CHAPTER 2: CONTEXTUAL BACKGROUND
This chapter presents the contextual issues pertaining to indebtedness with a particular focus on banking environment. The global outlook is presented in the next section. Thereafter, the South African banking environment is presented followed by a discussion on the South African economic environment.
GLOBAL BANKING ENVIRONMENT
The Basel Accords are the banking supervision accords. Basel I, Basel II and Basel III are issued by the Basel Committee on Banking Supervision to ensure the implementation of a regulatory framework in the global banking industry.
The Basel IV accord is an extensive review of the previous Basel Accords to minimize the risk of bank capital and bank credit as a major driver of potential bank instability. The Basel Accords have been developed not only to ensure smooth financial intermediation, but also financial stability. This view is not always shared amongst scholars. For example, Werner (2013) in a landmark empirical study conducted in 2013, established strong evidence that the notion that financial institutions are merely financial intermediaries can no longer be left unchallenged. Werner (2012) argues that when banks create credit, they set up numerous chain reactions both locally and globally with numerous multiplier effects. A simple explanation of this theory is that money is created endogenously when banks create new loans.
Vivian and Spearman (2015) hold a conservative approach that the banks’ primary function is a financial intermediary role between buyer and seller as opposed to borrower and lender. According to Vivian and Spearman’s (2015) argument, this is an erroneous representation of the banks’ role in the money creation process. The correct explanation, as per their argument, is that the role banks play in the money creation process needs to be re-explained to accentuate the significance of the value-for-value exchange transaction which forms the basis of the money creation process and the banks function as facilitator of this crucial transaction between buyers and sellers.
Vivian and Spearman’s (2015) critique denotes the need to correctly define the banks’ role in this relationship to uphold corporate credibility which is ultimately vital for influencing public policy and academic integrity. The two authors contend that there is deliberate confusion created between cash money and bank money. That is, banks create money – bank money not cash money. Their argument is that bank money is a record of debt-credit relationship and that the creation of this type of money has been misunderstood to be an act of creating something out of nothing, thereby disregarding the value-for-value transaction between the buyer and the seller.
According to Vivian and Spearman, the reason for banks’ existence is not motivated by money creation but by the reduction of various risks and costs associated with value-for-value transactions. This process, they maintain, exposes the banks to high levels of impaired accounts, solvency risks and liquidity risks associated with cash demand and supply dynamics. Vivian and Spearman argue that commercial and retail banking’s role is that of intermediation between the seller and the buyer transactions. The authors articulate the purpose of commercial and retail banks as that of facilitating “the process of inter-temporal exchange transactions between buyers and sellers”.
The buyer and seller transactions are based on value-for-value inter-temporal exchange which must be completed by the immediate settlement and payment of the debt raised by the buyer. If the bank’s role is merely reduced to facilitating these debt-credit transactions, this then begs the question: who then provides the funds to pay the seller and how is this money created?
From the Marxist perspective, the underlying principles of the credit creation policy in commercial banks flow from the “institutionalized powers and freedoms of banking and other financial institutions” (Pixley and Harcourt, 2013). These freedoms and powers of banks as financial intermediaries involve the provision, allocation and withholding of the credit as they deem fit. These freedoms include banks entering high risk areas of speculative credit creation which is mainly focused on, amongst other things, the financing of loans to private equity, loans for hedge funds, real estate, mortgages and direct financial investment by banks. Marxist economists have identified speculative credit creation as the main cause of economic bubbles in the financial markets.
The Marxist position is that when a portion of financial credit creation rises, it creates capital gains from the speculation and bolsters the balance sheets artificially. This creates a sense of elation in the market driving asset prices to go up and encouraging the banks to increase loans and credit book. The situation becomes unsustainable as credit creation falls forcing asset prices down, leading to the increase of bad debts as banks get more risk averse causing deflation in the economy. According to Pixley, and Harcourt (2013), most of the banking crises have been caused by the multiple incidents of speculative credit creation practices from the 1980’s to the late 2000’s.
The Marxist Socialist interpretation of the debt creation phenomenon is that there are powerful vested interests with pressure group capabilities empowered by the institutionalized mechanics of the credit creation and allocation in the financial system supported by specific ideological assumptions and models. The capitalist system and its banking system is considered to be predestined to ultimate disintegration amidst continuous attempts to reinvent and reconstruct its endemic deficient financial system. Pixley and Harcourt (2013) maintain that “the general arrangements of credit creation and allocation are more or less maintained and reconstituted through crises after crises even after a major failing and crash”. This means a reformation rather than a fundamental transformation and transition disabling potential alternatives to the current global credit creation mechanism.
