IDEAS home Printed from https://ideas.repec.org/h/spr/sprchp/978-3-030-66340-7_25.html
   My bibliography  Save this book chapter

Is the Excess Capital Adequacy Ratio Beneficial in Neutralising Excessive Credit Growth and Inflationary Pressures? What Are the Implications for Monetary and Financial Policy?

In: Achieving Price, Financial and Macro-Economic Stability in South Africa

Author

Listed:
  • Nombulelo Gumata

    (South African Reserve Bank)

  • Eliphas Ndou

    (South African Reserve Bank)

Abstract

What is the impact of the excess capital adequacy ratio (CAR) on excessive credit growth and inflationary pressures? Did excess CAR neutralise the repo rate adjustments? Evidence shows that excess CAR dampens the impact of demand shocks on credit growth and GDP growth in line with the intended primary purpose of countering the amplitude and duration of the financial and business cycles. But it is also true that excess CAR propagates and amplifies adverse demand shocks on credit growth and GDP growth as was the case post-2007. Excess CAR is detrimental to credit growth and GDP growth because it restricts the supply of credit during severe financial shocks and demand shocks. Furthermore, excess CAR becomes pro-cyclical during severe financial and business cycles downturns. Hence, in part credit growth and GDP growth remained subdued post-2008. In addition, excess CAR dampened the transmission of positive cost pull or push shocks to inflation especially post-2008Q1, thus sustaining muted inflationary pressures. Excess CAR propagates financial shocks via the financial accelerator mechanism, plays its intended role as a cushion for banks and prevents balance sheet damage due to severe financial shocks and adverse shocks to the business cycle. However, excess CAR accentuates the responses of credit growth and GDP growth to tight monetary policy shocks. This means that excess CAR is a potent propagator of tight monetary policy to credit growth and GDP growth. These two policy tools interact and reinforce each other’s effects in the same direction. Nonetheless, excess CAR is not a potent tool in neutralising other inflationary processes driven by factors such as the exchange rate passthrough to inflation. In this respect, other central bank balance sheet policy tools possess superior properties and are well positioned to complement the repo rate as a monetary policy tool.

Suggested Citation

  • Nombulelo Gumata & Eliphas Ndou, 2021. "Is the Excess Capital Adequacy Ratio Beneficial in Neutralising Excessive Credit Growth and Inflationary Pressures? What Are the Implications for Monetary and Financial Policy?," Springer Books, in: Achieving Price, Financial and Macro-Economic Stability in South Africa, chapter 0, pages 381-393, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-66340-7_25
    DOI: 10.1007/978-3-030-66340-7_25
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:sprchp:978-3-030-66340-7_25. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.