An Empirical Study of Potential Risks of Shadow Banking in South Africa

Abstract

A large number and valuable, academic literature on shadow banking has developed since the 2007/8 financial crisis but with different conclusions on the essential factors at work. In the rapidly evolving literature, especially from the United States of America, reviews have been done on the fundamental reasons for the existence of shadow banking, the functioning of shadow banking institutions and activities, the reasoning behind the drive to regulate shadow banking and the impact of financial sector reform efforts on shadow banking credit intermediation.Limited research has, however, been done on the prevalence, the importance and the risks of shadow banking to the financial systems of emerging economies. This thesis contributes to the discussion and on whether shadow banking activities and/or institutions contribute to systemic risk so as to necessitate the need to be regulated in order to maintain stability in the financial markets. Testing the hypothesis that shadow banking leads to increased risks for the formal banking sector will play a significant role to understand potential risks that may arise within financial systems and enable the development of policy and regulatory responses. These are currently unresolved empirical issues. The research focuses on empirical evidence about the presence of shadow banking in South Africa and its impact on the stability in financial markets, emphasizing both microeconomic and macroeconomic perspectives for which there is little empirical evidence in extant literature.