What Is the Impact of Large-Scale Asset Purchases and Private Banks’ Balance Sheets?

Do large-scale asset purchases (LSAPs) of government securities by the South African Reserve Bank (SARB) curb excess liquid asset holdings (LAH) by private banks? Yes, they do. Using a TVAR model, we find that LSAPs by the SARB result in a decline in the excess LAH liquid asset by private banks. In addition, evidence shows that bank credit to government declines. How are LSAPs of government securities by the SARB transmitted to the banks’ deposit and lending rates? Evidence shows that LSAPs result in loose (accommodative) credit conditions, an increase in the interest rate pass-through and a decline in the bank loan intermediation mark-up. Furthermore, the results indicate that lengthening of the maturities of funding options available at the accommodation can result in the substitution of funding sources by banks on their liabilities side of the balance sheets and the cost of funding. Most importantly, long-term repurchase agreements will also affect the way banks price lending on their asset side. The lengthening of the maturities of funding options available at the accommodation can loosen the funding constraints experienced by banks and this will spill over to the funding of important markets such as the housing sector and small-, micro- and medium-sized enterprises. In addition, from a policy and regulatory perspective, the lengthening of the maturity of the funding options for banks is especially important given the longstanding regulatory concern of the maturity mismatch risks induced by funding long-term assets, such as housing, using deposits which are of a short duration. At the same time, such a strategy will neutralise the impact of sterilisation and other costs associated with the foreign currency reserves accumulation programme.