Banks Amendment Bill [B12-2018]: public hearings

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Finance Standing Committee

04 September 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee held public hearings on the Bank Amendment Bill as introduced by Mr F Shivambu (EFF). The Banking Association South Africa gave a submission, and National Treasury and the South African Reserve Bank (SARB) gave inputs.

Mr F Shivambu (EFF) said the EFF’s correct observation was that the multi-party democratic system and dominance of one political party in the executive and legislative arms of the State has largely limited the legislative arm’s capacity to initiate, process and pass legislation. 99% of Laws that Parliament deliberates on are submitted by the Executive and this does not fare well for a truly democratic system. Outside of the oversight functions, Parliament should develop and internalise the practice of initiating, processing and passing legislation, even in instances where the Executive did not initiate. This should change. On the Banks Amendment Bill, it would effectively amend the Banks Act to allow the State to own banks. In its current form, the Bank Act only permits public companies to own Banks and does not explicitly permit the State to own Banks. This is despite the fact that the State currently owns, what could be termed as quasi-banks since they are not regulated as per the Banks Act and could not therefore perform certain functions. These include but were not limited to the Post Bank and iThala.

The purpose of the amendment is to enable a state-owned company to register and conduct the business of a bank in terms of the Banks Act; to allow a state-owned company to register an appropriate memorandum of incorporation with the Commissioner appointed in terms of the Companies Act; to enable a state-owned company to exercise control over a bank; and to allow a state-owned company to be eligible to apply for registration as a controlling company; and to provide for matters connected therewith.

On the political and economic rationale for the amendment, banking concentration was foremost. Currently, South Africa’s banking sector is dominated by five large banks, which collectively held 90.5% of the total banking sector assets as at 31 December 2017. Local branches of foreign banks held 5.9% of banking sector assets as at the end of December 2017, while other registered banks collectively represented 3.7%.

BASA and its members support all new banks in South Africa insofar as they are subject to similar regulatory supervision enforced by the South African Reserve Bank as the primary supervisor under the provisions in the Banks Act, South African Reserve Bank Act and the Financial Sector Regulation Act. BASA was of the view that this will ensure a level playing field in terms of prudential, governance and risk standards which the entirety of the financial sector is subject to. Furthermore, supervision for any new banks should be in line with the type of products and services such banks offer. This should include the relevant prudential, market conduct, credit and resolution requirements as this will be the best way to manage any risks such bank/s may introduce to the financial system. In light of the aforementioned, BASA recommended the efficient utilisation of DFIs and/or enhancements to their mandates to achieve policy goals. Consideration should be given to comprehensive and coordinated programmes beyond access to finance – such as: non-financial support (infrastructure), coaching/mentoring, ease of doing business; access to markets.

National Treasury pointed out that there were heightened risks for depositors’ money in a state bank because of the following reasons: a generally bad repayment culture (for example, Eskom); problems with asset quality (Ithala Bank); and the fact that such banks often lend to single markets (for example, the Land Bank) which made their business model more risky. Governance and operating model are therefore what defines safe sustainable banks regardless of ownership. In the final analysis, a State Bank would face similar constraints as existing banks. In effect any State Bank that wishes to ensure safety of depositors’ funds must act conservatively along with the same regulatory oversight. The implications of this means that the operating model of the State Bank could not diverge dramatically to commercial banks currently operating.

The SARB said a state-owned bank would have to be subject to exactly the same laws and regulations as commercial banks. Only state-owned companies with a solid track record of fiscal rectitude, solvency and financial sustainability should be allowed to create a state-owned bank. As a matter of principle, the Reserve Bank was broadly comfortable with a more comprehensive inclusion of state-owned financial institutions into the formal regulatory framework.

Members supported the amendments to the Bill. Having a fully-fledged state-owned bank was a ruling party resolution. Changes must happen and the private sector could not be relied upon to be drivers of such change. The private sector should come on board. They expressed concern that the bulk of empirical evidence suggests that having state banks is associated with slower economic development and weak financial sector stability leads to greater economic stability. It would not be ideal to have such amendments before the country gets to the bottom of the institutional weakness which enabled state capture to occur. Beyond the regulatory framework, challenges such as weak governance within the public sector had to be grappled with. Proposals by the EFF were glossing over obtaining realities.

The Chairperson said the Private Members’ Bill must be given the fullest attention it deserves as it was no different from a Committee Bill or one from the executive. The input from BASA was disappointing as the Committee’s position on financial sector transformation were made clear in its Report on the Transformation of the Financial Sector. Stakeholders could disagree with the Report but should not pretend as if it did not exist. He was surprised that there has not been much meaningful participation on the part of established banks. There had been few submission from the public as well. Furthermore, the Committee’s primary commitment in the current parliamentary term was finalisation of the three tax bills, the Carbon Tax Bill as well as the Banks Amendment Bill. The majority in Committee was not saying the mooted state bank should be subjected to a lighter dispensation. Rather, there should be a diversified regime. BASA seemed to be worried about the fiscus only when it is convenient. Its credibility was at issue here. He indicated this was the initial foray and the majority would decide at a later stage.

