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Banking South Africa

Basel III shifts South African banks' lending focus

According to a recent study by the South African Reserve Bank, the implementation of Basel III's net stable funding ratio (NSFR) since 2008 led South African banks to boost short-term lending while reducing long-term loans, notably in residential mortgages.
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The NSFR, a global initiative in response to the 2008 financial crisis, aims to rectify mismatches in asset and liability maturities. However, its impact on emerging market banks remains underexplored, prompting this study's investigation.

The South African Reserve Bank (Sarb) expressed concerns regarding banks' motivations to divert their portfolios away from crucial sectors like small and medium-sized enterprises (SMEs), essential for inclusive economic growth.

The Basel accords aimed to rectify regulatory gaps primarily found in developed nations, distinct from the banking systems in emerging economies.

South African banks were required to comply with the Net Stable Funding Ratio (NSFR) by 2018.

NSFR influence on loan composition

“While total lending does not appear to have been affected, our results indicate NSFR has influenced loan composition and maturity profiles,” analysts said. “The results also show that the NSFR regulations in SA were largely compliant with Basel III standards. The Sarb said, however, that the impact of the NSFR on bank lending has been unclear, as it hinged on the adjustment strategy chosen by non-compliant banks to meet the liquidity ratio."

Banks in emerging economies, including South Africa, often maintain higher levels of liquid assets for precautionary measures.

The study revealed that local banks have reduced loan maturities to manage maturity transformation and enhance their Net Stable Funding Ratio (NSFR), potentially impacting household access to credit. Furthermore, the study identified a high level of concentration in the South African banking sector, with the top five banks holding approximately 90% of total bank assets.

The banking sector heavily relied on deposits for funding due to limited interbank markets. South African banks also maintained surplus liquidity.

Lending trends analysis overview

From 2013 onward, corporate loans surpassed household loans, becoming more prominent in the loan portfolio, especially after the implementation of the NSFR in 2018. Corporate lending consistently outweighed household lending in the latter part of the study period.

Throughout 2008 to 2022, mortgage advances remained the largest loan category, although their proportion decreased over time.

Conversely, the proportion of overdrafts and various types of loans to the private sector increased during the latter years of the study. Bank loans expanded from slightly over 100 billion in 2008 to over 400 billion in 2022. However, their share of total assets declined from nearly 8.5% in 2008 to below 6% in 2001, then rose slightly to just over 7% in 2022.

Household loans, which accounted for over 80% of bank assets in 2008, decreased to just over 60% by 2021. This decline in loans was compensated by an increase in other assets and financial investments. Notably, government debt securities as assets grew from approximately 5% to 14% of total bank-sector assets.

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