The political economy of bank failure and supervision in the Republic of South Africa

The failure of banks has financial, economic, social and political implications. Banks serve as deposit holders and financial intermediaries. As deposit holders they are the custodians of savings and via the market for capital, transfer the savings into investment or consumption. The particular role which banks play in the modern economy is significant and accordingly they are subjected to an extensive regulatory framework to ensure that they can continue to play the role for which they have been designed and to maintain confidence in the monetary andfinancial system. Despite these regulations (some would argue, because of these regulations) banks still become insolvent or fail to meet the conditions for maintenance or renewal of their licences. The final arbiter of this decision is usually the central bank. In the Republic of South Africa (RSA), it has been suggested that the central bank - Reserve Bank of South Africa (RB) - has been unduly political in determining the manner in which it has applied banking regulation and conducted its role as lender of last resort. This paper contributes to this debate by discussing the manner in which the RB has performed its role and ways in which bank supervision in South Africa can be improved.