Top-down stress testing of the largest full service South African banks

Abstract

Banks are key to a well-functioning economy. Periods of economic stress could put banks and therefore the financial system at risk so regulators such as the Prudential Authority in South Africa need to know if banks are resilient to economic stress. A model that forecasts the impact of severe economic stress is developed using publicly available information. The model forecasts the credit losses, deposit volumes and other general equity movements of the biggest five full-service South African banks to assess capital and liquidity strain for any defined macroeconomic stress scenario over the next 3 years. The full-service banks being considered account for more than 90% of all bank lending in deposits in the market and therefore covers the vast majority of banking systemic risk in South Africa. It is shown that different macroeconomic factors affect these banks in different ways due to differences in the type of customers with deposits with each institution and differences in credit risk associated with various loan products. From an overall market perspective economic growth, lending levels, household debt levels and equity markets are the key drivers of deposit volumes. Credit risk in turn is primarily driven by interest rates, inflation and household debt to disposable income.