Banks say failure to pass insolvency amendments poses a risk to financial system
National assembly rules that there is no time to deal with proposals before it goes into a recess
The banking industry is at loggerheads with parliament after the national assembly ruled that there was no time to deal with a proposed amendments to the Insolvency Act before it goes into a constituency recess on March 20 ahead of the national polls.
The national polls will take place on May 8.
The Reserve Bank and the banking sector regard the amendments as key in order to secure existing international banking relationships. The Banking Association SA (Basa) has warned in a letter to finance committee chair Yunus Carrim that the amendments "are critical to the stability of our financial market."
US banks have already indicated that they would have to terminate current agreements with SA banks if the Insolvency Act remains unchanged.
"Foreign banks will simply be exiting the SA market and SA will have fewer or no counterparties with whom to trade over-the-counter derivatives or transfer risks from our economy. This will cause one or more SA bank failures and lead to a national financial crisis," Basa MD Cas Coovadia warned.
Basa urged the speedy promulgation of the amendments, warning that failure to pass them before September posed a potential risk to the banking system. "If left unaddressed, risks will be introduced into our economy, severely undermining government's current economic stimulation, growth and investment efforts," Coovadia said in the letter.
The Treasury also wants the proposed amendments to the Insolvency Act to be dealt with, together with the rest of the Financial Matters Amendment Bill, which includes them. The proposed amendments to the Insolvency Act would protect financial obligations under derivative contracts from automatic incorporation into an insolvent estate.
Basa senior general manager for prudential Mark Brits explained that the amendments would provide the international banking partners of SA banks with certainty regarding contractual arrangements in the event of insolvency. "These are international contracts that financial markets use between parties to guarantee that these payments will take place," Brits said.
Brits said that from September SA banks will be required to provide a guarantee of repayment under derivative contracts. If they are unable to provide it, international banks might decide not to transact with them on these particular contracts or might charge much more for them.
This would mean that SA banks would not be able to provide these products to their corporate clients who want to transfer their risks (related, for example, to commodity prices, exchange rates and interest rates) onto the banks, which then hedge this risk with offshore banks. It is customary for the parties to provide security for their obligations under these hedge transactions.
The parliamentary authorities have ruled that the finance committee can only proceed with two other matters in the Financial Matters Amendment Bill: one relating to the establishment of a state bank by state-owned enterprises and the other providing for equality in payments of military pensions.
Carrim insisted in an interview Wednesday that the finance committee wanted to deal with the insolvency amendments and was prepared to sit extra hours to do so but had no control over the matter.
He told the committee that he had discussed the issue with deputy Reserve Bank governor Kuben Naidoo earlier in the day and told him that the committee could not do anything because it was beyond its control. It was a position taken by the decision makers of the national assembly and the National Council of Provinces on the basis of the limited time available.
Carrim said processing the proposed amendments to the Insolvency Act very swiftly could be challenged in a court of law on the grounds that the committee did not give adequate attention to it.
"When we had public hearings there were representations to contest the provisions. On the other hand, the committee has had lengthy deliberations on the question of state-owned banks, while terminating discrimination in the payment of military pensions was an uncontested constitutional matter."
Carrim questioned why the Treasury introduced the insolvency amendments to parliament only in January.