CoDI: Robin Hood in Reverse?

Considerable negative public comment notwithstanding, the National Treasury and the South African Reserve Bank (SARB) have pressed ahead with the establishment of a new statutory body, this time a state insurer of bank deposits. DR BRIAN BENFIELD says it could be tantamount to Robin Hood in reverse – a case of robbing little guys to create jobs and perks for bigger guys.

Almost every previously established statutory insurer has traded itself into circumstances that would have had privately-owned insurers being forthwith declared insolvent (think the Road Accident Fund, Workers Compensation Fund, Compensation for Occupational Diseases in Mines Fund, Sasria, and others). They have then had to be bailed out by the fiscus using money more properly destined for care of the poor. Despite this, the Treasury and SARB drive on with this narrative.

Incorrectly described as a “subsidiary” of SARB, the Corporation for Deposit Insurance (CoDI) will nevertheless be run and managed by SARB employees. Disturbingly, CoDI will not be a registered insurer subject to the usual oversight by insurance regulators. Nonetheless, it will undertake the insurance of private citizens’ bank deposits and those of companies, up to a maximum covered amount of R100 000 (around US$5 500). This insurance will pay out if and when, on SARB’s recommendation, the Minister of Finance determines that a bank may be unable to meet its obligations. Then, to protect the bank’s small depositors, SARB will put the bank into a state of “resolution”.

CoDI required no fewer than three Acts of Parliament to bring it into being. Firstly, the Financial Sector Laws Amendment Act 23 of 2021 provided for the establishing of CoDI. Then the Financial Sector and Deposit Insurance Levies Act 11 of 2022 provides for the paying of deposit-insurance levies to fund the operations of CoDI. Finally, the Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Act 12 of 2022 provides for the charging of deposit-insurance premiums.

Compulsory deposit-insurance premiums will be collected from every bank in relation to the size of each bank’s total covered deposit amounts. Compulsory levies to fund CoDI’s operations will also be collected from every bank in relation to the size of each bank’s total covered deposits. SARB will collect all these deposit-insurance premiums and all the new levies before paying them over to CoDI. It may not be immediately apparent to depositors, but every bank’s charges to its customers will soon reflect that bank’s extra overheads for these deposit-insurance premiums and levies.

Before long CoDI will accumulate vast funds, assuming that these funds are properly accounted for and are not first drained away by discretionary expenses such as donations to ANC functions (think Sasria) and colossal executive salaries and travel perks (think FSCA).

Insurance professionals have already indicated that SARB has proposed unsound means of establishing one-size-fits-all premium rates. Moreover, the SARB suggestion that this is part of the so-called “twin peaks” programme is palpable eyewash. This is akin to SARB’s opportunistic and cynical reference to the recent Silicon Valley Bank insolvencies, ironically brought about by the very conduct of the US Federal Reserve itself. A senior US treasury official has, in any event, been put in a position where he has had to authorise the bailout of depositors with amounts far in excess of the $250 000 insured under their FDIC scheme. As an aside, compare the US’s $250 000 protection per depositor with South Africa’s derisory $5 500. How is this supposed to counter systemic risk in the SA financial system, one wonders?

It is also nonsense to simultaneously imply – as the SARB, Treasury, and FSCA have often done – that “twin peaks” was introduced to prevent a recurrence of the 2008 “global financial crisis”. There is nothing in the inscrutable twin peaks legislation that could realistically contribute to such an objective.

By SARB’s own admission, nearly 80% of the overall value of all bank deposits will not be covered by its CoDI scheme. The likelihood of pressure on the fiscus to bail out depositors for this uncovered excess will therefore immediately be brought to bear when SARB employees fail to successfully “resolve” a bank’s difficulties. The systemic losses might otherwise be far too great and, inevitably, have a seriously detrimental effect on the economy. This will mean the all-but-complete defeat of the stated purpose of the three newly promulgated CoDI statutes of 2021 and 2022.

What has not been explained is why, in more than two centuries of private banking in South Africa, no private deposit-insurance scheme to cover deposits across the entire banking system has ever been deemed necessary by the market. If indeed such a deposit-insurer is now deemed necessary, it may be questioned why private insurers have not been asked to provide this type of indemnification. Why is it suddenly necessary to put bank depositors (and potentially the general taxpayer) at even greater risk with another statutory enterprise of indeterminate pedigree and benefit? 

The new statutes require that CoDI must, after the end of each financial year, submit to the Minister and to SARB a report on its operations and those of its Deposit Insurance Fund, as well as audited financial statements. The Minister must table a copy of the report and the financial statements in parliament. Among many other things, observers will be interested to note how often these accounts are presented on time, how often extensions of time will be requested and why, how solvent the fund will prove to be (especially after each institutional “resolution”), the composition of the organisation’s overheads, and the amounts being paid to CoDI executives in salaries and perks.

Regrettably, it is difficult not to gain the impression that this new statutory insurance contrivance is being introduced for reasons that include objectives other than those proffered by Treasury and SARB.

Let us take steps now to avoid CoDI becoming just another governmental insurance financial calamity with, God forbid, the accompanying patronage, corporate capture, and corruption which CoDI’s operations might so easily entail.

South Africa has been warned.