Hilary Joffe
8 October 2008
opinion
Johannesburg — IN 2002, SA lost 22 banks. Some went under, others were bought out. Many chose to relinquish their licences because the market had lost confidence in smaller banks and it simply wasn't worth having a licence any more.
But they weren't all small: the banks that went down included the seventh-largest , Saambou, and the contagion caused the demise of the sixth-largest, BOE, which was bailed out by the government and then bought by Nedbank.
The crisis was probably worse than it looked at the time, with even larger banks taking some strain as clients pulled deposits and liquidity dried up. Fortunately, perhaps, we may never know how close SA came to a major banking crisis. It was all handled behind the scenes. Not only did the banking system survive, but the crisis is one of the reasons SA's financial system remains in good shape now, as others melt down.
That is ironic in at least two senses. First, one might have expected that SA, of all places, would have had a subprime crisis, given the political pressure for banks to lend more to low-income earners. But SA has prided itself on having a world-class banking system. And that's the other irony -- our banking system wasn't nearly first world enough to allow for the more exotic and excessive derivatives trade that ended up destabilising the global financial system.
That SA's banking system is, so far, immune from any of the direct effects of the global credit crunch is thanks to regulation in the broad sense -- banking regulation, but also credit regulation and foreign exchange controls. Regulators (and policy makers) deserve some credit, but it's not necessarily that they were geniuses -- more that they were a product of SA's often quirky history, which bred an almost obsessive caution about the financial sector.
The history in SA of home loans for low-income earners goes back to the 1980s, when The Perm building society took the progressive step of pioneering home loans to black people -- and lost so much money it had to be rescued (by Nedbank). The result was that South African banks were wary of lending to people who couldn't afford it from early on.
The banking crisis early in the new millennium highlighted the dangers of pushing debt on to households that were already over-indebted, because the disastrous losses incurred by a couple of reckless microlenders -- Absa subsidiary Unifer and Saambou -- were the spark that precipitated the crisis.
But the crisis was also about failures of governance and of risk management, not to mention fraud, at failed banks such as Saambou . The post-apartheid government had always been keen to preserve the sophisticated financial system that was seen as one of SA's great assets but, in the wake of the crisis, banking regulators became ultra-cautious and even more determined to be more first world than the first world.
That approach had costs -- a banking system that was all but closed to new entrants, because the bar for new licences was set so high, and some stifling of innovation. But if there were critics then, there won't be now, for the result was that SA implemented years ago some of the measures that are being looked at in more advanced markets only now. The new capital accord, Basel Two, is one example: the US still hasn't implemented the accord, which sets out how banks must assess and provide capital against the risks they face.
Bankers now wonder whether the US shied away from implementing the accord because it knew banks would have required huge capital infusions to comply. But SA dutifully complied with Basel, and the costly, seven-year process of implementing it ensured SA's bankers were highly attuned to monitoring and managing risk.
But rules don't work on their own: the people in charge have to know what they're doing and they have to ask the right questions. The UK's banking regulator is only now looking at vetting bank directors to ensure they are competent to do their jobs. SA's Office of Banks put rules in place four years ago requiring it to approve the appointment of all bank directors, and the regulator keeps a close eye on banks' boards.
What has also worked well for SA is that, unlike in the UK or US, where the bank supervisor is separate from the central bank and fragmented regulation has worked against spotting problems early, bank supervision in SA has stayed in the Reserve Bank.
An assertively independent central bank hasn't harmed either. In the US, political pressure to expand home loans to as many as possible, and interest rates that were arguably too low for too long, helped to drive the subprime market and the explosion of exotic credit instruments that went with it, as lenders sliced and diced their risk and parcelled it out to investors in search of high yields.
SA did have explosive growth in consumer credit, particularly in the mortgage market. But even if bankers had been tempted to take ever more risk, the interest rate hikes that began in mid-2006 might have alerted them to the prospect of bad debts to come.
Although bad debts have gone up in the past year or so, they are still within manageable limits and banks continue, for now, to make good profits.
What came along too was the National Credit Act (also in its way an outcome of the 2002 microlending disaster) which intervened to stop any more high-risk lending that banks might have done. Many of the US's subprime loans were at "teaser" interest rates (low at the start, sharply higher later); were sold by brokers, who took no risk, rather than banks themselves; and were made without proper proof of income. All those practices are illegal under the act.
The fact that SA's institutional fund managers often have mandates that prevent them buying speculative grade, high-risk assets also helped to curb the development of the more exotic debt instruments that allowed subprime lenders, and other lenders, to get the risk off their own balance sheets and parcel it out to investors all over the world.
But SA's exchange controls, which have been liberalised over the years but never shed, did even more to prevent excesses. Not only did they prevent financial institutions in SA from investing directly in subprime paper and other toxic assets, they also limited the development of markets in credit derivatives, for example, because regulators wouldn't allow exposures that might mean money would have to flow out of SA.
The strictures were a source of much frustration to financiers wanting to innovate and trade internationally and, as one investment banker puts it, "our foreign counterparts used to say we were just a banana republic. Now we say, thank goodness for bananas."
Though SA's banking sector has been insulated from the direct effects of the global crisis so far, the fear is that as the world's banking system melts down, so will ours.
It is hard to see how. Only 3% of the funding of SA's banks is foreign. Even if Europe's banks, for example, ceased all loans to SA's banks, the effect would be tiny.
And while research by Merrill Lynch shows that the "leverage" (loans to deposits ratio) of SA's banking system is relatively high, reflecting a well-developed system, it is still well below the US or Germany and puts SA in a low-risk category as far as vulnerability to a credit squeeze is concerned.
But SA is part of the global financial system and its banks do plenty of trading with foreign counterparties. We simply don't know what the consequences might be when the world's banks gum up and confidence in the system is lost: there are no precedents for a crisis this extensive.
What is clear is that the macroeconomic effects for SA will be significant. And while the banks are unlikely to be hit directly, their earnings surely will be hit indirectly as leading economies head into recession, commodity prices fall, local economic growth slows and the global flight from risk drives up the cost of capital and keeps markets volatile for months, if not years, to come.
Joffe is senior associate editor.
Be the first to Write a Comment!
Copyright © 2008 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
