Bank Credit Extension and Real Economic Activity in South Africa | springerprofessional.de

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2017 | Book

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Bank Credit Extension and Real Economic Activity in South Africa

The Impact of Capital Flow Dynamics, Bank Regulation and Selected Macro-prudential Tools

Authors: Nombulelo Gumata, Eliphas Ndou

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book presents empirical evidence that supports and facilitates a practical, integrated approach to how bank regulatory and selected macro-prudential tools interact with monetary policy to achieve price and financial stability. The empirical results contained in various chapters accompany in-depth historical analysis and counterfactual scenarios that enable proper policy evaluation and the interaction of bank regulatory, macro-prudential and monetary policy tools in South Africa. The presented evidence also identifies financial asset boom and bust episodes and the associated costly output losses. In addition, the authors explore the amplification of credit dynamics by commodity prices and sector credit re-allocation due to capital inflows shocks. The book’s empirical analysis uses a wide range of statistical and econometric approaches on granular data and economic variables to derive policy implications and recommendations. This in-depth quantitative analysis includes determining inverse transmission of global liquidity, as well as the effects of capital flows, lending-rate margins, financial regulatory uncertainty, the National Credit Act, bank capital-adequacy ratios, bank loan loss provisions, loan-to-value ratios and repayment-to-income ratios on the macro-economy.

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Table of Contents

Frontmatter

1. Introduction

Abstract

The United States mortgages subprime crisis is acknowledged as the start of what became the global financial crisis in 2007. This period was followed by global recession and the Euro Area sovereign debt crisis. South Africa went into a brief but sharp recession in 2009. The subsequent period was characterized by elevated economic uncertainties and fragile recovery. In response to the financial crisis, central banks in advanced economies lowered policy rates to almost zero percent and embarked on various unconventional monetary policy interventions, injecting liquidity in global financial markets. The central assumption underlying this approach by central banks was not solely to normalize the functioning of interbank markets but to improve global output and demand conditions. The transmission of quantitive easing (QE) was supposed to stimulate economic growth, investment and expenditure, primarily by encouraging risk-taking by firms and households via the so called “real risk-taking.”

Nombulelo Gumata, Eliphas Ndou

Global Liquidity, Capital Flows, Asset Prices and Credit Dynamics in South Africa

Frontmatter

2. The Inverse Transmission of Positive Global Liquidity Shocks into the South African Economy

Abstract

• Understand how the foreign repercussion process occurs as envisaged by the use of global liquidity injections
• Ascertain what evidence is available regarding the inverse transmission of global liquidity shocks into the South African economy
• Determine the differences in the impact of various rounds of G3 central bank liquidity injections via quantity and price measures on domestic credit, inflation and the policy rate
• Examine the role of domestic labor markets in the adjustments to external shocks
• Compare how the impact of the US Fed and ECB bank balance sheet shocks exert inverse transmission effects on the domestic economy
• Apply counterfactual scenarios to assess the impact of the inverse transmission and the role of commodity price dynamics

Nombulelo Gumata, Eliphas Ndou

3. The Impact of Capital Flows on Credit Extension: The Counterfactual Approach

Abstract

∙ See the effects of capital flow shocks on credit growth, economic growth and the real effective exchange rate.
∙ Use the counterfactual analysis to show the extent to which credit growth, economic growth and changes in the REER would have evolved in the absence of capital flows.
∙ Show the importance the amplification effects of commodity prices on the responses of credit growth to capital flow shocks.

Nombulelo Gumata, Eliphas Ndou

4. Capital Flow Episodes Shocks, Global Investor Risk and Credit Growth

Abstract

• Show the importance of classifying capital flow episodes, separating between foreign and domestic investor activities
• Understand the channels of transmission of capital waves and how they impact real economic activity and credit growth
• Show how changes in global risk shocks impact capital flow surges, sudden stop episodes, credit growth and real activity
• Demonstrate the significance of economic costs exerted by capital flow surges, sudden stops and capital flight and retrenchments
• Show costs associated with capital flows driven by domestic and foreign investor behavior.
• Examine the role of commodity prices and the exchange rate in amplifying credit growth based on the counterfactual scenarios
• Establish whether capital flow surges and sudden stop shocks lead to the reallocation of sectorial credit shares

Nombulelo Gumata, Eliphas Ndou

5. Bank, Non-bank Capital Flows and Household Sector Credit Reallocation

Abstract

• Establish the impact of the composition of capital flows on the sectorial credit shares to assess the potential financial stability risks involved
• Use the findings to assist in shaping policy responses and design of macro-prudential tools

