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What could be lurking in the shadows?
Procyclicality found its place in the common vernacular over the
past six years. The IMF argues that transaction within the shadow
banking sphere may perpetuate this. At the beginning of the
financial crisis it was asset backed paper that showed the first
signs of significant distress as the underlying assets devalued. Later
it emerged that certain compensation arrangements may have
incentivised executives to over expose themselves to assets with
underestimated credit risk.
Monetary policy is affected by the state of capital markets where
shadow banking appears to play a major role. In a low interest rate
environment other financial intermediaries flourish as the returns they
offer often exceed prevailing rates. This may have adverse implications
when the economic cycle turns and asset bubbles burst.
And when the cycle turns it could be up to average Joe to bail
out these other financial intermediaries. This may have significant
implications for fiscal policy.
Understandably, many an investor is questioning the quality of the
collateral underpinning their investments while those issuing assets
in the shadows scratch their heads in terms of pricing.
South Africa in the shadows
South Africa has a very well developed and regulated financial
services sector. Lenders and borrowers actively transact using all
forms of shadow banking assets.
However, Ingrid Goodspeed (the Governor of the South African
Institute of Financial Markets) perhaps better defines shadow
banking in the South African context as “non-banks carrying out
bank-like activities… with limited (if any) supervision and regulation”.
The key differentiator between banks and non-banks according
to this definition lies not in their lending activities, but rather in
their deposit taking capabilities – only registered banks are able to
legally take deposits in South Africa. The South African Reserve Bank
currently recognises 19 registered banks.
EM Foster once said that “... there are shadows because there are
hills”. This could not be more apt in the South African context. The
World Economic