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 importance of risk assessment in the banking sector, especially systemic risk, cannot be over emphasized as failure to adequately assess the risks in the banking sector usually leads to serious financial crises including the collapse of major financial institutions. The CGE model considers interactions amongst various entities of the economy so could detect the risks in the banking sector. Our results suggest that interest rate targeting has more controlled effects than monetary base targeting since pecuniary externalities are reduced.

Keywords: Computable general equilibrium, Banking regulation, Systemic risk