African Bank curatorship: update by Minister of Finance, National Treasury & Reserve Bank

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Finance Standing Committee

10 March 2015
Chairperson: Mr Y Carrim (ANC, Finance SC), assisted by Ms J Fubbs (ANC, Trade and Industry PC)
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Meeting Summary

The Minister of Finance provided introductory comments on the curatorship of African Bank Ltd. The bank crisis dated back to the previous year. The crisis had an adverse contagious effect on the economy. The curator was not available for comment as he had to be protected from scrutiny. There could be no statement from his office. The guiding principle was to separate and remove the Good Bank and deal with the Bad Bank. Good progress had been made thus far. The principle was to remove the Good Bank and deal with the Bad Bank. It was rather like an amputation performed to salvage as best as possible. Except for minor administrative changes, good progress was being made. New legislation was needed to support the salvage process.

National Treasury explained that a bank in trouble could not be dealt with under normal insolvency procedure. African Bank had also borrowed from other countries, hence there were cross-border implications. There had been a substantial rise in unsecured lending from 2007 to 2012. Global liquidity made it easy to raise funding. The situation became more complex in 2013, but the bank continued to extend large amounts of credit, which led to the eventual crisis. African Bank, Stangen and Ellerines were held by African Bank Investments Ltd (ABIL). Stangen was an insurance company, and Ellerines a furniture company. Curatorship only applied to African Bank. The Reserve Bank had tried to nurse African Bank back to health, but was finally compelled to announce a curatorship package in August 2014. The Good Bank would become a subsidiary of a new company, to be listed on the Johannesburg Stock Exchange (JSE) in due course.

The challenge to curatorship was the multitude of regulators, namely the Reserve Bank, the National Credit Regulator (NCR), the Financial Services Board (FSB) and the Companies Act. The strategy was to re-organise the bank with losses to creditors, known as “bail-in”, rather than “bail-out”. Regulators could not touch ABIL.

Curatorship had led to improvement. African Bank had stabilised and the liquidity situation had improved. Stakeholders in the curatorship were retail depositors; senior and junior creditors, and shareholders. Junior creditors represented higher risk investment funds. Shareholders were the highest risk category. Implementing curatorship proposals required that the Banks Amendment Bill be passed.

In May 2015, the curator will provide an Information Memorandum (IM) to be made available to all interested parties, detailing the intended restructuring approach to African Bank. The IM is intended to inform affected parties of the proposed restructuring of African Bank. This will include details of anticipated offers to affected creditors and other parties, the financial information supporting the anticipated approach and details of the alternative approaches assessed and rationale for following the anticipated approach in the circumstances. The curator will take public comment on the proposal from all interested parties and based on that will propose an optimal way forward.

Treasury also looked at the lessons learned from the bank failure and the plans for improving financial sector regulation.

In discussion, there was general concern about the fact that warning signals should perhaps have been heeded earlier about the unsecured lending, which was deemed reckless by some. It was felt that the regulators could have responded earlier. There was interest in the fate of Ellerines, especially with regard to jobs lost there. There was also concern about banks diversifying their products, and challenges that arose from that. Trasury was asked who the private players are, concerning the Good Bank. A DA Member insisted that contracts be gone through to identify reckless loans and to separate these out. There was concern over the fate of shareholders. It was mentioned that shareholding was supposed to empower the previously disadvantaged. There was a question about government policies to support cooperative banks. Unsecured lending that led to repossession of cars and houses caused grave concern. The Chairperson remarked that reckless lending formed part of a consumerist culture in which the upwardly mobile wanted what their parents never had. Members showed considerable interest in the interaction between regulators, especially the National Credit Regulator and the Reserve Bank. Had the two regulators talked to each other? There had to be consequences for managers and the CEO for reckless lending.
 

