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What Can The US Learn From SA's Banks?

Author: Megan Ellis
Date: 2017-06-21
The US has been criticised for rolling back post-crisis banking reforms. What could they learn from our banks?
Banks are a vehicle for economic growth which allows consumers to protect and grow their assets. With their power, however, comes the ability to send entire markets into crisis. This was seen in the 2008/9 economic crisis - where excessive risk-taking by banks, plunged the global market into recession. This caused a domino effect seen around the world. The US government learnt from the mistakes of the past by enacting post-crisis laws. Donald Trump's government, however, is making moves to repeal some of them. But is banking regulation the villain the US president makes it out to be? We take a look at bank regulation and what the US can learn from SA's own banking system.    

Why Should We Regulate In The First Place?

It is no secret that completely free-market capitalism doesn't protect consumers. Repeated crises have proven that with little oversight, consumers' money can be easily lost by banks and other financial institutions. America has, therefore, moved from its more free-market roots to a higher level of regulation. These reforms were introduced under the Dodd-Frank Wall Street Reform and Consumer Protection Act. But how does this regulation help? Julie Stackhouse, the Executive VP of the Federal Reserve Bank of St. Louis (in the US), cites four main reasons.
  • Financial stability,
  • Protection of funds in place to assist failing banks;
  • Consumer protection;
  • Preservation of competition.
For example, the regulation allows for the prevention of certain mergers which would create an unhealthy monopoly. It also requires banks to have a certain capital-to-risk ratio. Dodd-Frank, in particular, requires financial institutions to have plans in place should the company ever need to liquidate. Spencer Bullard, Director at Cape Point Derivatives, agrees that regulation in the sector is important.
"Regulation within the banking sector is extremely important. It affects everything from the amount of Tier One Capital they must maintain, to whether they have to have segregation between speculating areas and commercial areas of the bank.  As such it will have a massive effect on the banks' ability to loan, grow and offer certain services and products," Bullard told CompareGuru.



What The US Can Learn From South Africa?

Some people might scoff at the notion that a developing country has anything to teach the world's biggest economy. For South Africa's banking system versus the US's, however; this is the case. The World Economic Forum has repeatedly ranked South Africa's banking system as one of the world's most trusted. In the 2016 Global Competitiveness Index, South Africa placed in second place for perceived stability and soundness in the banking sector. The only country to beat us was Finland. America, on the other hand, was ranked at number 36. The same report saw that the ease of securing a loan in South Africa is less than that of the US. This is likely due to risk analyses which disqualify people. Not being able to secure a loan does stifle business and individual development. But on the other hand, loaning money to those who can't pay back is one of the reasons the US banking system was in crisis in 2008.
"Economies require sophisticated financial markets that can make capital available for private-sector investment from such sources as loans from a sound banking sector, well-regulated securities exchanges, venture capital, and other financial products," the WEF says.
According to the Banking Association of South Africa, our country has been consistently ranked in the top ten safest banking systems by the WEF.
"South Africa has a well developed and proactively regulated banking system which compares favourably with those of industrialised countries," the association says on its site.

The Role Of The Reserve Bank

Regulation is overseen by the Reserve Bank, our country's central bank.
"In order to ensure that the deposits taken from the public are not used irresponsibly and to protect the public at large, banks have to be supervised," the South African Reserve Bank (SARB) says on their site.
The Bank is independent of government, meaning that politics cannot interfere with the bank's mandate. Regardless of who is in power, the SARB has a role outlined by the Constitution. This means that, for example, they cannot be forced by government to print more money if it will negatively impact inflation and thus consumers.

Threats To SA Banking

Bullard does note though that our banking system is at risk due to downgrades resulting from our political leaders. This is because trust in our banks is based on their stability - including their ability to make profit. With the current economic situation, profits will be harder to come by for many businesses.
"If this is continually jeopardised by the ANC, the banking sector will be the hardest hit," Bullard says.
Our five largest banks saw a credit rating downgrade by Moody's last week. The Banking Association of SA says that despite this, our banking system is still fundamentally solid. But even more challenges are arising. On Tuesday, SARB made headlines as Public Protector Busisiwe Mkhwebane made recommendations that Parliament amend the role of the bank as outlined in the Constitution. The Bank is taking the report to Court.

What Did Dodd- Frank Do For The US?

Regulation in the banking sector was welcomed by many. But as Donald Trump was elected, some realised that these policies might change. In a speech towards the end of 2016, US Securities and Exchange Commission (SEC) Investor, Advocate Rick Fleming reiterated the importance of regulation.
"We need strong and effective regulations – not to stifle financial markets and our economy, but to give them the framework to thrive.  And to replace anger with trust, confidence, and hope for the future," he said during the speech.
He urged then-President-elect Trump to not haphazardly repeal regulations.

The Downside Of Regulation

The Republicans' and Donald Trump's motivation for repealing Dodd-Frank is based on the idea that it is stifling growth in the country. Politicians on both sides, Democrat and Republican, have acknowledged that the legislation is too restrictive on smaller banks. These banks do not impact the global market should they fail, International Banker reports. They were also not responsible for the crisis, with larger banks being the culprits. There are also definite downsides to regulation.
"Regulation of banks hinders their ability to reinvest deposited capital, partake in speculative trading, and generally act in a manner which maximises profits.  This will limit the amount of money that is loaned versus the deposit ratio," Bullard says. "It could also limit the return on investment at the institutions due to the increased regulatory and reporting burdens. This results in generally less aggressive and expansionary policies hurting the end consumer and businesses."
A balance is needed to weigh risk with promoting business growth. The problem that many have with the Dodd-Frank repeal attempts, is that it also loosens restrictions on large banks. This sets regulation closer to the pre-2008 crisis levels - and we all know how that ended.

Consequences Of Repealing Dodd-Frank

It is difficult to ascertain exactly what the consequences of repealing Dodd-Frank laws will be. It definitely works in the favour of Wall Street companies, however.
"If Trump manages to repeal large sections of the Dodd-Frank Act it could have wide ranging affects.  Covering a large swathe of financial regulation, the Dodd-Frank act was the single largest piece of financial legislation in US history. It covered everything from commercial banking, investment banking, the creation of a consumer financial protection bureau, key capital and liquidity requirements, derivative regulations and too big to fail institutions," Bullard says.
What do you think of banking regulation? Let us know in the comments below...

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