Regulation and Bank Lending in South Africa: A Narrative Index Approach

The extension of affordable credit is a key component of financial inclusion but it could reduce the stability of the financial sector. Prudential policies, on the other hand, are designed to mitigate financial sector risk. Thus, policies aimed at the extension of credit and prudential regulations may be in opposition. This study estimates and contrasts the impact of these potentially contradictory regulations on the bank lending volumes of South Africa's largest banks. We find that announcements of prudential regulation are associated with an increase in secured lending, while the implementation of prudential regulation is associated with an increase in unsecured lending. Despite tighter implementation of prudential reforms, we observe an increase in unsecured lending that is driven by unsecured lending to corporates. Our results also indicate the contractionary effects of prudential regulation on mortgage lending. Furthermore, the estimated effects of efforts aimed at extending credit to households have no impact on bank lending to households but increase secured lending to corporates. The two regulatory approaches overlap with regard to lending to corporates.