26Fe braary 199.
Submission by Dr C.L, Stals,
Governor of the South African Reserve Bauk, .
. to the Section 417 Commission of Enquiry
Into the Affairs of Tollgate Holdings Limited :
PART ONE: GENERAL PHILOSOPHY BEHIND CENTRAL RANK
ASSISTANCE TO BANKING INSTITUTIONS
1. The nature of central banking
Central banks are very special institutions, They
are empowered by sovereign governments to create money
where money does not exist. Central banks are therefore
mot dependent on outside sources such ag governments,
business organisations or private individuals for their
funding. This very potent power places a great
wesponsibility on central banks, namely to manage the
monetary system of the country in the interest of the
total community.
Private banking institutions axe licensed by
central banks (or governments) to share in this
>Fesponsibility of the central bank. They also create
money, using central bank money as a basis for their money
creation activities. This makes banking institutions
Gitferent from all other types of financial institutions.In addition, private banks also serve as custodian
for the
money holdings of the commmity, and provide the public
with savings and money payments, transmission and
settlement facilities.
The central bank has a vested interest in
establishing and maintaining a sound banking aystem, with
healthy and well-managed banking institutions.
therefore normal in most countries to find
relationships between central banks and private
It is
special
banking
institutions, established for example through bank
regulation and supervision, discount window facilities,
national payment and settlement arrangements, and lender
of last resort assistance. It is this latter function that
is of great importance for this investigation,
‘The origin of the function of lender of last resort
was described by Dr M.H. De Kock in his authoritative hook
Central Banking, first published in 1939:
"Ik was only after the publication
Bagehot's Lombard Street, in 1873, that
responsibilities of the Bank of England as
of
the
the
yender of last resort were ‘unequivocally
recognized’, and it was Bagehot himself
who
coined the expression ‘lender of last resort’.
After ite final recognition by the Bank of /
England, this function was also assumed by
similar banks of issue in other countries, and
it came to be regarded as a sine qua non of
central banking. Tt was thus automatically
accepted by the many new central banks which
were created in the twentieth century. Therewas, for example, no argument about it when
the Federal Reserve Banks were established in
the United States. Moreover, within its first «
two years (1921-23) the South African Reserve
Bank was called upon to face the responsi-
bilities of lender of last resort when ane of
the biggest banks became involved in serious
difficulties, and it did so unflinchingly and
successfully". (pp. 92/93) .
The functions of central banks
Universally, central banks are tasked with the
function of promoting, supporting and maintaining overal)
financial stability, Financial stability may be inter-
Preted differently in different countries -- it may, for
cxample, be regarded as low inflation or, alternatively,
@ stable exchange rate of the currency, or a more general
connotation of overall stability attained simltaneously
in a number of financial aggregates such ag money supply,
bank credit extension, interest rates, inflation, exchange
rates and the level of the foreign reserves, Financial
stability is regarded as essential for economic growth and
as a minimm prerequisite for sustainable economic
development in the long term -- the ultimate objective of
Macroeconomic policies in most countries.
In order to achieve their objectives, central banks
will often target intermediate goals, for example the
growth in the money supply, or in the amount of domestic
bank credit extension, or @ predetermined level of3.
interest rates. Central banks my also use different
operational instruments to pursue these intermediate
goats, for example open-market operations, variable cash
“reserve requirements, intervention in the money and
foreign exchange markets, etc. 5
Be that as 4t may, in most countries in the world,
including South Africa, monetary policy cannot be
implemented successfully without the presence of sound and
well-managed banking institutions, operating in most cases
An and through efficient and effective financial markets,
and trusted at all times by the public. The effectiveness
of the central bank’s monetary policy is therefore to an
important extent dependent on the existence of sound
individual banking institutions.
The zelationship between central banks
and_private banking institutions
In all countries, there exists an intimate
relationship between the central bank as the creator of
base money, and other recognised banking institutions ag
the conduit through which the money creation process is
extended. This ‘relationship is in the first instance
substantiated by almost daily contact through discount
~ Window opezations, clearing and settlement arrangements
and central bank intervention and operations in the
financial markets.The relationship, however, goes further than the
normal operational aspects of banking. In many countries,
as in South Africa, the central bank has also been tasked
with the function of bank regulation and supervision, and
with providing at its discretion in the unavoidable
Periodic need for special assistance to banks in distress
“> the “lender of last resort" function of the central
bank. Banking is a risk business and, however extensively,
Gedicated and effectively bank regulation and supervision
may be applied by the authorities, the odd banking
institution may still find itself from time to time in the
situation where its total Liabilities or commitmenta to
the public, exceeds the value of its total assets.
