Analyses: Comments on the Effects of Section 40 of the Banks Amendment Act 19 of 2003 on Section 60 of the Banks Act 94 of 1990

• Jurisdiction: South Africa
• Pages: 170-182
• Author: Johann de Jager
• Published date: 16 August 2019
• Citation: (2005) 17 SA Merc LJ 170
• Date: 16 August 2019

Analyses

Comments on the Effects of Section 40

of the Banks Amendment Act 19 of 2003

on Section 60 of the Banks Act 94 of 1990

JOHANN DE JAGER

South African Reserve Bank

Research Fellow, Department of Mercantile Law,

University of South Africa

1 Introduction

Banks are different from other non-banking companies because of the

pivotal position they hold in the f‌i nancial system (especially in the clearing

and payment system), the potential systemic dangers resulting from bank

runs, the nature of their contracts (they offer contracts for liquid deposits with

the redemption value of a deposit being independent of the performance of

the bank and the value of its assets), and the moral hazard associated with

the lender-of-last-resort role and other f‌i nancial safety measures that apply to

them. They are custodians of the public’s money and their business consists

mainly in the management of risks. In the absence of a depositor-protection

scheme, ordinary depositors run the risk of losing all their deposits in the event

of their bank’s failure (see Bank for International Settlements (‘BIS’) ‘Mr

McDonough Discusses Sound Banking Systems: A New Growth Imperative’

(2000) 27 BIS Review 1 at 3; Rosa Maria Lastra Central Banking and Banking

Regulation (1996) at 72; JJ de Jager ‘Recognition of the Interests of Bank

Depositors: the Corporate Governance Dilemma (Part 2)’ 2002 Tydskrif vir die

Suid-Afrikaanse Reg 713 (De Jager ‘Recognition Part 2’); Richard J Herring

& Susan M Wachter Real Estate Booms and Banking Busts – An International

Perspective (1990) at 7).

The board of directors is ultimately responsible for supervising the risk-

management process of a bank and must, similarly, accept responsibility for

protecting the interests of depositors. However, since the generation of returns

to shareholders with depositors’ funds creates the framework for determining

the risks that a bank may undertake, management may be tempted to generate

extraordinary prof‌i ts. Such prof‌i ts may be achieved by subjecting depositors’

funds to unjustif‌i ably high and outrageous risks. Consequently, effective

governance measures need to be maintained in order to strike a proper balance

between the rights and interests of depositors in the safety of their deposits,

and the rights and interests of the directors and management of banks to earn

170

(2005) 17 SA Merc LJ 170

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