Meeting report

Comments by the Minister of Finance
Mr Nhlanhla Nene, Minister of Finance, said that he appreciated the opportunity of addressing the two Committees on the matter of African Bank. The crisis developed a year earlier. It had an adverse contagious effect on the economy. The curator could not be called on for comment, as he had to be protected from scrutiny. There could be no statements from his office. The curatorship package was announced in August 2014. There was a twin structure process. The principle was to remove the Good Bank and deal with the Bad Bank. It was rather like an amputation performed to salvage as best as possible. Except for minor administrative changes, good progress was being made. New legislation was needed to support the salvage process.

Update on the African Bank curatorship by the National Treasury
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National Treasury, said that the presentation was based on what the curator had made public. It was important to note that a bank in trouble could not go through normal insolvency processes. Problems related to corporate depositors became worse. The report was based on reports that were in the public domain. It referred to a broad context. Bank failure had to be analysed. There were studies on the South African system conducted by the Financial Stability Board (FSB) and the International Monetary Fund (IMF), to identify vulnerabilities. African Bank had also borrowed from other countries, hence there were cross-border implications. Laws of other countries had to be considered.

Mr Roy Havemann, Chief Director: Financial Markets and Stability, noted that from 2008 household debt, particularly unsecured lending, began to rise rapidly. There was a rapid increase in unsecured lending between 2007 and 2012. Global liquidity and low interest rates made it easier for African Bank to raise funding, but conditions became more complex in 2013. The growth rate slowed from 2013 onward, and credit quality deteriorated. Despite the adverse environment, African Bank continued to extend large amounts of credit.

Section 69 of the Banks Act of 1990 provided powers to resolve a bank in distress. The Minister could appoint a curator on the advice of the Registrar of Banks. African Bank, Stangen and Ellerines were held by African Bank Investments Ltd (ABIL). Curatorship only applied to African Bank, not the total entity. African Bank had relied on wholesale funding (senior unsecured and subordinated debt). There was a sharp decline in liquidity from April to June 2014. The regulator had tried to nurse the bank back to health for about 12 months before curatorship. Rapid deterioration culminated in the resignation of the CEO. The Reserve Bank announced a package of measures on 10 August 2014. The bank was placed under curatorship. A Good Bank would be created through a capital raising of R10 billion. The Good Bank would be a subsidiary of a new holding company to be listed on the JSE in due course. Retail depositors would be transferred without loss and would continue to receive interest. Senior unsecured debt holders would be offered amended terms and transferred to the Good Bank, subject to a 10% haircut of their face value.

Curatorship had led to improvement. African Bank had stabilised and the liquidity situation had improved. Stakeholders in the curatorship were retail depositors; senior and junior creditors, and shareholders. Junior creditors represented higher risk investment funds. Shareholders were the highest risk category. Implementing curatorship proposals required that the Banks Amendment Bill be passed. In May 2015, the curator will provide an Information Memorandum (IM) to be made available to all interested parties, detailing the intended restructuring approach to African Bank. The IM is intended to inform affected parties of the proposed restructuring of African Bank. This will include details of anticipated offers to affected creditors and other parties, the financial information supporting the anticipated approach and details of the alternative approaches assessed and rationale for following the anticipated approach in the circumstances. The curator will take public comment on the proposal from all interested parties and based on that will propose an optimal way forward.

A key challenge was the multitude of regulators involved. Those were the Reserve Bank, the NCR, the FSB and the Companies Act. Also, more options than mere curatorship were required. The strategy opted for was to re-organise the bank with some losses to creditors, known as “bail-in” as opposed to “bail-out”. The IMF had recommended that the South African resolution regime be updated to meet best international practice. Current curatorship practice lacked critical features to deal with a systemic failure and minimise taxpayer risk. The Reserve Bank would be given responsibility to oversee financial stability. Key legislation to follow would be the New Resolution Bill and the Conduct of Financial Institutions Bill, both scheduled for 2015.

Mr Havemann explained that bank failure had repercussions. ABIL could not be curated. African Bank was primarily a lender.