Meeting report

Presentation by Mr F Shivambu
Mr F Shivambu (EFF) said the EFF’s correct observation was that the multi-party democratic system and dominance of one political party in the executive and legislative arms of the State has largely limited the legislative arm’s capacity to initiate, process and pass legislation. 99% of Laws that Parliament deliberates on are submitted by the Executive and this does not fare well for a truly democratic system. Outside of the oversight functions, Parliament should develop and internalise the practice of initiating, processing and passing legislation, even in instances where the Executive did not initiate. The practice however, has been where the executive, which is often bloated with the dominant party senior leaders, feeds Parliament with readymade legislation, and only few changes are accommodated from public hearings and comments of Members of Parliament. Members of Parliament were therefore relegated and demoted from the constitutional title of lawmakers to law commentators. This should change. Only one Private Members’ Bill was passed since 1994, and the rest came from the executive.

Banks Amendment Bill
The Banks Amendment Bill would effectively amend the Banks Act to allow the State to own banks. In its current form, the Bank Act only permits public companies to own Banks and does not explicitly permit the State to own Banks. This is despite the fact that the State currently owns, what could be termed as quasi-banks since they are not regulated as per the Banks Act and could not therefore perform certain functions. These include but were not limited to the Post Bank and iThala.

Purpose of the amendment

  • To amend the Banks Act and insert certain definitions;
  • To enable a state-owned company to register and conduct the business of a bank in terms of the Banks Act;
  • To allow a state-owned company to register an appropriate memorandum of incorporation with the Commissioner appointed in terms of the Companies Act;
  • To enable a state-owned company to exercise control over a bank;
  • To allow a state-owned company to be eligible to apply for registration as a controlling company; and to provide for matters connected therewith.

Section 1

  • Section 1 of the Banks Act (hereinafter referred to as the ‘‘principal Act’’), is hereby amended—
  • By the substitution for the definition of ‘‘bank’’ of the following definition: ‘‘bank’’ means a public company or a state-owned company registered as a bank in terms of this Act’’;
  • By the substitution for the definition of ‘‘branch’’ of the following definition:‘‘ ‘‘branch’’ means an institution that is not a public company or a state-owned company as contemplated in section 11(1), but by means of which a foreign institution conducts the business of a bank in the Republic under an authorization referred to in section 18A;’’;
  • By the substitution for the definition of ‘‘controlling company’’ of the following definition:‘‘ ‘‘controlling company’’ means a public company or a state-owned company registered in terms of this Act as a controlling company in respect of a bank;’’; and
  • By the insertion after the definition of ‘‘securitization scheme’’ of the following definition: ‘‘state-owned company’’ has the meaning ascribed to that expression in section 1 of the Companies Act;’’.

On the political and economic rationale for the amendment, banking concentration was foremost. Currently, South Africa’s banking sector is dominated by five large banks, which collectively held 90.5% of the total banking sector assets as at 31 December 2017. Local branches of foreign banks held 5.9% of banking sector assets as at the end of December 2017, while other registered banks collectively represented 3.7%. This is despite that South Africa has 19 banks as well as 15 local branches of foreign banks. There are quasi banks that are owned by the State and these should be given full operating licences. Postbank should be a fully-fledged bank for social grants recipients, and a public servants bank should be created through the asset base of African Bank, which is owned by the South African Reserve Bank, Public Investment Corporation and other banks. Salaries paid through this and affordable mortgage provided with the assistance of the PIC through this. Further, a bank for all state-owned companies should be licensed, and be tasked with raising capital. This is in light of the fact that the Minister of Public Enterprises had already mandated BASA to engage with banks and institutional investors with a view of putting in place a facility to finance SOEs.

Examples of state-owned banks in the world
China has the biggest publicly-traded bank in the world by market capitalization, the Industrial and Commercial Bank of China (ICBC). The government of China, through the Minister of Finance, is the most important shareholder in the bank with significant influence, in direct ownership of approximately 34.6% of the issued share capital. The Central Huijin Investment, another state-owned investment company owns 34.7% of the issued share capital of the bank, which brings the state control of the bank well over 65%. In 2017, ICBC recorded R50 trillion group total assets of R50.1 trillion, an increase form R36.7 trillion recorded in 2013. According to ICBC 2017 annual report, the bank also achieved R287 billion in net profit for the year, the best in the global banking industry.

