To get a sense of the credit market in South Africa, it is useful to see who funds whom. Most credit in SA is extended via the banking sector. The banks act as intermediaries: savers deposit cash in checking or savings accounts and the bank then lends the majority of these deposits to other individuals or businesses who demand credit. The bank earns a profit by charging a higher rate on the lending than it pays on its borrowing (in SA, banks appear to earn profit on their borrowing as well, by paying a rate on deposits below inflation). The following graphs plot the different components of the aggregate balance sheet for all South African banks.
I first plot the total liabilities of South African banks. This adds up to a bit more than 3 trillion rand, of which 2.7 trillion is deposits. The remainder consists of repo transactions (Borrowed Funds), foreign currency funding, and subordinated debt securities (Other Liabilities).
Deposits in checking and savings accounts as well as money market funds is the channel through which we ordinary citizens lend money to banks. Banks can then lend the funds to other households and businesses. However, a closer look reveals that deposits include much more than just household savings. The figure below illustrates the importance of both financial firms (fund managers, money market funds, pension funds, insurers etc) and non-financial corporations. Household deposits only account for a fifth of total deposits. The role of fund managers and money market funds have clearly become a very important channel of directing savings onto bank balance sheets. The remaining liabilities of banks are categorised as “Other Borrowed Funds”, “Foreign Currency Funding” and “Other Liabilities”. The “Other Borrowed Funds” are mainly repurchase transactions, typically short term debt where the borrower submits collateral for the entire amount. This is typically used to cover short term needs for cash, often to cover the required reserve ratio with the South African Reserve Bank. Banks can also use this as temporary financing to extend loans without having to wait for customer deposits to fund the lending.
It is slightly surprising to see that repo borrowing actually increased to a higher permanent level after the global financial crisis. It was this type of borrowing, on a much larger scale, that enabled US financial institutions to build massive leverage with an extreme maturity mismatch. The maturity mismatch refers to the short term nature of the debt, often overnight funding, combined with the long term nature of their assets, often household mortgages with maturity over several years. This is not a major concern in South Africa – despite the increased use of repo funding it still only accounts for approximately R100 billion out of an aggregate balance sheet of R3000 billion.
Foreign currency funding, plotted above saw a huge leap during the financial crisis, and has stayed high ever since. But as was the case with repo funding, foreign currency funding still accounts for only R100 billion out of a total balance sheet of R3000 billion.
The figure below plots “Other Liabilities” which consists mainly of subordinated debt securities. Here we see the same pattern again, of a sharp increase in recent years. This type of lending adds up to approximately R200 billion out of the total R3000 billion. Again not a very large amount.
As one would expect from ordinary banks, we have seen that deposits account for the vast majority of their funding. We call this “core liabilities”. The more unconventional funding of banks, mainly repo transactions, foreign currency funding and subordinated debt securities were each of less significance. However, if we add up all these “non core liabilities” we see that the use of such alternative funding has greatly increased in recent years. This may be a consequence of a strong demand for credit combined with low rates of savings. It also indicates that banks are eager to lend out money; so eager that they choose not to wait for deposits to come in, but rather use alternative borrowing to fund such credit extension. This may be a good thing in an economy with lackluster growth, but this is a risky business and a crash in these markets will have dire consequences for the real economy. So keep watching these numbers, they do give a good sense of how South Africa is doing.