The South African Reserve Bank (SARB) is hoping that the country’s new deposit insurance scheme will result in the banks paying interest rates on deposits that are closer to the repo rate.
The central bank on Thursday officially launched the Corporation for Deposit Insurance (CODI), which offers protection of up to R100 000 per qualifying depositor in the event of a bank collapse.
All registered banks – including commercial, co-operative, and mutual banks, as well as local branches of foreign banks – are automatically members of CODI. They are required to pay an annual levy to CODI and monthly premiums to the Deposit Insurance Fund (DIF).
Read: Breaking the CODI – peace of mind comes at a price
CODI, a SARB subsidiary, became operational on 1 April. It maintains and administers the DIF.
According to the SARB, the R100 000 threshold will fully cover 90% of qualifying depositors in South Africa. The cover is automatic, and depositors do not have to register for CODI’s protection.
CODI protects deposits held by retail and private non-financial corporate depositors in qualifying products. They typically include individual depositors and non-financial businesses, charitable or non-profit organisations, religious entities, trade unions, consumer associations, and stokvels.
CODI protects banking products where both the deposit and the accrued interest are guaranteed. Qualifying products typically include savings accounts, current accounts, transactional accounts, term and notice accounts, tax-free savings accounts, and Islamic Wadi’ah, Qard, and Murabaha products.
Boosting competition
In a speech at the launch in Sandton, SARB Governor Lesetja Kganyago said CODI might result in more competition among the banks for deposits.
He said benchmark interest rates are close to the SARB-determined repo (policy) rate of 8.25%. For example, the ZARONIA (South African Rand Overnight Index Average) is currently at 8.12%. The rate is a measure of the interest rate at which rand-denominated overnight wholesale funds are obtained by the banks in South Africa.
According to data compiled by the SARB, transaction accounts are paying an average rate of 4.64%, a gap of 3.61 percentage points compared to the repo rate, “which is a big deal”, Kganyago said, while acknowledging that these accounts are usually bundled with services such as overdraft facilities and payment cards.
“But still, there is a comfortable spread between what banks pay on deposits and what they can earn, even just from leaving the cash at the SARB overnight. The relevance of this for deposit insurance is that if someone is eyeing a better rate at another bank, but they aren’t switching because they are worried about the safety of that bank, they no longer need to worry.
“Yes, a small new bank is probably not quite as safe as a big established bank. But with CODI, your R100 000 deposit is equally safe in any member bank. It would be good for South Africans if this caused a bit more competition for deposits, and we would be happy to see deposit rates move a bit closer to the policy rate,” Kganyago said.
Yatin Narsai, the chief executive of Bank Zero, expressed similar thoughts about CODI’s potential to level the playing field between the “big five” – Absa, Capitec, First National Bank, Nedbank, and Standard Bank – and the smaller, digital-only banks.
In an environment without deposit protection, the big banks enjoyed a “trust advantage” among depositors, who could feel relatively confident that, in the event of a liquidity problem, the government would intervene because these institutions were considered too big to fail, Narsai said in a statement last week.
“Pre-CODI, many depositors decided to put up with the high bank fees and poor service of the big banks to have peace of mind. Thanks to CODI, they can now switch to the more customer-focused, innovative, and cost-effective banks like Bank Zero.”
Deposit insurance makes sense
With CODI, South Africa is joining a common global practice of governments protecting depositors, Kganyago said.
Usually, investors must accept the risks of making investments, but deposits are “special”, he said.
One reason deposits are special is that few depositors think of themselves as investors in banks. They naïvely assume their money is kept in a vault until they want it back.
“But this is not how banking works. And this is one of those rare cases where a naïve view is so widely held that policymakers have ended up shaping the world so that the naïve view is effectively true, and depositors are protected as if their money really were locked up in vaults.”
Another reason is that deposits usually have zero maturity – they can be called at any time – and they always retain their face value. If you put in R1 000, you expect to get R1 000 out. This is different to investment products such as bonds or equities, which have longer maturities and prices that can rise or fall.
