SA: Bottom Line is Banks Take Risks

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Story Filed: Thursday, June 28, 2001 4:21 PM EST

Johannesburg, Jun 28, 2001 (Business Day/All Africa Global Media via COMTEX)-- The banking authorities' decision yesterday to put Regal Treasury Private Bank into curatorship comes after a history of mishaps, rescues and near mishaps in SA's small banking sector.

Regal brings to three the number of banks put into curatorship in the past 30 months, following curatorships at New Republic Bank in early 1999 and at FBC Fidelity in October of that year.

Business Bank and Real Africa Durolink have been baled out by PSG Investment Bank in high-profile deals over the past year, while Ons Eerste Volksbank was quietly bought by Bidvest.

The number of small banks is also dwindling as banks deregister Southern Bank's licence was withdrawn by the registrar of banks, and its assets were sold earlier this year. Recently Cadiz said it no longer needed its banking licence and would apply to have it cancelled.

Several smaller banks have also been absorbed into larger groups. The larger banks have the ability to provide small banks with the reliable funding that they have been so short of since the liquidity crisis ahead of Y2K in late 1999, and amid large liquidations, particularly Macmed.

Nedcor last year bought 51% of Imperial Bank and McCarthy Bank was sold to Investec, which also bought part of Mercantile's loan book. Gensec was absorbed into parent Sanlam and delisted.

The failure of some small banks and trouble at others have led some in the market to ask whether banking regulators were not a little generous with bank licences, particularly in 1997/98, when the financial services sector was flying high on the stock market.

In an interview earlier this year, however registrar of banks Christo Wiese strongly defended his approach, saying he wanted competition in the sector and as long as banks met the Reserve Bank's criteria they could gain licences.

The successful bank bale-outs of the past couple of years indicated a strong system, not a weak one, he said.

"The banking system is not healthy if there are no bank failures. It is healthy if bank failures are not systemic," he said.

Banks were in the business of taking risk and in any system some banks would fail, Wiese said. The challenge for banking regulators was to ensure this could happen without undermining public confidence in the banking system as a whole. In the US, one of the world's strongest financial systems, some 3000 smaller banks failed in recent years.

Wiese said there were no applications for new banking licences at present, but the philosophy remained that if banks met the established criteria, they could be registered.

Wiese wants to see a diversified, properly functioning banking market where no single player can dominate. The system must offer alternatives.

"It is not for us to dictate who will be successful and who will not," Wiese said. "As long as a bank has a viable business plan, we will license it and it is then up to management to make it work and up to the market to judge it." Regulators raised the barriers to entry last year and moved to ensure that only viable players could apply, by lifting the minimum capital required for a banking licence from R50m to R250m.

New regulations also require banks to report more comprehensively to the Office of Banks, enabling the regulator to keep a more careful eye on them.

In his annual report for 2000, released earlier this year, Wiese spoke of continued funding difficulty at some small banks, and said his office would continue to monitor the liquidity profiles of small banks closely and engage them in regular discussions.

Bankers say Wiese and his team do a great deal of work behind the scenes, interacting with banks, putting pressure on them to clean up any problem areas and assisting where necessary.

A priority for the banking regulators is to protect the interests of depositors. Curatorship, with deposits frozen, is the last thing they want.

But the experience of the past couple of years is that each case is different. FBC Fidelity ran into liquidity troubles ahead of Y2K, and amid negative publicity, but was kept afloat for a while with the help of R600m in deposits from its largest shareholder, Fedsure.

It was its exposure to the Macmed liquidation that finally sank FBC. Many other small banks which have failed have also done so because of "credit risk" essentially, the quality of their loan books has been a problem.

But Real Africa Durolink was different because its problem was market risk it ran up trading losses of more than R200m on equity derivatives positions.

The previous time this happened was in 1994, when Sechold went under because of about R200m of trading losses, and was bought by Investec.

Regal is different again, because it applied for curatorship in the face of concerns about a run on the bank sparked by news of some dicey transactions. These had little to do with its core business of taking deposits from, and lending to, high-net-worth individuals. The transactions involved the bank lending to vehicles which among other things were buying and propping up the shares of its holding company.

But the failure of most small banks has largely been a case of management inability to assess correctly their varied risks. Although there are no reports of depositors withdrawing from other small banks, the Regal debacle is sure to set the small bank sector back yet again.

Northern Light

-- Anonymous, July 06, 2001


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