Shadow banking and systemic risk in South Africa: does size matter?

Purpose The relationship between the size of financial institutions and systemic risk remains a subject of interest among regulators, and research on this subject has focused mostly on banks, while overlooking the shadow banking sector. This paper examines the relationship between the size of shadow banking and systemic risk in South Africa. Design/methodology/approach The study employed the conditional value-at-risk (CoVaR), using the returns of fixed-income funds, funds-of-funds, money market funds and multi-asset funds from January 2015 to December 2021, to measure systemic risk. Ordinary Least Squares and quantile regressions were used to estimate the models. Findings The results reveal a positive relationship between the size of shadow banking and systemic risk, and the relationship is stronger for retail multi-asset funds sponsored by asset managers. However, we did not find any relationship between the size of fixed-income funds, funds-of-funds and money market funds and systemic risk. Practical implications The regulator should monitor the rapid growth of multi-asset funds and the concomitant systemic risk implications, and fund managers should shift their attention from idiosyncratic risk to the prevention and management of systemic risk. Originality/value To the best of the author's knowledge, this is the first study to examine the relationship between the size of shadow banking and systemic risk with a focus on sponsor and investor types.