African Bank and the Myburgh Report: SARB briefing

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Finance Standing Committee

24 May 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Deputy Governor of the South African Reserve Bank presented the Myburgh Report on the African Bank. He provided an explanation of events leading up to the curatorship of African Bank, the contents of the Myburgh Report and how the curatorship was progressing.

Some of the reasons for the collapse of African Bank was that it had a single source of income which was unsecured loans and the fact that it acquired Ellerines in 2007. Commissioner Myburgh had also blamed poor fiduciary oversight by the Board of African Bank Investment Ltd.

As a rescue solution, South Africa had instituted a bail-in of African Bank and invested R3 billion. It also owned 50% of African Bank shares, which they did not intend to keep.

Members asked if SARB was complicit in the African Bank collapse through their endorsement of the appointment of Mr Sokutu as the Chief Risk Officer of African Bank for which he was unqualified; why the National Director of Public Prosecutions was not furnished with the Myburgh Report sooner; what was SARB’s involvement in African Bank’s acquisition of Ellerines; in future when would SARB be expected to intervene in situations like this; and how did SARB intend to improve its fit and proper test for directors. There was also a question raised about if SARB was collecting money to cover the collateral on its loan to African Bank from people who were not capable of repaying their loans, as those loans were recklessly given. There was a comment that this situation was bound to happen as African Bank catered to the poor of South Africa, which no other bank wanted to do.

The SARB Deputy Governor assured the Committee that they would only use ethical means of recovering money to cover their collateral. He did not think any supervisor could guarantee that there would no banks failing on his watch. What he would do, was do everything in his power to prevent it from happening.

Meeting report

Mr Kuben Naidoo, the Deputy Governor of SARB, introduced himself and said that he oversaw the Bank Supervision Department. He was joined by Mr Denzel Bostander, who from 1 June 2016 would become the Deputy Registrar of Banks. Mr Bostander was also responsible for the process leading up to the curatorship of African Bank in the supervision of African Bank and had managed the processes of putting the curatorship in place and liaising with the curator. He was also joined by Mr Vukile Davidson from National Treasury, who worked in the Financial Sector Policy Unit.

On 10 August 2014, the Minister of Finance, Nhlanhla Nene, after consulting with the Registrar of Banks, put African Bank under curatorship. From as early as 2011, SARB had picked up certain issues within African Bank and thought African Bank should be put under intensive supervision. The reason was that they were what was called a monoline lender, meaning they had a single product, unsecured loans, and the majority of their income was derived from that single source, interest on unsecured loans and/or insurance related to unsecured loans and/or the sale of furniture and provision of credit to people who had bought the furniture, largely on an unsecured basis. SARB thought this was risky and so put the bank under intensive supervision.

The second issue that led to the curatorship of African Bank was Ellerines, a furniture group that was acquired by African Bank in 2007. It was clear from as early as 2008 that Ellerines was not necessarily a good purchase, the price paid was incredibly high and there were losses in Ellerines that were being subsidised by African Bank. In the Myburgh Report, Adv John Myburgh called the loan made by African Bank to Ellerines of R1.4 billion “reckless” because it was unsecured and had little chance of being repaid.

The Myburgh Report next dealt with governance. There were two or three broad sets of lessons there. The first was whether the board had adequate fiduciary oversight and independence in relation to African Bank. It was not uncommon for the board of a holding company and the board of the bank to be the same when there are not significant other businesses involved in the group. However, in this case, African Bank Investments Ltd owned African Bank, which had a banking licence, Ellerines and Stangen, which was a captive insurer. Considering the loan that was given by African Bank Investments Ltd to Ellerines, it was clear that there was a potential conflict of interest in the roles of the Boards between African Bank Investments Ltd and African Bank. In the view of the Myburgh Report, that conflict of interest should have given rise to questions about the loan and about the transaction. So the independence of the board was a big issue that was focused on.

The second lesson was the accounting standards applied by African Bank. According to the testimony and submission of the Chief Financial Officer at the time, in his view the accounting practices of African Bank were very aggressive. The view of Deloitte, who was the external auditor at the time, said they may have been aggressive but they were within the realms of acceptable. What was clear was that the provisioning practices of African Bank were not the most prudent, and not in line with banking best practices in general. African Bank only began making provisions when a person had not paid for four months, whereas most banks started making provisions much earlier. There was a very aggressive impairment policy that was a contributing factor to the deterioration of the finances.

The next lesson was the growth of the unsecured loan book. This was not just an African Bank issue, but a broader one. Unsecured loans was growing at a rate of about 30% a year between 2010 and 2012. African Bank had seen very aggressive growth in unsecured lending. It was the view of SARB that there were broader systemic issues with unsecured lending and they took steps to slow that growth down. Those steps included talking to the banks, moral persuasion of the boards and putting additional capital charges on banks that were specifically focused on unsecured lending, what SARB called pillar 2B charges. They were non-disclosed but SARB put additional charges on banks if they felt the business was too risky. On a positive note, SARB had been able to slow the growth of unsecured lending down from 30% to less than 10% today. African Bank definitely ran the increased size of its book very aggressively from 2010 to 2012.

By 2013 it had become apparent that the size of the non-performing loan book was growing and that additional provisions had to be made. African Bank had a rights issue of about R5.5 billion at the end of 2013. They were able to raise additional capital. It was SARB's opinion, in the period leading up to the curatorship that they needed additional capital. There was a difference of opinion between the CEO and other board members about the amount of capital needed. In the end the bank put out an announcement that they needed R8.5 billion of additional capital. According to submissions to the Myburgh Report, the CEO felt a much lower amount was needed, around R5 billion. It was at that point that there was a liquidity squeeze in the bank where they had to raise funds in the short term window and people would just not lend them the funds to continue business. On 10 August they put African Bank under curatorship.

The next set of lessons, and the Myburgh Report made this quite clear, is that in any good corporate governance model, the board had to hold CEO accountable. There could not be a situation where the CEO’s personality dominated the board and the company. It was clear from the testimonies to the Myburgh Commission that in African Bank, there was the founder of the bank, the CEO of the bank, who in the words of Myburgh had a sense of hubris, and that was one of the factors that contributed to poor decision making over this period, and those factors eventually led to the collapse of African Bank.

African Bank did not have lots of retail deposits. In fact at the time of curatorship, out of a loan book of about R50 or R60 billion and short term debt of around R4 billion, they only had around R111 million of retail deposits. When SARB put the bank under curatorship, their first priority was to protect those retail deposits. The second principle was that, for the first time in South Africa, and it was actually one of the first times in the world, where they forced a bail-in of equity holders and debt holders into the rescue of African Bank. There was a waterfall structure, where equity holders would have lost almost all of their investments, it was still too early to tell but they would probably lose in excess of 95% of their investments, senior debt holders would lose 10% of their investment and subordinated debt holders, at the beginning SARB thought they would lose almost all, but at the end they structured a deal where they would lose about 62% of their investments. They forced subordinated debt holders, of which there was around R4 billion to take a 67% haircut and forced senior debt holders to take a 10% haircut to contribute toward the resolution of African Bank.

It had been a long process; they had to go to Parliament to get an amendment to the Banks Act to give the curator power to allocate assets, to split between good book and bad book. They had to give the curator power to structure the waterfall in terms of losses in a particular way. The Banks Act did not have those powers in the beginning, but it did now empower the curator to make those kinds of decisions.