Mr Momoniat added that there were three regulators but none could touch ABIL. The Reserve Bank could not publicly look at the crisis as it could cause a bank run. The Reserve Bank had first wanted to see African Bank could be returned to a healthy state but its attempts at that failed.

Discussion
Ms J Fubbs (ANC) noted that there had been concern about external loans made in 2012. She asked if no one was aware of the challenges.

Mr Momoniat responded that banks liked deposits for funding, but they also engaged with the market like any other company. The Africa Bank model resembled that of North Rock Bank. Not only deposits were relied on for funding. It was not a secret. There was an optimistic scenario, but then shares dropped.

Mr Denzel Bostander, Acting Deputy Head: Bank Supervision Department, Reserve Bank, added that there were danger signals related to liquidity in the second quarter of 2013. NCR findings scared investors. The September bank statement showed bad results. There was negative investor sentiment. Liquidity was flowing out, instead of in.

Ms P Mantashe (ANC) noted that the crisis was said to have started in 2013. The question was whether it was known at the time of the bi-annual report in 2012.

Mr Havemann replied that the crisis manifested fully in late 2014. Things had at first looked good for 2013/14. The Reserve Bank had not wanted to spook the market.

Mr Momoniat added that the market was constructed in such a way that the primary concern was what happened to the consumer. There were bright investors who got it wrong right up to August 2014. It was easy to say in retrospect that challenges should have been picked up earlier. An analysis would have to be done when the curatorship was completed, to improve the quality of regulation.

Dr B Khoza (ANC) asked if pension fund deposits had been made as individuals or by a pension fund. She asked why the FSB allowed it.

Mr Havemann replied that the FSB had strict rules concerning the pension fund. The bulk of the money had to be deposited safely. The pension fund trustee could invest in higher risk investments. Trustees had to be granted flexibility.

Mr F Shivambu (EFF) asked what would happen to Ellerines.

Mr Shivambu asked who owned the Good Bank and which private entities were involved.

Mr D van Rooyen (ANC, Finance SC) asked if there was nothing to recoup for the shareholders.

Mr Havemann replied that shares had become worthless. Shareholders had known what they were getting into.

Mr Shivambu asked who the players were with regard to the Good Bank and Ellerines. People were saying that they had paid money to Ellerines, but when they went to collect the goods there were no more stores.

Mr Havemann replied that the Good Bank package was presented to six  major banks. The banks were asked to underwrite it. Risk was thereby reduced. When the Good Bank was listed, the other banks would move away.

Mr Havemann added that it depended on whether Mr Shivambu was concerned about the jobs lost at Ellerines, or the demise of the company itself. More jobs were lost at African Bank. It was not possible to appoint a legal curator for Ellerines. There was severe financial stress. Ellerines would have to be committed to business rescue.

Mr G Hill-Lewis (DA) referred to reckless credit. The NCR had done an investigation prior to the crisis and had found evidence of reckless credit. It was advisable to go through each contract and identify every reckless loan. Reckless loans had to be separated out. Even a performing loan could be reckless.

Mr Havemann replied that Good Bank exposure had to be reduced. NCR responses had to be confined to the public domain. The curator had to think about reckless lending. The Treasury would not support reckless lending. It was not possible to go through every credit agreement.

Mr Hill-Lewis referred to accountability. A bank resolution implied losses by shareholders. There had to be serious consequences for senior management also, henceforth.

Mr Havemann replied that shareholders could form a board. Adv John Myburgh (heading up the Commission of Inquiry into the bank collapse) was investigating the way the bank had been run. There would be accountability.

Mr A Williams (ANC) remarked that ABIL was the listed holding company. There was a bank, an insurance company and a furniture outlet. The Treasury had only saved the bank. The bank had re-emerged and Ellerines would be allowed to die quietly, it seemed.

