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Is Basel III counter-cyclical: The case of South Africa?

Author

Listed:
  • Guangling Liu

    (Department of Economics, University of Stellenbosch)

  • Thabang Molise

    (Department of Economics, University of Stellenbosch)

Abstract

This paper develops a dynamic general equilibrium model with banking and a macroprudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. Basel III has a pronounced impact on the financial sector compared to the real sector and is more effective in mitigating fluctuations in financial and business cycles when the economy is hit by financial shocks. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust capital requirement to changes in credit and output when implementing the counter-cyclical buffer.

Suggested Citation

  • Guangling Liu & Thabang Molise, 2018. "Is Basel III counter-cyclical: The case of South Africa?," Working Papers 10/2018, Stellenbosch University, Department of Economics.
    • Handle: RePEc:sza:wpaper:wpapers303
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    File URL: https://www.ekon.sun.ac.za/wpapers/2018/wp102018/wp102018.pdf
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Bank capital regulations; Financial stability; Counter-cyclical capital buffer; DSGE;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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