Alternative Measures of Credit Extension for Countercyclical Buffer Decisions in South Africa

Abstract. This paper analyses the behaviour of alternative measures of credit extension for countercyclical buffer decisions in South Africa. These measures include the deviation of the ratio of private sector credit extension to gross domestic product from its long term trend, the deviation of the logarithm of private sector credit extension from its long term trend as well as the annual percentage change in private sector credit extension. The cyclical properties of these measures are examined over the economic and the financial cycles. The results show that the deviation of the ratio of private sector credit extension to gross domestic product from its long term trend is countercyclical with the economic cycle. The results further show that the deviation of the logarithm of private sector credit extension from its long term trend is procyclical with both the economic and the financial cycle. The results finally show that the annual percentage change in private sector credit extension generally performs poorly in cyclical terms with both the economic and the financial cycle. Consequently, of the three alternative measures of private sector credit extension considered, the deviation of the logarithm of private sector credit extension from its long term trend could be used as a common reference guide for implementing the countercyclical capital buffers for financial institutions in South Africa.Keywords. Credit extension, Countercyclical capital buffers.JEL. C32, E44, E51, G21