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A computable general equilibrium model for banking sector risk assessment in South Africa

Author

Listed:
  • Conrad F. J. Beyers

    (University of Pretoria)

  • Allan Freitas

    (University of Pretoria)

  • Kojo A. Essel-Mensah

    (University of Pretoria)

  • Reyno Seymore

    (Western Australian Department of Treasury)

  • Dimitrios P. Tsomocos

    () (University of Oxford)

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 CGE model allows interactions amongst various entities of the economy so that policy makers could detect the risks in the banking sector. The CGE model used in this paper performed well as a risk assessment tool for the South African banking sector. The results of the various shocks from the model are consistent with the results obtained from similar shocks done in the UK. We establish that default penalty has a higher effect on the banks’ profits and the interest rates than capital requirement infringement penalty. Our results also suggest that interest rate targeting has more controlled effects than monetary base targeting since pecuniary externalities are reduced.

Suggested Citation

  • Conrad F. J. Beyers & Allan Freitas & Kojo A. Essel-Mensah & Reyno Seymore & Dimitrios P. Tsomocos, 2020. "A computable general equilibrium model for banking sector risk assessment in South Africa," Annals of Finance, Springer, vol. 16(2), pages 195-218, June.
  • Handle: RePEc:kap:annfin:v:16:y:2020:i:2:d:10.1007_s10436-020-00362-4
    DOI: 10.1007/s10436-020-00362-4
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    References listed on IDEAS

    as
    1. Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, vol. 5(3), pages 224-255, September.
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    More about this item

    Keywords

    Computable general equilibrium; Banking regulation; Systemic risk;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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