Proposed state-owned banks
A Public Service Bank should bank public servants across all spheres of government, including payment of salaries; issuing credit; mortgage; vehicle finance among other related functions. The Postbank must provide efficient and affordable banking for the State, including banking services for other state-owned entities. The Postbank must also facilitate all state transactions, a cost-efficient move that will ultimately reduce the cost of banking and ensure banking services to the poor and workers at a minimum bank charges. Postbank must also make available loans to allow people who do not qualify for loans to build homes and start businesses within reasonable terms and cost of borrowing. Also, the Land Bank must become a commercial bank that focuses on agriculture, fisheries and forestry businesses. The state-owned banks should be under the existing regulatory framework, the FSR, the Banks Act, and all related legislation.

On the Financial Matters Amendment Bill, introduced by National Treasury on 22 August 2018, the Bill only scratches the surface- not only of the Banks Act, but of five legislations. The recommended amendment of the Treasury focuses on only one section and emphasises the capital adequacy of the banks and the EFF is not opposed to insertion of that in the Banks Amendment Bill.

Mr Shivambu urged movement towards the redefinition of banks ownership and control in South Africa. The freedom charter which is the most important revolutionary framework says that the banks, mines and monopoly industries shall be transferred to the ownership of the people as whole.

Banking Association South Africa (BASA) submission
Ms Nobambo Mlandu, BASA Representative, said BASA and its members support all new banks in South Africa insofar as they are subject to same regulatory and supervisory provisions. Subjecting all banks to the same regulatory framework and oversight will provide a level playing field for the entirety of the financial sector and ensure that: there is no introduction of systemic risk into the financial markets; there is an effective resolution regime for the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss; and all banks to contribute to an explicit and privately funded deposit insurance scheme. 

Provisions of the Banks Act
To provide for the regulation and supervision of the business of public companies taking deposits from the public; and to provide for matters connected therewith. Section 2 of the Banks Act has provisions for exclusions from application of Banks Act insofar as they impose requirements with which any institution must comply.
These exclusions apply to the Reserve Bank; the Land Bank; Development Bank of South Africa; PIC; any mutual bank or any other institution or body designated by the Minister by notice in the Gazette. Development banks are established with the aim of addressing market failures in the provision of finance.

Consideration 1: rationale and reasoning
The objective is unclear, given the provisions for development finance institutions (DFIs). BASA was concerned about the potential additional burden on the fiscus in relation to, inter alia, initial and ongoing funding and licence obligations of a state-owned bank. There was also possibility of political influence and interference which could result in moral hazard. Therefore, consideration should be given to unintended reckless lending in light of NCA provisions and debt intervention discussions. The impact on commercial banks in terms of their risk profile and target market needs to be considered as this may change going forward once the impact of a state-owned or operated bank on the banking industry starts to take effect. Consideration should be given to the potential for systemic risk on the current banking industry should such a bank come into being‚ especially if there is large-scale movement of public sector staff away from the current banks to such a bank.

Consideration 2: Public Finance Management Act (PFMA) provisions
The proposed state-owned bank must comply with the Banks Act prescripts in relation to, inter alia, capital requirements, financial reporting and external audits, disclosures, notwithstanding other PFMA obligations. A regulatory gap analysis needs to be undertaken to understand the implications of state-owned banks being subject to the PFMA, Companies Act, Banks Act, Financial Sector Regulation Act, and any other in-scope legislation.

Consideration 3: state-owned companies
BASA was concerned about the public record of governance, funding and administration challenges facing SOEs. The banking sector had demonstrated willingness in addressing these challenges. Therefore, applicants for bank licences must have financial means to comply with Banks Act requirements. State-owned bank must comply with the same regulatory and supervisory requirements in line with Banks Act licence requirements. Collaborative partnership including DFIs, BASA and its members. Safeguards would have to be put in place to prevent the state imposing laws or regulations that compelled other state institutions - including provincial and local government - to only hold accounts with the state-owned bank. Currently all commercial banks compete via tender to operate banking facilities for various arms of government and this forms a substantial portion of business for such banks.

BASA and its members support all new banks in South Africa insofar as they are subject to similar regulatory supervision enforced by the South African Reserve Bank as the primary supervisor under the provisions in the Banks Act, South African Reserve Bank Act and the Financial Sector Regulation Act. BASA was of the view that this will ensure a level playing field in terms of prudential, governance and risk standards which the entirety of the financial sector is subject to. Furthermore, supervision for any new banks should be in line with the type of products and services such banks offer. This should include the relevant prudential, market conduct, credit and resolution requirements as this will be the best way to manage any risks such bank/s may introduce to the financial system. In light of the aforementioned, BASA recommended the efficient utilisation of DFIs and/or enhancements to their mandates to achieve policy goals. Consideration should be given to comprehensive and coordinated programmes beyond access to finance – such as: non-financial support (infrastructure), coaching/mentoring, ease of doing business; access to markets.

