Banks investigate new funding models

2011-05-29 09:06

Johannesburg - The way in which banks are being managed could change radically if new regulations on their funding are introduced.

This could also change the approach to investments.

A representative task team from the South African Reserve Bank, the banks themselves, portfolio managers and the Association for Savings and Investment South Africa (Asisa) is currently investigating different funding models for South African banks.

Banks are too dependent on short-term deposits by institutional investors – generally in the form of money-market investments.

Standard & Poor’s said the quality of banks’ investment instruments and their exposure to inflows of money from portfolio managers threaten the economy as a whole.

The dependence on inflows from portfolio managers creates an imbalance in banks' assets and liabilities.

According to Standard & Poor’s, this means that none of the South African banks meets the new liquidity requirements of the Basel Committee on Banking Supervision (Basel III).

In terms of Basel III banks must hold sufficient capital and liquid assets to protect themselves from a solvency and funding crisis.

Banks should also have sufficient liquid assets to withstand outflows of money resulting from panic withdrawals over a period of a month. According to National Treasury, South African banks are well capitalised, but they do not satisfy the liquidity requirements.

The task team's work is to find solutions for the funding problem – but each member wants to protect different interests.

Standard & Poor’s credit analyst Matthew Pirnie says banks' funding problem derives from the low rate of savings in South Africa and the switching around of money by portfolio managers and pension funds.
Deposits by individuals and investments by institutional investors currently represent about 50% of bank deposits or funding.

As a partial solution to the problem, pension funds are already committed to buying long-term debentures from banks. Pirnie said another option was to allow pension funds to invest up to 75% of their assets in instruments issued by banks. A further suggestion is to modify savings products for the longer term, which would prove expensive for banks.

There is, according to Pirnie, no doubt that exchange control needs to be adjusted to make more foreign investment possible.

The task team is not disposed to do so, precisely because exchange control played a large part in protecting South African banks during the global financial crisis.