From the Financial Sector Regulation (FSR) Bill perspective, there were some important lessons that could be drawn and that had been taken into account in the drafting of the FSR Bill. The first was that the FSR Bill provide for conglomerate supervision. For example, assuming there was a bank that had an investments company and a furniture retailer, there may be losses that could affect the bank in the medium to long term. Under the present Banks Act, SARB could only supervise a bank that had a banking licence, but they did not have the ability to supervise all its legs. Under conglomerate supervision, they could deem it proper to draw the particular structure around the conglomerate to include significant entities such as investment or a furniture retailer if they thought there was significant risk to the bank. He thought that was a positive provision in the FSR Bill.

The second element was that prudential supervision of investments would move into the Prudential Authority. Currently prudential supervision was done by Financial Services Board (FSB). The merging between banks and insurers would deal with both conglomerates who had banks and insurers but also broader systemic risk in the economy. The third element they thought was very well dealt with in the FSR Bill was SARB's powers in the case of potential instability. The FSR Bill provided adequate powers to the Financial Stability Oversight Committee and Governor of SARB to act speedily if there was financial instability.

It was often asked why SARB rescued African Bank. The internationally understood definition of 'systemic' had three components. One was size, two was interconnectedness and three was complexity. African Bank was not big, it accounted for 1.7% of the banking sector in South Africa. So for the size box they could probably put an x there because it was not systemic. On complexity, it was not a very complex institution, it had a single product - unsecured loans. However, when looking into detail they found there was significant interconnectedness between African Bank and the rest of the banking sector and the rest of the financial sector. This was mainly because African Bank raised debt in the wholesale market and a lot of that debt was bought by money market funds, which were either controlled by banks or pension funds or asset managers. There were significant investments, in this case R44 billion, that the banks, pension funds and asset managers had in African Bank. SARB was concerned if they had a run on the money market funds, they could have a run on the banks and there were insufficient deposits to deal with that. If there was a run on the money market funds, it would pose a systemic risk, not only to African Bank, but to the broader financial sector. It was on this basis, using the financial stability argument, that they asked the Minister to put the bank under curatorship.

Mr D Bostander, Acting Deputy Head of SARB, began by saying that when they drafted the African Bank resolution plan, days before 10 August when the announcement of curatorship was made, they decided to split the bank into good assets and bad assets. They particularly decided to transfer the good assets into a new entity because of the possible litigation that may arise within the existing African Bank Investments Ltd structure.

African Bank Investment Ltd was currently under business rescue and there a new bank controlling company African Bank Holdings, and the new African Bank, which retained the old African Bank name, was essentially a new registered company. That new entity, the bank, transferred good assets from the R60 billion, about R20 billion, to the new African Bank, and those were the good assets. That was only the good loans, but about R24 billion of good bank consisted of cash which also comprised a cash injection from SARB of about R3 billion.

On the R3 billion, they had already last week received a repayment from the curator of about R1.6 billion. The total loaned was about R3.28 billion so the outstanding amount is about R1.6 billion, and SARB believed they would in time fully recover the loan. They went through a rigorous process, where they had to ensure that the new entity, because it was a new registered company, applied for banking licence. They went through the normal process of assessing whether the entity would comply with the Banks Act and could be registered as a bank. The Registrar of Banks in consultation with the Minister of Finance, finally decided that the new African Bank, and the new African Bank controlling company should be granted a banking licence, in March 2016. The new African Bank was launched on 4 April 2016. They had already had their first meeting with the new CEO of the new African Bank, Brian Riley, formerly WesBank CEO, just to ensure that they did not find the same issues as with the old bank.

They had constituted a new board. The new Chairman of the board was an old banker from Barclays who brought his experience into the bank. One of the banking licence conditions was for the new African Bank to diversify their products and avenues of income to not be so vulnerable to one specific unsecured lending product line. In the banking licence application and in the conditions, it had given the CEO about two years to achieve this. In terms of the insurance side, within the old African Bank, African Bank Investment Ltd was not a successful entity because of the old African Bank. It had made profits prior to the problem years because of the insurance leg that included Stangen. There was an attempt by the consortium of banks to buy Stangen from the African Bank Investment Ltd shareholders. That did unfortunately fall through and in order to ensure that the resolution of the Bank was still successful, they had to go with Plan B, which basically comprised of the African Bank Holding establishing a separate insurance company that could complement the income of the bank within the rest of the group.

The SARB, as mentioned previously, had taken about 50% of the shares in the new entity, with the consortium of banks taking 25% and PIC taking the remaining 25% as shareholders of African Bank Holdings.

Mr Naidoo had been asked frequently about how long SARB intended holding this 50% stake. It was not the intent of SARB to own banks. It was not the intent of SARB to own 50% of African Bank for a long period. However, they did not want to put a timeframe to this. When they thought the bank was stable and on its feet they would dispose of their investment. When putting a time frame they immediately put a discount on the price and for that reason they were not putting a timeframe. Both their 50% and the 25% held by the consortium of banks was likely to be put up for sale in the future when the bank was sustainable and viable.

Mr D Maynier (DA) said, in his view, at least in one respect, SARB was complicit in the collapse of African Bank. If one looked at the executive summary concerning one of the directors Mr Sokutu, the Myburgh Commission report stated that Mr Sokutu was the Chief Risk Officer of the bank between 2004 and 2014. That he was not qualified to be the Chief Risk Officer and that he did not have the capabilities for various reasons to make any contribution to the resolving the crisis faced at the bank. What was shocking was that if one turned to page 60 of the report, one found in paragraph 4, that his appointment was endorsed by SARB. What process was followed to endorse Mr Sokutu, who interviewed Mr Sokutu for his appointment, when was he interviewed, who finally approved the endorsement and what gave the SARB such confidence in Mr Sokutu? Given this failure, what action had SARB taken to ensure that something like this did not happen again. Finally, did SARB concede that in this respect SARB was complicit in the collapse of African Bank?

The second question had to do with furnishing a report to the National Director of Public Prosecutions (NDPP). It was his view that SARB again erred in not making a copy of the final report available to NDPP. If one looked at s69(a)(12) of the Banks Act, it stated that a report by a commissioner carried out in accordance with this section was to be forwarded to the Registrar, Minister and in the event of findings contemplated in s11(c) and s11(d) to the Attorney-General. S11(c) and s11(d) referred to whether the business of the bank was carried out recklessly or negligently, and whether any person could be identified by the commission who was partly responsible for that. If they looked at the executive summary, they found in paragraph 98 that the commissioner found that the business of the bank was conducted negligently, in paragraph 199 that the business of the bank was conducted recklessly, in paragraph 90 the business of the bank was conducted negligently, and as to whether any person was a party to the conduct the commission found that the directors of the investments and the bank were responsible. Despite that, it appeared to him, the report was never referred to the NDPP. There was an obligation for that report to be sent immediately and directly to NDPP. At least by 22 April 2016, a year after the report was furnished to SARB, it had still not been referred to NDPP. Only after the publication of the report on 22 May 2016, was the report furnished to NDPP. Did the Commissioner refer the report to NDPP, if not, did he make a recommendation to SARB to furnish NDPP with the report? More broadly, why was copy not furnished to NDPP and when finally was it referred to NDPP? Again, did SARB concede that it erred in not furnishing NDPP with the report?