although central banks (and/or governments)
therefore do their best to prevent default in banking
institutions, the Safety of a bank can never be fully
guaranteed. When any individual banking institution finds
itself in distress, the central bank, taking account of
ite assignment as lender of 1ast resort, of its
responsibility for maintaining financial stability, and of
its function as the main creator of money, is often faced
with difficult options,
The first course of action open to the central bank
in such a situation could be one of benign neglect --
leave the institution to be liquidated and let its
shareholders and depositors suffer the consequences of theliguidation. This in many cases presents the best course
to follow, provided it will not contaminate the rest of
the banking sector and undermine public confidence in the
banking system as a whole which could then lead to the
collapse of the whole system. %
A second course of action could be one of damage
limitation -- that is, the provision of special support to
the particular banking institution to enable it to recover
from its affliction. This is the option often preferred
where the collapse of a large banking institution could
lead to a dispersion of mistrust in other banks, and to
the contagion of the total system.
A third course could be one of mitigation of
consequences -- let the institution be liquidated, but
provide some special assistance to its depositors to
alleviate the burden of liquidation. This alternative may
be preferred when the main concern of the authorities is
the protection of depositors, and where the affected bank
is too small to taint the entire system.
The appropriate course of action is no easy
decision for a central bank to take, and any decision will
usually be a no-win decision -- the central bank will be
criticised for the course it takes whatever its decision
might be. There are, however, some general guidelines that
are universally applied by central banks, and whichguidelines are normally not based on the nature of any
particular institutional problem, but rather on relevant
circumstances surrounding the event.
‘The nature of the assistance given by central banks
may also vary from country to country, and also from case
to case. As the interest in this investigation is
primarily focused on outright financial assistance to a
banking institution, a few recent examples of such
assistance provided to banking institutions in distress in
some other countries are provided in the next section.
Recent experiences in some other countries
A number of cases occurred recently where a major
banking crisis developed and where the overall banking
system of the country concerned fell into distress.
Remedial action in such cases will normally not only
involve central banks, but also governments. To the extent
that government funds are utilized for the assistance of
banking institutions -- a very common practice as will be
illustrated below -- taxpayers’ money is directly applied
for the purpose.
There are also numerous examples where central
banks provided financial assistance from their own
resources, that is through the creation of money. It is
more difficult to assess and to understand the
implications of this type of assistance for taxpayers. Thequestion can be raised whether new money created by the
central bank for this purpose, without any retourse to the
government's budget, can also be regarded as taxpayers’
money, particularly in a country where the central bank is
privately owned and in cases where no losses are incurred,
and the newly created money is eventually returned to the
central bank for cancellation. If the answer is yes,
should new money created by private banking institutions
under licence from government then also be xvegarded as
taxpayers’ money? This is a debatable issue which will
rather be left aside. There are, undoubtedly social and
macroeconomic costs involved in a bank rescue operation
that involves money creation by the central bank. These
costs should rather be assessed by considering possible
effects of the operation on monetary policy in general,
the control of money supply in particular, and the level
of interest rates and inflation in the economy.
A fair amount of specialised economic analyses will
be required to argue this point. It should, in all
circumstances for example, be taken into account that the
alternative, that is not to provide assistance to a
banking institution in distress, will also have adverse
consequences for taxpayers, particularly if it happens to
be a large banking institution serving thousands of
individuals and businesses in the community. The
unenviable task of the central bank confronted by such a
situation is, in each case, to decide on the basis ofoverall social cost benefit considerations, what
alternative option will in the end bear the least cost for
the total commmnity.
Central banks often provide’ assistance to an
individual banking institution in an effort to avoid the
danger of systemic risk that could lead to a collapse of
the whole banking system. The action of the central bank
is therefore intended to protect taxpayers from massive
losses they are confronted with, either through the
liquidation of a number of large banking institutions, or
through forced fiscal assistance to the total banking
system provided directly from the budget of the central
government
A good example of this strategy recently occurred
in Finland which experienced a major banking crisis. In
September 1991, a major Finish commercial bank (Skopbank)
ran into problems and was heavily supported by special
loans from the Bank of Finland. The total injection of
funds by the central bank amounted to FIM 15,6 billion
(equal ,to 10,6 billion). In 1992, Skopbank was
transferred to’ @ government funded agency for
FIM 6 billion (R3,8 billion), and the Bank of Finland
suffered losses of more than FIM 9 billion (RS,7 billion)
in the exercise.-10-
This initial support by the Bank of Finland did not
succeed in avoiding a major banking crisis, ‘and the Gov-
ernment of Finland had to step in, and in 1992 established
“a Government Guarantee Fund, capitalised with taxpayers’
money for more than FIM 80 billion (R§0,5 billion), equal
to more than 10 per cent of the total gross domestic
Product of the country, to provide assistance to banking
institutions in distress.
