Modelling the Impact of Macroprudential Bank Regulations for South Africa. By Laurence Harris

Laurence Harris (SOAS)

* This presentation is an output of the Macroeconomic Modelling for Policy Analysis workstream of the SA National Treasury/UNU-WIDER research programme, South Africa-Towards Inclusive Economic Development (SA-TIED).

Authors: Konstantin Makrelov, Rob Davies and Laurence Harris

Abstract

There is growing recognition that macroprudential bank regulations have wide economic effects beyond the financial sector (Boar, Gambacorta, Lombardo, and Pereira da Silva, BIS Quarterly Review, September 2017). We employ modelling techniques to study the impact on the South African economy of one type of hypothetical regulatory change, a rise in banks’ required leverage ratios. The model differs from both standard CGE and DSGE models and is calibrated for South Africa. One key innovation is that the model incorporates a well specified financial sector and links it to the real sectors while preserving stock-flow consistency; its incorporation reflects the role of South Africa’s typically highly developed financial institutions and markets. In our model, the financial sector’s behaviour is based on a theory of the relationship between bank capital, the risk taking behaviour of the financial sector, lending spreads and economic activity. In line with the economic literature, our simulation results indicate that regulators’ introduction of a higher leverage ratio for banks would generate negative economic impacts in the short-run that depend on the banks’ choice of adjustment strategy. A general implication is that macroprudential regulatory requirements affect the transmission mechanisms of monetary policy. Effective execution of monetary policy requires an understanding of how banks adjust balance sheets to meet new regulatory requirements and how banks’ perceptions of risk are affected.