Counter-Cyclical Capital Buffers and Interest-Rate Policy as Complements – The Experience of South Africa

Counter-cyclical capital buffers are increasingly popular new "macroprudential" tools. However, there is limited empirical evidence on both the intended and unintended consequences of using these buffers. During the pre-crisis period (2002--2007), South Africa increased capital adequacy ratios to curb rapid credit extension, and so provides a useful test case. Using a new data set from that period, this paper extends a standard large-scale macroeconomic model to include capital adequacy ratios as a policy lever. It is found that a 1 percentage point shock to the capital adequacy ratio has similar effects to an interest-rate shock of between 0.3 and 0.4 percentage points. These results are in line with those in other jurisdictions. The econometric results are only indicative -- if actively used as a tool, counter-cyclical capital buffers may have their own complexities, including asymmetric impacts and endogeneity problems. Monetary policy issues, such as signalling, time inconsistency, expectation and communication challenges also apply, reducing the usefulness of proactive macroprudential policy. Nevertheless, macroprudential policies have an important complementary role to play