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A Critical Analysis of Bank Failures in South Africa

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A Critical Analysis of Bank Failures in South Africa A Critical Analysis of Bank Failures in South Africa by Tshepo Thulare (11191423) Submitted in partial fulfilment of the requirements for the degree Master of Laws (Mercantile Law) In the Faculty of Law, University of Pretoria October 2019 Supervisor: Prof R Brits Declaration 1. I understand what plagiarism is and am aware of the University’s policy in this regard. 2. I declare that this thesis is my own original work. Where other people’s work has been used (either from a printed source, Internet or any other source), this has been properly acknowledged and referenced in accordance with departmental requirements. 3. I have not used work previously produced by another student or any other person to hand in as my own. 4. I have not allowed, and will not allow, anyone to copy my work with the intention of passing it off as his or her own work. Tshepo Thulare October 2019 i Summary There are certain financial institutions that are considered to be systemically important financial institutions – which means that these institutions are of such a large scale that should they fail, it would disrupt the financial sector due to their complex nature and interconnectedness amongst other sectors of the economy and this could lead to bank runs and ultimately financial instability. As a result thereof, government authorities would need to step in and provide financial support to prevent the imminent threat associated with the possibility of bank failure. Thus, this dissertation aims to investigate and explore the common reasons and factors that contribute to banking institutions; inability to achieve or maintain financial stability in South Africa, subsequent to our democracy in 1994. The dissertation will further explore the regulatory policy frameworks and the measures put in place to rescue banking institutions. The focus will be on the Banks Act. 94 of 1990, particularly section 68, which facilitates the procedure for winding up of a bank, and sections 69 and 69A, which facilitate the procedure for placing a bank under curatorship. This dissertation will also analyse the cases of African Bank and VBS Mutual Bank which recently fell into hardships, as well as the amendments implemented in terms of the Banks Amendment Act 3 of 2015. Furthermore, the dissertation will highlight the importance of the South African Reserve Bank (SARB) and its evolution as a central bank. The changing roles of the SARB and the powers and responsibilities vested in it in terms of the South African Reserve Bank Act 90 of 1989, the Banks Act 94 of 1990, the Constitution of South Africa Act, 1996 and the Financial Sector Regulation Act 9 of 2017 will be explored in so far as the financial stability mandate is concerned. And finally, the new developments in the South African financial sector will be discussed: the shift to a Twin Peaks model, the Financial Sector Regulation Act and the powers of the Resolution Authorities. ii Acknowledgements I would like to appreciate my supervisor, Professor Reghard Brits for his guidance and assistance towards the successful completion of this dissertation. iii Abbreviations ABIL African Bank Investment Limited BSD Bank Supervision Department CDO Collateralized Debt Obligations FSB Financial Stability Board FSCA Financial Sector Conduct Authority FSR Act Financial Sector Regulation Act 9 of 2017 GFC Global Financial Crisis that occurred between the periods 2007 - 2008. NCA National Credit Act 34 of 2005 PA Prudential Authority SARB South African Reserve Bank SIFIs Systemically Important Financial Institutions USA United States of America VBS Venda Burial Society Mutual Bank iv Table of contents Declaration.................... ............................................................................................ i Summary................... ............................................................................................... ii Acknowledgements ................................................................................................ iii Abbreviations ......................................................................................................... iv Table of contents..................................................................................................... v Chapter 1: General introduction ........................................................................ 1 1.1 Introduction ................................................................................................. 1 1.2 The 2007 to 2008 Global Financial Crisis ................................................... 2 1.3 Bank failures in South Africa post 1994 ...................................................... 6 1.4 The purpose of this dissertation .................................................................. 9 Chapter 2: The South African financial legal framework – mechanisms available to financially distressed banking institutions ............. 10 2.1 Introduction ............................................................................................... 10 2.2 The operation of the Twin Peaks model in South Africa ........................... 11 2.3 The roles of the SARB as a central bank .................................................. 13 2.3.1 The financial stability mandate ......................................................... 14 2.3.2 The overseer and supervisor of financial services and institutions .. 15 2.3.3 Lender of last resort ......................................................................... 15 2.4 The Banks Act 94 of 1990 ......................................................................... 17 2.4.1 Winding-up of a banking institution .................................................. 17 2.4.2 Placing a banking institution under curatorship ................................ 18 2.4.3 Section 69A: Investigation of affairs of a bank under curatorship .... 23 2.5 Case analyses of bank curatorship ........................................................... 25 2.5.1 African Bank case ............................................................................ 25 2.5.2 The VBS Mutual Bank case ............................................................. 29 v Chapter 3: Bank resolution: a new way of dealing with failed banking institutions ............................................................. 34 3.1 Introduction ............................................................................................... 34 3.2 The imperative features of an effective resolution regime for banking institutions ................................................................................................ 35 3.2.1 Bail-in ............................................................................................... 35 3.2.2 Stabilisation powers ......................................................................... 37 3.2.3 Deposit Insurance Scheme .............................................................. 37 3.2.3.1 Implicit deposit insurance ............................................................... 38 3.2.3.2 Explicit deposit insurance ............................................................... 38 3.2.4 Loss absorbing capacity ................................................................... 40 3.2.5 The importance of the creditor hierarchy.......................................... 41 Chapter 4: Conclusion ..................................................................................... 43 Bibliography 47 Books…….. .......................................................................................................... 47 Journal articles ..................................................................................................... 47 Case law .............................................................................................................. 48 Legislation ............................................................................................................ 48 Internet sources ................................................................................................... 49 Policy documents, reports and working papers .................................................... 51 Dissertations and theses ...................................................................................... 52 Other………… ...................................................................................................... 52 vi Chapter 1: General introduction 1.1 Introduction The financial industry, in particular the banking sector, plays a significant role in developing the economy of South Africa. Banking institutions are at the centre of the financial realm: firstly, they operate as depositories for people and institutions that desire to save their funds and receive accrued interest on such deposits and secondly, they operate as a bridge between those with funds to invest and those who are in need of funds, as such deposits become available for purposes of lending and giving advancements, which plays a critical role in growing a financially sound economy, especially within a developing country.1 In essence, the core business of a bank involves performing a variety of roles such as providing payment facilities, taking deposits and serving as a lending intermediary.2 Although the day-to-day functions of a bank may seem simplistic, the risks that come with running this type of business makes it rather complicated. The South African banking industry has various participants who are role players that contribute towards a sound financial system holistically; however,
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