By Sifiso Sibandze
The collapsing of banks is presumably a hot topic in almost all central banks and commercial banks’ boardrooms globally following the failure of two US Banks, the Silicon Valley Bank and New York’s Signature Bank.
Undoubtedly, the collapse of these banks has provoked near-irrational reactions from central bank governors and banking sector investors and executives.
This has prompted the US Government agencies to take emergency measures to backstop the financial system, and President Joe Biden reassured Americans that the money they have in banks is safe, thanks to the existence of a deposit insurance fund.
On the domestic front, Eswatini does not have a deposit insurance fund. Deposit insurance is where you wire your bank, pay a very small premium, and over time there’s a fund that accumulates. If there are bank failures then up to a certain amount of your deposit (E100 000 in the case of South Africa) in a particular bank is covered.
In the wake of the two US bank failures, Eswatini Financial Times reached out to the Governor of the Central Bank of Eswatini (CBE) Dr Phil Mnisi to find out what the Bank is doing regarding the establishment of a deposit insurance fund to safeguard depositor’s fund should one of the banks collapse.
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Dr Mnisi said the Bank is “working and exploring the establishment of a deposit insurance scheme.” With the absence of the deposit insurance scheme, if one of the banks in the kingdom would fail, depositors may get some money from the government if out of the goodness of its heart, decides to give them some. But the government is not legally obligated to, and they may not.
Interestingly, neighbouring South Africa has finally set up its first own deposit insurance body, called the Corporation for Deposit Insurance, or Codi. It has been set up to protect bank depositors, as well as to ‘bring further confidence to a resilient sector, the South African Reserve Bank Deputy Governor Kuben Naidoo said.
The Reserve Bank will run and administer the insurance scheme and will be responsible for paying out covered deposits in case a bank should default. Other African countries with deposit insurance funds are economies under the Economic and Monetary Community of Central Africa comprising Cameroon Central African Republic, Chad, Equatorial Guinea, Gabon and the Republic of the Congo.
These six countries formed the Central African Deposit Guarantee Fund which insures deposits in all the economies. The World Bank has observed that a dozen developing countries have deposit insurance systems and several others are considering establishing them. According to the Bank, these systems are typically created to prevent contagious bank runs, to provide a formal national mechanism for handling failing banks, and to protect small depositors from losses when banks fail.
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The World Bank has noted that without a deposit insurance system, many developing nations in recent years have extended implicit deposit protection to depositors on a discretionary, ad hoc basis. Deposit insurance systems have several advantages over these implicit protection schemes. Deposit insurance probably gives the banking system more protection against bank runs, provides more protection for small depositors, and provides a faster, smoother administrative process.
“On the other hand, deposit insurance probably creates more moral hazard for depositors, thereby contributing to the erosion of market discipline and increased bank risk-taking,” the World Bank said.
Furthermore, the World Bank said deposit insurance also tends to be a more expensive mechanism for protecting depositors because it offers less freedom of action to policymakers than an implicit scheme.