His last question was about the process followed to making the report public. Looking at s69(a)(13) of the Banks Act: "an examination or any report by a commissioner under this section shall be private and confidential unless Registrar, after consultation with the Minister, either generally or in respect of any such examination or reports, directs otherwise". The section was very clear, the Registrar had an obligation to consult, and in this case the obligation was to consult the Minister. It appeared to him that SARB chose, in contravention of this Act, to consult with the witnesses in the interest of fairness. Those witnesses had already been offered an opportunity between 19 January and 30 January to make submissions to the Myburgh Commission before the final report was produced. What SARB chose to do was replicate that procedure and consult witnesses on whether they thought the final report should be made final or not. In his view, SARB erred, because the Act was clear. The Registrar had an obligation to consult with the Minister not with witnesses. Did SARB concede that it erred in not making the report public sooner?

Mr S Buthulezi (ANC) stated that SARB had pointed to African Bank's interest in Ellerines as problematic. Before the bank started investing in what was considered non-banking institutions, did they require any approval from SARB, and if they did what was considered? As he heard from Mr Naidoo, there were a lot of issues that emanated from that investment.

SARB spoke about having seen the red lights much earlier, and referred to SARB using moral persuasion to try and mitigate certain things. However, if that did not work, what was the next step to take and did the bank take that step? He was assuming that over the years, apart from the risk officer that had been referred to, what had been the role of internal audits in the whole process, and what was their position? What about the external auditors? They saw CEOs getting dividends of about R286 million. Did the bank not consider the liquidity of the bank when dividends were being paid. The risk officer was part of the executive but it was his duty to look at these things. What did the internal and external auditors say? One of the issues that emanated from the global economic crisis in USA, was that institutions were given a clean bill of health but a few months later there was disaster. So what were the checks and balances relied upon? SARB spoke about different levels of debt holders He asked who the senior debt holders were when the Bank went ‘belly up’.

There was one thing that troubled him. There were three elements SARB considered on whether to save the bank or not. They were size, complexity and interconnectedness, he referred to other banks and therefore the systemic risk that became apparent. His hypothesis was that the big banks were even more interconnected. If they were, there was a subtext in the report that said if they took that interconnectedness into consideration, then they felt obliged to save the bank. If he was an investor in the bank now, it was immediately a question of moral hazard. If the banks were interconnected, then they had elements of size and complexity, it meant the other banks would come to the rescue, was he right in coming to that assumption? If he was, he thought moral hazard cropped up and people would continue engaging in these illegal activities.

Dr B Khoza (ANC) appreciated the progress made so far and acknowledged that this was an unprecedented challenge in South Africa. They would have hoped that SARB would have intervened much earlier. When they did intervene, their rescue plans were effectively carried out. She did not think they should be negative but rather see it as a learning curve.

Sometimes one jumped to conclusions without sufficiently applying one's mind to the causes of the problem. She wanted to reflect on whether the structural deficiencies of the economy were attributable to the old bank going into that space. The reason was because there was a narrative not often told, which was that the old bank was operating in the space of the marginalised and financially excluded - those who were not able to procure loans in normal banks. That narrative was important. Going forward, they had to see how they were going to mitigate the risks that had to do with structural economic challenges in South Africa.

On conglomerate supervision, did SARB think the current legislation was sufficient in giving SARB supervision over aspects that were not necessarily financial? She also wanted them to comment on the Bill going forward in terms of Twin Peaks legislation because they had an opportunity to tighten the legislation. She asked to what extent SARB was aligned to that? The issues of market and prudential were not going to be the kind of challenges initially faced and probably they would be mitigated.

There had been some concerns around Capitec and she wanted to be comfortable that SARB was drawing from its experiences. She knew that Capitec was a deposit drawing institution and therefore was not going to face the same concerns as African Bank. She just asked whether they were sufficiently monitoring what was happening in that area. She was saying this because when the economy contracted, it was institutions like Capitec that were vulnerable going forward. People had to decide whether to pay their loan or buy bread. These issues were intertwined and she thought it was going to be important for them to have a sense that SARB was on top of their game going forward so that they did not face similar challenges in the future.

She got worried when people used concepts that appeared intelligent and catchy but she was unsure whether she understood them. They kept referring to the aggressive accounting practice and aggressive policies of the African Bank. At what stage did it become aggressive? Was it when it was no longer going according to norms and standards, or because they were getting into a market space that was risky. She was careful of using the word 'risky', because they tended to bunch a group of people together, because in South Africa capital had a colour. It was important for them to get give a definition of when it became aggressive, they did not want to be reading between the lines. The other thing she wanted to know, was in terms of the plan of SARB going forward, at what stage would SARB intervene? What were the keys, given the experiences they had had, and she tended to be futuristic because what of had happened, and they dealt with it. The most important thing though was how they moved into the future. She asked about the indicators that showed once abc had happened, it was time for intervention. She thought it was important for politicians, they were not bankers, they were just there to perform oversight, but they also wanted to see the country prosper and ensure that the financial institutions remained healthy and strong.

She asked what was happening with the non-performing loans. When they were left in the old bank, what was happening to them? Were they not going to be recovered or were they going to be written off?

SARB said that going forward, it did not see itself in that space and at some point they would sell their stake. When speaking of the many marginalised people who were not financially included, was that a consideration that SARB had, and if they had, what kind of mechanisms did they have to ensure they did not go into the space that would open the financial sector to risk factors. She was worried because of the mention that governance was a major issue. In as much as she agreed when it came to the other shareholders, she did not think SARB should rush into this. She thought they should ensure that systems were in place and expertise for overseeing that governance was intact before pulling out. It was easy for SARB and other major banks to pull out but then next thing, they were back to square one. She asked if they had applied their minds to the transition.

She did not subscribe to the school of thought that they had to apportion blame. She was of this opinion that the South African financial sector was a healthy sector. There were mistakes and African Bank should not have been allowed to get into furniture, but going forward they needed to find ways to mitigate such. In future they had to be stronger and the Committee's fiscal oversight had to be more potent than it was now because they now had a precedent. Previously they did not have a precedent of this magnitude. She thought SARB should be congratulated for the manner in which it had worked through this and the curator had done a good job as well.

Ms P Kekana (ANC) agreed with the approach of Ms Khoza and appreciated the work done by SARB so far. What became critical going forward, was that the Twin Peaks should assist them in pre-empting some of these pitfalls and tightening the screws. It was also about SARB putting their foot down, especially on fitness and propriety tests. SARB did all those tests on every individual. It had to be very thorough so whoever became part of the executive or board of a bank, that the fitness and propriety tests were done adequately and they knew the bank was in good hands.

The other issue was that it was a requirement for banks to have auditors. Auditors also certified the business plan of the bank. SARB had to ensure that auditors had done their work and the business plan would work. The Twin Peaks was going to separate the work of SARB and FSB. The lessons learnt spoke about conglomerate supervision, did the FSR Bill speak to that? Did he still see Twin Peaks being relevant or would it assist in unbundling some things?

