Macroprudential policy and credit allocation evidence from South Africa

In 2013, South Africa amended its bank regulatory framework in line with the Basel III accord, which introduced system-wide capital and liquidity adequacy requirements designed to curb the economys financial cycle so-called macroprudential policy. These regulations aim to create a more resilient banking system, but they can also lead to changes in lending behaviour, potentially affecting the availability and terms of loans to specific segments of the credit market. This is especially important in emerging markets such as South Africa, where market segmentation and inequality are more prominent than elsewhere. This paper examines how South Africas credit market has responded to macroprudential policy measures, with a focus on borrowers heterogeneity, to evaluate whether financial stability objectives are achieved at the expense of an equitable credit allocation. Our empirical approach is two-fold and employs both panel and time-series data for the period 20082023. We find that macroprudential regulation has reduced lending to households, especially if poor, to the benefit of firms, especially if large. We also find that this regulation triggers lenders adverse selection by penalising more creditworthy enterprises. Our results suggest that while Basel III has reduced reckless consumer credit, it has also redistributed finance in ways that are not beneficial to long-term growth and financial stability.