Kganyago said deposit insurance makes sense to central banks because it removes the incentive for investors to withdraw their money at once if they fear their deposits are at risk.
A run on a bank – “one of the great nightmares of the central banker” – creates “a dual equilibrium problem”. If a run starts, it becomes rational for all investors to try to get their cash out, and the affected bank will fail. Runs can also spread to other banks, severely disrupting the stability of the entire financial system.
But there is credible deposit guarantee, depositors do not have to worry about getting their money, and so the incentive to run is removed. Such guarantees can therefore create an alternative equilibrium, which is much more benign, where bank runs don’t even get started, Kganyago said.
Formal promise of insurance
Before CODI’s introduction, South Africa did not have an explicit deposit insurance scheme, compelling the government to use taxpayers’ money to compensate affected depositors on a case-by-case basis.
Kganyago said depositors in South Africa have been “well protected” despite the absence of deposit insurance. For example, when VBS went into curatorship, its regular depositors were provided with accounts at Nedbank, which carried over their cash balances, for amounts up to R100 000.
“What we are really gaining with a formal deposit insurance scheme is a more explicit and consistent set of arrangements. As with any insurance, insuring deposits entails costs. By building a scheme in advance of any particular crisis, we formalise how the costs will be apportioned.
“We also develop a clearer set of rules for how depositors will be treated. In a hypothetical future bank failure, I therefore see CODI as a tying up loose ends, where we take a promise of insurance that was previously implicit, and formalise it, so you get the same benefits of protecting depositors which you always had, but you take away the impromptu element, and the inefficiencies it entails.”
Certainty for depositors
CODI chief executive Sabihah Mohamed said at the launch that, in the event of a bank failure, qualifying depositors will know how much they can expect to be paid, and when and how they can access their covered deposits.
Initially, CODI will ensure that depositors receive access to their money within 20 days. However, CODI aims to reduce this response rate in line with international best practice.
Bank failures are rare in South Africa because of “robust prudential regulation”. But the bank failures that have occurred have affected smaller banks, causing devastation for the most vulnerable members of society, Mohamed said.
“You may recall the snaking queues of mostly elderly people, braving the cold and sleeping outside the branches of VBS Mutual Bank when it collapsed in 2018. Forensic investigator Advocate Terry Motau described it as ‘the Great Bank Heist’ in his report into the looting at VBS. His report details the involvement of 53 people and companies that, over a period of three years, received R1.9 billion. The report carefully lists the gratuitous payments and provides details of collusion involving the executive, external auditors, and board of the institution.
“Others may still remember the bank failure of Saambou in 2002, when panic-stricken customers withdrew over a R1bn in two days following speculation that the bank was bankrupt.
“Most recently, Habib Overseas Bank was placed under curatorship, affecting just under 3 000 customer accounts.
“Globally, we have also seen the failure of larger institutions, including the recent crisis with Swiss lender Credit Suisse and three American banks, serving as a reminder that unexpected shocks to the system can occur. This is why we have to plan even for such rare occurrences,” Mohamed said.
Advancing Twin Peaks
Minister of Finance Enoch Godongwana said at the launch that CODI marks a significant step in overhauling South Africa’s financial regulatory structure and advancing the Twin Peaks model.
Twin Peaks separates prudential regulation (ensuring financial stability) from market conduct regulation (protecting consumers).
The model, introduced by National Treasury in 2011, was crafted in response to vulnerabilities exposed by the global financial crisis in 2008.
“Trust is fundamental to any financial system’s effectiveness and existence. Yet, global trends, especially post-2008, show a marked decline in trust towards financial regulators, attributed to regulatory failures and perceived alignment with financial elites rather than the public,” Godongwana said.
“To counteract this, we must adopt a regulatory framework that is as dynamic and proactive as the financial sector itself. This involves not only adapting to but anticipating market changes, ensuring transparency, and enhancing public understanding and engagement in financial regulation.”