(Quoted from: Bank of Finland Bulletin, August 1995, Vol 63, No. 8.)
Other Nordic countries such as Denmark and Norway,
went through similar experiences and provide further
interesting case studies of central bank and government
Support operations for banking institutions.
Further examples of public support for banking
institutions in cases of sectoral crises can be found in
the Savings and Loan Associations debacle in the United
States in 1989; in the major banking crisis that developed
in Mexico after the financial breakdown of December 1994,
and in Japan at present times. In Mexico, the central bank
created and partly financed a Saving Protection Fund
{FOBAPROA) to provide additional capital for banking
institutions in the form of subordinated debt, FOBAPROA
28 partly funded by the Rank of Mexico, partly by the
Government of Mexico, and partly by aid funds made
available to the country by foreign governments (mainly
the United States and Canada).-11-
Tn Japan, the Bank of Japan wag heavily involved
Ana number of bank rescue operations and, for example,
Provided a loan of ¥100 billion (R3,9 billion) at a tow
interest rate to the Tokyo Kyodou Bank, and "special"
toang of ¥50 billion (R2,0 billion) to-Cosmo Bank and ¥500
billion (R23,4 billion) to the Kizu and Hyogo Banks. The
Bank of Japan also Provided fresh capital for some of the
banks in distress.
Fxamples of more isolated support to individual
banking institutions are also numerous, but details of the
Support facilities are not always available because of the
Squally common practice of central banks not to disclose
Such information. The reason for such secrecy was recently
very aptly described by Mr Eddie George, Governor of the
Bank of England, in a speech in Tokyo on 26 october 1995.
Mr George said, in explaining the Bank of England's policy
in this regard:
"se. we may try to keep the fact that we are
Providing systemic Support secret at the time. In
principle, I am against Secrecy for the sake of
at, And in thie field there are often
circumstances where the markets will be reassured
by knowing that we are involved. sometimes,
however, the opposite is true. re people know that
we are s0 concerned about systemic fragility that
we have judged it necessary to provide support,
that could lead to a wider loss of confidence.
They would wonder how far that support would be
extended, and we could rapidly find ourselves in
the position where we were in practice under--12-
writing all the liabilities of the banking
system".
(Speech given to the Japanese Federation of zankers’
Associations.)
Mr George could have added that premature
disclosure of such assistance could easily lead to a loss
of confidence in the particular. banking institution, toa
"run on the bank", and to the forced liquidation of the
institution that needs salvation. In such a situation, and
particularly in a country such as South Africa where the
ethical code of most people is self-protection rather than
national interest, the central bank will be blamed for the
downfall of the bank. Disclosure would indeed defeat the
Object of the exercise and would impose the social cost of
the liquidation of the bank on the general public, without
any chance of escape.
In a recent authoritative book on central banking
entitled The Central Banks (Hamish Hamilton, tondon, 1994),
Marjorie Deane and Robert Pringle had the following to say
about the need for secrecy of lender of last resort
assistance:
".., it (the central bank) tries to keep the
fact that it is providing support secret at
the time, in order to minimize the risk of a
wider loss of confidence. Bven when the danger
ig past, it will often be difficult to dis-
close publicly the details of the support as
disclosure could weaken even banks that had
succeeded in dispensing with support". (p. 196)tm his Tokyo speech of October 1995 mr George also
said:
"When we [i.e, the Bank of England] do con-
sider extending last resort support -- on our
own balance sheet, or, if the amounts are too
large, with the Support of government -- there
ave a number of other principles that we seck
to apply.
The Bank of England therefore does from time to
time provide lender of last resort financial assistance to
‘banks in the United Kingdom, if in the assessment of the
Bank it is regarded as being in the interest of the
Protection of the stability of the financial system. In
sddition, the Bank of ineland often does keep such
assistance secret. This was confirmed to me in discussions
with Governor Rddie George and other senior Bank of
England officials in London on 6 February 1996.