Mr D Macpherson (DA) referred to unsecured lending. With better regulation and monitoring, warning signals could have been heeded earlier. The problem was that the Reserve Bank and the NCR neither listened nor talked to each other. The question was whether the Reserve Bank knew about the challenges, or whether ABIL was hiding it from the Reserve Bank. It was stated that the African Bank business model resembled that of North Rock Bank. That being so, the question was why action had not been taken earlier. The rapid increase in lending as indicated in the presentation should have sounded alarm bells.

Mr Havemann replied that with regard to the Reserve Bank, the Minister had to decide. The law did not allow for more to have been done earlier. The bank and Ellerines were making bad decisions that were feeding into each other. There were issues about capital requirements. The new bill prescribed that the Reserve Bank and the NCR had to talk to each other.

Mr Bostander added that the capital requirement was 10%. African Bank had 25%, but was not protected against liquidity risks. There had been a sharp increase in unsecured lending. Four percent of assets were unsecured personal loans. Mitigating risk strategies had to be considered. African Bank had failed because of lack of confidence by investors that led to loss of funding.

Mr Macpherson referred to the statement by Mr Hill-Lewis that the NCR had as yet not classified cases of reckless lending. There was a case where someone had only R50 left, and yet it was not viewed as a case of reckless lending.

Ms Fubbs said that the statement about the NCR was not true.

Mr N Koornhof (ANC) asked if it had never been considered to include a deal for ordinary shareholders in the rescue package. He asked if it would be considered. In a free market banks could die if money was not secured.

Mr Havemann replied that it had been considered to give shareholders their money back, but it would have been taxpayer money.

Mr Van Rooyen remarked that a one-size-fits-all approach to shareholders was inadequate. Shareholders included a category of previously disadvantaged people whom the bank was meant to empower. He asked if that fact had been considered as a mitigating factor. It had to be inserted into the law that the Reserve Bank and the NCR had to cooperate. There were two streams of regulators. Collaboration had to be properly managed. He asked about current practices for collaboration.

Mr Havemann replied that shares were not on the JSE. The FSB was looking at rules about how shares were traded. The two Committees could take up the matter. A culture of cooperation between the two regulators had to be developed. The two Ministers had to put the two in a room and encourage them to talk to each other.

Adv A Alberts (FF) said that a macro view of banks in South Africa was required. There were banks in the world that were too big to fail. Such banks were propped up by various means. Contagion was interlinked, and the question was how to address that.

Mr Havemann replied that too big to fail banks could hold governments hostage. South Africa did not have that problem. There were few bank failures in the country’s history. Contagion was indeed interlinked.

Adv Alberts questioned whether government policy supported banking cooperatives. With reference to risk management, it was significant that there were only two or three cooperative banks in South Africa. He wondered why the Portfolio Committees were not encouraging people to create their own banks.

Mr Havemann replied that Treasury had formulated the Cooperative Banks Act five years before. It provided a regulatory framework. More cooperative banks were being established.

Dr Khoza remarked that bold statements had been made. She asked what the assumption of the Treasury and the Reserve Bank was concerning whether the Reserve Bank would come out empty handed.

Mr Havemann replied that the Reserve Bank was taking some risks with the bad bank, but would make a small profit.

Mr Bostander added that the Reserve Bank had injected R7 billion for positive net asset value. The Reserve Bank was collecting more than anticipated. As the Good Bank kept getting more, less state support would be needed.

Dr Khoza requested that a Pi chart of different bank creditors be made available. She agreed with Mr Van Rooyen that it had to be seen who were affected and by how much, among the shareholders. A rationale for a cut-off point had to be given.

Mr Havemann replied that senior creditors accounted for R40 million, and subordinate creditors for R4 million. Senior creditors were most affected. There would be more information at the next Banks Amendment Bill meeting.

Dr Khoza referred to the statement by Mr Momoniat that the Reserve Bank had to be prudent, and that market conduct had to be sidelined. It had to be known what went where. It had to be established  under what circumstances the Reserve Bank would intervene with a bail-out.

Mr Havemann replied that the market conduct of banks was of utmost importance. A financial sector conduct authority was being set up. The Committees would be briefed on that. Intervention would occur when the most vulnerable people had to be protected.

