Abstract
LL.D.
Banks are important institutional mechanisms in local and international markets. In
general a bank is required to fulfil the important function, inter a/ia, of collecting the
general public's savings and channelling it into productive investments in the economy.
As part of this process a bank subjects mainly depositors' funds to various types of risk
in an endeavour to generate profits. It results in the level of risk exposure assumed by
the bank normally being much higher than the actual level of the bank's capital. This
gearing effect may unfortunately act as an incentive for directors and management
("management") of a bank to subject depositors' funds to outrageous risks in a quest
to earn extraordinary profits. Under such circumstances the chances of gain may be
unreasonably small in comparison with the high probability of loss of the depositors'
funds and the (possible) failure of the bank. In addition, the danger exists that the
failure of a bank may cause the demise of other banks or may even result in the failure
of whole financial systems. Therefore, in view of the worldwide expansion of banks, the
Bank for International Settlements (together with other international bodies) is involved
in developing and maintaining uniform international minimum standards of supervision
on a global scale. Regulators worldwide are required to adhere to these standards if
the banks in their jurisdictions are to participate in the international financial markets.
In South Africa, the Banks Act, 1990 (Act No. 94 of 1990), provides for the regulation
and supervision of banks, which banks (other than branches of foreign banks and
mutual banks) are required to be public companies. This company structure offers
persons who are equipped with special managerial abilities and skills the opportunity
to manage and control the company's business. Accordingly, the worldwide
phenomenon of the separation between the shareholders and management of the
company (concomitant with virtually unlimited managerial freedom) extant in large
public companies exacerbates the risk of the loss of deposits occasioned by negligence
or misdemeanour on the part of management of banks. Moreover, market forces and
principles of South Africa's statutory and common law pertaining to the duties of management fail to provide the necessary system of countermeasures to guard against
the exploitation by management of the business of a bank and to reduce the risk of loss
to depositors. Consequently, considerations of public interest dictate that the principles
of a free-market economy be supplanted by legislation that introduces prescriptive rules
with regard to the regulation and governance of the management of banks. The purpose
of such legislation should be to rectify market failures and to protect the interests of
depositors. It must also provide the Registrar of Banks with an adequate structure to
oversee compliance with international minimum standards of regulation and governance
pertaining to the management of banks. In this vein, the study undertaken in this thesis
has resulted in draft pro forma legislation aimed at addressing the designated needs
and standards. Should legislation of this nature be introduced and applied to the
management of banks in South Africa, it would not only ensure compliance with
internationally recognised regulatory and governance standards, but should also protect
the interests of depositors. The proposed legislation ought to minimise the risk of the
loss of deposits and should contribute towards maintaining/restoring the confidence of
the general public in the financial system of South Africa. It would also enhance the
process of ensuring that only fit and proper persons are appointed as managers, and
continue to manage a bank and/or bank controlling company. The pro forma legislation
is designed to be enacted as amendments to the current provisions of the Banks Act.