The South African Reserve Bank (SARB) today released the March 2006 edition of the Financial Stability Review. This publication covers the six months to December 2005 and is part of the SARB’s approach to encourage debate on financial stability issues and enhance the understanding of the financial system and its strengths and weaknesses. According to the Financial Stability Review the global economy continued to expand strongly during the second half of 2005, albeit at a slightly more moderate pace. This supported stable macrofinancial conditions by reducing uncertainty and promoting confidence in financial markets and institutions. A number of key risks to the global economic and financial stability outlook remain, including high and volatile energy prices, global imbalances and the possible mispricing of risk as a result of an extended period of favourable economic and financial market conditions. Furthermore, a sudden change of sentiment of investors towards emerging markets remains a risk. The outlook for the Southern African Development Community countries continues to improve, while HIV/Aids, high unemployment and poverty remain risks for the region. Based on the analysis of various indicators, the South African financial system continued to be characterised by robust financial institutions, stable financial markets and a resilient market infrastructure. The banking sector remained profitable, well-capitalised and able to withstand considerable adverse shocks. The life insurance sector was generally healthy and confidence in the financial services sector remained high. Although households were able to service outstanding debt quite comfortably, the ratio of household debt to disposable income was at a historical high in December 2005. Measures of residential property market activity stabilised at high levels and point to a cooling-off phase following above-trend growth rates in house prices. Despite its current robust financial infrastructure, South Africa has recently introduced some important changes that have the potential to contribute to the promotion of financial stability, market efficiency and consumer protection. In addition to efforts to detect and prevent financial instability, the SARB also helps to coordinate financial sector contingency planning for systemic crisis resolution. Domestic financial institutions and regulatory authorities have co-operated well to manage risks that threaten continuity.