The aim of this study was to examine the extent of linkages between business cycle and capital adequacy requirements in South Africa employing the VECM framework. We want to understand the extent to which the imposition of capital adequacy can accentuate and deepen the business cycle in the financial system. The Johansen Cointegration approach was used to ascertain whether there is indeed a long-run co-movement between capital adequacy and business cycle, but first we tested the stationarity of our series under the NG–Perron and KPSS framework, where we established that all the series were I(1), a property essential for cointegration analysis. Results from the tests and VECM model show that there are significant linkages among the variables, especially between capital adequacy and business cycle. In other words, the imposition of a capital adequacy requirement can amplify the business cycle in South Africa.
Can bank capital adequacy changes amplify the business cycle in South Africa?
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Research Brief 143