Page 133 - SARB: 100-Year Journey

The 1980s banking crisis
The economic fallout in the 1980s resulted in a partial banking crisis that lasted from the mid-1980s until the early 1990s. The SARB stepped in to assist a number of banks in distress. The distress could be traced back to aggressive banking asset growth during the early 1980s and “... the undesirably high rates of growth in bank credit.” (Quarterly Bulletin, December 1989, p 21).
In the latter part of the 1980s, worsening conditions gave rise to high inflation and interest rates. Moreover, the South African economy, and the banking system, was dealing with the shock of trade and financial sanctions whose consequence was capital outflows, which placed pressure on short-term funding requirements (Davis Panel of Experts Report, 2002).
In 1988, for example, inflation decelerated to 12.9%, from 18.6% in 1986. However, towards the end of 1988 inflation was on an upward trajectory. The SARB responded by increasing interest rates, which remained high for a prolonged period (Davis Panel of Experts Report, 2002; Quarterly Bulletin, December 1989).
The Davis Panel of Experts Report reflects that South African banks and consumers had previously been accustomed to short-term interest rate hikes followed by immediate reductions, and not a sustained effort of monetary policy tightening. This meant consumers and businesses to whom “the undesirably high rates of ... bank credit” had been extended began struggling to service loans. Another unintended consequence of the abnormal economic environment was that the South African banking sector’s credit risk models were not always adequately prepared to predict such an occurrence (Davis Panel of Experts Report, 2002).
In the December 1989 edition of the SARB’s Quarterly Bulletin (p 19), the central bank noted: “Rates of increase in the banks’ credit extension in the past several months and in the past few quarters were also influenced, on occasion and at the margin, by a number of special factors that included management buyouts, disinvestment actions and companies’ use of bank credit for the payment of loan levies.”
Alpha Bank, Cape Investment Bank Limited, Finansbank, Pretoria Bank Limited, Prima Bank Limited and Bankorp, among others, went into distress. “[Two] banks were placed under curatorship and a third one liquidated.” (Davis Panel of Experts Report, 2002,
p 28). The situation not only reflected the prevailing adverse economic context, but also highlighted a structural defect in South Africa’s supervision of banks.
“In the mid-1980s ... no adequate, explicit principles and procedures for bank supervision existed in South Africa. ... Since the transfer of the responsibility for bank supervision to the Reserve Bank in 1987 and following the Banks Act of 1990, South Africa now has a supervisory regime that is strong by international standards,” according to the Davis Panel of Experts Report (2002, p 100).
Before that change, the function of bank supervision had previously resided in the Department of Finance (now the National Treasury).
The government and the SARB at the time kept the banking emergency a secret. In part, this action could be attributable to the fact that the authorities wanted to prevent contagion, and were also influenced by the politics of the era. “Reserve Bank policy was conditioned by the political climate of the period.” (Davis Panel of Experts Report, 2002, p 5).
Behind the scenes, the SARB quietly provided lender of last resort assistance to eight banks. “In essence, a central bank acting as lender of last resort provides temporary extra liquidity to banks in order to stem a potential loss of confidence and deposit run.” (Davis Panel of Experts Report, 2002, p 59).
The biggest beneficiary of the SARB’s assistance was Bankorp. In some instances, the secrecy surrounding the SARB’s actions was disguised through the use of simulated transactions, an action that was criticised by the Davis Panel of Experts.
In terms of the SARB’s assistance to Bankorp between 1985 and 1995, the Davis Panel of Experts Report (2002, p 77) concluded that the cumulative amount advanced to the bank was “... a grant disguised as a loan by a simulated transaction.”
Despite the banking distresses of the time, “[it] is noteworthy that, unlike three-quarters of International Monetary Fund member countries (including highly developed countries), South Africa actually experienced no major, system-threatening banking failures during the past thirty years.” (Davis Panel of Experts Report, 2002, p 56).
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