Browsing by Author "Mashimbye, Lawrence"

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    Shadow banking and systemic risk in South Africa
    (Stellenbosch : Stellenbosch University, 2023-12) Mashimbye, Lawrence; Fanta, Ashenafi Beyene; Stellenbosch University. Faculty of Economic and Management Sciences. University of Stellenbosch Business School.
    ENGLISH SUMMARY: Shadow banking, credit intermediation involving entities and activities outside the regular banking system, is growing globally and even at a faster rate in emerging economies. The development of shadow banking is driven by a demand for safe and liquid investments redeemable at par, investors’ pursuit of higher returns, regulatory arbitrage, financial sector development, technology, and economic growth. Shadow banks perform credit, liquidity, and maturity transformation without or with limited supervision and backstop support from the central bank, which among policymakers and regulators in South Africa and elsewhere led to concern about shadow banks’ potential threat to financial system stability or systemic risk. However, a lack of data impeded the effective regulation of shadow banking. This study is motivated by three critical gaps in the literature. Firstly, there are few studies on the contribution of shadow banking to systemic risk globally, but none focus on South Africa despite the unique structure and composition of shadow banking in the country. Secondly, there is scant information on the interconnectedness within the shadow banking system. The interconnectedness, through counterparty contracts and common assets and market exposure, creates a channel for contagion in financial systems. Lastly, efforts to prevent systemic risk prioritise the monitoring of large shadow banking entities; however, whether a relationship exists between the size of shadow banks and system risk remains an empirical issue. Nevertheless, large financial institutions are theoretically assumed to be more connected such that their failure could trigger systemic failure. To this effect, we investigate the contribution of shadow banking to systemic risk in South Africa using monthly returns data of fixed-income funds, funds-of-funds, money market funds, and multi-asset funds for the period of January 2015 to December 2021. We measure systemic risk using Conditional Value-at-Risk (CoVaR) and Delta Conditional Value-at-Risk (ΔCoVaR) and apply the quantile regressions with financial sector returns as an independent variable. We include a set of state variables (equity market return, market volatility, yield spread) as independent variables to produce the time varying CoVaR and ΔCoVaR. We determine the contribution of shadow banking to systemic risk, and also breakdown the analysis into pre-COVID-19 and during-COVID-19 periods. We analyse interconnectedness in subsamples of shadow banks with high marginal contributions to systemic risk and examine the relationship between the size of shadow banks and systemic risk. Insights from the study are presented in three empirical chapters to address the critical gaps identified. In the first chapter, we report the contribution of shadow banking to systemic risk in South Africa and highlight that all shadow banks contribute to systemic risk. Multi-asset funds provide the largest contribution to systemic risk, followed by funds-of-funds and fixed-income funds. Whilst money market funds do not contribute to systemic risk during whole study period, they are the largest contributors during COVID-19. Therefore, money market funds are found to be systemic only during turbulent periods. Altogether, the contribution of shadow banking to systemic risk follows patterns of macroeconomic and financial distress and is at an all-time high during the COVID-19 period. In the second empirical chapter, we focus more narrowly but also in more depth on the subsample with the highest ΔCoVaR and estimate interconnectedness using a Toda and Yamamoto Granger causality analysis. The level of interconnectedness in shadow banking is high, and linkages reach a peak during COVID-19 showing the impact of the pandemic on the financial sector. Multi-asset funds are more interconnected than all other funds. However, money market funds have more inbound connections. Generally, multi-asset funds are significant transmitters and receivers of systemic risk whereas money market funds are receivers. In the last empirical chapter, we measure the relationship between the size of shadow banks and systemic risk using ordinary least square regressions (OLS) and quantile regression. We find a positive linear relationship between the size of shadow banks and systemic risk, and the linkages are pronounced among multi-asset funds, especially retail multi-asset funds sponsored by asset managers. There is no relationship between the size of fixed-income funds, funds-of-funds, and money market funds and systemic risk. The size of shadow banking institutions does not increase the marginal contribution to systemic risk. Overall, we conclude that shadow banking contributes to systemic risk in South Africa. Among the shadow banking entities, multi-asset funds are the largest contributors to systemic risk, and money market funds are more systemic during turbulent periods. Notably, systemic risk and interconnectedness increase during periods of shocks, reaching an all-time high during the COVID-19 pandemic. Our results also confirm the relationship between the size of shadow banks and systemic risk, with the relationship being stronger for retail multi-asset funds sponsored by asset managers. The regulatory implications of our results point to the need for the regulator to strengthen macroprudential regulation of shadow banking to prevent and manage systemic risk.