South Africa’s 2003–2013 credit boom and bust: Lessons for macroprudential policy

We evaluate South African financial stability policy from 2003 to 2013 – the country’s most significant credit boom and bust cycle. This cycle overlapped with both rising bank capital adequacy ratios and the global financial crisis of 2007/8. We use a dynamic stochastic general equilibrium model to identify South African Reserve Bank (SARB) interventions and run counterfactual policy scenarios. We document two instances of policy inaction. Our counterfactual scenarios suggest that, with the benefit of hindsight, the SARB took the correct steps to raise capital requirements during the credit boom, but could have persisted with raising capital requirements for longer (past 2004), and could have adopted a looser policy stance after the global financial crisis to mitigate the credit bust. Our findings reaffirm the importance of counter-cyclical action, the usefulness of bank capital as a buffer against unexpected shocks to build financial sector resilience, and the need for independent but close coordination between monetary and macroprudential policy. In addition, because of structural differences between household and firm credit, the SARB should consider buttressing the uniform countercyclical capital buffer with sector-specific capital requirements.