Money market mutual funds and their impact on bank deposits in South Africa

Abstract

Traditional banking theory has always viewed banks as financial intermediaries. Technological developments and regulatory changes have given rise to different types of non-bank financial intermediaries. Researchers have made claims about banks losing importance due to the emergence of non-bank financial intermediaries. As a non-bank financial intermediary, money market mutual funds have experienced phenomenal growth in Europe and the United States over the years. This growth has also been evident in South Africa in the past ten years. Several researchers have investigated the alleged disintermediation of banks’ traditional deposit taking in favour of investment management activities like managed funds. These researchers have found different levels of existence of such disintermediation in the different countries wherein the research was conducted. None of the research known to the author has provided empirical evidence of or refuted the allegation that the traditional deposit taking role of banks is declining and that money market mutual funds are substitutes for banks’ deposits. Moreover, such research has not been conducted in South Africa. Using banks’ deposits data and the net assets of money market mutual funds reported at the South African Reserve Bank, this thesis uses regression techniques to provide evidence for the substitutability of banks’ deposits by money market mutual funds. This substitution exists more in long-term deposit and short-term deposit products. The regression models derived in this thesis are found to be stable enough to be used for forecasting total bank deposits.