Deposit insurance design and bank regulation in South Africa
| Date | 01 February 2001 |
| Pages | 136-150 |
| DOI | https://doi.org/10.1108/eb025069 |
| Published date | 01 February 2001 |
| Author | Charles C. Okeahalam,Tudor Maxwell |
| Subject Matter | Accounting & finance |
Journal
of
Financial Regulation
and
Compliance
Volume
9
Number
2
Deposit insurance design and bank
regulation in South Africa
Charles C. Okeahalam* and Tudor Maxwell
Received: (in revised form): 5th March, 2001
University
of
Witwatersrand,
Department
of
Business
Economics,
Faculty
of
Commerce,
Private
Bag
3,
Wits
2050,
Johannesburg,
South
Africa; tel: +27 11 717 8141; e-mail:
okeahalam.c@wbs.wits.ac.za
Charles C. Okeahalam is the Liberty Life
Professor of Finance and Investment at the
University of the Witwatersrand and at the
time of writing is a Senior Fellow of the
Houblon-Norman Fund at the Bank of Eng-
land. Over the last two years he has
served as lead advisor to the Ministry of
Finance in South Africa for the establish-
ment of the South African deposit
insur-
ance scheme. He obtained his PhD in
econometrics from Queen Mary and West-
field College, University of London.
Tudor Maxwell is a lecturer in Analytical
Methods at the University of the Witwaters-
rand. He was awarded the E.P. Bradlow
prize as the top student of the 1998 MBA
class at the Graduate School of Business
Administration of the University of the
Wit-
watersrand.
ABSTRACT
Explicit deposit insurance is a safety net that
bank regulatory authorities use to attempt to
prevent and mitigate the costs of bank failures.
International experience has shown however
that explicit deposit insurance can increase the
risk-taking behaviour of banks. In this paper
the authors briefly explore the policy lessons
and the implications of
the
relationship between
deposit insurance design and bank system stabi-
lity, relate this to a possible proposal for expli-
cit deposit
insurance
design in South Africa and
describe aspects of the proposed South African
Deposit Insurance Scheme (SADIS).
INTRODUCTION AND BACKGROUND
The aim of the paper is to discuss the role
which explicit deposit insurance might
play in South Africa, briefly describe the
South Africa banking system, and some
design features of the South African
Deposit Insurance Scheme (SADIS). This
section reviews the debate on deposit
insurance. The second section introduces
the South African banking system, the
third section discusses incidences of bank
failure over the last decade, the fourth sec-
tion describes some of the key variables
which might be considered for the SADIS
model. The fifth section concludes the
paper.
Deposit insurance: A brief discussion
Explicit deposit insurance is a system in
which the government guarantees a pay-
ment to depositors in the event of a bank
failure. Banks are charged a premium,
which is levied usually once or twice a
year, and these premiums are held in a
fund. The fund is invested either in domes-
tic treasury bills or treasury bills of other
countries. The premium can be risk based
or charged on a flat rate basis. In principle,
explicit deposit insurance provides an
explicit guarantee to depositors up to set
Journal of Financial Regulation
and Compliance, Vol. 9, No. 2,
2001,
pp. 136-150
© Henry Stewart Publications,
1358-1988
Page
136
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