What would you do if you heard your bank was going bust?
You no doubt try to be first in the queue – and get as much money as you could out of your account, as quickly as possible.
That’s what happens when there is a loss of confidence in a bank's ability to repay depositors. The moment you fear you might lose that money in the bank, you and fellow customers are bound to want to get yours before it runs out.
When a statement from VBS Mutual Bank at the weekend warned the Reserve Bank, which regulates commercial banks, was considering curatorship, it sealed its own fate. If there was the slightest hope of avoiding curatorship, it was lost.
When banks fail, it can lead to a crisis of confidence in an entire banking sector and regulators have learned to act quickly.
VBS's business model was just too risky. As a mutual bank with lower capital requirements and a less onerous regulatory regime than large commercial banks, it was forbidden to accept big deposits from municipalities due to the fact that public money could be at risk. It was then using that money to make loans, primarily in rural areas (most famously to former President Jacob Zuma to settle his R7.8 million Nkandla debt) and in general assuming a level of risk commercial banks appear unwilling to have taken.
As a bank, we understand our strategic importance in society by maintaining highest standards of governance, local empowerment and ethics.— VBS Mutual Bank (@VBSMUTUALBANKZA) December 9, 2016
The best example of what happens in a liquidity crisis came during the global financial crisis in 2008 and 2009. Banks that yesterday would happily put their capital on deposit with a rival – or even lend to that competitor – simply stopped doing so as there was a fear the money would not find its way back to its rightful owner.
When the flow of money in a financial system dries up, panic ensues, and trust evaporates.
See also: 18 months ago VBS gave Jacob Zuma a loan – and municipal deposits started pouring in. The Reserve Bank just put VBS into curatorship because it could not pay back the money.
Bank failures are nothing new, but the Reserve Bank has shown itself to be more adept at handling crises of confidence that previously might have rattled the entire financial system.
African Bank is gradually returning to a new normal after it was put into curatorship in 2014. That was the first serious banking sector hiccup since the crisis of 2002, which was sparked by a run on deposits at Saambou and then spread to BOE. Both those banks are history now. A large part of the former was absorbed into First National Bank, and the latter was bought out by Nedbank as part of state-orchestrated process to restore confidence in banks' ability to pay back deposits entrusted to them.
When a bank is unable to guarantee you your money back when you stick your card into an ATM, it’s as good as dead in the water.
A dozen banks have failed in South Africa since 1990, a further 20 voluntarily handed back banking licences during the small banks crisis seeing the consolidation into the “big four” and their virtual dominance of the industry alongside the likes of Investec and Capitec.
The reality is that running a bank is hard and cannot be left to chance. The one thing governments around the world understand is that when you are seen to mess with people's savings, you run into trouble.
Which is why the social media storm which erupted at the news of VBS going into curatorship is so dangerous: it is aimed at undermining the independence and integrity of the Reserve Bank.
Don’t for a moment fall for the nonsense of the need to nationalise the Reserve Bank. It’s a red herring. Government controls the central bank, appoints its governors and provides its mandate. Anyone who believes for a moment that they will be able to influence monetary policy or the mandate of the Reserve Bank by buying shares in it will be sorely disappointed. Beyond the annual cup of tea and other snacks provided as a perk at the annual general meeting, shareholders and the few directors they appoint have little influence beyond ensuring the governors properly manage corporate governance. All profits made by the Reserve Bank revert to the state beyond a maximum 10c a share for each of the maximum 10 0000 shares an individual is permitted to own.
If you want to save VBS Mutual Bank, a social media outcry and the vilification of the Reserve Bank is not the way to go.
Instead, go immediately to your closest branch. Open an account. Tell your human resources department to pay your salary into VBS, and transfer all your debit orders across.
Well, that’s what happens when confidence in a bank evaporates.
If you’re not prepared to step up and show your confidence, why would anyone else?
Whitfield is a multi-award winning financial journalist who witnessed the small banks crisis
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