Johannesburg - UCT students have designed a new ranking system that shows which South African banks contribute the most to systemic risk.
Systemic risk is the possibility of an event triggering severe instability or
collapse of an entire industry or economy.
Qobolwakhe Dube and Trésor Kaya of the African Institute of Financial Markets and Risk Management (AIFMRM) unit, this week said they designed the system, called
SA Financial Institution Systemic Risk Ranking, which showed that three banks
contributed half of the
systemic risk to the financial sector.
The system found that Standard Bank, Barclays Africa (BGL) and FirstRand constituted up to 50 percent of all systemic risk in the country.
PhD student Dube said they used statistics and mathematics to arrive at their model.
Dube said while the model did not give an indication of the likelihood that a financial institution would default, it gave a clue how such a default would affect other South African financial institutions.
“We thought it was very important to understand the financial system as a whole and to be able to look at who is putting the system at risk and why,” said Dube.
The model rates Standard Bank as leading the pack significantly at 25.5 percent, followed by BGL at 13 percent and FirstRand with 12.9 percent.
The findings mean that the three banks are regarded as too big to fail.
It was the chief contributor to the financial crisis of 2008.
Global ratings agency, Standard and Poor’s last year said systemic risks in South Africa’s financial services sector was lower than in other emerging markets because of the closed rand system and minimal reliance on external and hard currency funding.
The South African government would this year implement the duo’s system to strengthen consumer protection and market conduct in the financial services sector.
They believe that their system will also create a more resilient and stable financial sector.
Kaya, a master’s student and co-founder of the ranking, said it was significant that only three financial institutions constituted half of
all systemic risk in South Africa.
“It is especially valuable for policy-makers and regulators to know which companies contribute most to systemic risk and may be in need of additional scrutiny and oversight,” said Kaya.
African Institute of Financial Markets and Risk Management senior lecturer, Co-Pierre Georg, who supervised the students’ work, said the ranking would help regulators to start thinking about a systemic risk tax that
would help in making the
sector more competitive and protect taxpayers in the unlikely event of another banking crisis.
“It is the first time that a ranking like this has been done in South Africa and it comes at a crucial time.
“The concentration in our banking system has many adverse consequences,” Georg said.