With the publication of the Draft Deposit Insurance Regulations for public comment earlier this month, the operational implementation of the Corporation for Deposit Insurance (Codi) is one step closer.
The draft legislation goes hand in glove with the establishment by the South African Reserve Bank (Sarb) of Codi, the nation’s first deposit insurance body. Its aim: to protect bank depositors and boost confidence in the financial sector.
According to the Sarb, Codi’s primary responsibilities are establishing, maintaining, and administering a deposit insurance fund to protect the banks’ covered depositors and to inform depositors of its benefits and limitations if a bank is placed into resolution.
The fund forms part of the implementation of the Financial Sector Laws Amendment Act, which gives the Sarb the power to act as a resolution authority and establish the body.
With Codi recognised as a legal entity from 24 March, the scheme is set to become operational on 1 April next year once the secondary legislation that provides for the implementation of the scheme’s functions has been enacted.
If you find this a bit confusing, well, you are not alone. Moonstone did a deep-dive into the “Statement of the need for, expected impact and intended operation of the proposed Deposit Insurance Regulations June 2023” – which was made available on National Treasury’s website with the Draft Deposit Insurance Regulations.
The nitty-gritty
Codi is a subsidiary of the Sarb, but its affairs are managed by an independent board. In October last year, Hendrik Nel, the chief executive of Codi, said the insurance body would protect deposits held by natural or non-financial persons. He said it would protect qualifying banking products where the nominal balance is guaranteed and repayable at par.
Qualifying accounts held by sole proprietors would be covered separately from an individual’s personal bank account.
The coverage limit will be R100 000 if the bank can identify the accounts the individual uses for its sole proprietor business. Qualifying deposits in foreign currencies will also be covered up to R100 000.
When a bank fails, foreign currency balances will be converted to rands before a depositor is paid.
Who will be covered by Codi?
The term “qualifying depositor” occurs frequently in the Statement.
According to the definition in the draft, a qualifying depositor includes an account holder of a simple account, a beneficiary of a formal beneficiary account, and an informal beneficiary account holder that holds a qualifying product.
A “qualifying product” means a product included in depositor protection, namely a deposit, a qualifying deposit, or a product where the capital amount is guaranteed and repayable at par, regardless of its term or currency.
In 2021, Codi conducted a survey based on the proposed coverage rules outlined in the coverage paper. The results of the survey, shared in the Statement, found that, as of the end of March 2021, about 85% of deposit values, 95% of depositors, and 97% of accounts qualify for deposit insurance protection.
According to the Statement, for all types of banks, most of the qualifying depositors will be fully covered at an R100 000 coverage level.
Why R100 000?
Results from this same survey showed that the total qualifying balance for the banking sector was R2.72 trillion. At the proposed R100 000 coverage limit, the banking sector’s estimated total covered deposit balance was R613 billion. This means that the percentage of total qualifying deposit balances covered is 23% on average.
When fund was first announced, the question was asked whether this R100 000 coverage limit would be sufficient. Sarb responded saying it was in line with international best practice.
For this best practice, the Sarb looks to the International Association of Deposit Insurers (IADI).
The IADI’s core principles state that the level and scope of coverage must be limited and designed to be credible, “so as to minimise the risk of runs on banks and to not undermine market discipline”.
It further states that “the level and scope of coverage must be set so that the large majority of depositors across banks are fully covered while leaving a substantial proportion of the value of deposits partially covered”.
Regarding the impact of the proposed coverage limit, the Statement said the limit influences the cost to the banking sector.
“Unlimited coverage is expensive and more likely to cause moral hazard. The coverage limit should provide adequate protection to the more vulnerable depositors, but it should not be too costly for the banking system and unlikely to cause moral hazard.”
According to the survey results, 49 573 966 depositors qualify for deposit insurance coverage. Of these qualifying depositors, almost 85% hold lower deposit values (in the R0-R10 000 size bucket) compared to less than 5% of the qualifying depositors having deposit values above the coverage limit (in the size bucket greater than or equal to R100 001).
