Business, South Africa

VBS Mutual Bank placed under curatorship by the Reserve Bank

Finance Minister Nhlanhla Nene has approved the Registrar of Banks’ recommendation to place VBS Mutual Bank under curatorship.

“The National Treasury can confirm that the Minister of Finance has approved the recommendation of the Registrar of Banks to place VBS Mutual Bank under curatorship in order to nurse the bank back to health,” said Treasury in a statement on Sunday night.

Earlier in the day, at a media briefing at its premises in Tshwane, the Reserve Bank announced that it had placed the black-owned bank which has most of its branches in Limpopo under curatorship.

Reacting to the announcement, Treasury said the Registrar of Banks which is located within the Reserve Bank fulfils a critical role in the regulatory framework to protect depositors, customers, and the shareholders of a mutual bank.


Turning VBS around

Treasury said the aim of the curatorship is ultimately to turn the mutual bank around.

“This is in contrast with liquidation, where the mutual bank is closed down. The curator is given the legal means to create the necessary mechanisms to implement a resolution plan which will ensure the long-run sustainability of VBS. The recent example of African Bank which emerged as a stronger bank after curatorship should be noted,” said Treasury.

In mid-2017, following an application from the Financial Services Board, the High Court placed two related parties, Bophelo Beneficiary Fund and Bophelo Benefit Services under curatorship.

“It is critical to protect customers, particularly widows and orphans who may have their savings affected by this problem. The Financial Services Board has indicated that there are other related parties that may be impacted by the curatorship,” said Treasury.

The rationale for restricting municipalities and their entities from placing funds into mutual banks is consistent with the objective of ensuring that funds meant for service delivery are managed as responsibly as possible. The list of permitted investments therefore does not include any equity or equity-like instruments, for example shares in an institution.


Complying with the law

Treasury said being highly regulated entities, all banks need to not only set aside large capital reserves, but take care not to break the law in all their activities, and fully comply with laws like the Public Finance Management Act, Municipal Finance Management Act (MFMA) and Financial Intelligence Centre (FIC) Act.

The MFMA does not allow municipalities to bank with a mutual bank, but allows it to do so with a fully registered bank.

“Any bank must ensure that at all stages, it takes deposits in line with our laws. Whilst sensitive to the need to prevent a bank from failing, the National Treasury cannot and will not do so by breaking any laws. To the extent that any bank is experiencing any prudential challenges, it is between the Reserve Bank and that bank to consider how best to ensure the bank is safe for all its depositors.”

In  addition, the Board of any bank must at all times operate within the law, and must take full responsibility for its business model, and the risks that go with such a business model.

Since late 2016, National Treasury has been working to try and find an orderly resolution to the problem of municipalities placing deposits in contravention of the MFMA.

The matter of municipalities investing in mutual banks was also raised in a series of parliamentary questions during the course of 2016 and 2017.

In August 2017 Treasury issued a communication to selected municipalities drawing attention to legal requirements as part of its monitoring and compliance functions. Since then, no circular was issued to municipalities.

“Municipalities make their own decisions on banking and investment, as long as it is within the framework of the law,” Treasury said, adding that it will engage affected municipalities to determine the extent of their potential loss and ensure that service delivery is not affected.

“In the past few weeks, National Treasury and the Reserve Bank have been working closely to try and save the bank so as to protect ordinary depositors. It is never the intention of Treasury for any bank to be liquidated, particularly a small black-owned bank.

“National Treasury’s actions are trying to balance the need for a more diversified small banking sector against the need for well-run and well-governed municipalities,” it said.