Reserve Bank’s first act was to save FNB precursor

Ethel Hazelhurst

The Reserve Bank, which is celebrating its 90th anniversary tomorrow, caught its first whiff of action almost as soon as it opened for business in 1921.

In its first week as lender of last resort, the central bank was called on to assist the National Bank of South Africa – now First National Bank (FNB). The commercial bank was short of cash and gold to meet its reserve requirements and the Reserve Bank loan kept it afloat.

The rescue was repeated in 1923, when National Bank of SA faced a run, as other commercial banks withdrew deposits.

FNB records the events on its website: “By the early 1920s, National Bank was suffering from bad debt and heavy losses. A merger appeared the best way to ensure survival and, in 1925, it amalgamated with the Anglo-Egyptian Bank and the Colonial Bank. The new bank was called Barclays Bank (Dominion, Colonial and Overseas).”

Barclays divested from South Africa in 1986 and returned to the country in 2005, when it took a majority stake in Absa. Its original domestic subsidiary changed its name to incorporate its historical identity.

The Reserve Bank itself faced a liquidity and solvency crisis in 1931. In his history of the bank, late governor Gerhard de Kock recorded that the decision to keep the local currency at its existing exchange rate against sterling resulted in an exchange loss on the sale of sterling holdings of about £1.5 million (R16.5m), which wiped out its reserves and £400 000 of its capital. On that occasion, the government rode to the rescue.

A political crisis followed in 1932, after the bank persuaded the government of the day to keep South Africa on the gold standard.

While the Reserve Bank is now known largely for its monetary policy function – adjusting interest rates when needed, depending on whether inflation is high or low – its most dramatic interventions have come when failing banks have threatened the financial system. Over the years, the Reserve Bank has arranged a number of rescues, some of them behind the scenes and some high profile.

The one that attracted most publicity came after problems surfaced at Bankorp and Trust Bank. Trust Bank’s solvency was threatened by debt defaults in 1989. The following year, after an unsuccessful rights issue, its parent, Sanlam, approached the Reserve Bank for help with its other troubled subsidiary, Bankorp.

The outcome of the negotiations was that both banks were absorbed into Absa in 1992. Absa had been created by a three-way merger, a year earlier, between the United and Allied banks (both formerly building societies) and Volkskas.

In following years, the central bank was attacked for orchestrating the rescue which, critics claimed, benefited Absa. However, a panel of experts appointed by the Reserve Bank in 2000 concluded that “Absa paid for the continued assistance of Bankorp by the Reserve Bank and could not be regarded as beneficiaries of the Reserve Bank assistance package”.

Another crisis occurred in 2002, after Saambou Bank faced a run on deposits. The Economist magazine reported at the time that depositors drew R1 billion over two days in February. With the help of the central bank, parts of Saambou were salvaged. But the brand disappeared along with a number of other small banks, which returned their banking licences.

The decision to establish the Reserve Bank was made in 1920 after the inflation that followed the World War I. The Currency and Banking Act of 1920 allowed the central bank to control the note issue and conserve the stock of monetary gold.

The Reserve Bank was set up with capital of £1 million, which was taken up by the four commercial banks and members of the public. It started issuing bank notes a few years later and, in 1927, became the government’s banker.

When exchange control was implemented during World War II, it became the responsibility of the bank.