South African Reserve Bank (Sarb) deputy governor, Kuben Naidoo, told parliament’s Standing Committee on Finance on Tuesday that the Sarb had been engaging with VBS Mutual Bank for 18 months before it was placed under curatorship on March 11.
“Over this time the bank had four liquidity events,” Naidoo explained. “The most recent was on February 16, when they effectively didn’t have money in the overnight settlement system to make a payment.”
It was this issue that ultimately culminated in the Minister of Finance putting VBS under curatorship earlier this month.
In briefing the committee, both the Sarb and National Treasury explained that the primary issue at VBS was that it had, since 2015, been taking a number of very large deposits from a small number of municipalities. This was creating a mis-match between these deposits, which are typically short term, and the loans it was granting to clients, which are mostly longer term.
Compounding this is that municipalities are expected to spend their annual budgets and therefore would be expected to have withdrawn all of their money by the end of the financial year. In other words, the deposits were extremely transient.
“The Constitution doesn’t allow municipalities to run an operational deficit,” explained the head of tax and financial sector policy at National Treasury, Ismail Momoniat.
Figures provided by the National Credit Regulator suggest how quickly this issue had escalated. At the start of 2016 VBS had a mortgage loan book of R240.3 million, and R48.8 million in secured credit, mostly vehicle finance.
Less than two years later, at the end of September 2017, its books showed mortgages to the value of R425.3 million and secured credit worth R211.7 million. This was total growth of over 120% in just 21 months.
At the same time, it was increasingly taking deposits from just a few municipalities, even as the regulator was warning of the risks.
“We’ve been engaging with the bank repeatedly to reduce the risk in this concentrated nature of its deposits,” Naidoo explained. “We now know that what they’ve done is exactly the opposite.”
Over the last few months, even with the Sarb having registered its concerns, municipal deposits at VBS grew from R1.063 billion at September 5 2017 to R1.580 billion at March 2 2018. The number of municipalities holding such deposits increased from 12 to 16.
This mis-match between a small number of very large, short-term deposits, and a large number of much smaller, longer-term loans, is what led to a liquidity crisis at the bank.
“VBS board and management failed to manage the bank’s rapid growth and its funding and liquidity position,” Naidoo explained.
After the latest liquidity event on February 28 the regulator requested an action plan from VBS to resolve the matter. The bank indicated that it had requested a liquidity injection from its two major shareholders – Vele Investments and the Public Investment Corporation.
The regulator allowed some time for this funding to be realised, but by March 8 it had still not been forthcoming.
The registrar therefore advised VBS that if it did not have written confirmation of a commitment of funds by the close of business on Monday, March 12 it would recommend to the Minister of Finance that the bank should be placed under curatorship. However, on Friday March 10 the chairman of VBS, Tshifhiwa Matodzi, wrote an open letter in which he made this public.
This forced the registrar to act immediately to prevent a run on the bank.
“We put it under curatorship not because we wanted to,” said Naidoo. “This bank has failed because board and management repeatedly refused to heed our advice and recommendations.”
Currently VBS remains open for business, although withdrawals are limited to R1 000 per client per day. The Sarb has also guaranteed retail deposits up to R50 000 per depositor.
Questions about municipalities
This doesn’t protect the millions deposited by municipalities, but the committee heard that this money should never have been placed with VBS in the first place. Under the Municipal Finance Management Act, municipalities are required to bank with a registered bank.
While the act does not specifically forbid using mutual banks, National Treasury has indicated that mutual banks do not in fact meet the requirements. This was communicated directly to a number of municipalities in August last year, yet it apparently had no impact.
“Even when VBS knew it was wrong for municipalities to invest, they were still touting for deposits from municipalities,” Momoniat said. “That seemed to be their business model.”
He admitted, however, that this caused a real dilemma.
“If we told municipalities to take their money out, the bank would have gone bust,” Momoniat noted.
He added that these and other issues must be looked at to ensure that there was no fraud and to understand where there may have been failures of governance.
“The curatorship is here to save the bank,” Momoniat said. “We are hoping that the bank will be saved, that we will find assets, and that there is no funny business. Once we have the report from the curator we will know how big or small the problem is.”