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Pooled OLS estimates
We start our empirical analysis with a simple pooled ordinary least square (OLS) regression. We look at the impact of financial openness and also its components, total assets and total liabilities, on financial stability. The results are presented in Table 2.2. Firstly, we start with a simple model specification of financial openness and trade openness as determinants of financial stability in column (1) to (3). Then we extend our model specifications with other control variables from column (4) to (12). Due to the high correlation between total assets and total liabilities, we run the estimations of the two separately. From column (1), the results for both financial and trade openness are significant. The results indicate that financial openness reduces financial stability, whereas trade openness improves financial stability. These results only remain robust when we add credit and the change in credit in column (4), though credit and the change in credit are insignificant. The model specifications in column (7) and (10) indicate that the level of credit, inflation and real exchange rate growth have negative effect on financial stability, whereas stock market capitalisation improves financial stability. When we look at the two components of financial openness, the results for the simple model specification in column (2) and (3) indicate that both total assets and total liabilities have a negative effect on financial stability. Similarly to financial openness, the individual components lose their significance level as we add more controls, with total liabilities only being significant in column (5) and total assets only being significant in (12). Again, stock market capitalisation, inflation and real exchange rate growth are robust across all model specifications.
Basic characteristics of the banking sector
This section provides a non-theoretical background on selected financial variables of the banking sector between 2002Q1 and 2014Q3. The chapter covers the six local commercial banks3 that dominate the local retail market. The categorisation of the banks by bank size is taken from the South African Reserve Bank (SARB). The big four banks mainly serve the middle and high-income earners, whereas the other two banks (referred to here as the small banks) mostly serve the low-income earners through unsecured lending operations. The ratio of total loans to total assets for the big and small banks averaged 76% and 85% respectively during the sample period. As of the writing, the big four banks have market share of 83.3% of the banking sector 4. The South African banking sector has been acclaimed for its financial soundness amidst the global financial crisis. Amongst the reasons for financial stability in the retail lending is the National Credit Act (NCA) of 2007 and macro-prudential practises. Recently, the latest development of the African Bank in 20145, continuing increase in household debt and credit impairment has put the banking sector under great scrutiny by the rating agencies. Figures 3.1 to 3.4 present selected basic characteristics of the six banks in real terms. Figure 3.1 (a) shows the year-on-year growth of liabilities and loans for the big banks. We can see that there is a positive relationship between the two variables, with growth in liabilities outpacing growth in loans for most parts of the period between 2003 and the second quarter of 2011. The impact of the global financial crisis is also evident, with negative growth for both loans and liabilities during the period. Figure 3.2 (a) presents the loan components of the big banks. Mortgage loans and overdrafts and advances to the private sector make up more than 60% of total loans and advances for the big banks during the sample period. Similarly, Figures 3.1 (b) and 3.2 (b) show the growth of liabilities and loans and components of the loans for the small banks respectively. The growth in liabilities for the small banks exceeds the growth in loans during November 2004 to June 2009. Surprisingly, unlike the big banks, there is positive growth in loans during the crisis. In Figure 3.2 (b), we can see that the loan portfolio of the small banks is undiversified, with unsecured lending, especially overdrafts, loans and advances to the private sector, accounting for at least 70% of the loan portfolio.
1 General Introduction
2 Financial Openness and Local Banking Stability: A Panel Analysis
2.1 Introduction
2.2 Financial openness and stability
2.3 Data and Methodology
2.4 Panel Analysis: Results
2.5 Conclusion
2.6 Appendix
3 Investigating the bank lending channel using disaggregate bank loans
3.1 Introduction
3.2 Theory
3.3 Empirical methodology
3.4 Results
3.5 Conclusion
3.6 Appendix
4 Banking stability and keeping up with the riches
4.1 Introduction
4.2 Model
4.3 Aggregation and market clearing
4.4 Calibration
4.5 Simulations
4.6 Conclusion
4.7 Appendices
