Credit procyclicality and financial regulation in South Africa

Abstract

This study assesses the behaviour of credit extension over the business cycle in South Africa for the period 2000 to 2012. This is motivated by the proposal of the Basel Committee on Banking Supervision to look at credit extension over the business cycle as a reference guide for implementing countercyclical capital buffers for financial institutions. The study finds that credit extension in South increases during the trough phase, while the relationship between credit extension and the business cycle becomes insignificant during the peak phase. The study also finds that credit extension decreases during the expansion phase, while it increases during the contraction phase. Thus we do not find any evidence of procyclical behaviour of credit extension in South Africa, and the latter should therefore be used with caution and not as a mechanical rule based common reference guide for countercyclical capital buffers for financial institutions.