A Computable General Equilibrium Model as a Banking Sector Regulatory Tool in South Africa

37 Pages Posted: 5 Aug 2020

See all articles by Conrad Beyers

Conrad Beyers

University of Pretoria

Allan De Freitas

University of Pretoria

Kojo Essel-Mensah

University of Pretoria

Reyno Seymore

Western Australian Department of Treasury

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall

Date Written: July 8, 2020

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, reducing the default penalty the banks profits increase whereas reducing the CAR violation penalty banks profits decrease. The effects of changing the default penalty are stronger than the ones of changing the CAR violation penalty such that when both penalties are reduced the banks profits increase. Moreover, regulatory policies which are targeted at different banks produce asymmetric results as well capitalized 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. Finally, during periods of adverse economic conditions, tightening regulatory requirements reduces the banks profitability and increases defaults, and hence increases financial fragility.

Keywords: Computable General Equilibrium; Banking Regulation; Capital Requirement; Base Money; Policy Rate

JEL Classification: D58, E52, G28

Suggested Citation

Beyers, Conrad and De Freitas, Allan and Essel-Mensah, Kojo and Seymore, Reyno and Tsomocos, Dimitrios P., A Computable General Equilibrium Model as a Banking Sector Regulatory Tool in South Africa (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=3646263 or http://dx.doi.org/10.2139/ssrn.3646263

Conrad Beyers

University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

Allan De Freitas

University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

Kojo Essel-Mensah (Contact Author)

University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

Reyno Seymore

Western Australian Department of Treasury ( email )

Australia

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

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