Measuring shadow banking activities and

exploring its interconnectedness with banks

in South Africa

Esti van Wyk de Vries

October 2017

Confidential

What is shadow banking?

Shadow banking - Credit intermediation outside the formal banking system

QB March 2011

What is shadow banking?

Shadow banking system can be broadly defined as

the system of credit intermediation that

involves entities and activities (fully or partly)

outside the regular banking system.

FSB Report “Shadow Banking: Strengthening Oversight

and Regulation” (27 Oct. 2011)

What does outside the regular banking systemlook like?

QB March 2011

Credit intermediation,

liquidity & maturity

transformation,

leverage

What is shadow banking?

QB March 2011

Banks

The rise of shadow banking

“Shadow Banking”: 2007

Shadow banking activities have existed long before the

recent global financial crisis

– US Money-market mutual funds: 1970

– US Cash management accounts: 1977

– Less-regulated market for capital grew rapidly next to

the traditional banking system

– Regulatory arbitrage

• Deregulation

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The role of the FSB

In response to the G-20 Leaders’ request at the Seoul

Summit in Nov. 2010, the FSB has been working on the

following three aspects:

– Define the scope

– Establish a system-wide monitoring framework to assess global trends

and risks

– Develop policy recommendations to address financial stability risks from

shadow banking

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Why is shadow banking and its measurement important?

Systemic risk

Regulatory arbitrage

Monetary policy transmission

Channel for capital flows

Financial inclusion

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Measuring shadow banking – FSB approach

Two step approach:

– 1. Cast the net as wide as possible

• Holders of financial assets

– 2. Narrow down

• Risk-based shadow banking measure

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Monitoring exercise – STEP 1

Macro mapping

– Balance sheet data of financial intermediaries

Central

Bank

Deposit

taking

institutions

Insurance

companies

Pension Funds

Public

Financial

institutions

Other financial

Intermediaries

• Collective Investment Schemes

• Hedge Funds

• Finance Companies

• Trust companies

• REITs

• Securitisation schemes

• Prime brokers

• StokvelsMonitoring Universe

of Non-bank

Financial

Intermediaries

Narrowing down – STEP 2

Economic Function Definition Key shadow banking risks Typical entity types*

EF1

Management of collective

investment vehicles with

features that make them

susceptible to runs

Public funds: Liquidity and

maturity transformationFixed income funds,

mixed funds, credit

hedge funds, real-estate

fundsPrivate funds: Leverage and

maturity transformation

EF2

Loan provision that is

dependent on short-term

funding

Liquidity and maturity

transformation, leverage

Finance companies,

leasing companies,

factoring companies,

consumer credit

companies

EF3

Intermediation of market

activities that is dependent

on short-term funding or on

secured funding of client

assets

Liquidity and maturity

transformation, leverageBroker-dealers

EF4 Facilitation of credit creation Credit risk transfer

Credit insurance

companies, financial

guarantors, monolines

EF5

Securitisation-based credit

intermediation and funding of

financial entities

Liquidity and maturity

transformation, leverageSecuritisation vehicles

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STEP 1: Assets of financial intermediaries participating* in the FSB exercise

* 21 Jurisdictions and the euro area

Source: Financial Stability Board, 2016

STEP 2: Global Narrowing down - 2016

STEP 1: Measuring shadow banking in SA –FSB approach

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STEP 1: Measuring shadow banking in SA –FSB approach

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Other Financial Intermediaries

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Step 2: Narrowing down: moving from OFIs to shadow banking

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Shadow banking activities

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SA shadow banking

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Banks’ OFIs and shadow banking assets as a percentage of GDP

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Things to keep in mind

Risk-based classification

Duplication

This was done following FSB approach – there are other

approaches that can be followed

– Non-bank credit extension

– Non-bank financial activities that require a public of a

private backstop to operate (Claessens et al, 2014)

– All entities that do not accept deposits (Buchak et al,

2017)

– Non-core liabilities of banks (Harutyunyan et al,

2015).

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Where is South Africa standing out?

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Interconnectedness in the financial system

Source: Financial Stability Board

Total exposure to the banking sector*

Which OFIs?

Data issues….

Clear view on

– Money-market funds (MMFs)

– Non-MMF Collective Investment Schemes

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MMF investments – Sept 2016

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MMFs, Banks, Insurance companies and pension funds

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Holdings of other CISs, excluding MMFs, hedge funds and PBSs

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Percentage

of total R millions Bank Non-bank Government SOE REIT Other

Another fund domestic 18 374 669 - - - - - -

Another fund foreign 16 344 306 - - - - - -

Bond - domestic 13 268 265 110 572 36 861 96 222 12 923 10 912 775

Bond - foreign 0 160 - - - - - 160

Cash and interest 3 58 774 28 688 - - - - 30 086

Cash-foreign (foreign cash) 0 7 711 - - - - - 7 711

Equity - domestic (including equity options) 37 771 145 103 733 577 619 - 3 969 85 563 260

Equity - foreign (foreign equity) 4 79 248 - - - - - 79 248

MMF instrument - ZAR and other 8 157 020 128 266 15 448 1 007 5 608 2 415 4 276

Other 1 30 582 4 824 - - - - -

TOTAL 2 091 880

Percentage of total 18% 30% 5% 1% 5% 6%

Shadow banking industry – potential risks

Shadow banking activities amounts to roughly 50 per cent of

GDP in South Africa and could become a risk to the financial

system if not properly measured and understood

Data limitations

Banks face relatively large funding risk from OFIs

South Africa’s financial system differs from those in advanced

economies in several important ways, two of which are

(i) that pension funds and insurance companies hold a large

share of financial assets; and

(ii) banks are more dependent on OFIs for funding.

Room for regulatory arbitrage

Innovations, Fintech and shadow bankingQB March 2011

But…

Despite having the potential to create and amplify risks to

financial stability, shadow banking can provide useful and

legitimate financial intermediation throughout economic

fluctuations

QB March 2011

QB March 2011

Thank you!

any Questions?