Two UCT students have designed South Africa’s first systemic risk ranking system of all banking institutions. The ranking system highlights some of the dangers and risks facing South African banks. It also indicates what could potentially happen in a financial crisis. The two students, Trésor Kaya and Qobolwakhe Dube are students at the UCT African Institute of Financial Markets and Risk Management.
Following recent revelations of collusion and currency fixing, the Competition Commission has referred a total of 17 banks to the Tribunal Prosecution to date.
The SA Financial Institution Systemic Risk Ranking rates South African financial institutions according to their contribution to systemic risk. It also considers the likelihood that the failure of a bank would lead to the failure of the financial system as a whole.
The ranking gives an indication of how a default would affect other South African financial institutions. This, rather than the likelihood that a financial institution would default.
“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. We used a lot of statistics and mathematics to arrive at our model, which can be updated easily with a few clicks of the button,” said Dube.
A Model Adapted For Banks
The model is an adaption of the SRISK model which was developed following the financial crisis of 2008. It was created by Nobel Laureate, Robert Engle from the New York University’s Stern School of Business.
“It is especially valuable for policy makers and regulators to know which companies contribute most to systemic risk. They may be in need of additional scrutiny and oversight,” said Kaya.
The point of the systemic risk ranking is not to identify institutions that are at risk of failure. It looks at which institutions would have the greatest impact on other institutions should they fail.
According to Dube and Kaya’s model, this would be the Standard Bank Group. It leads the ranking quite significantly at 25.56% before Barclays Africa Group at 13%. In third place is the FirstRand Group at 12.94%.
Three Banks Constitute 50% of Total Risk
“It is significant because it shows that only three financial institutions constitute up to 50% of all systemic risk in South Africa.” Dube continues saying; “This is why it was possible for them to collude on fixing the Rand. There is too much concentration and a lack of competition, which is not healthy for the industry.”
Systemic risk is affected by factors like the company’s share price, as well the activities the bank engages in. Liabilities also come into play as well as to whom the banks owe money.
“Our ranking will be most beneficial to those in industry, to the regulators as well as policy makers,” said Dube. “It provides novel and very useful information. It helps financial institutions to internalize their systemic risk contribution.”
Dube and Kaya intend updating the ranking frequently and have made the code they used freely available as open source.
Financial Institutions With the Highest Systemic Risk Contribution
|Financial group||Contribution (%)|
|Standard Bank Group||21.56%|
|Barclays Africa Group||13.00%|
|Alexander Forbes Group||10.21%|
|Old Mutual Plc||2.77%|
|Coronation Fund Managers||2.04%|