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

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Authors

Beyers, Conrad F.J.
De Freitas, Allan
Essel-Mensah, Kojo Amonkwandoh
Seymore, Reyno
Tsomocos, Dimitrios P.

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Publisher

Springer

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.

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Keywords

Computable general equilibrium (CGE), South Africa (SA), Banking regulation, Systemic risk

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Citation

Beyers, C.F.J., De Freitas, A., Essel-Mensah, K.A. et al. A computable general equilibrium model for banking sector risk assessment in South Africa. Ann Finance 16, 195–218 (2020). https://doi.org/10.1007/s10436-020-00362-4.