Ms T Tobias (ANC) remembered Mr Naidoo being at National Treasury, and then graduating to Deputy Governor. When she was in Youth League, they believed young blood brought new ideas so they were on course. It was their duty as public representatives to put a different perspective on things and not just ask questions. They were bound to be where they were now with the African Bank. If they prohibited a nation from getting an education and skills in order to get into the job market, they were subjecting the people to a situation where they had to find and manoeuvring ways to exist. If they subjected the majority of a nation to illiteracy, ill health and poverty, it had no other choice but to use manoeuvring skills. A simple example was when people could not afford housing they went to banks, borrowed money knowing they could not repay it. Banks thought they could go to the township to repossess, but those people would throw stones and would not allow anyone who bought that house from the bank, to stay in it. They could read the statutes, but the statutes would not work there. That was the response when faced with difficulties. They could say what African Bank was supposed to do, but she thought they did what they had to do by helping the poor, and it was bound to get to where it was.

So while buying Ellerines may not have been right, someone had to take that calculated risk. Unfortunately, managers did not sit in the townships and understand the day to day struggles of the people. That four months was the best the bank could do, in fact, they should have given them six months. Looking at how many people lost their jobs on a daily basis and went into the pool of unemployment and could not afford to pay their bills. Mechanisation and robotics replaced unskilled labour. When mines closed down, governments should take responsibility of reskilling those miners. It was not a system that they had created as a democratic state. It was not the ANC government that came with those problems. The ANC government could not build houses where there was no sanitation, no tar roads, no electricity. It was busy correcting those, so they were bound to be where they were. She thought there needed to be some understanding of a black person in the community. She appreciated the intervention of SARB.

Ms Tobias said that African Bank's Mr Sokutu said ‘f***’ the poor' before he died. When she looked at him she understood that elitism and capitalism did not know any colour. When one was taught in a particular way, you would not understand the life of the poor. That was why he had to resort to those mistakes. Ms Khoza had put it in a very succinct way, When capitalism thought it could survive, it did so at the cost of the poor. She was challenging anyone who challenged the policies of the ANC. The ANC wanted to build a developmental state with a mixed economy. One which understood where they were coming from, and aspired to change life for the better. That was why half of the budget was spent on education; why they had the jobs fund, internship programmes, NFSAS. They understood that if the nation was educated its skills level would go up, it could participate in the private and public sector. People would be able to create jobs for themselves. If a person took a loan, they were protected by Consumer Act. If the loan was five years or older, you could not recover that money. It was not just malicious individuals who said they would not pay for five years and then it would be struck from the books, it was literally people who could not pay.

There were institutions who took on risk portfolios, taking advantage and saying whether or not a person could pay back they just had to do it, and the institution would impose interest on that credit. Sending people summons was not going to address the challenges. It was a policy matter, it was a matter that going forward where they had made suggestions to SARB that there needed to be management engagement on a quarterly basis. Were there warning signs they could see? People were undermining the statutes and there was no guarantee that they would follow the law to the letter. When people did profit maximisation they took a higher risk with the intention of getting a short term turnover. There were was a clean bill of health for institutions and yet there was an economic crisis, and this was caused by major banks, not the African Bank. These were not calculated risks, it was more about individual gain by shifting profits higher and taking higher risks without acknowledging the stop gap measures that were in place. It was bound to be here, there were no elitist answers to this dilemma the country was faced with. It could have happened to any other bank that had taken responsibility for the poor. It would not have happened at the four major banks because they had never helped the poor. It was the responsibility of government to intervene, and SARB took a sterling decision by taking that type of intervention by injecting funds. The country was doing better, and they would not experience that problem 10 or 15 years down the line.

The Chairperson had no doubt, he was not sufficiently to be clued up to be precise, that SARB had erred and could have intervened earlier and maybe they could have scrutinised the board of the bank better. However, he thought overall, SARB did very well. This was a Bank, after all, that dealt with the poor and disadvantaged, and was more vulnerable than the established banks. SARB had used the three criteria but prior to this had not seen that there was interconnectedness with the entire financial sector. This could have happened anywhere. Looking at what happened in 2008, it was astonishing what had occurred in most financial systems in the world. He thought if SARB looked at their performance as a whole, they had done very well. Mr Naidoo was a young Deputy Governor and much younger than others around the world but he thought the team was very competent. It was inspiring for their generation. He did agree that if there was anyone responsible, they could not get away with it, they had to be put through the court system.

The main thing was what were the lessons learnt. It was possible in these volatile times that something like this not happen again, but now they were better prepared. The Committee would not forgive if SARB repeated the same errors.

When they went to England, someone took them around their Reserve Bank. The lady asked him quite sincerely why they were visiting the Reserve Bank because they had learnt lessons from the South African Reserve Bank. His sense was that London was the centre of the global financial world. In the two informal exchanges he had, one bluntly telling him SARB was a wonderful Bank, and the other in a more veiled way complimented our Reserve Bank.

SARB may not have wanted to answer this question for diplomatic reasons, but what else did they think could be done by the Committee and could be inserted into the FSR Bill to reduce the possibilities of what happened to the African Bank happening again.

Business Day had been picking up that Capitec was a bit shaky, it was a fleeting piece in the past 10 days. Financial commentators had been praising Capitec Bank. At one stage Business Day was commending them for their performance and they were also a bank that dealt with the vulnerable in our society.

Mr Naidoo, SARB Deputy Governor, replied that there were policy frameworks in which it said that banks would not fail. If a bank was badly run, if they made significant errors, the bank should fail. SARB's duty was ensuring that the system was sound, safe and secure, that the depositors were sound, safe and secure, but they could never guarantee that a bank would not fail. They would do as much as they could to minimise the possibility of a bank failing, but they could not guarantee against that. He did not think any supervisor would stand up and say that that no bank would fail on his watch. He took over as Registrar of Banks on 1 June 2016, and he was not prepared to say on his watch no bank would fail. He would do everything in his power to prevent it from happening, but sometimes if a bank was mischievous, reckless or misreads the market or abuses investors funds then they may fail. His job was to ensure the system was secure.

That led him to the second distinction. Where was the dividing line between supervising a bank and running a bank. As supervisors they could have firm and frank discussions with the bank, they could give an instruction to the bank, sometimes the bank did not comply. For example, African Bank was told to sell Ellerines, either they could not or would not. As part of the intensive supervision process, fairly early on, they saw that this was necessary. It was a public policy matter, this had to be discussed - where the bounds of the supervisor ended and that of the manager began. It was not SARB's job to run all the banks, and they did not have the capability or resources to do so. Their job was to supervise, and they would attempt to do so to the best of their abilities, but he was almost certain that there would be circumstances where banks did not listen to SARB, did not do the right thing, made inappropriate bets and investments and get into trouble. SARB would try to resolve the matters in a sensible manner.

In the next year the Committee would be presented with the Special Resolution Bill and the Deposit Guarantee Key. Both would be elements of Twin Peaks to make South African banking more safe. Their proposal in the Deposit Guarantee Key was to protect depositors below a certain level. He thought the discourse was about R100 000, so any depositors with less than R100 000 would be protected. Their job was to resolve matters with as little impact as possible on the poor, but they could not guarantee a no-failure system.

On whether SARB was complicit in the collapse of African Bank, again he drew the distinction between the ability to supervise a bank and the ability to run a bank. At some point a line had to be drawn to say this was the responsibility of the supervisor and this was the responsibility of the bank board and management. He was not saying that SARB did not make mistakes - he thought there were mistakes made and lessons learnt. However, as was pointed out in the Myburgh Report, they could not hold SARB responsible for the failure of African Bank. There was no evidence that it was the fault or mistakes of the supervisors that led to the failure of African Bank. African Bank was a failure of governance, of risk management, of impractical accounting practices, of hubris and in some cases of investors underestimating the risk in the bank. He would not concede that SARB was complicit in the collapse of African Bank. He would concede that SARB had made mistakes, learnt lessons and they were doing things differently today because of those lessons.

