The South African Reserve Bank (the Bank) today released the September 2006 edition of the Financial Stability Review. This publication covers the six months from January to June 2006. It is part of the Bank’s approach to encourage debate on financial stability issues and to enhance understanding of the financial system, its strengths and weaknesses. The Financial Stability Review highlights that macrofinancial conditions globally have benefited from continued solid growth, supported by high confidence levels and low and declining unemployment. However, risks to this positive outlook include large fiscal deficits and low household savings in a number of developed countries, unprecedented levels of global current-account imbalances, an uncertain inflation outlook given high and volatile oil prices and mounting geopolitical tensions. The period under review was characterised by increased risk aversion among investors in major economies, which combined with vulnerabilities in certain emerging market countries sparked a sharp correction in prices of riskier emerging market assets. This correction did not, however, imply a reassessment of emerging market fundamentals. Economic activity in sub-Saharan Africa and in the Southern African Development Community region remained robust, although some economic and political risks remain. The South African financial system was assessed as sound during the period under review, based on an analysis of various indicators. Overall confidence in the financial services sector, as measured by the Financial Services Index, remained high. Stress-testing results showed that the banking sector would remain resilient to a range of plausible adverse developments impacting on its loan assets. The life insurance sector was generally healthy although there is some concern about the high lapses and surrenders and the low number of new policies issued. The level of household indebtedness remained high by historical standards. Mortgage advances, which form the largest portion of credit to the household sector, continued to grow at a high rate. Even though existing fundamentals do not point to fragility in aggregate household-sector finances, growth of household debt needs to be monitored, taking into account the moderate increase in interest rates recently. Despite South Africa’s robust financial infrastructure, regulatory authorities have introduced some important financial and regulatory changes during the period under review that have the potential to contribute to the promotion of financial stability. Furthermore, the Corporate Law Reform process is gaining momentum which is expected to stimulate economic growth, and bring about much needed social renewal and enhanced governance. In addition to efforts to detect and prevent financial instability, the Bank also helps to co-ordinate financial sector contingency planning for systemic crisis resolution. In this regard an economic impact assessment of a possible avian influenza or other pandemic contemplates the roles and responsibilities of financial-sector institutions and authorities in this regard and proposes possible actions that could be taken by government, the central bank, other regulatory authorities and financial-sector participants.