Nombulelo Gumata, Eliphas Ndou

6. Capital Flows and the Reallocation of Credit from Companies

Abstract

• Establish whether the substitution effects induced by the composition of capital flows benefits credit to companies
• Examine the potential financial stability risks involved and how regulatory and macro-prudential tools can respond to mitigate these risks
• Look at whether the composition of capital flows amplifies the responses of the repo rate to positive inflation shocks

Nombulelo Gumata, Eliphas Ndou

7. Stock Price Returns, Volatility and Costly Asset Price Boom–Bust Episodes

Abstract

• Understand how stock market price returns and volatility exert different impacts on macroeconomic variables.
• Distinguish between the adverse effects of stock price volatility shocks and those exerted by a positive monetary policy shock.
• Assess the impact of unexpected stock returns shocks on inflation and economic growth.
• Establish how the contributions of stock price returns and volatility reinforce each other.
• Understand in which periods different techniques identify asset price booms and busts.
• Learn what the Taylor rule suggests about monetary policy settings during asset price booms.
• Assess whether all booms in South Africa are followed by costly busts. In cases where they are, the cumulative output costs and the severity of equity price and house price busts.

Nombulelo Gumata, Eliphas Ndou

8. The Interaction Between Credit Conditions, Monetary Policy and Economic Activity

Abstract

Understand the construction of the credit conditions index and its importance for policy inferences
Examine the extent to which accommodative monetary policy post-2009 impacted credit conditions
Disentangle the effects of credit conditions and those of other adverse business cycles shocks, adverse business confidence and equity price shocks and other bank lending standards
Asses the different impact of credit conditions on manufacturing production, property market and business confidence
Establish the interaction between tight credit conditions and monetary policy, the contributions of the monetary policy stance to credit conditions and the amplifying role of credit conditions to repo rate responses to inflationary pressures

Nombulelo Gumata, Eliphas Ndou

9. Credit Conditions and the Amplification of Exchange Rate Depreciation and Other Unexpected Macroeconomic Shocks

Abstract

• See the different impacts of CCI on credit to households and companies.
• Examine the fluctuations and nonlinearities induced by the CCI on GDP growth and repo rate responses to inflation before, during and after the global financial crisis.
• Look at the impact of tight credit conditions on credit driven demand shocks and propagation of rand depreciation shocks on inflation and the exchange rate pass-through

Nombulelo Gumata, Eliphas Ndou

Credit Supply Dynamics and the Economy

Frontmatter

10. The Lending-Deposit Rate Spread and the Bank Pricing Behavior

Abstract

• Determining the thresholds of the lending-deposit spread, the asymmetry and the momentum in change in spread towards the equilibrium level
• The direction of momentum in the lending-deposit spread adjustment when the policy rate is adjusted
• The prevalence of the asymmetric adjustment of the lending-deposit rate spread
• Insight on the transmission mechanism of adjustments in the policy rate
• Testing for collusive pricing and transaction costs theory in the setting of the deposit and lending rates spread
• Testing for adverse customer reaction in banks’ behavior

Nombulelo Gumata, Eliphas Ndou

11. Adverse Credit Supply Shocks and Weak Economic Growth

Abstract

• Know the benefits of using the pure sign restriction and penalty function sign restriction approaches in VAR
• Distinguish between adverse credit supply effects, tighter monetary policy and adverse credit demand shocks on lending spreads, GDP and credit growth
• Show that adverse credit supply shock is partly responsible for the weak economic growth recovery and elevated loan spreads
• Determine the role of global economic uncertainty shocks on elevated lending spreads

Nombulelo Gumata, Eliphas Ndou

12. Credit Supply Shocks and Real Economic Activity

Abstract

• See how credit supply shock drives real economic activity cycles
• Credit market dynamics explain slowing growth of GDP, credit and capital formation
• Adverse credit demand contributions slow economic activity
• Credit demand shocks contributions elevate and depress credit growth and capital formation
• Sovereign bond yields impact credit supply shock contributions to GDP
• High government bond yields impact credit supply conditions

Nombulelo Gumata, Eliphas Ndou

13. Credit Growth Threshold and the Nonlinear Transmission of Credit Shocks

Abstract

• The growth rate at which the credit growth rate threshold occurs
• The credit regimes and their non-linear and asymmetric effects in transmitting shocks
• The threshold effects on the pace and magnitudes of the policy rate adjustments in curbing inflationary pressures
• The asymmetric effects of the threshold on inflation shocks and economic growth
• Consideration of nonlinearity effects induced by the thresholds and by policy

Nombulelo Gumata, Eliphas Ndou

14. Credit Regimes and Balance Sheet Effects

Abstract

Show the credit growth threshold and its influence in constraining economic responses in different credit regimes
Distinguish the credit shocks effects on output in low and high credit growth regimes