On whether Mr Sokutu was fit and proper and whether he had the requisite qualifications to be the Chief Risk Officer, Mr Naidoo thought in hindsight that SARB erred. However at the time Mr Sokutu had become Chief Risk Officer, he was a Director General in government, a senior civil servant, a very able candidate so therefore, the people at the time in SARB, thought he was a fit and proper person. One could be a fit and proper person and then as time went by lose some of that capability for certain reasons as described in the report. It was hard to ascribe responsibility to SARB but they had to tighten their 'fit and proper person' tests and they had done so.

About furnishing the report to the NDPP, SARB's interpretation of the Banks Act was that the implication was that the Myburgh Report and other such commission reports should be confidential. It was their view that it was in the public interest to release the Myburgh Report. There were two or three considerations they wanted to consider. Firstly whether the release of the Myburgh Report would impact financial stability, so they had to take time to consider this. They did not think it would. Secondly, they needed to ensure that the release of the report did not compromise the good bank, after considering the matter, they were of the opinion that the release of the report would not compromise it. The next step was consulting the Minister of Finance, and together with the Minister of Finance they agreed on a process whereby they would allow people who were named in the report, to look at the report before it was made public. The Minister of Finance was replaced in December and in some ways SARB had to go through a consultation process again, which was impacted by the budget and road show. Once they had consulted the Minister of Finance and went through that process of allowing the 37 people to look at the report, there was no legal implications, they decided to lift the confidentiality in May 2016. As soon as they lifted the confidentiality, the Registrar forwarded it to the NDPP. It was now up to the NDPP to decide if there any action was to be taken.

It was possible that some investors may take the report and use it as evidence against certain board members or executives in a civil suit. When there was a failure in Regal Bank, it took 11 years to prosecute Mr Levenstein. These things did take long. He was not justifying the length of time but it did take long. NDPP would have to go through the report and decide if there was a case to be made. He agreed that while they should not lay blame, if there were people who did wrong they had to be held accountable, and SARB hoped that process happened. These people had to be seen to be held accountable in the eyes of the justice system. It was in the interest of justice to be held accountable.

Mr Bostander wanted to make the point that the 37 stakeholders were not consulted on whether the report should be made public. They were given the opportunity to have a final view of the report because of the legal implications it may have on certain individuals and institutions. The consultation was between Registrar and Minister of Finance.

Mr Naidoo said that it was true that SARB approved the acquisition of Ellerines. In hindsight that was a mistake that increased the risk of the bank. At the time the economy was booming, the furniture industry was doing really well, Ellerines had made R1 billion profit. The bank then applied to SARB for permission to buy Ellerines. It was with the understanding by SARB that it was with the approval of the Board and that a thorough due diligence had been done. It appeared from the Myburgh Report that this was not done, there was no approval from the Board or due diligence done. SARB had approved it on the assumption that these items had been done. That was one of the things that went wrong.

On the role of internal and external auditors, and what was the difference between prudent and aggressive accounting practices. Paragraph 30 of the executive summary said that African Bank's impairments policies were aggressive in comparison with the rest of the banking industry. Impairment practices were when banks decided to put money aside for a possible loss. Customer X was likely to not pay the loan, and because the loan was X the bank had to make a provision for X on its balance sheet. Some banks did this immediately, so if someone did not pay for a month, they put cash aside in case the person did not pay. If the person did pay it was a bit of an upshot on the profit line, but if not the bank was protected. Aggressive was purely on the accounting standards. When a bank impaired a loan, was it after 1,2,3 or 4 months? Even if a loan was impaired, and the person had not paid for 6 months and the loan had gone bad, it did not mean that the bank did not try to recover some of that money. Sometimes they tried to recover some themselves, sometimes they tried to sell the book to a debt recovery practitioner. Some of the practices used by debt recovery practitioners were not always wholesome. There was a big problem with the regulation of those entities. Sometimes it was necessary to write it off completely. Accounting practice said the bank had to provide for it fairly early on in the process. The distinction made in the Myburgh Report was that African Bank was making provisions later than what was the norm in the banking sector.

Mr Naidoo agreed that the board of African Bank had fiduciary responsibilities. One of the things that went wrong was that the board did not exercise its fiduciary oversight. There was the acquisition of Ellerines where the board did not exercise its fiduciary oversight and also African Bank’s loan to Ellerines. The third conclusion that Myburgh made was that the board did not sufficiently question the CEO. For any good company, the board had to question the CEO. They had to be the nagging voice:, was this right; was this prudent? In this case, they did not do that.

On interconnectedness, since the 2008 financial crisis much of the financial sector regulatory reform agenda had moved to reducing interconnectedness and preventing the 'too big to fail' problem. In South African they had also taken steps to prevent this problem. They had increased capital requirements for banks as they implemented Basel lll. They had introduced a liquidity requirement and they would introduce a net stable funding ratio to ensure adequate maturity mismatches from 2018. All to prevent banks from failing and to minimise systemic risk that large banks posed.

South African banks, the Big Four, were very large, and they did have systemic risk in the economy and it was SARB's job to minimise that risk to the financial sector. Whether that implied a moral hazard, they hoped not. They hoped that the steps put in place in the regulatory reform put in place over the last seven or eight years had minimised the moral hazard. He did not think they had eliminated that moral hazard, but he thought they had gone a long way. He did think it was true that in general, all over the world, that if the banks failed, the government bailed them out.

He agreed that SARB had made progress both in securing the financial sector and in the resolution of African Bank. As the Myburgh Report showed, it was as early as 2011 that SARB put African Bank under intensive supervision. It was necessary for SARB to reflect on those issues and whether they would do things differently if they happened again. He wanted to repeat the distinction between supervisors and managers in the financial economy. There was a line they did not want to cross, they did not want to take over responsibility of running the banks. They did not have the resources or capabilities or skills to do so. SARB's job was to ensure the banks complied with the law, that they were safe and governed in a sound way. African Bank was an example of how things could go wrong.

Mr Bostander gave an example of when SARB should have intervened. Mr Naidoo had already mentioned that there was intensive supervision from 2011. There was a fine line that had to be kept on when to intervene. Section 69 said that SARB could only put a bank under curatorship if it was unable to meet its liabilities in the future. If they did not follow that section they could have been in breach of their regulatory duties and put a bank into curatorship that should not be under curatorship. The Act did specify when to intervene, especially on the point of curatorship.

Mr Naidoo referred to the structural inadequacies of the economy. He did think that South Africa was a country of consumers rather than savers. It was part of the problem which was made worse by the low employment rate and that some people had precarious employment. It added to the culture of consumerism. Politicians had been placing pressure on the policy makers over the last two decades to enhance financial inclusion, which was a good thing. But it had to be seen as beyond credit, and include transactional banking, access to payment system, access to remittances, access to medical insurance, access to pension funds, access to insurance. All of those had to be seen as financial inclusion. If they only looked at credit they would run into problems. Some politicians were saying that they should increase credit but this pushed banks into increasingly riskier sectors and banks that get into trouble cause a public problem. He did think they needed to broaden financial services, including insurance, pension and savings. Why could farmers not insure their crops or livestock? That should be a financial inclusion issue. So if there was a drought, the famer did not have to go to the bank to take out a loan. He thought broader financial inclusion could help mitigate that which had been spoken about: the structure of our economy contributing toward the problem.

