By dr. Sandra Adendorff
The collapse of a number of banks in America and Europe earlier this year resulted in more than just the biggest banking crisis since 2008. This collapse, which was largely initiated by the failure of the Silicon Valley Bank (SVB), further exposed the vulnerability of financial institutions, especially in an environment of rising interest rates, brought to light.
However, this raises the question: How safe is South African citizens’ money in the bank? Why do such crises occur and what can be done to stop them?
South Africa has a sophisticated financial system – in fact, one of the best in the world. The Reserve Bank places financial institutions under strict supervision, and there are a multitude of regulations that banks must comply with. The Financial Sector Regulation Act (FSR) was signed on 21 August 2017, and is considered an important milestone on the journey towards a safer and fairer financial system for the service of all citizens.
What causes a banking crisis?
Bank failures can be attributed to various causes. In short, this means that the risk has not been foreseen correctly, and the bank does not have sufficient capital to be able to hedge the outflow of deposits and investments. Inefficient management sometimes also plays a role, as well as a number of external factors.
South African banks withstood the previous banking crisis of 2007 very well due to the fact that our banks were better regulated than their American counterparts, which did not apply all the international regulation (as prescribed by the Bank for International Settlements (BIS) Basel III) not.
Locally, relevant regulation includes the establishment of the South African deposit insurance scheme (Corporation for Deposit Insurance (CoDI)) on 28 January 2022. The role of the deposit insurance scheme (DIS) is to ensure that a bank failure does not affect the most vulnerable customers. Personal deposits of up to R100 000 are therefore protected by this entity. However, it is important to remember the golden rule of not putting all your eggs in one basket.
Local banks are under pressure
If we follow the financial media, however, we get worried. Circumstances are very tight, which means that banks are under tremendous pressure. Problems that give rise to this pressure include:
- Fluctuating power supply that reduces economic growth by up to two percentage points.
- Weakened logistics in the road and rail transport networks that are not effectively addressed.
- Low economic growth and high levels of unemployment increasing the possibility of social unrest.
- International diplomatic tensions.
- Weakened diplomatic relations, including the possibility of secondary sanctions which will cost South Africa dearly, especially if we are cut off from the international payment system SWIFT. The largest multilateral trade agreement between South Africa and the USA, namely AGOA, is also under threat, which could cripple the country economically.
- South Africa’s involvement in money laundering, which resulted in the International Financial Action Task Force (FATF), which oversees money laundering and terrorist financing, placing South Africa on the international Gray List in February 2023.
- The increasing government debt which remains a source of concern and its financing which is very problematic, as foreigners are no longer interested in buying our government bonds. Local investors are also not very keen on the more expensive government bonds. The Reserve Bank and other financial institutions are restricted by legislation not to take on too much government debt, which can become a significant problem. The capital outflow and reduced depth in financial markets and liquidity are worrying.
- High levels of interest rates that are necessitated by increased inflationary pressure and make the debt payments of households problematic. Loan defaults in the banking sector also represent a real risk.
The problem with South African banks is therefore predominantly local, with circumstances that put increasing pressure on the economy and therefore also on our banking institutions. Banks’ customers are struggling to stay afloat and debt levels have increased astronomically. Customers are consequently increasingly turning to credit in order to survive in the environment of higher living costs.
South African citizens’ total loan balances amount to a staggering R2.3 trillion according to the research results of Debt Rescue. There is also increasing pressure on the banking system due to customers struggling to repay loans with increasing interest costs. Banks provide for bad debt, but this environment is now characterized by ongoing challenges that make it problematic especially for banks that largely grant consumer credit without any collateral.
What can we do?
It remains everyone’s own responsibility to manage his/her finances effectively and responsibly. Monitor your investments yourself and don’t rely too much on others. Also, be wary of schemes that promise amazing returns, because unfortunately pyramid schemes and fraud are the order of the day. The Reserve Bank monitors the financial stability of financial institutions and regularly conducts stress testing which helps them proactively address problems.
Finally, we hope and pray that the negative geopolitical problems will soon come to an end and that the entry of the private sector will enable us to build the South African economy for the future generation. While we mourn the deteriorating conditions, we must still try to remain positive about the future.
- Sandra Adendorff is a lecturer in economics at Akademia.