Bankorp bailout explained in 10 questions

• What are the marches by the ANC Youth League about?

The ANC Youth League is marching because of news reports based on a leaked, confidential provisional report of the Public Protector. This report was sent to Absa and other affected parties, such as the SA Reserve Bank and the Presidency, so that they could provide further information before the Public Protector finalises it. The further inputs may change the conclusions and recommendations of the provisional report.

• What is the Public Protector investigating?

The Public Protector is investigating whether the SA Reserve Bank and the Government have a duty to try and recover funds that were used to bail out a bank called Bankorp between 1985 and 1995. Bankorp received SA Reserve Bank assistance during that period because it was about to collapse due to mounting bad debts. Had it collapsed, people who had deposited money with Bankorp would have lost their money.

• Why is Absa mentioned if the bailout was given to Bankorp?

Absa acquired Bankorp on 1 April 1992 while the SA Reserve Bank’s assistance was still continuing. As a new owner of the business, Absa assumed responsibility for the management of Bankorp’s assets and the SA Reserve Bank assistance programme.

• Why did the SA Reserve Bank step in to help Bankorp?

The SA Reserve Bank is a Central Bank and lender of last resort. The responsibility of a Central Bank is to make sure a country’s financial system remains stable. Bankorp was one of the largest banks in South Africa at the time, with 10% market share. It is possible that customers of other banks would have panicked and started withdrawing their money for fear of losing it like Bankorp’s customers would have.

• How much total assistance was given to Bankorp between 1985 and 1991; as well as in 1992 after Absa took over?

The SA Reserve Bank provided a total loan of R1.5bn at 1% interest. Yes, this is a very low interest rate. Central Banks are a lender of last resort. By the time they are approached for help, the bank facing collapse can no longer borrow at normal lending rates from other banks or capital markets. The Central Bank therefore sets a nominal interest rate when it intervenes.

For example, during the 2008 financial crisis the US Federal Reserve (the US equivalent of the SA Reserve Bank) offered US banks hundreds of billions of dollars in loans at 0% interest.

• What were the key terms of the contract between the SA Reserve Bank and Bankorp, and later Absa?
  
  
• The SA Reserve Bank provided a loan of R1.1bn at 1% interest.
• The loan was used to buy Government Bonds at 16% interest. Bankorp had to deposit R400m into the SA Reserve Bank as security. This R400m was equivalent to assistance Bankorp had already received since 1985.
• In order to simplify the arrangement, the parties agreed that the 1% interest due to the SA Reserve Bank would be deducted from the 16% interest on the Government Bonds due to Bankorp (and from 1992, Absa). The total interest due to Absa and Bankorp was therefore 15% instead of 16%. This 15% interest generated R225m per year.
• The money was to be used to write off the debts of customers who could not pay back the Bank’s money.
• Bankorp and Absa were obliged to hire external auditors, at their own cost, who would verify that the money was used for its intended purpose and then submit detailed reports to the SA Reserve Bank.

This process was completed in October 1995, when the arrangement was no longer needed, and the SA Reserve Bank was satisfied that the money had been used as intended.

• Clearly Absa received money from the SA Reserve Bank. Why does Absa believe it does not owe money then?

When Absa acquired Bankorp in 1992, the assistance programme was already in place. The debt write-offs that would result from the SA Reserve Bank’s intervention were taken into account in determining the price Absa would pay for Bankorp. This price was set at R1.23bn and Absa paid it in full. This is why Absa cannot pay for the same thing twice.

• Did Absa enter into an agreement with the SA Reserve Bank? If so, what did the agreement say?

Yes, Absa entered into an agreement with the SA Reserve Bank in 1994.

As a result of this takeover, the agreement was renegotiated between 1992 and 1994. A new agreement was concluded in 1994 and was backdated to 1 April 1992, the day of the acquisition of Bankorp by Absa. The terms of the agreement as described above  remained, except Absa replaced Bankorp as the beneficiary.

This agreement ended on 23 October 1995, when the accumulated total of financial assistance since 1985 amounted to R 1.125bn.

• Should Absa not pay back the R1.125bn then?

No. That money did not go to Absa shareholders. It was used to write off the bad debts of Bankorp customers. Absa paid for Bankorp after taking account of the bad debt write-offs. This is why Judge Denis Davis said Absa paid fair value for Bankorp and is not liable to pay anything further. Judge Davis and a panel of experts, he chaired, conducted a thorough investigation between 2000 and 2002, and produced what is now known as the 'Davis Report'.

• Who should pay then?

Judge Davis delivered a comprehensive report that was over 150 pages long. In it he determined that the beneficiaries were the shareholders of Bankorp. Sanlam policyholders owned 88% of the bank, while the remaining 12% was owned by minorities. The R1.23bn Absa paid was split between these parties.