A computable general equilibrium model for banking sector risk assessment in South Africa

Abstract

In this article a banking sector Computable general equilibrium (CGE) model for South Africa is developed. The model is used to estimate the potential effect of regulatory policy on the economy and as a risk assessment tool to assess how changes in regulation affect the economy. The model provides a methodology for regulators of the banking sector and policy makers in South Africa to deal with risk assessment and future regulatory planning. The CGE model allows interactions amongst various entities of the economy so that policy makers could detect the risks in the banking sector. The CGE model used in this paper performed well as a risk assessment tool for the South African banking sector. The results of the various shocks from the model are consistent with the results obtained from similar shocks done in the UK. We establish that default penalty has a higher effect on the banks' profits and the interest rates than capital requirement infringement penalty. Our results also suggest that interest rate targeting has more controlled effects than monetary base targeting since pecuniary externalities are reduced.

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

“…In Beyers et al (2020), we developed a banking sector CGE model for South Africa and used it for risk assessment. We now use the model for macroprudential regulation policy.…”

“…The calibration exercise, which is based on the balance sheet data of South African banks as at the end of 2016, was initially presented in our paper (Beyers et al, 2020). We include this calibration exercise in Appendix B for completeness.…”

“…The model also allows users to study how other domestic forms of finance provision influence the results of regulatory reform. It all depends on the scenario considered by the policy maker, and some of these scenarios, such as capital shocks and deposit supply shocks to a particular bank, were considered in our first paper (Beyers et al, 2020).…”

“…The model that performed well as a tool for risk assessment for South Africa (Beyers et al, 2020) is now used for banking regulation. In that paper, one of the scenarios considered was the impact of restrictive regulatory policy where the effects of each of the penalties (the default penalty and the CAR violation penalty) on key variables were determined.…”

“…One of the scenarios we considered was the impact of a restrictive regulatory policy on some key variables of the model. In that paper (Beyers et al, 2020), we built a CGE model for the South African banking sector. In the current paper, the model has been used as a regulatory tool.…”