Reference to such support facilities, which
incurred a loss of £115 million for the Bank of England in
1991/93, can be found in the Bank's Report and Accounts
for 1593. The names of the banks assisted, the amounts
involved, and the nature of the assistance provided to
each bank were never disclosed -- only a vague reference
to the reason for the assistance:
"the Support was designed to avert the
possibility of more widespread difficulties in
the banking system and in the wider economy,
and was successful in containing the potential
Problem". (p. 10)‘Two other recent examples of assistance provided by
central banks and governments to particular Danking
institutions can be quoted. The one is the crisis that
“engulfed Banco gspatiol de crédito (nanesto), Spain's
fourth largest bank, in 1993/94. The tentral bank at the
time decided that Banesto was "too-big-to-fall" and the
authorities offered open-ended liquidity support to enable
the bank to recover from its affliction. The stated
objectives of the Spanish central bank's action were:
"(i) to protect the assets;
(14) to protect the interests of depositors;
(444) to assure the correct functioning of the
banking system;
(iv) to maintain public confidence in the
banking sector;
(v) to restore the financial stability of the
bank through the incorporation of execu-
tives of recognised stature and banking
experience; and
(vi) to establish the exact financial position
of the bank and subsequently to restruc-
ture and refloat the bank. There are no
limits placed on the plans to be adopted
and, specifically, these plans may call
upon the Deposit Guarantee Fund to pur-
chase assets and to provide finance*.
(Financial Regulation Report, Financial Times
Business Information, January 1994.)Another recent case which attracted mich publicity
was the support provided by the Bank of France and the
French Government to Crédit Lyonnais in 1994/95, crédit
tyonnais made a net loss of FFr 6,9 billion (R5,0 billion)
in 1993/94, and suffered large losses pn loans and invest-
ments made in the preceding five years. The French
Government, working with the Bank of France, agreed to
back a FFr 44,9 billion (R32,7 billion) rescue operation
which involved a FFr 4,9 billion (R3,6 billion) cash
injection and the creation of a new Government funded
company to take on FFr 40 billion (R29,1 billion) of non-
performing property loans.
1 yt:
zegort" assistance to banking institutions
There are no fixed rules for central bank
assistance to private banking institutions. Monetary
policy cannot be governed exclusively by rules --
subjective discretion is unavoidable. Governor Eddie
George, in the speech quoted above, expressed himself as
follows on this issue:
“There are no hard and fast rules -- no
objective criteria -- that can be applied in
such situations. The considerations vary from
time to time and place to place".-16-
"The judgement is invariably a difficult one.
The potential commitment of public funds to
support failing financial institutions can be «
daunting. But failure to extend support, which
then turns out to have been needed, my
ultimately turn out to be even more costly",
From the foregoing examples of central bank/gov-
ernment support to failing banks, it is interesting to
note that special guarantee or support funds have been set
up in a number of countries for this purpose, for example
FOBAPROA in Mexico and the Government Guaranty Fund in
Finland. These special organisations are all being funded
by governments and central banks -- that is with tax
payers’ funds and with newly-created money provided by the
central bank. In many countries there are also various
public schemes for depositor protection in respect of
funds placed by the general public with banking
institutions. No such organisations or deposit insurance
schemes exist in South Africa, which places the
responsibility for handling bank crises squarely on the
Reserve Bank (working closely with the Minister of
Finance)
Some general rules can nevertheless be derived from
the practices followed universally by central banks:
= Firstly, financial assistance is applied very
sparingly, and as a general rule only when a
particular case provides a threat of contagion of
the whole banking system.-17-
Secondly, protection of depositors is a major
consideration that must be taken into account,
sspecially by central banks that have to operate
in @ vacuum where there is no public system of
depositor protection.
Thirdly, confidence in the banking system must be
preserved, without Providing open-ended support
for mismanagement, fraud or internal inefficien.
cies in banking institutions.
Fourthly, arising from the foregoing, financial
assistance emanating from the central bank/gov-
Srnment mist, as far as possible, serve to protect
depositors and not shareholders of banking insti-
tutions,
Yitthly, in order to assist the banking institu~
tion to overcome its problem, the central bank may
Provide a loan at.a nominal rate of interest, or
Perhaps provide guarantees for raising low
interest rate loans from other institutions.
Sixthly, the assistance must be conditional upon
semedial action that will lead to recovery and may
often require a change of ownership, of senior
management, and even of the structure of the
affected institution,
Seventhly, there must be possible exit for the
Sentral bank from the assistance programe,
Perhaps only after the credibility, credit.
worthiness and public trust in the institution
have been re-established.-18-
* Eighthly, it may in certain circumstances be
necessary to keep the assistance package secret,
Particularly if disclosure could be counter-
productive and defeat the objective of the
exercise.
These are generally the considerations that the
Reserve Bank applied in Providing assistance to South
African banking institutions in recent years. The Bank is
of the opinion that, if tested against those criteria, the
assistance it provided to the Bankorp Group and later Absa
was justified in terms of such comon practices applied in
this regard by central banks in the rest of the world.
