Banks Wary of Deposit Insurance

November 10 - There has been a lukewarm reaction by South Africa's banks over a recent announcement by the country's banking regulator that a deposit insurance scheme is soon to be introduced.

The new scheme will essentially provide a certain level of protection to depositors in the event that the bank fails.

In a report released by the Reserve Bank's Financial Stability Review (FSR), it was shown that, following international trends, the insurance deposit will be introduced in South Africa after banks and financial organizations reach an agreement with the regulator.

"There is some indication that domestic and foreign banks favour the establishment of an explicit deposit insurance scheme," said the FSR. "Consequently, work has been initiated in developing a South African deposit insurance scheme with the role players currently collaborating in this regard."

Unfortunately, the South African banking industry said that it was unaware of any such collaboration going on and asked the FSR to be more specific about the plans underway.

"I don't know what role players they are talking about, said Cas Coovadia, the Managing Director of the Banking Association. "We certainly haven't discussed the topic for some time."

The larger banking institutions in South Africa are generally against the introduction of insurance tax as they believe that they will be subsidizing the risk of smaller banks in the country.

Larger banks are therefore calling for an insurance scheme that is covered by the government.

"Bank failure inevitably results in costs which have to be borne by one party or the other," said the CEO of First National Bank, Michael Jordaan. "The choice from a regulatory perspective is merely who has to foot the bill of consumer protection. If the consumer is to be indemnified against certain losses, the state may wish to recompensate customers based on political considerations or the task may be assumed by the regulatory authorities themselves."