South Africa: Why Lenders Should Withstand Subprime Heat - AllAfrica.com

Simon StockleyJohannesburg

IN THE aftermath of the subprime meltdown we might inquire if a Bear Stearns or a Northern Rock scenario could go on in SA? Are it possible that one of SA's big banking establishments or nonbank loaners could fall in under the weight of losings in the lodging sector?

A cardinal conducive factor to the crisis is that, in many instances, the investors who purchased the mortgage-backed securities (the repacked mortgage merchandise assembled by mortgage originators) had no bosom cognition of the nature or hazard profile of the mortgages that underpinned their investments. In some case, investors were buying into cross-border mortgage portfolios or exposure with no possible cognition or apprehension of those portfolios. The term "subprime" states it all -- they were investing in borrowers whose hazard profile was less than premier and, even worse, of whom they had no existent apprehension or knowledge.

However, partly as a mathematical function of our exchange controls, but also because of the more than than conservative mind of South African investors and bankers, South African investors have got a far more bosom human relationship with mortgage providers. There is also a more than thorough apprehension of investable plus social classes in SA, reducing the hazard of possible losses.

To that extent, Sturmarbeiteilung have been and is likely to stay insulated from similar collapses. The lone South African depository financial institution to have got disclosed any exposure to subprime losings so far is Investec, primarily because of its double listing and investing in United Kingdom mortgage supplier Kensington and partially because of its engagement in some United States residential mortgage-backed security trades.

This is not to state that the local marketplace is immune from planetary markets. We have got already seen a drying up of liquidness and investors demanding a greater premium. These factors are likely to interpret into higher pricing for South African consumers.

An further conducive factor of what caused the job with the UK's Northern Rock was its support strategy. Northern Rock funded a big per centum of its mortgage concern with odd support lines; it funded long-term

mortgage loans with short-term deposits or commercial paper, creating a misaligned exchequer place (because it was able to raise inexpensive short-term funding in the working capital marketplaces and by using investors' short-term deposits).

When liquidness in that sector began to dry out up, the depository financial institution faced a classic "run". It was not able to refund depositors on demand and had to turn to the cardinal depository financial institution for support. This is not to state that there were necessarily any jobs with the quality of Northern Rock borrowers, the job was rather one of support and liquidity.

However, the attack of South African Banks to exchequer support is far more than conservative. South African Banks have got survived the worst of the United States subprime clang in portion because of their prudent exchequer direction policies and in portion because the class of "subprime loans" have never established itself in Sturmarbeiteilung as a class of consumer loans. The lone establishment exposed completely to the caprices of the working working capital marketplaces is nonbank loaner Sturmarbeiteilung Home Loans, which have been raising long-term funding since 2000 through a series of securitisation minutes funded by the local capital markets. A figure of these are shortly owed for refinancing and it is improbable Sturmarbeiteilung Home Loans will be able to raise the money required to refinance at the same charge per unit as it did then and may have got to trust on its stockholders (JPMorgan and Standard Bank) to fund a part of its mortgage portfolio.

So while it looks improbable that we are going to see a major collapse in SA, what would go on here should a local establishment human face a similar liquidness squeezing or be not able to refinance its long-term loan portfolio?

When Northern Rock's jobs began to leak into the market, it took so long for the United Kingdom regulator to react and support the establishment that literally billions of lbs were withdrawn overnight. In the end, the United Kingdom authorities had to nationalise the depository financial institution to bale it out. However, in the US, the regulator was far more than proactive when rumors surrounding Bear Sterns began to emerge. Over a weekend the Federal Soldier Modesty Depository Financial Institution had warrants in topographic point that allowed JP Lewis Henry Morgan to offer for the thrashing institution, while at the same clip aggressively cutting involvement rates to excite liquidness in the market.

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It is not clear whether the registrar of Banks in Sturmarbeiteilung would respond as swiftly and aggressively. The collapse of Saambou Depository Financial Institution is our most recent illustration and a upsetting 1 at that, given that the regulator was loath to offer support for the establishment and the depository fiscal institution collapsed.

On balance, it would look that South African financial establishments are improbable to fall quarry to the subprime crisis as their abroad opposite numbers have. The concern is, should it happen, what will we do? Perhaps it is clip for our regulator to follow a more than proactive and interventionist approach.

Stockley is chief executive officer of place loan supplier Integer.