PARTIWO: SOUTH AFRICAN RESERVE BANK ASSISTANCE TO
‘THE_BANKORP GROUP
6. Ba id Jt
The assistance to Bankorp had its origin in 1985/86
when the bank first approached the Reserve Bank with a
vequest for special assistance to enable it to cope with
bad investments and other non-performing assets inherited
with the takeover of Trust Bank in 1977 and Mercabank in
1984. Moreover, 1985 was an extremely difficult year for
South Africa when international sanctions were extended,
“and trade boycotts, disinvestment campaigns and
international loan withdrawals put severe pressure on the
balance of payments. In the process, a domestic liquidity-19-
Squeeze adversely affected the banking sector in
particular, and weak elements in the system were cruelly
exposed.
against the background of the emerging inter-
national debt standstill and the declining creait-
worthiness of South Africa in the international capital
markets, a crisis in the domestic banking system had to be
averted at all cost. In the judgenent of the monetary
authorities, the situation of Bankorp, one of the major
banks in the country, created a serious threat of
contagion of the rest of the banking system. At the same
tine, failure of a major South African banking group with
extensive international relations at that juncture would
pave aggravated the country’s international debt crisis.
qn April 1985, Bankorp approached the Reserve Bank
with a request to provide financial assistance of R300
million to it. Initdally a low interest-rate loan of R200
million was extended, but after further representations
fhe amount was increased to R300 million in April 1986.
The loan was to be repaid, in consultation vith the
Reserve Bank, from 1 June 1988 and full repayment had to
be achieved by 31 May 1990. In 1987 the Bankorp Group
vintroduced a major reconstruction and rationalisation
Programme and to lend support to that programme, the
Reserve Bank agreed to a rescheduling of the repayment of
the loan. Accordingly, the loan was to be repaid in tiveequal instalments of R60 million each, beginning on 1
april 1990 and ending on 1 April 1994,
I was appointed Governor of the Reserve Bank in
August 1989. Barly in 1990 I was“approached for the
first time by the Chief Executive Officer of Bankorp who
informed me that Bankorp would not be able to meet its
obligation on 1 April 1990 for a first repayment of R60
million in terms of the loan arrangement.
T immediately demanded a thorough investigation
into the Bankorp situation by the Registrar of Banks and
the management of Bankorp, and requested proposals for a
final and comprehensive restructuring programme that would
re-establish the bank as a viable proposition. Alteraa-
tively, the bank would have to be liquidated. The time for
the repayment of the instalment of R60 million was
extended until 1 August 1990.
Extensive investigations were made during the
period April to July 1990, and senior Reserve Bank
officials (mainly from the Office of the Registrar of
Banks) and senior management of Bankorp were involved in
these investigations. The external auditors of Bankorp
~were also drawn into the investigation and I, as Governor
of the Reserve Bank, was kept informed of the findings as
Progress was made,7. The assistance package of 1 august 1990
Based on the findings referred to above, I cdh-
“vened a meeting to be attended by senior representatives
of Bankorp, Sankorp and the Reserve Bank. This meeting,
which was held on 1 August 1990 in my office in Pretoria,
was attended by:
Dr C.L. Stals Governor
Dr J.A, Lombard Senior Deputy Gover-
nor
Dr B.P. Groenewald Deputy Governor
Dr 3.H. van Greuning Registrar of Banks
Mr §.8. Walters Secretary
Bankorp and Sankorp
Mr M.H. Daling Chaixman, Sankorp
Mr P.J. Liebenberg Executive Chairman,
Bankorp
Mr Hi. van der Merwe — Bankorp
Mr P. Strydom Bankorp
Mr A. du Plessis Sankorp
Summary notes of the discussion at this meeting
were incorporated in the official documents submitted by
the Reserve Bank to the Commission.
The picture that emerged fron thie discussion was
Father desperate. Bankorp made no profit during the
~ 1989/90 financial year, and only about 52 per cent of the
bank's total assets at that stage were profitable. ‘The
MBpagement Of the bank did not succeed in absorbing the
bad debts inherited from the past, and the situation was22+
aggravated by the takeovers and the expansion programme of
the preceding five years. The Reserve Bank was confronted
with the option of either closing the institution, ox
“providing further assistance,
The South African economy was then in recession and
‘he Liguidation of Bankorp at that stage would not only
have adversely affected other banking institutions and the
many depositors of the bank, but would also have forced
Fhe Liquidation of many of the debtor clients of the bank.
