The impact of capital adequacy requirements on loan pricing : the case of South African Commercial Banks

Capital adequacy requirements are viewed as an important form of regulation within the banking sector and they represent a major change in banking regulation. The capital accord is a globalised regulation which seeks to reduce banking failures and achieve a stable and efficient financial system for the growth of the global economies. Through the adoption of the capital adequacy requirement in the South African banking system as well as having internationally active financial institutions, the South African economy is no exception to the benefits ensued by this regulation to the global economies. In light of this, this study examined the impact of capital adequacy requirements on loan pricing of South African commercial banks, using quarterly time series econometric analysis over the time period 2000-2016. The study used interest rate on loan, the dependent variable as a measure of loan pricing and the following independent variables: risk of default, market structure, Treasury bill and capital adequacy ratio. To confirm the level of integration, the study employed the Augmented Dickey-Fuller and Phillips-Perron tests. The Johansen co-integration and the Vector Error Correction Model were employed to obtain long-run and short-run coefficients. The findings of this study show that the measure of capital adequacy requirements CCAR is negatively related to real interest rate on loans CRL. This agrees with theory and expected priori. In addition, past studies in the developing countries’ context support these findings. Estimation of results reveals that all other variables such as market structure CMS, Treasury bill rate TB and loan loss provisions GLLP have a positive impact on interest rate on loans