Abstract:
The size of the nancial sector in South Africa has grown signi cantly over the past
fi fteen years to now almost three times the size of the economy. Parallel to that
growth is the growth of the banking sector, speci cally the six commercial banks
that dominate the sector. This expansion has both monetary policy and financial
stability implications.
The objectives of this PhD are to: (1) study the importance of internal and
external variables for nancial stability; (2) determine the role of the structure
of the banking sector in the transmission of monetary policy and macroeconomic
shocks; and (3) understand financial stability in the context of both the South
African financial system structure and demographic dynamics.
We start with a cross-sectional analysis of how external and internal variables
affect local fi nancial stability. We fi nd that local variables such as credit, stock
market capitalisation and real exchange rate growth are better candidates for understanding
local fi nancial stability for both the high and the upper middle income
countries.
Next we explore monetary policy and financial stability in the context of the
South African banking system structure and socio-economic dynamics. An empirical
analysis of the bank lending channel indicate that the effect of monetary policy
is asymmetric - small banks are more affected by a contractionary monetary policy,
whereas the big banks can adjust their loan portfolios to cushion the effects. However,
these results (as well as the current South African literature) assume that the
transmission of monetary policy and the way the exogenous shocks are generated
have remained constant over time. We show that following the 2008 fi nancial crisis,
both the big banks and small banks became more responsive to a monetary policy
shock.
We then develop a dynamic stochastic general equilibrium model to analyse -
financial stability for the South African banking sector. The main elements to capture
the socio-demographic characteristics include banking and household heterogeneity.
We incorporate the relative consumption motive to capture the culture of "keeping
up with the Joneses" that has resulted in high consumption driven by debt. The
heterogeneity of the banking sector is motivated by the structure of the banking
sector, which has enabled the existence of the big and the small banks serving the
high-income and low-income households respectively. We calibrate the model using
South African data. Our model shows that liquidity injections in the presence of
the relative consumption motive increase loan demand whilst adverse shocks to the
banks' balance sheets have welfare effects, especially for low-income households.
