensuring banks maintain sufficient cash or assets that can quickly be converted into cash, as well as stable sources of funding,” the spokesperson says.
What is deposit insurance?
SARB set up the Corporate for Deposit Insurance (CODI) scheme in March 2023 to protect South African depositors. It will come into effect from 1 April 2024 and will be managed independently.
This insurance protects you if you’ve deposited money in the bank and the bank collapses.
Does your bank have a deposit insurance scheme?
It will be compulsory for all banks to become members of CODI once it has been established.
If a bank fails, CODI covers up to R100,000 of a qualifying depositor’s funds, which would cover the losses of most bank customers, since banks do not take out deposit insurance.
The impact of economic and political issues on banking safety
Political instability or conflict can threaten the stability of banks. In Sudan, for example, which is experiencing a civil war, online banking services have collapsed.
Economic factors can also affect banks. For example, banks have had to contend with low growth and the fact that some customers are currently defaulting on their debt. Banks are lending faster than the economy is growing, which means the bank ratio for unsecured credit will be strained.
On the plus side, banks have learnt to manage interest-rate risk efficiently over the years.
What are South Africa’s future challenges and emerging risks?
In its 2023 Financial Stability Review, SARB notes that load shedding is a significant risk that may threaten the functioning of ATMs and cellular networks.
SARB has also noted the threat of secondary sanctions being imposed on South Africa because of its close relationship with Russia, which is currently under sanction for its war on Ukraine.
Sanctions could potentially trigger a financial crisis. More than 90% of South Africa’s international payments are made by SWIFT, and this would be disallowed, were sanctions to take place.
The rise of digital banking – are online banks safe?
Fully digital banks are no different from brick–and–mortar banks, and the lines between them are becoming increasingly blurred. One of their key common features is the need to protect customers from online security breaches.
“We only take well-considered, calculated risks, to ensure stability,” says Jacobs.
“TymeBank’s capital adequacy ratio and loan-to-credit ratio are significantly above regulatory minimums, and we have effective governance structures in place, including a formally constituted board, to provide the necessary oversight.”
Which banks are the safest in South Africa right now?
All banks that manage their concentration risk - meaning, the risk attached to concentrating investments in a single area or sector - are safe, says Jacobs. “It depends on how aggressively banks lend, but they are generally well-capitalised and have extensive, varied financial portfolios with a diverse customer base.”
Bagraim notes that assets are rarely concentrated in any one bank, and this reduces their exposure risk.
African Bank was placed under curatorship in 2014 due to a spike in bad debts, but it has since moved away from being an unsecured lender. Its balance sheet and cash reserves have improved, allowing it to weather some of its losses as its customers struggle with debt, due to inflation and load shedding.
Of the VBS Mutual Bank insolvency, declared in 2018, Jacobs says, "This small, niche bank failed solely as a result of corruption at all levels. Regulators were unaware that the bank had difficulties, as financial reports and regulatory returns were manipulated. This, however, is extremely rare.”
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