Foreign banks, exchange controls and the future of the four pillars bank policy in South Africa¶
Roger Gidlow (2008). Foreign banks, exchange controls and the future of the four pillars bank policy in South Africa. South African Journal of Economic History, 23 (September 2008). Economic History Society of Southern Africa.
| Type | journal article |
| Scope | Wider apartheid literature |
| Method | policy analysis |
| Period studied | 1793–2006 |
| Regions | South Africa |
| Themes | macro fiscal finance debt, business and state, sanctions divestment, transition post apartheid, politics ideology elections |
| Citation key | gidlow2008 |
Argument¶
Gidlow reviews the history of foreign commercial banks in South Africa, stressing the period after 1970. He argues that the 1972 restrictions on foreign bank ownership, which grew out of the Franzsen Commission, were counter-productive: they reflected Afrikaner nationalist and isolationist thinking and ignored the risk of sanctions. The restrictions made foreign banks' exit in 1986-87 easier and left the country short of foreign capital. He also argues that the 1985 credit withdrawal was possibly herd panic rather than purely political. He then contends that the four pillars policy and the cap on foreign ownership of the big four banks, as seen after Barclays took 56% of Absa in 2005, should be loosened. He argues further that exchange controls helped drive the restrictive banking legislation. The argument is policy-analytic and narrative, drawing on official reports and some data. The author is a former Reserve Bank economist.
Evidence and method¶
Franzsen Commission report (1970), Banks Act 1972, Deposit Taking Institutions Act 1992, a 2004 National Treasury Task Group report on competition in banking, Reserve Bank and bank data, secondary histories (Jones, Coleman, Hamersma & Czypionka), and the author's earlier articles. No archives or new datasets.
Place in the debates¶
- Why foreign banks disinvested in 1985-87, and whether the credit-line withdrawals were political (see Finance, capital flight, the 1985 debt crisis and banking). Doubts that disinvestment was purely political. He points to the falling rand and its effect on parent-bank profits, a herd panic after Chase Manhattan's August 1985 call, and policies that had already forced banks to cut their stakes.
- Effects of state restriction of foreign capital and the isolationist economic policy under the National Party (see Finance, capital flight, the 1985 debt crisis and banking). Judges the 1972 legislation and exchange controls counter-productive. He argues they retarded capital inflows, facilitated sanctions and left South Africa vulnerable in the 1980s debt crisis.
- Four pillars policy versus foreign ownership of big banks (see Finance, capital flight, the 1985 debt crisis and banking). Argues the policy rests on moral hazard and competition grounds that may justify keeping the big four independent. He still supports allowing 100% foreign ownership, and calls the national-savings argument outmoded.
Findings¶
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The Franzsen Commission found extreme foreign control of banking, which justified the restriction policy. (p. 7)
At the end of 1970 foreign controlled commercial banks possessed 73,2 per cent of all South African commercial bank deposits.
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The Commission's recommendations were enacted in the Banks Act of 1972, with limits on foreign shareholding and on foreign branches. (p. 7)
This recommendation meant that branches of foreign banks could not be set up in the Republic. Legislation along these lines was incorporated in the Banks Act of 1972.
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Gidlow judges the 1972 policy counter-productive and says it eased sanctions. (p. 8)
It totally failed to take account of the repercussions of foreign sanctions and indeed facilitated the introduction of such sanctions.
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The authorities never prioritised foreign capital inflows. The 1961 exchange controls and the 1972 restrictions reflected isolationism. (p. 8)
Despite these problems the authorities never placed an emphasis upon trying to boost inflows of foreign capital, as shown for instance by the resort to draconian exchange controls in 1961
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Barclays, Standard and Citibank disinvested in 1986-87, and earlier forced share sales eased their exit. (p. 9)
During 1986 and 1987 three foreign controlled banks, namely the British owned banks of Barclays National and the Standard Bank and the American owned Citibank, disinvested from the Republic
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Economic factors, not only politics, explain the bank disinvestment. (p. 10)
The sharp decline in the external value of the rand, which began around the middle of 1984 and was exacerbated by financial sanctions, served to reduce the foreign currency values of profits
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The 1985 debt crisis was triggered by Chase Manhattan's demand for repayment, with herd behaviour spreading it. (p. 53)
Early in August 1985 the Chase Manhattan bank demanded a repayment of all its claims on South African banks within 90 days involving roughly $270 million.
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The 1972 forced share sales left banks more amenable to foreign political pressure and eased the spread of sanctions. (p. 54)
This reduced their investment stakes in South Africa and rendered them more amenable to foreign political pressures.
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The four big banks dominate the market, and the Nedcor-Standard bid failure made the four pillars policy explicit. (p. 14)
These four banks accounted for around 83 per cent of commercial bank deposits in South Africa and if one includes Investec Bank, then 89 per cent
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Gidlow argues exchange controls helped produce the restrictive 1972 banking law. (p. 59)
without exchange controls the chances are that the ill-conceived banking legislation introduced in 1972 would never have seen the light of day.