There were risks that conglomerates brought to the economy, and financial conglomerates in particular and their relationships. They thought the Financial Sector Regulation Bill  would enhance SARB's supervision of them.

On Capitec, SARB would not comment on any bank in public neither would they comment on any action taken on any regulated entity, unless they had imposed a fine for anti-money laundering for example and they chose to make that public. They would not say what they thought of a bank publicly, because that would introduce systemic risk into the economy. He could assure them that SARB was an intrusive supervisor, and they were monitoring all of the banks and entities that they regulated. Where they found issues, they raised those in a timeous fashion with the board and executive of banks.

In 2019, South Africa was going to adopt what was called the International Financial Reporting Standard 9 – IFRS9. IFRS9 would be a standard that would regulate how the banks scored in credit. It was called a credit loss model, or an expected loss model. Banks would be expected to have specific models for when they made provision for bad debt, and SARB would have to audit those models. SARB thought this would introduce more rigour in how banks dealt with accounting practices.

On non-performing loans, they did attempt to recover. In the bad book there was R17 billion worth of loans of which they thought it was possible to recover about R5.6 billion.

Mr Bostander indicated that the total SARB loan of R3.3 billion would be fully covered from the R5.6 billion.

Mr Naidoo said that they would exit African Bank when they felt the systems were in place, the business was on its feet, there was good governance and when selling their stake would not increase risk to the bank or the financial sector.

What else they could do in the Financial Sector Regulation Bill  to reduce risks was a difficult question because the Bill was well crafted, but he thought financial sector policy coordination in government was still fragmented and greater coordination on financial sector policy between the policy makers and regulators would help to get greater coherence in the sector.

SARB had tightened its criteria in terms of the fit and proper person test. He did think they had a good financial sector in South Africa, it was well regulated, well capitalised, and they were getting the balance right in broadening financial services and ensuring the safety of the financial sector. They were however a country of high unemployment and that did add pressure to the financial sector. They were constantly engaged with banks about those stresses.

Mr Bostander explained the role of internal and external auditors by looking at the external governance structure. If they had a weak internal audit committee in providing direction to the internal department and setting the audit plan for the next year, they were likely to get into a space where they were not focusing on the right things. He would not commenting on external auditors because there was some litigation in process in terms of the previous bank.

Mr Buthelezi reminded SARB of his question on senior debt holders in African Bank Investment Ltd.

Mr Maynier referred again to appointment of Mr Sokutu. What could possibly have caused SARB to think that Mr Sokutu, even though he may have been a senior civil servant, could possibly have equipped himself as a Chief Risk Officer, with no significant experience in the private sector, in banking or with risk management in banking? His more specific question on this matter was who interviewed Mr Sokutu, who approved Mr Sokutu’s appointment and when was it done? SARB endorsed the appointment. If so, who endorsed the appointment? He was not asking if SARB would concede that SARB was complicit in the collapse of African Bank, but whether they had erred in endorsing the appointment of Mr Sokutu which subsequently was one of the factors leading to the collapse of African Bank.

He said SARB's reply about the NDPP seemed to suggest that SARB had discretion ono whether the report should or should not be sent to the NDPP, and that furnishing the report to the NDPP was contingent on the report being made public. It appeared to him that the onus was on the commissioner to furnish the NDPP with a copy of the report. His reading of the Act was that the report in February 2015 ought to have been furnished by the commissioner, not SARB, to NDPP given its findings - in compliance with s11(c) and (d) on business being conducted negligently and recklessly. In their reply they conceded that the NDPP would only have received a copy of the report on 12 May 2016. So his question still stood, why did the commissioner or perhaps SARB, not furnish the NDPP with the report in February 2015, as required by the Banks Act.

His understanding was that a draft report was drawn up on 12 January 2015 by the Myburgh Commission, and the 37 witnesses were provided with an opportunity to comment on the draft report, and as Mr Naidoo had correctly pointed out, some witnesses made adverse comments. Based on those comments and the process to cater for procedural fairness, a final report was furnished to the Registrar. Then SARB subsequently decided to replicate the process and provide witnesses with an opportunity to comment on the final report by Myburgh. So his question was whether SARB, as a result of submissions by witnesses, made any alterations to the final report furnished to SARB by Myburgh. Was this the Myburgh Report or was this SARB's version of the report?

The Chairperson confirmed that it was the Myburgh Report. He told Mr Naidoo that there was no need for him to answer the question because underpinning it was an insult to him. If it had been asked by anyone other than Mr Maynier, it would not have implied that Mr Naidoo was dishonest, incompetent or corrupt. To present a report to Parliament that was not the actual report was corrupt, they could present a report and say it was SARB's version of the Myburgh Report and these were the reasons for not being able to present the actual report. He ruled out the question.

Ms Tobias said that if she had made such comments the Chairperson would have intervened much earlier.

The Chairperson stated that there was nothing stopping her from commenting now on the racialised subtext of what Mr Maynier constantly raised. Mr Carrim said he was a Marxist and did not use the race term easily but there was a pattern and a Committee chair had no choice. He had raised with Mr Maynier how he polarised the Committee and his oversight role became diluted and people did not take him seriously. He could do whatever he wanted as long as he abided by the rules and he was very clear, given the racial tenterhooks on which this society hung, this idea that black people, Africans in particular were inherently corrupt, incapable of governing, treated as suspicious, was very different to rigorous oversight conducted by opposition, he had never had this experience before. He had to act in accordance with the Rules of Parliament and its spirit. He thought this question, in the context of the same person repeatedly raising these issues, was inacceptable. It was a fair question to ask without all the innuendos.

Mr Maynier objected to the Chairperson’s constant suggestion that the themes or directions of his questions, were motivated by racism.

The Chairperson said he had not said that Mr Maynier was a racist but that there was a racial subtext, an inherent subtext that black people, African people in general, were incompetent. These representatives were competent, Mr Maynier did not even have one iota of acceptance to say he disagreed but there were things that were said that were right. He could not stop that, but he could stop Mr Maynier polarising this Committee on racial grounds, whether he was doing it wittingly or unwittingly.

Ms Tobias commented that sometimes when Members asked questions they did not do so in good faith. In hindsight, what entities said may be used in courts of laws by certain Members. If one looked closely at the line of questioning, it seemed they were trying to garner information to use in litigation processes. She believed so because when someone asked whether there had been changes to the Myburgh Report, based on engagement with the witnesses, that was a legal question. It was not about looking at the systemic challenges faced by supervision of banks. Sometimes Members took advantage of the fact that entities were coming before Parliament to present confidential information that was sensitive to the markets.

She was happy that Mr Naidoo spoke to the issue of financial inclusion. She knew it was not the work of SARB to encourage people to save rather than indulge in conspicuous consumption. Investing in a Louis Vuitton belt, when they could have saved for immovable property. There were differing views. She had observed that perhaps it was a psychological issue, people who had been impoverished, the first thing they wanted to do was emulate the life of the rich - and it had taken them backwards. The question was, when Ellerines was making high profit margins, did SARB envision a time when the banks would want to maximise profit by taking higher risk. Perhaps there should be a guideline that said there should be monitoring of the profit margins and performance of a bank when it started moving in that direction.