In terms of the Delegation of Powers of the Board
of Directors of the Reserve sank, read together with
Section 10 of the South African Reserve Bank Act, igs,
(which authorises loans by the Reserve Bank against the
Provision of adequate security) I took ful1 responsibi-
Mty, together with the other Reserve Bank officials
Present at the meeting, for agreeing to a lender of last
Fesort loan to Bankorp under the terms and conditions
contained in a letter dated 3 august 1990, signed by me
and accepted by Messrs Liebenberg and Daling on behalf of
Bankorp.” A copy of this letter has also heen provided to
the Comission au part of the official documentation, as
Annexure A to the Bankorp agreement of 1 September i991.
~ (Note: Although the Delegation of Powers Docu-
ment vests the unqualified right to enter into
agreements of this nature in the Governor or a
Deputy Governor, the procedure in the Bank is,
as far as possible, to involve the Governor-23-
and all three Deputy Governors in decisions --
hence the presence of the Governor and two
Deputy Governors at the meeting of 1 august «
1990. The third Deputy Governor, Dr C.s. de
Swardt, could not attend the meeting but was
also fully informed of the arrangements.)
‘The gist of the agreement of 1 August 1990, already
in possession of the Commission, was the following:
* The existing loan facility of R300 million would
be increased to R1 000 million;
* Certain strict conditions would be applied in the
internal administration of the bank, including the
following requirements:
~ 70 branches of the bank will be closed by 32
December 1990;
~ total staff will be xeduced by approximately
3 000 before 31 December 1990; and
- total assets will be reduced by x5 billion by
30 June 1993.
* Dividend payments would be restricted to minority
shareholders for as long as the assistance
facility .continued. Sankorp had to reinvest its
share of the dividends in the form of capital of
Bankorp;
* The external auditors of Bankorp had to report to
the Reserve Bank from time to time on progress
made within the Bank; ‘“The Managing Director of Bankorp was required to
hold a quarterly review discussion with the Office
of the Registrar of Banks; and .
* The total loan of R1 000 million had to be
collateralised at all times by. redepositing funds
with the Reserve Bank or by ceding government
stock to the Bank.
7H June 1991 the external auditors of Bankorp
informed the bank that their investigations indicated a
further deterioration in the position, and that the income
of about R150 million per annum generated by the Reserve
Bank support package would not be sufficient to salvage
‘he situation. The external auditors indicated that it
would not be possible for them to continue to certify the
statements of Bankorp as the institution no longer
complied with the capital adequacy requirement of the
Banks Act. A final list of potential losses was then
Submitted to the Office of the Registrar of Banks to
confirm accumlated doubtful debts of Ri 930 million. (the
Uist was attached as Annexire A to the agreement of
September 1991, already in the Possession of the
Commission.) After further extensive negotiations, it was
agreed that the shareholders of Bankorp would have to
Provide the means to cover approximately R@00 million of
the potential loss and the Reserve Bank’s loan would be
increased to Ri $00 million to enable the bank, through
Fhe income earned on an investment: in government stock, to-25-
generate approximately R1 125 million over a period of
five years, which would be applied towards the write-off
of the accumulated losses. The balance of about
R800 million, representing the share capital of the bank
at that time, had to be absorbed by the shareholders.
Before entering into a firm agreement with Bankorp,
the further financial assistance was discussed with the
then Minister of Finance, Mr B.J. du Plessis, at a meeting
on 31 July 1991. The meeting was attended by myself,
DrC.J. de Swardt and Adv. M.J. van Rensburg as
representatives of the Reserve Bank.
