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In this article a banking sector Computable general equilibrium (CGE) model for South Africa is developed. The model is used to estimate the potential effect of regulatory policy on the economy and as a risk assessment tool to assess how changes in regulation affect the economy. The model provides a methodology for regulators of the banking sector and policy makers in South Africa to deal with risk assessment and future regulatory planning. The CGE model allows interactions amongst various entities of the economy so that policy makers could detect the risks in the banking sector. The CGE model used in this paper performed well as a risk assessment tool for the South African banking sector. The results of the various shocks from the model are consistent with the results obtained from similar shocks done in the UK. We establish that default penalty has a higher effect on the banks' profits and the interest rates than capital requirement infringement penalty. Our results also suggest that interest rate targeting has more controlled effects than monetary base targeting since pecuniary externalities are reduced.

We consider the fraction of nodes that default in large, stochastic, inhomogeneous financial networks following an initial shock to the system. Results for deterministic sequences of networks are generalized to stochastic networks to account for interbank lending relationships that change frequently. A general class of inhomogeneous stochastic networks is proposed for use in systemic risk research, and we illustrate how results that hold for Erdős–Rényi networks can be generalized to the proposed network class. The network structure of a system is determined by interbank lending behavior which may vary according to the relative sizes of the banks. We then use the results of the paper to illustrate how network structure influences the systemic risk inherent in large banking systems.

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