Question:
Time and again the newspapers say that South African banks are safe. How true is this and can we be certain? What about the time lag between events in Europe, the USA and here?

Answer:
With the recent developments around the global credit crisis, government rescue packages and banks shutting their doors, it is not surprising that many South Africans have questioned how safe they are from similar disasters. Remember, this comes at a time when we are just beginning to forget the Saambou saga of 2002 that made us realise that money in the bank has some inherent risk, albeit small.

The most appropriate way of understanding the risk/safety of your money is to look towards the robustness of the banking system that governs the banks as well as the individual 'health' of the respective bank.

Our banking system

The World Economic Forum recently released a report ranking various countries’ banking systems. With the scoring between 1.0 (insolvent and possibly requiring a government rescue) and 7.0 (healthy, with sound balance sheets), South Africa came out in 15th place with a score of 6.5. This was one ahead of Switzerland and way ahead of the USA and UK, who took 40th and 44th place respectively.

Assuming everything else remains the same, our National Credit Act should see our score rising even further in future. This has certainly shed a positive light on the soundness of our banking system. The implicit guarantee offered on deposits by the government on the assumption that they will not allow a big bank fail should provide further comfort. Depositors in Saambou were the benefactors of this implicit guarantee. So although investors who held Saambou shares did not benefit, the depositors who had funds in current accounts and so on were largely saved.

Bank 'health'

It is important to note that our banks are well capitalised. This is measured by a capital-adequacy ratio (the ratio of a bank’s capital to risk-weighted assets) and is set by the Reserve Bank at a minimum of 9.75 percent. This means that for every R1 deposit received, banks are able to lend R10. This is in stark contrast to the ratios of some US banks who could lend up to US$40 for every US$1 deposited. The average capital-adequacy ratio for local banks during 2007 ranged between 12.24 percent and 12.79 percent, with the breakdown per bank highlighted below.

  • Nedbank's capital-adequacy ratio (December 2008): 13.2 percent

  • ABSA's capital-adequacy ratio (December 2008): 14.1 percent

  • Standard Bank's capital-adequacy ratio (March 2009): 12.7 percent

  • First Rand (December 2008): 12.97 percent

What it is also incredibly important to remember is that even before the National Credit Act was promulgated, the banks here in South Africa were far more prudent than their American counterparts. In short, while we were 'limited' in our borrowing limits, which were largely determined as a percentage of gross income, overseas banks were happy to lend more to borrowers with the only condition that they had equity in their property. In other words, as long as the property value was higher in value than the borrowed amount (regardless of the borrowers ability to pay back), they were comfortable in lending because of being able to recoup in the event of a bad debt. For many property owners, they were borrowing against the rising value to cover the repayments. This may have worked provided the house prices continued rising, however, the opposite happened with the result that many were left unable to afford the repayments. Property values plummeted and the banks were left with thousands of bad debts where the property value was far below the mortgage amount still outstanding.

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