An empirical analysis of macroeconomic risk in South Africa

M.Com. (Financial Economics)Abstract: The austerity of the 2007/8 global financial crisis underlined the significance of effectively monitoring systemic risk in the financial system and gauging its potential effect on the broader economy. Subsequent to empirical studies (by Giglio et al., 2016 and Allen et al., 2012), this paper aims to satisfy the macroprudential mandate by conducting an empirical analysis on how the build-up of systemic risk in the financial system affects the downside of macroeconomic risk – i.e. large and infrequent economic downturns – in the South Africa economy. We outline and apply several proposed systemic risk measures derived from six of the largest banks in South Africa. Thereafter, we employ the quantile regression to evaluate the policy relevance of the systemic risk measures to tail events of macroeconomic outcomes. We then propose a systemic risk index for South Africa to be used as a monitoring tool for assessing a build-up of systemic risk in the financial sector in South Africa. This analysis is conducted over the sample period of nine years, from 2007 to 2016, with monthly intervals. The findings reveal the “Big Four” banks as being the systemically important financial institutions. Furthermore, the study reveals that majority of the systemic risk measures are significant predictors of macroeconomic risk as opposed to the median. The proposed systemic risk index proves to be an effective and informative tool in monitoring systemic risk. Moreover, the index demonstrates the ability to significantly predict macroeconomic risk in the South African economy. The policy relevance of this study is its ability to provide South African regulators with tools assisting in the surveillance of the South African financial system by identifying build-ups of systemic vulnerabilities, systemically important financial institutions and too interconnected to fail institutions. Moreover, the tools provided by this study are useful in the early warning analysis of financial systemic risk and assessing the consequences of systemic risk on macroeconomic outcomes