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| Final report of the commission of inquiry into fiscal and monetary policy in South Africa (Franzsen Commission), 1970, pp 215-17 | commission or official report | 1970 | Establishes the 1970 foreign-control finding (73.2% of deposits) and recommendations to cut foreign shareholding to 50%, which underpinned the Banks Act of 1972 restrictions. |
| Task Group Report for the National Treasury, Competition in South African banking, April 2004 | commission or official report | 2001-2004 | Supplies bank counts for 2001 and 2003 and the finding that the big four behaved as a complex monopoly with high returns on equity. |
| Banks Act of 1972 | legislation gazette | 1972 | Legislation restricting foreign bank shareholding and branches, central to the author's critique of policy. |
| Deposit Taking Institutions Act of 1992 | legislation gazette | 1992 | Shows the removal of the 1972 shareholding restrictions on foreign banks. |
| T.T. Mboweni, The South African banking sector: An overview of the past ten years, Pretoria, November 2004 | official statistical series | 1994-2004 | Cited for the Reserve Bank view that other international banks could be interested in acquiring one of the big four. |
| Hamersma & Czypionka, Essays on the South African financial structure, Standard Bank of South Africa, 1976 | secondary literature compilation | 1947-1965 | Source for the postwar establishment of foreign bank subsidiaries and the Chase/Standard merger. |
| Stuart Jones, 'The amalgamation movement in banking in South Africa' and The great imperial banks | secondary literature compilation | 1836-1941 | Underpins the early banking history and the five-bank structure by 1941. |
| Coleman (ed), Economic history of South Africa, 1983 | secondary literature compilation | 1942 | Cited for the origins of Volkskas and Afrikaner capital in banking. |
| Gidlow, 'The role of foreign banks in South Africa', The Banker, August 1992; and 'The stability of the South African banking system', ABSA Economic Perspective, 2002 | newspapers periodicals | 1992, 2002 | Author's own earlier work used for the entry of foreign banks in the 1990s and the skills shortage reported by local banks. |
| Falkena & Llewellyn, The economics of banking, SA Financial Sector Forum, 1999 | secondary literature compilation | 1999 | Supports the herd-behaviour interpretation of the 1985 withdrawal of foreign credit. |
| Reserve Bank / banking sector statistics (unreferenced): bank deposit and asset shares, bank numbers, foreign bank share of assets, JSE net foreign purchases | official statistical series | 1970-2006 | Concentration, foreign share and efficiency figures for 2004-2006, and net foreign equity purchases, are given without cited sources. |
| Standard and Poor's ratings agency commentary on Barclays-Absa | other | 2005 | Cited for the expected effect of the Barclays takeover on competition. |
Inference¶
Quantification: Illustrative figures.
Narrative and policy-analytic essay. It combines historical description, counterfactual reasoning (for example, a world without exchange controls) and comparison with other countries (New Zealand, Argentina, Switzerland), with a few headline statistics quoted from official reports and unnamed official data.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| In 1970 foreign-controlled banks held most South African commercial bank deposits, which led the Franzsen Commission to recommend restrictions that were enacted in the Banks Act of 1972. (p. 34) | Franzsen Commission report 1970 and the Banks Act 1972. | Partial data |
| The South African banking sector is highly concentrated, with the big four holding about 83% of deposits and, with Investec, 89% of assets in 2005. (p. 41) | Unnamed official banking statistics, plus the Task Group report for the competition findings. | Partial data |
| Foreign banks' share of sector assets was small and declining (8.9% in March 2005 against 9.5% a year earlier), so the case for greater foreign ownership is strengthened. (p. 48) | Unreferenced banking sector statistics. | Partial data |
| The 1985 foreign debt crisis was triggered by withdrawal of foreign credit lines, with Chase Manhattan demanding repayment of about $270 million, and may reflect herd behaviour rather than purely political motives. (p. 53) | Rumour and secondary reasoning; the Falkena & Llewellyn text is cited for herd behaviour; no archival or bank data. | Illustrative or anecdotal |
| Without exchange controls, foreign banks would have played a larger role and the 1972 banking legislation would probably never have been enacted. (p. 59) | Counterfactual reasoning only. | Asserted |
| Foreign investors have been net buyers of JSE equities every year since 1993 except 2002, and this is bringing back pre-WWII-style foreign majority ownership. (p. 55) | Net purchase figures (R52 billion in 2005, R73.3 billion in 2006) are given without a source. | Partial data |
The author's caveats¶
The author notes that it is open to speculation whether foreign banks complied with exchange controls, and that the 1985 withdrawal of credit lines was only rumoured and has a competing explanation. Beyond these, there is no systematic discussion of data limitations.
Gaps in the evidence¶
The argument relies on a few headline statistics with sparse sourcing and on counterfactual reasoning. Bank-level balance sheets, Registrar of Banks returns, Reserve Bank Quarterly Bulletin series and archival records of the 1985 credit withdrawals would test the claims about concentration, foreign shares and the debt crisis. Government and Reserve Bank files on the 1972 Banks Act and the 1992 reforms would test the motivations. Much of this material existed at the time and some is now accessible in archives.
Replicability: Data poorly documented.