Nombulelo Gumata, Eliphas Ndou

Financial Regulatory Uncertainty and Bank Risk Taking

Frontmatter

15. The Banking Risk-Taking Channel of Monetary Policy in South Africa

Abstract

• Determine if there is a banking risk-taking channel of monetary policy in South Africa
• Provide empirical evidence on the link between monetary policy and bank risk taking; and that high interest rates reduce risk-taking behavior.
• Quantify and demonstrate the extent to which contractionary policy affects the bank risk-taking channel and the implications for macroeconomic performance.
• Show the implications of the monetary policy tightening cycle

Nombulelo Gumata, Eliphas Ndou

16. Financial Regulation Policy Uncertainty and the Sluggish Recovery in Credit Growth

Abstract

• Interaction between elevated financial regulation policy uncertainty, lending rate margins, credit risk and the sluggish recovery in credit growth in South Africa
• The extent to which lending spreads are driven by financial regulatory policy uncertainty
• Whether the impact of financial regulatory policy uncertainty complements or neutralizes monetary policy effects
• The impact of financial regulatory policy uncertainty on funding margins, lending spreads and provisions for credit losses

Nombulelo Gumata, Eliphas Ndou

Macro-Prudential Tools and Monetary Policy

Frontmatter

17. Excess Capital Adequacy and Liquid Asset Holdings and Credit

Abstract

• Establish the impact of the LCR on banks’ assets and risk
• Analyze the costs involved in the LCR requirements
• Understand the impact of regulations on bank credit supply and pricing of loans
• Assess the impact of excess CAR and LAH on credit developments
• Examine whether excess CAR and LAH induce any frictions in credit markets by raising lending spreads
• Distinguish between the effects of excess CAR and LAH and those associated with the National Credit Act (NCA) and the Basel III shocks
• Consider the responses of inflation and the repo rate to tight bank regulatory shocks

Nombulelo Gumata, Eliphas Ndou

18. Credit Loss Provisions as a Macro-prudential Tool

Abstract

• Assess how weak growth in credit can be linked to elevated credit loss provisions as macro-prudential tool
• Understand the extent to which provisions have been a driver of business cycle fluctuations in South Africa
• Distinguish how credit provisions can be classified into low and high regimes
• Consider how credit provisions shocks impact real economic activity in a nonlinear way
• Assess how tighter provisioning for credit losses makes monetary policy adjustments need to be less aggressive to curb positive inflation surprises
• Understand how elevated policy rates accentuate the adverse effects of tighter credit loan loss provisions on credit contractions

Nombulelo Gumata, Eliphas Ndou

19. The National Credit Act, Monetary Policy and Credit Growth

Abstract

Analyze how the National Credit Act (NCA) propagates the effects of monetary policy on credit and output
Determine the interaction and effectiveness of monetary policy and the NCA as part of the macro-prudential toolkit
Determine whether there is an economic case for these tools to be coordinated
Establish the degree to which the NCA and the repo rate reinforce each other

Nombulelo Gumata, Eliphas Ndou

20. Loan-to-Value Ratios, Contractionary Monetary Policy and Inflation Expectations

Abstract

• Discern the nature of the interaction between LTVs and the repo rate since 2001
• Assess the extent to which the tight (loose) LTVs reinforce (neutralize) the contractionary (accommodative) monetary policy stance
• Analyze whether the transmission of the LTV shocks occur through the same channels that are impacted by a tight (accommodative) monetary policy shock
• Examine the impact of the repo rate and LTV shocks on household balance sheets
• Assess the response of LTVs to an unexpected positive current inflation expectations shock and inflation
• Assess how deterioration in the inflation outlook leads to the LTV tightening
• Understand the impact of LTV tightening shocks on price stability

Nombulelo Gumata, Eliphas Ndou

21. Repayment-to-Income and Loan-to-Value Ratios Shocks on the Housing Market

Abstract

• Establish the extent to which positive RTI and LTV tightening shocks impact the economy, inflation and repo rate dynamics
• Analyze whether LTV tightening shocks and the unexpected tightening in the RTI shocks are complementary or supplementary tools
• Understand the role of inflation and inflation expectations in influencing LTV and RTI standards and their spill-over effects into financial stability issues
• Determine whether LTV and RTI tightening shocks benefit price stability
• Establish the influence of the LTV tightening shocks on the level of the repo rate

Nombulelo Gumata, Eliphas Ndou

Backmatter

Title: Bank Credit Extension and Real Economic Activity in South Africa
Authors: Nombulelo Gumata
Eliphas Ndou
Copyright Year: 2017
Publisher: Springer International Publishing
Electronic ISBN: 978-3-319-43551-0
Print ISBN: 978-3-319-43550-3
DOI: https://doi.org/10.1007/978-3-319-43551-0