Pixley and Harcourt (2013) view, that an entirely new and different credit creation system will have to be conceptualized, tested and implemented, is a sensible view. Their recommendation is that credit creation should be understood as a public good and made more decentralized and diverse than is currently the case. Putting it differently, Pixley and Harcourt’s position is that the credit creation mechanism should be de-privatized in favour of diverse and broadly-based public institutions. Thus, they are making a case to refocus credit creation towards a national development agenda. They are calling for a migration from a commercially driven system to a broad social, financial and ethical development imperative executed by various public institutions and agencies answerable to the state. To them, the current capitalist system of lending and borrowing on interest is by and large responsible for the present economic instability. Such a view would not work in a government with high levels of corruption. Most importantly, management of financial institutions requires unique banking skills and experience that is not necessarily available among public sector employees.
There are alternative banking models including the Swiss JAK bank model premised on zero interest for both deposits and withdrawals (Kennedy, 1995). The North Carolina public banking model which relies entirely on a productive investment agenda for the development and growth of the economy (Tesseman and Kruger, 2012). Said bases his argument on ethical banking practices derived from the Islamic finance philosophy (2008). Tesseman and Kruger (2012) argue for an interest rate commission agent banking system which they contend will remove the current technical and strategic deficiencies in the banking system. Baicu and State (2012) argue for an improved banking model that will ensure sustainable financial stability. This long-term sustainability includes the state playing a key role. The traditional banking system is under pressure as the result of recurring global economic disruptions in the financial system. The conceptualization and implementation of an effective banking model designed to address national development objectives has been viewed as being long overdue. Baicu (2012) argues that government requires formation of strong network of national industrialization banks (NIB’s) to carry out the onerous task of economic development and industrialization. Maintaining an acceptable industry debt ratio is argued to be the principle would underpin the operations of the NIBs
The critical realist model of financialisation expects actors in the financialisation processes to go the extra mile and incorporate ethical behaviours in their day-to-day activities (Danemark et al, 2000, p. 5-6). Ethical behaviour as several authors have indicated, can save the banks from systemic crises of conflicts, contradictions, domination, inequalities and, above all, indebtedness.
CHAPTER 1: ORIENTATION
1.1 BACKGROUND TO THE STUDY
1.2 RATIONALE FOR THE STUDY
1.3 PROBLEM STATEMENT
1.4 RESEARCH QUESTIONS
1.5 PURPOSE OF THE STUDY
1.6 OBJECTIVES OF THE RESEARCH
1.7 RESEARCH DESIGN
1.9 STRUCTURE AND CONTENT OF THE RESEARCH
1.10 CONCLUDING REMARKS
CHAPTER 2: CONTEXTUAL BACKGROUND
2.1 GLOBAL BANKING ENVIRONMENT
2.2 SOUTH AFRICAN BANKING ENVIRONMENT
2.3 THE SOUTH AFRICAN ECONOMIC CONTEXT
CHAPTER 3: LITERATURE REVIEW – THEORETICAL AND CONCEPTUAL FRAMEWORKS
3.1 THEORETICAL FRAMEWORK: FINANCIALISATION
3.2 CONCEPTUAL FRAMEWORK
3.3 CONCLUDING REMARKS
CHAPTER 4 RESEARCH METHODOLOGY
4.1 PHILOSOPHICAL ISSUES: CRITICAL REALISM
4.2 RESEARCH DESIGN
4.3 DATA DESCRIPTION
4.4 VARIABLE MEASURES AND DATA SOURCE
4.5 ADDRESSING STUDY OBJECTIVES AND MODEL SPECIFICATION
4.6 MODEL ESTIMATION
4.7 ETHICAL CONSIDERATIONS
CHAPTER 5: ANALYSIS AND RESULTS
5.1 DESCRIPTIVE STATISTICS
5.2 CHECKING DATA FOR AUOTOCORRELATION
5.3 UNIT ROOT TESTS
5.4 TRANSFORMING NONSTATIONARY SERIES
5.5 FINDINGS RELATED TO OBJECTIVE ONE
5.6 FINDINGS RELATED TO OBJECTIVE TWO
5.6 FINDINGS RELATED TO OBJECTIVE THREE
5.7 INDEBTEDNESS FRAMEWORK
5.8 CONCLUDING REMARKS
CHAPTER 6: DISCUSSION AND CONCLUSIONS
6.1 DISCUSSION AND CONCLUSIONS: OBJECTIVE 1
6.2 DISCUSSION AND CONCLUSIONS: OBJECTIVE 2
6.3 DISCUSSION AND CONCLUSION: OBJECTIVE 3
6.4 CONTRIBUTION TO KNOWLEDGE
6.5 POLICY IMPLICATIONS AND RECOMMENDATIONS
7.9 LIMITATIONS OF THE STUDY
7.10 FUTURE STUDY
GET THE COMPLETE PROJECT