Private Supply of Safe Assets: Shadow Banks Versus Traditional Banks

We show that the creation of private safe assets by shadow banks can decrease traditional banks' supply of safe assets. The 2014-2016 money fund reform created a large demand shock for safe assets, to which Federal Home Loan Banks (FHLBs) responded, expanding their balance sheets and increasing their issuance of short-term debt. To reduce the resulting interest rate risk, FHLBs shortened the repricing of their loans to banks. Focusing on small banks for which the reform was exogenous, we use a novel instrumental variable strategy to show that shadow banks create safe assets at the expense of banks' deposits.

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A modelling process of short-term interest rate risk management for the South African commercial banking sector

Corporate Ownership and Control ◽

10.22495/cocv9i1c6art6 ◽

2011 ◽

Vol 9 (1) ◽

pp. 628-637

Author(s):

Jiaqi Sun ◽

J.H. Van Rooyen

Keyword(s):

Interest Rate ◽

South African ◽

Inflation Targeting ◽

Banking Sector ◽

Empirical Finding ◽

Interest Rate Risk ◽

Commercial Banking ◽

The South ◽

Short Term ◽

Rate Risk

This study focuses on banking book interest rate risk (IRR) management, more specifically short-term IRR management (SIRR). This type of risk is partly induced by the inflation targeting policy of the South African Reserve Bank (SARB). As a result, inflation leads to an uncertain interest rate cycle and a period of uncertain interest rate levels as it relates to lending and borrowing activities in the South African commercial banking sector. This study highlights what causes short-term interest rate risk and how the banks may forecast and manage the SIRR with reference to the inflation targeting policy. The banking industry manages a high volume of fund transactions and portfolios of investments. The banks are intricately involved in the financial markets and are therefore exposed to a large number of risk factors. A sound banking system is an important prerequisite for a country’s future economic development. One key empirical finding of this research is that 50 per cent of the South African banks agree that loans that cannot undergo immediate rate adjustments are exposed to the repo-rate adjustment after the Monetary Policy Committee (MPC) meeting. Banks surveyed see the need for the development of a short-term interest rate risk (SIRR) management process to better control such repo-rate risk. The next key empirical finding is that interest rate risk is still managed via traditional repricing gap and sensitivity analysis which is not ideal for risk management due to inherent weaknesses (such as not quantifying capital risk exposure). This agrees with the Pricewaterhousecoopers Balance Sheet Management benchmark survey

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