A computable general equilibrium model as a banking sector regulatory tool in South Africa

Abstract

A computable general equilibrium (CGE) model is used as a regulatory tool for the banking sector in South Africa. The model is used to determine the effects of regulatory penalties, capital adequacy requirements (CAR) and the monetary policy on the economy. Our results indicate that there is a trade‐off between the default and the CAR regulation. For example, when reducing the default penalty, the banks' profits increase, whereas reducing the CAR violation penalty, banks' profits decrease. Changes to the default penalty have a stronger impact than changes in the CAR violation penalty (i.e. when both penalties are reduced, the banks' profits increase). Moreover, regulatory policies that are targeted at different banks produce asymmetric results, as well capitalised banks with richer portfolios swiftly readjust their balance sheet and transfer the default externality to the more constrained banks and/or the private sector agents.

The Relationship between Regulation and Consumer Protection in the Non-Banking Financial Sector: A South African Perspective

“…In understanding the background of financial regulation, one needs to also consider regulation and its cyclical patterns since the 1980s, which shows that regulatory choices by policymakers are based on political economy considerations [25]. There are two rationales behind regulating financial institutions, that is, to mitigate systematic risk and to regulate conduct of business in the financial market [27]. Given that one of the risks facing regulation is the political and government interference in the application of regulation, this may lead to conflicts and inconsistencies in the application of regulation [28].…”