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?
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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?