Abstract

BERNSTEIN, James; RAPUTSOANE, Leroi  and  SCHALING, Eric. Credit Procyclicality and Financial Regulation in South Africa. S. Afr. j. econ. manag. sci. [online]. 2016, vol.19, n.4, pp.467-478. ISSN 2222-3436.  http://dx.doi.org/10.17159/2222-3436/2016/v19n4a1.

This study assesses the behaviour of credit extension over the business cycle in South Africa for the period 2000 to 2012 and is motivated by the proposal of the Basel Committee on Banking Supervision (BCBS) to use credit extension over the business cycle as a reference guide for implementing countercyclical capital buffers. Using a logistic smooth transition autoregressive model, we find that credit extension in South Africa increases during the trough phase of the business cycle, while this relationship becomes insignificant during the peak phase. The study also finds that credit extension decreases during the expansion phase of the business cycle, while it increases during the contraction phase. Thus, unlike previous studies for South Africa, we do not find any evidence that credit extension is procyclical and that the common reference guide for implementing countercyclical capital buffers should therefore be used with caution. The reason is that the BCBS's proposed measure of credit extension would suggest implementation of capital buffers during contractionary economic conditions and their withdrawal during expansionary economic conditions, which could have adverse consequences for macroeconomic stability.

Keywords : credit extension; procyclicality; financial regulation.

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