Implication of financial crises, financial regulation and business cycle for bank lending in South Africa

Akinsola, Foluso Abioye (2016-03)

Thesis (D.Phil)--Stellenbosch University, 2016.

Thesis

ENGLISH SUMMARY: This thesis examines the link between financial crisis, financial regulation and credit crunch in South Africa. This was done by assessing how periods of credit growth or crunch are associated with recession periods in South Africa, concentrating on both the demand-side and supply-side phenomenon of credit procyclicality. The data set for the study covers 21 years from 1990Q1 to 2013Q4. The financial variables and control variables were obtained from the South African Reserve Bank (SARB) and the IMF’s International Financial Statistics (IFS). This study employed the Vector Autoregressive (VAR) based co-integration and vector error-correction models accompanied by impulse response and variance decomposition, The first article examines the relationship between commercial bank lending and the business cycle from the demand side of credit procyclicality as occasioned by the activities of non-financial firms during a business cycle. The result shows that fluctuation in the business cycle can influence the credit growth. Disruptions in the flow of credit occasioned by a downturn in the economy can induce a crisis that affects the real sector of the economy. The second article assesses the relationship between regulatory bank capital adequacy and the business cycle. The study asked questions on how an increase in bank regulation during a financial crisis amplifies the business cycle. The result shows that fluctuation in the business cycle can be amplified by the bank capital adequacy requirements. The third essay examines the effect of bank regulation and how it might deepen the business cycle and accentuate the credit crunch. The study adopts the regulatory driven capital crunch hypothesis employing data from the SARB. The result shows a vivid relationship between prudential regulations and credit growth. The study concludes that tightening prudential regulations, especially during a business cycle, will likely constrain banks’ balance sheet, retard credit growth and affect banks’ lending. The fourth essay investigates the relationship between lending to small and medium scale enterprises and the business cycle in South Africa after the global financial crisis of 2008. This paper employed monthly data from the SARB for the period 2008 to 2014. The result shows strong evidence of procyclicality in SME lending in South Africa. The study further sheds some light on the role that the credit market plays in business cycles and reviews their implications for small and medium scale enterprises in South Africa. The findings of this thesis have pertinent policy implications for the government, regulatory bodies in the financial sector and banks. We suggest that the South African economy needs forward-looking policies that will mitigate the flow of credit to the real sector and at the same time ensure financial stability.

AFRIKAANS OPSOMMING: Geen opsomming beskikbaar.

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