The implementation of Basel III regulations by SA’s banks — bolstered in the wake of the 2008/9 global financial crisis that required banks to raise capital held by the sector to ensure banks have enough buffers to respond to crises — has had a limited effect on credit extension.
However, the credit to households dried up following the financial crisis.
These are the results of a study conducted by SA Reserve Banks economists, in a working paper titled “The impact of Basel III implementation on bank lending in SA.”
The economists, Xolani Sibande and Alistair Milne, found “little evidence” that the introduction of higher capital requirements under Basel III had reduced the supply of bank credit in SA.
They said this was mainly due to the large banks being well capitalised and operating with capital buffers that were larger than regulatory minimum requirements.
“There are several reasons the impact of higher minimum capital requirements introduced in SA under Basel III may be small. Most obviously, in our estimation period, the large SA banks have operated with large capital buffers and faced only a remote risk of falling short of capital; minimum equity capital may simply not be a constraint on their portfolio decisions,” they said.
“Furthermore, the Basel III changes in minimum capital were announced well in advance, with a longer period to adjust than was the case for the changes in Peru ... Clearly, further investigation is warranted, but it appears that the SA authorities have introduced the higher capital requirements of Basel III in a sensible way with little or no impact on bank lending, at least for the four large banks in our sample.”
The research collected data on the four major SA banks: Absa Bank, Standard Bank, First National Bank and Nedbank. Together they constitute about 90% of banking sector assets.
Regulators all over the world require banks to hold a certain amount of capital, calculated as a percentage of their assets. This is to make banks less likely to fail and seek a government rescue, or trigger a financial crisis, like the one that almost consumed the world’s financial system in 2008/09.
The Basel Committee on Banking Supervision — so named because it meets in Basel, Switzerland — was established in 1974 to enhance financial stability by improving the quality of bank supervision.
The post global financial crisis period was characterised by significant fiscal deterioration, which — along with policy and political uncertainty and slowing economic growth — increased banks’ risk aversion.
Sibande and Milne noted that there were 34 active licensed banks in SA. Of those, five domestically controlled commercial banks together account for about 90% of banking sector assets.
The ratio of bank assets to GDP is 112%, while total financial-sector assets amount to 298% of GDP. The study found that credit to households was curtailed after the global financial crisis.
“The share of banking sector household mortgage lending to GDP fell from 26% in 2008 to 18% in 2020. Other forms of secured and unsecured household credit grew by around 2% of GDP between 2008 and 2013, but have since fallen back. Credit to nonfinancial corporations has also fallen somewhat since 2008.”
A spokesperson for the Banking Association SA, said: “We don’t see Basel III or post-Basel III reforms as being a problem. They are designed to make the banking industry internationally better and to be able to absorb stresses that take place.”
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