Most of the qualifying depositors (95%) have qualifying deposit balances below the proposed R100 000 coverage limit.
To validate the adequacy of the proposed R100 000 coverage limit, the survey also investigated the impact of increasing the coverage limit from R100 000 to R150 000 and from R100 000 to R200 000. Without going into too much detail, the survey found that the added cost of a higher coverage limit would not equate to much of a higher benefit to qualifying depositors.
Moonstone contacted Standard Bank South Africa (SBSA) for their input on the draft. Asked for the bank and financial services group’s opinion on whether the R100 000 coverage is sufficient, they said that the Sarb had done extensive research on the appropriate level of deposit insurance in South Africa.
“All banks in South Africa are subject to the same thresholds and premiums, and in general other countries also have such schemes with levels informed through assessments conducted in those jurisdictions,” SBSA said.
The cost of peace of mind
All registered banks will automatically become members of Codi. These include 17 commercial banks, three mutual banks, five cooperative banks, and 13 local branches of foreign banks in South Africa.
These banks will be required to pay an annual levy to Codi and monthly premiums to the Deposit Insurance Fund (DIF). Earlier this year, Kuben Naidoo, the deputy governor of the Sarb, told Business Day that Codi would use the annual levy to cover its operational costs, while the DIF premiums will be used to reimburse covered depositors.
Annual premiums, the Statement says, will be 0.2% of the sector’s total covered deposit balance, which is R1.22bn a year. The levy will be 0.015% of the sector’s total covered deposit balances, which is estimated at R92 million for one year based on the total sectors covered deposit balance.
According to the Statement, the various institutions’ financial contributions will depend on their covered deposit balance. Commercial banks’ slice of this pie equals 96.4%. That makes their financial deposit insurance contributions the largest by far.
A table, titled “The comparison of the deposit insurance contributions by type of bank” estimates commercial banks will pay R1 183 113 000 in premiums and levies of R88 733 000. Mutual banks, which have the lowest covered deposit balance, are estimated to pay R1 156 000 in premiums and R87 000 in levies.
But wait, there is more
Besides these premiums and levies, banks will also have to shell out for additional information technology systems costs and operational costs. For example, banks will be required to provide information to the Corporation in a single customer view (SCV) format.
“The Corporation’s requirement for SCV reporting may result in banks incurring costs for administrative requirements and IT systems configurations,” the Statement reads.
Additional operational costs will include the requirement for customer-facing staff to undergo depositor protection training annually “using the training or training material made available by the Corporation”, as well as instituting “adequate internal controls and robust systems for reporting to the Corporation”. Internal procedures and controls of bank documentation will also have to get a once-over to bring them in line with the Corporation’s requirements.
Considering all these underlying costs, Moonstone wondered whether the projected premiums and levies are a true reflection of what banks could end up paying once the DIS scheme comes into effect.
SBSB said the survey was conducted some time ago and there had been many changes to the framework since. The group added they were not able to compute the number the Sarb calculated because they did not have the inputs Sarb had.
“While there are many factors to consider and some legislative and DIS requirements still subject to finalisation, an exact number cannot be determined. However, the covered balance highlighted (above) can be referenced to determine the annual premium in aggregate.”
On whether the additional costs would, as the Sarb said, not be “too costly for the banking system and unlikely to cause moral hazard”, SBSA said that they had to a large degree relied on existing processes and systems to meet the requirements inclusive of SCV “and thus could limit the amount expended”.
What will consumers pay?
According to the Statement, should banks choose to recover the financial contribution to the Corporation from depositors, the estimated annual cost would be R26 per qualifying depositor.
Moonstone asked SBSA whether increased bank costs, as a knock-on effect of the scheme, were something bank users needed to be concerned about.
“SBSA has not finalised its internal processes in this regard.”
Written public comments may be submitted to CommentDraftLegislation@treasury.gov.za by close of business on 15 August 2023.
Click here to download the draft regulations and the Statement.