‘The Reserve Bank’s lender of last resort facility
therefore provided for the absorption of about 58 per cent
of the potential and confirmed losses that had to be
provided for at that time (30 June 1991). The list
included 2 provision of R75 million against the name of
Duros/Tollgate. The presence of the name of
Duros/Tollgate as one of more than 100 identified "bad
asset" items in this list, was purely coincidental and had
no special significance for Reserve Bank officials
involved in the fegotiations. Theoretically, 58 per cent
Of R75 million, that is R43,5 million, of realised losges
on the Tollgate liquidation, could therefore have been
recovered against the facility. It should be noted,
however, that two overriding restrictions were placed on
the use of the Reserve Bank facility. Firstly, the maximum-26-
amount of losses incurred by the owners of Bankorp on the
disclosed portfolio of bad assets that could be written
off against the income earned on the facility was
restricted to R1 125 million. Secondly, only losses that
alzeady existed or were anticipated on 30 June 1990 and
that were reported in the list, could be written off
against the income generated specifically for this
Purpose. Total confirmed and projected losses included in
the list amounted to R1930 million, and Bankorp was
allowed the flexibility to use its ow discretion in
deciding what losses from the accepted list would be
charged against the Reserve Bank facility, and what write-
offs would be debited to shareholders’ funds. There was
also an overriding constraint (section 9.3 of the 1991
Agreement) that if the realised losses on the bad
investment Portfolio turned out to be less than the total
amount of financial assistance provided by the Reserve
Bank and Sankoxp, namely R1 635 million, up to 20 per cent
of the interest earned on the facility would be
recoverable by the Reserve Bank. At the end of the day,
evidence was provided to confirm that the total losses on
the bad, book portfolio indeed by far exceeded Ri 635
million. In terms of a report submitted to the Reserve
Bank on 8 November 1995 by the independent auditors, Ernst
~ & Young and RPMS, the cumulative write-off up to 31 March
1995 exceeded R1 900 million so that the recovery
Provision would not have been triggered.The loan of Ri 500 million carried interest at a
rate of 1 per cent per annum and was partly invested in
government stock (R1 100 million), and partly placed On
“eposit with the Reserve Bank (at an interest rate of 16
per cent), Both the investment in government stock and the
deposit with the Reserve Bank were ceded to the Reserve
Bank as security for the loan. In this way it was assured
that the Reserve Bank would not incur any loss on the
transaction. The requirement that R400 million of the
loan proceeds had to be redeposited with the Reserve Bank,
Prevented this part of the newly created money from
flowing into the money market. The balance of the cash
proceeds amounting to R1 100 million had to be invested in
government bonds and therefore accrued to the Treasury,
and contributed to the normal funding of the Budget
deficit for that year. The amount was deposited in the
Exchequer Account with the Reserve Bank and, until it was
spent by Government, had no impact on the money supply.
In the books of the Reserve Bank, a simple book
entry was passed to credit an account for Bankorp, and
debit Loans and Advances (to Bankorp) with R1 500 million.
With the acquisition of the government stock, the Bankozp
account was debited with Ri 100 million and the Exchequer
«Account (the Government’s account with the Reserve Bank)
credited with the same amount. The balance of R400
million, remaining in the Bankorp account, earned interest
at 16 per cent per annum for Bankorp, and the amount of-28-
R1 500 million on the Loan account (to Bankorp), earned
interest at 1 per cent per annum for the Reserve Bank. The
two balances remained in the books of the Reserve Bank
until 1995. Normal entries were passed through the profit
and loss account every year for the interest payment and
veceipt and these were absorbed in the profit and loss
allocations as decided on by the Board of the Bank from
time to time,
The assistance to Bankorp was respresented by the
income generated through the transaction, which consisted
of imterest earned on the Reserve Bank deposit plus
interest on the government stock, and would in total
amount to approximately R225 million per annum. This
amount ha@ to be applied to the gradual absorption of part
of the confirmed and projected losses of R1 930 million
that existed at that time, (and that were verified in the
List of identified losses attached to the agreement).
Bankorp was thus given more time to wind down the book of
bad debts accumilated during the consolidation period of
the nineteen eighties, and to salvage what it could from
this portfolio of non-performing assets.
The contents of the final arrangement were
incorporated in the text of a formal extensive loan
agreement, drafted by the Reserve Bank's legal advisors,
and signed by the Governor of the Reserve Bank on
5 September 1991, acting in terms of the general mandate-25-
from the Board of the Bank referred to above. The
agreement was executed by the advance of a loan of Ri 500
million to Bankorp, which the bank partly invested “in
South African Government’ stock that were ceded to the
Reserve Bank to serve as collateral for the loan amount ,
and partly placed on deposit with the Reserve Bank. ‘The
interest earned on the investments accrued to Bankorp and
Provided Bankorp with additional income against which the
amount of the agreed Potential logses that existed at the
time and that were verified in the schedule attached to
the loan agreement, could be written off, as and when they
materialised. The loan amount would become repayable to
the Reserve Bank once an amount of R1 125 million had been
sarned Py Bankorp, or as soon as its total capital and
reserves had been replenished to a level of Ra 000
million.
‘The agreement remained in force until 23 october
1995, when a total amount of R1 125 million was earned by
Benkozp/Absa. This amount was fully utilised to absorb
part of the losses carried forward from 30 June 1990, Only
minor amendments were introduced to the agreement during
its tenure, firstly, in April 1994 (with effect from
April 1992), to provide for the transfer of the agreement
fo Absa Bank as new owners of Bankorp, and in June 1995 to
Provide for the purchase by the Reserve Bank of the
Sovernment bonds (some of which were due to mature), and
for the depositing of the proceeds by Absa with the
Reserve Bank for the remaining tenure of the agreement,-30-
9. The 1994 agreement
The substance of the 1991 agreement, in terms pf
which financial assistance of up to a maximum amount of
Ri 125 million was made available by the Reserve Bank to
Bankorp over a period of approximately § years, was not
affected by the 1994 amendments. The main Teason for the
amendments was the take-over of Bankorp by Absa, with
effect from 1 April 1992, which required the transfer of
all rights and obligations under the 1991 agreement from
Bankorp to Absa.