Dr Khoza referred to risk assessment conduct. Banks were diversifying their products. Products like funeral cover were being made available, and that situation was getting out of control.

Mr N Kwankwa (UDM) suggested that a detailed study be done on unsecured lending. Loan agreements were too stringent to access. There was unsecured lending in the townships to buy cars and houses. The risk of repossession problems had to be eliminated.

Mr Kwankwa referred to the statement by Adv Alberts that some banks were too big to fail. There were moral hazards in the finance sector. In the end shareholders had to pay. If there were no consequences for defaulting managers, it would contribute to the problem of reckless lending. Bank managers received bonuses for running banks into the ground.

Ms Mantashe remarked that mention had not been made of the fate of workers in the Ellerines group. Board members of the bank had to say what happened.

Ms Fubbs said that the two Committees had to work together. The NCR had to have oversight of the repossession of cars and houses. Things were repossessed, no matter how many years people had paid off on them. The NCR and the Reserve Bank had to look into the matter together. It was assumed that Ellerines was owned by African Bank, but it was in fact owned by the holding company. ABIL could not deal with the situation, but with the help of the Companies Act the Department of Industry (DTI) could. Treasury could legislate through the Standing Committee to insert clauses to prevent banks from underwriting loans for furniture. The fact was that Ellerines became a lender, not a furniture company.

Mr Havemann replied with regard to repossession and unsecured lending, that the title deed system had to be reformed. People struggled to get secured lending because of title deed problems. It had to be decided how to intervene regarding Ellerines, and the repossession of cars and houses. People were losing assets.

Ms Mantashe remarked that workers were the most vulnerable category, with respect to Ellerines. Jobs had been lost.

The Chairperson remarked that the NCR was an advanced institution. Despite that, African Bank had resorted to reckless lending. He asked if the CEO of African Bank who resigned, had just been allowed to escape. Legal precepts and market considerations had to be considered to decide on appropriate sanctions against such persons. People did not have the right to abuse. Reckless lending was part of a consumerist culture. The upwardly mobile wanted what their parents never had, and the advantaged wanted to retain what their parents had. Treasury was encouraging a culture of saving and investment. He asked if Treasury could do more to encourage the vulnerable not to borrow. The question was if those who were lending recklessly were to be punished. It was stated that pension money would not be entrusted to risky investment. Regulation was uncoordinated, and legislation had to be tightened up.

Ms Fubbs remarked that a bank had been allowed to enter into the furniture business, but when the time came to pay up it was released from the commitment. It was wrong to put interest on goods sold. People were paying the full amount for houses that had been repossessed.

The Chairperson said that the CEO and managers were getting huge bonuses. Something had to be done to not make banks scared to lend to the poor.

Mr Williams referred to slide 21. R7 billion had been injected by the Reserve Bank. There was backup from the Treasury. It was stated that it there would be zero cost to taxpayers. It seemed that the R7 billion would be at the cost of the taxpayer.

Mr Havemann replied that the Reserve Bank was just backstopping the amount. The backstop was a guarantee from the Treasury to the Reserve Bank. It was like the guarantee to Eskom, which implied that if there were losses, Treasury would make good the loss. It was probable that nothing from the backstop amount would be paid.

Adoption of minutes
Minutes of 3, 4, 5, 18, 24 and 26 February and of 3, 4 and 5 March were accepted were adopted without any changes.

Committee programme
The Chairperson noted that it had been agreed to that the Standing Committee would visit the Reserve Bank twice a year. The last visit had been well over six months before. The Committee load was too heavy. It would be in order with him if one of the scheduled visits were to be dropped.

Mr D Van Rooyen (ANC) suggested that other entities for oversight could be discussed at group level. He deemed it necessary that custom services be visited.

The Chairperson suggested that the JSE could be included.

The Chairperson adjourned the meeting.
 

[Apologies were received for Ms T Tobias (ANC) and Ms S Nkomo (IFP)]

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