11 August 2014

South Africa: Nene and Marcus Must Brief Parliament On African Bank Intervention

press release

I will today write to the Chairperson of the Portfolio Committee on Finance, Yunus Carrim, to request that the Minister of Finance, Nhlanhla Nene, and the Governor of the Reserve Bank, Gill Marcus, appear before the Parliamentary Portfolio Committee on Finance to report on plans to intervene in African Bank. In addition, I will again submit questions to the Minister of Finance on the current status of the implementation of the "Twin Peaks" financial regulatory framework.

Last night, Reserve Bank Governor announced that African Bank has been placed under curatorship.

African Bank is well-known for its huge appetite for offering unsecured loans. The Reserve Bank intervention is welcomed, as it will stabilise the situation.

The Governor also needs to explain to Parliament events leading up to the bail out the African Bank.

While the Governor stated that "collections against the bad book will be continued, and indeed strengthened," it is likely that a substantial portion will never be collected. This is often the outcome of extending unsecured loans to already heavily indebted borrowers.

These events strongly resemble those that sparked the Global Financial Crisis of 2008, which led to a Global Recession. The root cause of the near collapse of the financial system was the extension of loans that were never going to be repaid.

We must ask why the crisis at African Bank arose in the first place. Following from lessons learnt during the Global Financial Crisis, the so-called "Twin Peaks" model for regulating South Africa's financial sector was adopted for implementation, precisely to prevent what we are seeing now.

While the Financial Sector Regulation Bill remains in progress, the Governor stated in June that the Reserve Bank had not neglected its financial stability responsibilities and that our banks had been stable over the past year. It is worrying that this announcement was made as late as June.

The Reserve Bank, as banking supervisor, and as envisaged by "Twin Peaks", would have been alert to whether African Bank had adequate capital, liquidity, leverage ratios and sound governance with appropriate policies, yet it does not appear to have recognised the looming crisis. This has implications for the implementation of "Twin Peaks", and requires further deliberation in Parliament.

This event must be a lesson for government in curbing its ambitions for an expanded Post Bank. As well as for providing additional callable capital, underwritten by South African taxpayers, as recently requested by the Development Bank.

Unsecured lending is risky and needs prudent management and regulation.

To grow our economy and create jobs, it is crucial that clear attention be paid to coherent policy implementation. We must ensure that our financial institutions and system in general remains strong.

The DA will continue to optimise parliamentary oversight to make sure that this happens, to protect the financial well-being of all South Africans.

Dion George, Shadow Minister of Finance

South Africa

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