The lending implications of banks holding excess capital

Neryvia Pillay and Konstantin Makrelov

No 11056, Working Papers from South African Reserve Bank

Abstract: Banks hold capital above microprudential and macroprudential regulatory requirements for a variety of reasons, including as a risk mitigation measure. In this study, we assess how decisions around the size of excess capital as well as monetary and financial stability actions impact sectoral lending in South Africa. Using a unique set of micro data for the South African banking sector for the period 2008 to 2020, provided by South Africas Prudential Authority, our analysis controls for bank characteristics such as bank size, profitability and liquidity. Our results suggest that banks decisions around holding additional capital affect their lending. As expected, monetary policy actions have a strong impact on bank lending and so do regulatory changes to bank capital requirements. These impacts tend to be smaller for larger banks, in line with results published in the global literature. Our results highlight the difficulties of thinking about policy in a Tinbergen rule type of world. Fiscal, microprudential, macroprudential and monetary policy actions can affect price and financial stability goals through their impact on credit extension. When policies work at cross purposes, they can easily undermine each others goals.

Date: 2024-01-16
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-ifn and nep-mon
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Journal Article: The Lending Implications of Banks Holding Excess Capital (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:rbz:wpaper:11056

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