Credit procyclicality and financial regulation in South Africa.
Date
2014-10-10
Authors
Raputsoane, Leroi
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Abstract
ABSTRACT
This study examines the behaviour of credit extension over the economic cycle
in South Africa to assess its usefulness as a common reference guide for
implementing the countercyclical capital buffers for financial institutions in South
Africa, paying special attention to the recent proposals of the Basel Committee
on Banking Supervision. The Basel Committee on Banking Supervision at the
Bank for International Settlements has identified credit extension as one of the
major causes of the financial crises. It therefore came up with several proposals
in the form of Basel III to strengthen the financial system to make it more
resilient to future financial crises. One of the key proposals of Basel III is to
implement the countercyclical capital buffers for financial institutions using credit
extension as a common reference guide to limit credit procyclicality and its
associated systemic and economic risks. This study seeks to establish how the
proposed reference guide for setting countercyclical buffers that is based on the
gap between the ratio of aggregate private sector credit to gross domestic
product gap and its long term trend behaves during periods of expansions and
contractions in the economic cycle. The study also seeks to establish how this
common reference guide for setting countercyclical capital buffers behaves
during periods of upturns and downturns in the economic cycle. The empirical
results reveal a statistically significant positive relationship of the gap between
the ratio of aggregate private sector credit to gross domestic product and its
long term trend relative to its recent past during the busts in the economic cycle,
while such a relationship cannot be established during the periods of economic
cycle booms. The empirical results further reveal a statistically significant
positive relationship of the gap between the ratio of aggregate private sector
credit to gross domestic product and its long term trend relative to its recent
past during the downturns in the economic cycle, while such relationship turns
negative during the economic cycle upturns. The conclusion is that the use of
the proposed common reference guide to determine the level of the
countercyclical capital buffers for financial institutions may not be appropriate in
South Africa given that it would tend to increase capital requirements during the
economic downturns, exacerbating the procyclicality of credit extension with
dire consequences for the economy.
Description
MBA 2014
Keywords
Bank and banking, credit, monetary policy