Fiscal risks and their impact on banks’ capital buffers in South Africa

Konstantin Makrelov (), Neryvia Pillay () and Bojosi Morule ()
Additional contact information
Konstantin Makrelov: South African Reserve Bank
Neryvia Pillay: South African Reserve Bank
Bojosi Morule: South African Reserve Bank
Authors registered in the RePEc Author Service: Alain Kabundi ()

No 54, ERSA Working Paper Series from Economic Research Southern Africa

Abstract: South Africa’s fiscal balances have deteriorated significantly over the last decade, while the economy has been recording disappointing economic growth rates even prior to the COVID-19 crisis. In this paper, we estimate a series of equations using the Arellano and Bond (1991) estimator to test how sovereign risk premia affect capital buffers, while controlling for variables identified in the literature, such as size of banks, the economic cycle, competition and equity prices. Unlike other studies, we use actual capital buffers provided by the South African Prudential Authority. We show that these are substantively different to the proxy buffers calculated using the common approach in the literature, indicating that results based on proxy measures should be interpreted with caution. Our overall results show a positive relationship between the sovereign risk premium and capital buffers, and the results are robust across different specifications. This suggests that banks are accumulating capital to mitigate against fiscal and other domestic policy risks, and the related financial stability issues. It is likely that this is contributing to higher lending rates.

Keywords: Fiscal policy; Capital buffers; financial regulation; sovereign-bank nexus; South Africa (search for similar items in EconPapers)
JEL-codes: C23 E62 G28 H32 (search for similar items in EconPapers)
Date: 2024-09
References: Add references at CitEc
Citations:

Published in ERSA Working Paper Series, September 2024

Downloads: (external link)
https://ersawps.org/index.php/working-paper-series/article/view/54/38 First version, 2024 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rza:ersawp:54

Access Statistics for this paper

More papers in ERSA Working Paper Series from Economic Research Southern Africa
Bibliographic data for series maintained by Maggi Sigg ().