Ms Tobias said supervising and managing were two different things. SARB could not look at the finer details only the broad policy framework. SARB cautioned the behaviour of banks if this were to create a risk factor to the economy of the country. The total governance structure was party to the overall performance. Could they imagine if SARB could litigate banks for having failed? It would no longer be a supervisory role, they would be taking the justice system’s role to say whether an act of corruption or mismanagement had taken place in a legal framework. Jurisprudence would not allow them to take that purview. Clearing this would be helpful because the Committee was going to be reviewing the Twin Peaks legislation, and they would not want to go into that space when there was still confusion around the role of SARB to the point where blame was unnecessarily apportioned to SARB. She was happy that Mr Naidoo was going to be the Registrar as he was going to instil a totally different culture in terms of how bank managers took risks, thinking there would be bailouts from government. They needed to find ways of limiting that risk because at the end of the day it was the public purse that intervened. How they would intervene as and when it happened, people doing it knowingly that in any way government would intervene. It was not a mistake, it was a deliberate effort by individuals, and not unskilled individuals. They could take lessons from around the world, it was not black unskilled people who took those decisions.

Mr G Hill-Lewis (DA) spoke about the question of reckless lending by African Bank. He knew that SARB had dealt with this in the Portfolio Committee on Trade and Industry, but at that point the Myburgh Report had only been released the previous evening. He had now had a chance to read the report in detail and it was clear that the commissioner did not investigate reckless lending. He explained those reasons and Mr Hill-Lewis understood why. He understood very well that SARB needed collateral for their loan, and that to do away with that collateral would be prejudicial to SARB's position and to the fiscus. His concern was that they were creating a perverse incentive in South Africa whereby many non-performing loans were originally illegitimate and reckless loans and had trapped very poor people, or 'uncertainly employed' people, in a debt trap from which they could not escape. They now essentially owed this money to SARB who was pursuing that money as collateral for their loan. There was a lot of prima facie evidence that there was widespread reckless lending in African Bank, 699 cases found in their Dundee branch and that was only one small town in KwaZulu-Natal.

There were numerous high court and tribunal cases, all documents were in the public record. He found one of a public servant from Johannesburg who was taking home R16 000 a month and had African Bank payments of R13 000, leaving him with a disposable income of R3 000 on which to live. This was the kind of lending going on. Mr Hill-Lewis did not think these loans should be used as collateral. They had an ethical and legal obligation under the National Credit Act to separate those loans that were legitimate bona fide loans and those that were reckless. When he asked SARB this question in August 2015, he was told that that investigation was being done. It it was clear that the commissioner was not doing that investigation. So he wanted to have this debate because he did not think it was good enough to say they had to pursue those reckless loans and borrowers to pay just because it was collateral for SARB's loan. He wanted to go through those credit agreements one by one to separate the bona fide from the reckless loans, to apply to the Consumer Tribunal or High Court as the Act allowed for reckless loans to be written off. If they needed to pursue anyone for that collateral, then they should pursue the major shareholders, superior and subordinate shareholders. They should not pursue over indebted poor South Africans who could not afford it.

Ms Khoza wanted to take forward the important comment made on fragmentation of approach to the entire financial sector. They needed to engage with National Treasury to find a way to deal with this. The reason she was saying this was because if one listened to the questions, they were channelled to SARB but the most appropriate entity to ask those questions was the National Credit Regulator.

She said that they could not ignore that some Members had a subtext to their questions which they called tough questions but they did not draw a line between that and an insult. Her understanding was that there were a number of individuals at African Bank, Mr Sokutu was not the only key individual, to be found wanting. Myburgh himself said the board was not exercising their fiduciary duties over the CEO. For you to be targeting Mr Sokutu alone, and then say he had no experience in the private sector, they were emotionally charged words, it said something else. Mr Maynier took pride in the fact that he had found a black African that was not competent. Even when he says the Committee did not ask tough enough questions, she took exception to that. They had PCI here, and held them to account. Why they had increased their investment in African Bank when they knew it was not doing well. Now Mr Maynier was portraying himself as the master builder with his fantastic solutions to all the problems in South Africa. The Committee should not take it, and should not allow Mr Maynier to continue with his approach. He was not sensitive to the fact that some of them were proud and they believed that they were competent.

She wanted to stress the question raised by the previous speaker, on the recovery of the loans from poor South Africans who could not afford it, they needed to find a way of addressing that without getting into the operational space. They were policy makers, they could not get involved in that space because it was meant for people like the Deputy Governor. Their role was more to perform fiscal oversight in as far as the operational space impacted on the overall picture. They needed to find a way to best address that. There had to be a lot of education in the first instance so that the people were not only looking at credit to mean financial inclusion, he had made that point well. Most people tended to think that financial inclusion was credit access. But credit access was just one aspect of it which was very risky. They needed to start addressing the demand side of the economy. They were always addressing the supply side, and we were becoming over consumptive.

Mr Buthelezi stated that whenever there was a failure, people were quick to point to a particular direction. That was why he spoke about internal and external auditors as all those people should have been working with the Chief Risk Officer, so things went wrong there. The timing of the intervention and by whom was irrelevant. They needed to look at who was on the board and the audit committee. There was a failure of the board of African Bank and its subcommittees. It could not be put on the doorstep of the Chief Risk Officer alone. They may as well look at the whole management, because the Chief Risk Officer reported to the Exco of the organisation, there was a failure of the governance structure throughout. They should not blame one person who could not be present to defend himself. People who were responsible should be able to take collective responsibility. When they looked at this they needed to be very holistic.

The Chairperson thought it was unfair when people were not present in the Committee to speak for themselves. In this case the person had passed on. Perhaps they should focus on how to appoint appropriate people, given the lessons learnt with African Bank so that they did not this situation again. The suggestion that someone saw him as a comrade and therefore put him in the bank, the Chairperson found that hard to believe. It was like saying this guy does not have a job, let us give him a job as a pilot in the SAA. The idea of cadre deployment was in the mind of opposition members. Having learnt the lessons, what would they do to prevent it happening again.

Mr Lees said one had to be cautious about taking umbrage when a particular member of the Committee took on their oversight role to focus on African Bank, see what happened, what they thought may have gone wrong and find out how to prevent it in the future. Everyone had different ways of approaching that but they all had a genuine wish to accomplish those goals.

He was concerned when Capitec Bank was raised, and he was pleased that Mr Naidoo had taken the position he had. He checked now, and he could not find anything negative in the media, and he would hate if there was a run on the bank because this Committee had put out suggestions that the bank was not stable. In fact their share price had gone up today. In general he thought the Committee and SARB had an enormous task and he thought working together as they had done, the Committee had great confidence in SARB and they would make every effort. It could not guarantee that these things would not happen again. It was the Committee's obligation to try and mitigate these things from happening.

The Chairperson thought Mr Lees was correct to draw his attention to it. He handled it clumsily, but it was not that there was anything wrong with the bank. He withdrew what he said.

