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This study investigated the causal interactions between macroprudential policy, measured by the Macroprudential Policy Index (MPI), and financial cycles represented by the Aggregate Financial Cycle (AFC) and the Credit and Asset Prices Financial Cycle (CAFC) in South Africa from 1970q1 to 2023q2. Additionally, the study explored the effects of macroprudential policy during different phases of financial cycles. Using the time-varying Granger-causality model, the study found that the MPI Granger-caused financial cycles during the 2003/07 credit boom in South Africa, while the AFC and CAFC Granger-caused macroprudential policy during the Covid-19-induced collapse of financial markets. The results suggest that macroprudential policy is employed more proactively during financial booms and more reactively during financial busts in South Africa. The Markov switching dynamic regression model used to assess the MPI's effects revealed that macroprudential policy's effectiveness is stronger during financial busts and weaker during financial booms in South Africa. This is because financial institutions in South Africa tend to resist stricter regulations during boom phases due to heightened optimism about future prospects. Conversely, they are more receptive to stimulatory interventions during bust phases. Based on these findings, it is recommended that the South African Reserve Bank and the Prudential Authority use macroprudential policy more assertively during financial booms to enhance its effectiveness. This could involve setting more stringent parameters upon activating macroprudential policy tools or complementing macroprudential policy with monetary policy during financial booms.

The COVID-19 pandemic triggered a global economic crisis that significantly impacted the South African banking sector, already weakened by a pre-existing recession. While bank profitability and credit quality declined, stock market reactions appeared less severe, indicating a potential disconnect between fundamentals and investor behaviour. This study explores the influence of investor sentiment on credit risk, lending, and performance (ROA) of selected JSE-listed banks during the pandemic, incorporating behavioural finance perspectives. Panel regression analysis reveals that COVID-19 had a significant negative effect on stock, ROA and ROE, driven by heightened uncertainty and rising non-performing loans. Liquidity and capital positively influenced returns and ROE, reflecting investor confidence in resilient banks. Investor sentiment had a weakly positive impact on returns, but a significant negative effect on both ROA and ROE, suggesting that excessive optimism may have led to riskier lending practices and reduced profitability. Larger banks underperformed in terms of returns, likely due to operational complexity during the crisis. These findings highlight the critical role of behavioural factors in shaping financial outcomes during systemic shocks and provide new insights into emerging market banking dynamics under crisis conditions.

The COVID-19 pandemic triggered a global economic crisis that significantly impacted the South African banking sector, already weakened by a pre-existing recession. While bank profitability and credit quality declined, stock market reactions appeared less severe, indicating a potential disconnect between fundamentals and investor behaviour. This study explores the influence of investor sentiment on credit risk, lending, and performance (ROA) of selected JSE-listed banks during the pandemic, incorporating behavioural finance perspectives. Panel regression analysis reveals that COVID-19 had a significant negative effect on stock, ROA and ROE, driven by heightened uncertainty and rising non-performing loans. Liquidity and capital positively influenced returns and ROE, reflecting investor confidence in resilient banks. Investor sentiment had a weakly positive impact on returns, but a significant negative effect on both ROA and ROE, suggesting that excessive optimism may have led to riskier lending practices and reduced profitability. Larger banks underperformed in terms of returns, likely due to operational complexity during the crisis. These findings highlight the critical role of behavioural factors in shaping financial outcomes during systemic shocks and provide new insights into emerging market banking dynamics under crisis conditions.

This study investigated the causal interactions between macroprudential policy, measured by the Macroprudential Policy Index (MPI), and financial cycles represented by the Aggregate Financial Cycle (AFC) and the Credit and Asset Prices Financial Cycle (CAFC) in South Africa from 1970q1 to 2023q2. Additionally, the study explored the effects of macroprudential policy during different phases of financial cycles. Using the time-varying Granger-causality model, the study found that the MPI Granger-caused financial cycles during the 2003/07 credit boom in South Africa, while the AFC and CAFC Granger-caused macroprudential policy during the Covid-19-induced collapse of financial markets. The results suggest that macroprudential policy is employed more proactively during financial booms and more reactively during financial busts in South Africa. The Markov switching dynamic regression model used to assess the MPI's effects revealed that macroprudential policy's effectiveness is stronger during financial busts and weaker during financial booms in South Africa. This is because financial institutions in South Africa tend to resist stricter regulations during boom phases due to heightened optimism about future prospects. Conversely, they are more receptive to stimulatory interventions during bust phases. Based on these findings, it is recommended that the South African Reserve Bank and the Prudential Authority use macroprudential policy more assertively during financial booms to enhance its effectiveness. This could involve setting more stringent parameters upon activating macroprudential policy tools or complementing macroprudential policy with monetary policy during financial booms.