As @ result of the take-over some of the stipu-
rations in the 1991 agreement either became irrelevant or
could no longer be enforced and, therefore, had to be
@eleted. Tm particular, most of the requirements that had
fo Pe complied with in the internal administration of
Bankorp, were either fulfilled or became irrelevant. In
addition, for example, the requirement in terms of which
Sankorp had to invest all dividends, received from Bankorp
Guring the tenure of the 1991 agreement, in Bankorp
shares, could no longer be enforced. Another example of a
stipulation which had become irrelevant was that of
empowering the Reserve Bank to take certain actions if it
was deemed that Bankorp had become unable to continue its
~business as a bank.
Other important amendments that were introduced by
means Of the 1994 agreement were the following:~31-
(a) Bankorp was allowed to substitute a new statement
of bad and doubtful debts as at 31. March 1992, the
details of which had been audited, for the
unaudited list of bad and doubtful debts as at 30
June 1991, which was incorporated as an appendix
in the 1991 agreement. .
(b) The debts of debtors who had been classified as
bad or doubtful as at the beginning of the 1991
financial year, i.e. as at 30 June 1990, could,
depending on the financial position of the
debtors, be increased or decreased in the actual
write-off of had debts against the amount of
financial assistance provided by the Reserve Bank,
with the proviso that in the case of any debtor,
the debt written off might not exceed the amount
of his total indebtedness to Bankorp on 31 March
1992. The total amount of assessed bad and
doubtful debts as at 31 March 1992 totalled RS 400
million and far exceeded the total amount of
financial assistance of R1 635 million provided by
the Reserve Bank and Sankorp.
(c) Absa’s external auditors were required, in respect
of every financial year during the tenure of the
1991 agreement (as amended), to audit amounts
written off, in order to ensure that such write-
offs conformed to the stipulated conditions.
The long period between the 1991 agreement and the
subsequent 1994 amendment reflected the time required for
“the Bankorp/Absa external auditors to audit in detail
Bankorp’s financial position as at 31 March 1992, i.e.
immediately before the take-over on 1 April 1992. This
comprehensive audit was also necessary to produce the new
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Statement of bad and doubtful debts. Such a statement was
received by the Reserve Bank from the auditors under cover
of a letter dated 1 December 1993 and was incorporated in
the 1994 agreement.
10. The 1995 agreement
The 1995 agreement supplemented and amended the
1991 and 1994 agreements. The main reason for the 1995
agreement was that part of the government stock which
served as security for the Reserve Bank’s loan to
Bankorp/Absa would mature before the termination of the
agreement. During the tenure of the 1991 agreement, as
amended, the Government converted some of the stock into
new stock which would mature in three tranches. The first
tranche would mature before the termination of the
agreement and Absa would have received the redemption
amount prematurely.
To resolve this problem, the Reserve Bank purchased
all of the government stock from Absa and required Absa to
Seposit the proceeds of R1 100 million with it and to cede
the deposit to the Reserve Bank as security for the loan
extended to Absa, Absa would earn interest on the deposit
exactly equal to the interest that it would have received
~on the government stock investment.
The 1995 agreement terminated on 23 October 1995
when the accumulated total of financial assistance-33-
generated in tezms of the 1991 agreement, as amended,
reached the specified amount of R1 125 million. on that
date the Reserve Bank’s loan of R1 500 million to
“ Bankorp/Absa was fully repaid.
11, Binal remarks
Tt should be noted that the loans made available to
Bankorp and to Absa over the period from 1985 to 1995 were
at all times recorded in the books of the Reserve Bank,
were regularly audited by the Bank's internal and external
auditors (who also had to verity the existence of the
required collateral), and were included in the published
financial statements of the Bank and in the financial
statements that served before Board Meetings and meetings
of the Committee of Governors.
‘The Bank’s Directors and its staff were, however,
at all times bound by the restrictions of Section 33 of
the South African Reserve Bank Act from disclosing any
information on the loans to outside parties.
The Reserve Bank appreciates the opportunity
afforded by the Commission to make this information public
knowledge at this stage, particularly now that the
~ assistance programme has been successfully concluded and
Absa, the present owner of the Trust Bank, Bankorp and
Mercabank assets, is in a position to continue to function
as a sound and well-managed banking institution.