The banking-political nexus is complex. Banks lend government a lot of money. On most recent published data (for end-November last year), 11% of all the assets in the banking system consist of government bonds, which are loans by banks to the government. This is a nominal R830bn and has been growing significantly. In 2018, government lending was only 6% of assets and in 2008 it was 2.5%. The banking system has become more exposed than before to the financial health of the sovereign, and the government has become more dependent than before on banks lending it money. This has happened precisely as the government’s creditworthiness, measured by the debt-to-GDP ratio or ratio of interest spending to total revenue, has been deteriorating.

This has been highlighted by the SA Reserve Bank as a growing risk to the financial system, with concerns rising that a sovereign financial crisis will trigger a banking crisis, while a banking crisis would trigger a sovereign funding crisis.

It is tempting to assume that this growth in bank lending has happened to fill the void left by departing foreign investors, but that is not the whole story. Foreigners have returned as net buyers of bonds over the past two years. Banks have also not had many compelling alternatives for their money. Domestic economic growth and private sector credit demand has been weak. Government paper provides attractive returns with little other demand in the economy.

However, politicians need banks to lend to drive growth, and the problem is that it is now too easy for banks to park money in bonds than find ways to lend to the private sector. That presents a dilemma. The best way the government could get banks to lend more to the “real” economy would be to stop borrowing so much from them. Yet, politically, government’s need to run a deficit, and finance it, is more critical.

This dilemma plays out in the pronouncements politicians make about banks. Minister in the presidency Khumbudzo Ntshavheni was widely panned for saying in November last year that there was a conspiracy between the banks to collapse the government. She cited the allegations that banks had conspired to weaken the value of the rand to do so. This was obvious nonsense. If banks wanted to collapse the government, they could do it far more easily by stopping lending to it. But it is obvious to any banker that a collapsed government would be catastrophic given how big their balance sheet exposure to government is.

Weird case

Political electioneering has tended to focus on banks’ consumer lending, particularly unsecured loans. There is a big constituency there, with 10-million South Africans with impaired credit records. In the past two elections populist legislation was passed to crack down on credit bureaus or to empower politicians to cancel debt. But going into this election, the government has egg on its face. The dismissal last week of the Competition Commission’s case against most of the 28 banks alleged to have been involved in a conspiracy to manipulate the rand should be embarrassing. The Competition Appeal Court was withering in its criticism of the commission. It found in 2020 that the commission’s first affidavit outlining the case against banks was “lamentably inadequate to prosecute a cartel case” and last week’s judgment found it hadn’t met the bar since.

It is trite to say the commission should ruthlessly pursue cartels. But the long-running forex case has always been weird. There definitely was manipulation of the rand, which we know due to a successful prosecution of several banks in New York. After last week’s dismissal, it is essentially the same evidence and banks that the commission is left with (which, by the way, showed the manipulation often was to strengthen the rand rather than weaken it). But its purported ambition had been to make a case for a giant conspiracy between 28 local and foreign banks to actively manipulate the exchange rate, and that is what the Appeal Court has kicked into touch. Anyone who knew the basics of the giant global foreign exchange market would know just how far-fetched this was, and the commission could never produce any good evidence for it.

In the commission’s zeal, I detect more than a little politics. The commission, it is well known, is heavily influenced by its political head, trade, industry & competition minister Ebrahim Patel. In pursuing the case, which the commission’s own team must have known was weak, it is natural to fear they were acting more under political pressure than an aspiration to implement the law. The case, which goes back to 2015, has long been used by politicians to bash the banks, with Ntshavheni providing only the most recent example. It underpinned a narrative of evil exploitive bankers conspiring to damage the country. Somehow, that is thought a vote winner.

With the judgment coming as electioneering gets into gear, I hope it will chasten some of the madder proclivities to attack the banks that tend to emerge in these times. The saner in our body politic will hope so, given the need for the banking system to be healthy so that it can feed the government’s own demand for debt.

• Stuart Theobald is chair of research-led consultancy Krutham (formerly Intellidex).
  This article first appeared in Business Day.