National Treasury input
Mr Roy Havemann, Chief Director: Financial Stability and Markets, National Treasury, pointed out that there were heightened risks for depositors’ money in a state bank because of the following reasons: a generally bad repayment culture (for example, Eskom); problems with asset quality (Ithala Bank); and the fact that such banks often lend to single markets (for example, the Land Bank) which made their business model more risky. Governance and operating model are therefore what defines safe sustainable banks regardless of ownership. In the final analysis, a State Bank would face similar constraints as existing banks. In effect any State Bank that wishes to ensure safety of depositors’ funds must act conservatively along with the same regulatory oversight. The implications of this means that the operating model of the State Bank could not diverge dramatically to commercial banks currently operating.

South African Reserve Bank (SARB) input
Mr Unathi Kamlana, Head of Policy, Statistics and Industry Support, SARB, said a state-owned bank would have to be subject to exactly the same laws and regulations as commercial banks. Only state-owned companies with a solid track record of fiscal rectitude, solvency and financial sustainability should be allowed to create a state-owned bank. As a matter of principle, the Reserve Bank was broadly comfortable with a more comprehensive inclusion of state-owned financial institutions into the formal regulatory framework.

Discussion
Ms T Tobias (ANC) supported the amendments to the Bill. Having a fully-fledged state-owned bank was a ruling party resolution. Changes must happen and the private sector could not be relied upon to be drivers of such change. The private sector should come on board. It was arrogant for BASA to say the private sector should be left alone as the ushering in of a developmental state could only be spear-headed by government. BASA’s presentation was biased and did not provide convincing alternative views.

Ms G Ngwenya (DA) expressed concern that the bulk of empirical evidence suggests that having state banks is associated with slower economic development and weak financial sector stability leads to greater economic stability. It would not be ideal to have such amendments before the country gets to the bottom of the institutional weakness which enabled state capture to occur. Beyond the regulatory framework, challenges such as weak governance within the public sector had to be grappled with. Proposals by the EFF were glossing over obtaining realities. For instance, most of the state banks which Mr Shivambu made reference to rely on enormous bailouts to keep them in business. Financial viability could not be the only consideration for establishing a state bank; there needs to be an economic rationale and clear sense about the mandate of such a bank. She believed the Bill does affect provinces and therefore section 76 provisions should apply.

Mr N Nhleko (ANC) said at issue was the false perception that the state could not run anything effectively and efficiently. He failed to understand why there is a belief that everything owned by the state does not conform to strict regulatory measures is untrue and should be dispensed with. There is nothing wrong in having government pursuing developmental objectives. The current problems in some state-owned entities were not cast in stone, thus it would not be correct to judge a future situation on the basis of what was currently obtaining. He noted BASA’s concern about the possibility of political influence in the mooted bank. The Committee could not be told of that when banks are guilty of same, especially when they were part of the political problem and took position that under normal circumstances is unheard of in the recent months.

Mr Shivambu expressed concern about the deliberate misrepresentation of facts. The DA bases its ideological positions on falsehoods. The recent global crisis was as a result of recklessness by privately-owned banks. The State Bank Bill was different from the Banks Amendment Bill as the latter would give a legal provision and make way for the establishment of a state-owned bank. It was not an either/or situation. Accompanying legislation would have to be dealt with thereafter. He urged the Committee not to buy into the urban legends by neo-liberals.

Ms Mlandu said BASA was encouraged by the debate and comments from Members. BASA would present the comments to its member organisations and was looking forward to being a part of the conversations going forward.

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, said Treasury supports the Bill in as far as it removes the existing legal barriers to the establishment of state-owned banks. Treasury would deal with the substantial issues arising from the Bill at a later stage through appropriate processes. There was no ideological position on this subject.

The Chairperson said the Private Members’ Bill must be given the fullest attention it deserves as it was no different from a Committee Bill or one from the executive. The input from BASA was disappointing as the Committee’s position on financial sector transformation were made clear in its Report on the Transformation of the Financial Sector. Stakeholders could disagree with the Report but should not pretend as if it did not exist. He was surprised that there has not been much meaningful participation on the part of established banks. There had been few submissions from the public as well. Furthermore, the Committee’s primary commitment in the current parliamentary term was finalisation of the three tax bills, the Carbon Tax Bill as well as the Banks Amendment Bill. The majority in Committee was not saying the mooted state bank should be subjected to a lighter dispensation. Rather, there should be a diversified regime. BASA seemed to be worried about the fiscus only when it is convenient. Its credibility was at issue here. He indicated this was the initial foray and the majority would decide at a later stage.

The meeting was adjourned.

 

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