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Chris van Heerden

RELATIVE LIQUIDITY EFFICIENCY IN THE SOUTH AFRICAN BANKING INDUSTRY DURING THE FINANCIAL CRISIS. Chris van Heerden. Agenda. Background Problem Statement & Motivation Methodology Data Empirical results Conclusion Questions. Background.

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Chris van Heerden

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  1. RELATIVE LIQUIDITY EFFICIENCY IN THE SOUTH AFRICAN BANKING INDUSTRY DURING THE FINANCIAL CRISIS Chris van Heerden

  2. Agenda • Background • Problem Statement & Motivation • Methodology • Data • Empirical results • Conclusion • Questions

  3. Background • The South African financial sector is currently dominated by four large banks, which control over 84% of total banking assets in South Africa (SARB,2010). • Problems in terms of bank performance: • The lack of financial services provided (Hawkins, 2004); • The inability to introduce new financial products (Akinboade & Makina, 2006); • Operating costs outgrowing bank income (Hawkins, 2004); • Increasing staff costs (Banking Supervision, 2002); • Costly savings accounts (Hawkins, 2004); and • Customers not paying fair prices for financial services (Hawkins, 2004).

  4. Background (continue) • The effects of the financial crisis: • The International Monetary Fund (IMF) projected that the global bank balance sheets in advanced countries suffered losses of approximately US$4 trillion during the period 2009 to 2010 (Aisen & Franken, 2010). • The lending volumes decreased by 47% during the fourth quarter of 2008 and were 79% lower compared to the peak of the credit boom during the second quarter of 2007 (Ivashina & Scharfstein, 2010). • The interbank market evaporated and banks favoured hoarding cash instead of lending it (Heideret al., 2009).

  5. Background (continue) Figure 1: 3-month Libor rates

  6. Background (continue) • Figure 2: Interbank spread and excess reserve, daily average per week during January 2007 to April 2009.

  7. Background (continue) • The BASEL III reaction in terms of liquidity: • Liquidity Coverage Ratio (to cover short-term liquidity needs). • Net Stable Funding Ratio (to cover medium-term liquidity needs). • However, • Due to the liquidity mismatch in the South African banking industry and the limited size of the South African bond market, the South African banking industry will only be able to generate an approximated 50% for the Liquidity Coverage Ratio and 60% for the Net Stable Funding Ratio.

  8. Problem Statement & Motivation • Problem Statement • Was the existing reliability, stability, and competitiveness among the four largest South African banks, in terms of relative liquidity efficiency, influenced by the financial crisis? • Motivation • Past evidence indicates that there is a significant correlation between financial crises and bank liquidity (Chari & Jagannathan, 1988 and Berger & Bouwman, 2008). • The 2008 financial crisis hindered the ability to improve on banking performance, placing banks under “unparalleled liquidity” distress and limiting their lending abilities (Aisen & Franken, 2010).

  9. Methodology • The DEAP (version 2.1) program developed by Coelliet al. (1998) was used to estimate the following adjusted Data Envelopment Analysis (DEA) model that was developed by Charneset al. (1978). • Ability to solve “linear programming problems that generate a non-parametric, piecewise linear convex frontier that envelops the input and output data relative to which cost is minimised” (Färeet al., 1985). • This frontier can, therefore, be used to measure the relative efficiency or productivity in terms of the inputs and outputs selected by the organisation (Avkiran, 1999).

  10. Methodology

  11. Methodology

  12. Methodology • Both an input-orientated, output-orientated and variable returns to scale approach will be adopted to formulate the DEA model. • The input-orientated approach characterises the production technology of the bank, for producing a given output mix with the minimum inputs (Coelliet al., 1998). • The output-orientated approach characterises a bank in pursuit of producing the maximum output bundle with the given inputs mix (Coelliet al., 1998).

  13. Data & Results • The financial data of First Rand Bank (proxy for First National Bank), Nedbank, and Standard Bank were collected from the monthly BA 900 financial return statements on the South African Reserve Bank’s website (SARB, 2011), spanning from January 2008 to July 2011. • Table 1: The input and output variables for measuring relative liquidity efficiency.

  14. Conclusion • With the 2008 financial crisis past studies stated that the ability to improve on banking performance was hindered, placing banks under “unparalleled liquidity” distress and limiting their lending abilities. • The results indicate that the South African banking industry is stable, reliable, and highly competitive over the financial crisis. • An average technically efficiency, ranging from 0.974 to 0.998 (input-orientated) and from 0.962 to 0.998 (output-orientated) was reported, along with an average scale efficiency, ranging from 0.941 to 0.998 (input-orientated) and from 0.960 to 0.997 (output-orientated), was reported for the four South African banks. • The four largest South African banks illustrated immense competitiveness and relative performance correlations in terms of being able to comply with required liquidity obligations in times of a financial crisis.

  15. Questions ?

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