Ms Khoza apologised for having reacted the way she did. Mr Naidoo said they were going to tighten the liquidity requirements, capital requirements and also probably needed to look at the fit and proper tests. When they did that, how were they going to ensure it did not end up undermining the policy of government, even the structural deficiencies in the economy.            If they wanted to participate in the insurance space in South Africa, the capital requirement there was around R12 million, and obviously it excluded certain people, and unfortunately those who tended to be excluded were black. The very people that needed to be brought in, also in the space where they were playing an active and meaningful role in the financial space. She asked how, whilst they were doing that, the liquidity aspect of African Bank was never really looked at so it was dishing out loans. They also needed to have more women in that space. Women, black and white, had been excluded in participating in the financial services space. So how would SARB ensure they were not undermining that agenda?

Mr Hill-Lewis agreed that the most appropriate regulator was the National Credit Regulator (NCR). The problem was that everyone seemed to think that someone else was doing it: the NCR, the commissioner, the curator, SARB. If they agreed that they should investigate reckless lending then he suggested that SARB pass on the credit agreements to NCR to check those credit agreements because they were the proper regulator to do so, but they would obviously need the source documents. The NCR could go through the three billion credit agreements which had to be done to ensure the poor and vulnerable were not accountable for this mess up.

The Chairperson stated that the Chairperson of the Portfolio Committee on Trade and Industry, Joan Fubbs,  had approached him to say that that Committee had some ideas on strengthening NCR powers. He saw in Business Day that it was going to Cabinet. The second meeting in August was a joint meeting with this committee.

Mr Bostander replied on who were the senior debt holders, saying it was mainly the asset management companies. What they did for fit and proper testing, any board or executive appointment needed to go to SARB and the Act was clear. SARB could not approve the appointment but they could object to the appointment. The board would appoint, it would go through the board process and the board decided whether the person was fit and proper to work within the organisation. Then there was the procedure that had to be completed with a form sent to SARB and it had to decide whether it agreed with the appointment or not. SARB had learnt lessons. Some of the processes now were that they interviewed the board to see the specific process used to hire the individual.

On the precise date when SARB responded to the appointment of Mr Sokutu, he would have to get back to them. Maximising profits by taking higher risks was a big problem in the financial sector, often because the profits were private but when there were losses, it was public. Now they had to regulate the banks, and tightly, because they had to change that incentive structure. They could not have a situation of when there were high profits, shareholders got rich but when there were losses, society as a whole had to take responsibility. All the reforms put in place over the last seven or eight years attempted to minimise risk of financial instability and crisis to the taxpayer. They had attempted to minimise the chances of large systemic banks failing by raising the capital requirements, the liquidity requirement and more tightly supervising them. They could not provide a watertight guarantee; they would try their best but they could not provide that. They would continue that process of regulating and supervising the banks in a way that minimised the risk.

These tighter regulations did they raise the barriers to entry and did it prevent them from being transformed in terms of an ownership sense. How did they get a balance between high barriers to entry to prevent fly by night operators from becoming banks, but at the same time transform the financial sector so that women and black people could get access, not just to managerial roles but to ownership and contro? They had to have a combination of policies, tight regulations, high capital requirements but they had to realise that there had to be empowerment. The Financial Sector Charter went a long way in that regard as did the BEEE Codes. Each of the banks, and the banking system in general knew there was still a lot more to do to diversify the financial sector. It was imperative to broaden the ownership of the financial sector to the historically disadvantaged. But it had to be done in a way that did not compromise the soundness of the financial sector, because often it was the poorest of the poor who were impacted upon if they got the balance wrong. SARB was aware of that balance and trying to create that balance through a myriad of policies. National Treasury, FSB, NCR, Department of Trade and Industry were all involved in trying to change the financial sector.

On reckless lending, the debt trap and whether SARB was pursuing money to cover the collateral for its loan. SARB would not do anything unethical to attempt to recover money from the bad book. They would adopt the highest ethical standards to attempt to recover that money. At the moment, the National Credit Act stated that if a loan was found to be reckless, then it had to be written off. They could not do that willy-nilly. They could not say that the entire bad book was reckless lending. There were dangerous systemic risks to that. They had to have a competent authority, the National Credit Regulator, do a proper investigation to see if there was reckless lending. If there was, then the law made provision for that loan to be written off.

In the particular case of what happened in the Dundee branch of African Bank, there was a charge of reckless lending laid against African Bank for those loans. African Bank’s argument was that it was not reckless lending but fraud, that the staff members committed fraud. African Bank agreed to write off the loans and there was a settlement before it got to the Tribunal. They also paid a R20 million fine. It would not be fair to extrapolate that the entire loan book was reckless, because they had to maintain the tight balance of providing access and financial inclusion versus locking out the poor completely. If they took rash steps by saying all of those loans were reckless, the bank had to write off these loans, there would be no lending to poor people. He wanted to make that plea that they maintain that balance because if they got that balance wrong he thought the financial sector would be weak. If it was found there was reckless lending in African Bank or any other competent authority, then those could be written off.

He agreed on the point about fragmentation. On over indebtedness - there was a broader social question on how to manage a society that was over indebted. If they wrote off people’s loans there may be a moral hazard for the people and for the banks. If they did not write off certain loans, people who had recently become unemployed without means to repay, then there was a social problem. They had to find social solutions. The solution could not be to just write off that loan.

He agreed that there was a broader failure of governance that lead to this problem. It was a cascade of corporate governance, leading to the subcommittees on board risk, the culture of the bank, all of that failed. He fully accepted the spirit with which the Committee had engaged with SARB. What had gone wrong, how could they fix it, how could they make the financial sector better? That was essential and that was the spirit with which they came to this meeting. They recognised that mistakes were made, even in SARB. When something went wrong it was SARB's job to find out what went wrong and make it better. Where there was genuine negligence, those people had to be held accountable through a process of law.

Committee Report on UK Study Tour
The Chairperson said that this report was sent to the participants of the study tour because they were there and they would know most what was useful to add. None of the Members had gotten back to him. Up to half way through page 15 was an overview of what happened. The last conclusion was correct, it was very interesting and rewarding. It turned out to be even more successful than anticipated. It was one of the more interesting tours, not necessarily the best, but very interesting for many of them because they were not familiar with the technical financial side. There the context was different and the lessons they drew would not directly apply to them. It was a good study tour and a pity that they could not take the whole Committee.

It was unfair to expect members who were not there to scrutinise every line, but for members who did go it was not acceptable that they did not look at it carefully. He asked if there were any comments.

Ms Kekana said the report covered broadly the activities they engaged in during that excursion. They agreed with what was written. Last week she mentioned that they needed ombudsman because they had met different ombuds in the UK and saw how they were able to interface in the interests of the public.

The Chairperson stated that she could have written a reply to say she was happy with it. It was amazing that for a 21 page report there were no comments. Any comments on lessons learnt. It did not affect policy decisions, all Committee members were bound by the report. In his view as chair it was unacceptable that all Members who went did not have anything to say. He wanted to look at lessons learnt. Presumably everyone else agreed. He asked for permission to go through the lessons section again. This report would be kept while going through the Bill. All Members were bound by this report. They should look at it more carefully.

Ms Kekana (ANC) referred to page 17 on whether South Africa was a strict Twin Peaks model, saying the way this question was phrased, was relevant.

The Committee adopted the Committee Report.

The Chairperson noted that the Minister was supposed to introduce the Rates and Monetary Amounts and Amendment of Revenue Laws Bill in the House, but that was postponed until the next term. On Thursday 26 May there was a debate in the House on building inclusivity around economic growth.

The meeting was adjourned.

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