Treasury mulls pushing banks to pay for deposit insurance

Bankers raise concern about costs and encouraging risky behaviour.

JOHANNESBURG – National Treasury is looking at putting out a proposal on a deposit insurance scheme that could make banks explicitly pay to insure clients deposits, but some senior bank executives have cautioned that this could push the cost of banking higher and somehow encourage risky lending.

Currently in South Africa National Treasury, or the taxpayer if you like, bears the risk of deposit insurance should a bank collapse. Close to a decade ago when Saambou Bank was put under curatorship Treasury had to protect depositors money in the then ailing bank.

Fast forward to 2011, post-financial crisis, it now looks like Treasury will push hard to spread the responsibility - the discussion of a deposit insurance came up at the second annual banking summit hosted by the Banking Association of South Africa (BASA) and attended by banking executives.

“With any country there’ already a deposit insurance because when a bank fails governments tend to intervene. The issue is how do we make it explicit...It’s one of the areas that we are looking at ... It’s a proposal that we will be putting forward over the next two years,” Treasury deputy director general Ismail Momoniat told Moneyweb.

During engagement some banking executives raised concern about this initiative and the consequences it would have for the sector.

 “It does protect a layer of deposits. But it comes at a cost. It will have to be paid for if you are going to have it. The banks are going to have to recover it at the pricing level. But again competition determines how the pricing will be,” Investec (JSE:INL) CEO and BASA Chairman Stephen Koseff said.

Standard Bank (JSE:SBK) Group deputy Chief Executive Sim Tshabalala said there was a risk of a moral hazard whereby some banks would engage in risky lending based on the fact that there was insurance to cover clients deposits.

“What we have said to National Treasury on that is the problem with deposit insurance is it creates a moral hazard ...We would not want to support anything that adds to moral hazard  ... but if that is avoided then we will. But there are very few deposit insurances that cover all these things,” Tshabalala said.

First National Bank CEO Michael Jordaan said he understood the principle of a deposit insurance but also raised concern that some banks would have to pay for the risky behaviour of others.  

“We should not be forced to pay for other people’s risky behaviour ... The insurance must be related to the risk of the banks,” Jordaan said.

Momoniat said before Treasury acted it would come up with a discussion paper to allow for proper engagement on this matter.