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

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  • Frederik J.C. Beyers
  • Allan De Freitas
  • Kojo A. Essel‐Mensah
  • Reyno Seymore
  • Dimitrios P. Tsomocos

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, when reducing the default penalty, the banks' profits increase, whereas reducing the CAR violation penalty, banks' profits decrease. Changes to the default penalty have a stronger impact than changes in the CAR violation penalty (i.e. when both penalties are reduced, the banks' profits increase). Moreover, regulatory policies that are targeted at different banks produce asymmetric results, as well capitalised 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.

Suggested Citation

  • Frederik J.C. Beyers & Allan De Freitas & Kojo A. Essel‐Mensah & Reyno Seymore & Dimitrios P. Tsomocos, 2022. "A computable general equilibrium model as a banking sector regulatory tool in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 90(1), pages 93-120, March.
  • Handle: RePEc:bla:sajeco:v:90:y:2022:i:1:p:93-120
    DOI: 10.1111/saje.12304
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    References listed on IDEAS

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