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

Author

Listed:
  • Konstantin Makrelov
  • Neryvia Pillay
  • Bojosi Morule

Abstract

South Africa's fiscal balances have deteriorated significantly over the last decade, although 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 to test how sovereign risk premia affect capital buffers, while controlling for variables identified in the literature, such as size of banks and the economic cycle. Unlike other studies, we use actual capital buffers. 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. This suggests that banks are accumulating capital to mitigate against fiscal and other domestic policy risks. It is likely that this is contributing to higher lending rates.

Suggested Citation

  • Konstantin Makrelov & Neryvia Pillay & Bojosi Morule, 2023. "Fiscal risks and their impact on banks' capital buffers in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 91(1), pages 116-134, March.
    • Handle: RePEc:bla:sajeco:v:91:y:2023:i:1:p:116-134
    DOI: 10.1111/saje.12337
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    References listed on IDEAS

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