The South African Reserve Bank (SARB) today released the September 2007 edition of the Financial Stability Review. This publication focuses on the six months to June 2007 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 resilience of financial markets globally was severely tested during the past few months following the widespread impact of negative developments in the United States’ housing market, and the subprime mortgage market in particular. Global markets generally experienced considerable volatility and illiquidity and there are signs that borrowers will face tighter terms and conditions, which could harm global economic growth. Emerging market economies in general have proven to be resilient to the financial market turmoil following the subprime crisis. South African financial institutions have very little exposure to the United States’ subprime lending industry or to securities with subprime loans as underlying assets. Any direct impact of the subprime mortgage turmoil on the South African financial system is likely to be negligible. Based on an analysis of selected financial soundness indicators, the South African financial system remained sound during the period under review. Overall confidence in the financial services sector remained high and confidence in the banking sector was confirmed by the high level of the retail banking confidence index. Banks were well capitalised, but the South African banking sector remained highly concentrated. The insurance industry remained strong although there are concerns about deteriorating profitability and a high loss ratio. Despite strong growth in household indebtedness the financial position of households remained sound given strong growth in disposable income and financial assets. The moderation in the level of activity in the residential property market continued and could be extended further by the relatively high level of household debt that is limiting the ability of households to accumulate more debt. The South African financial regulatory system is undergoing continuous change and legislative reform in an effort to maintain an appropriate level of financial regulation. A number of recent financial regulatory developments are reported, namely, the directives issued to regulate the conduct of non-bank stakeholders in the national payment system, notices issued by the Financial Services Board pertaining to the regulation of hedge funds, and the Co-operative Banks Bill as part of a process to broaden access to finance and facilitate the development of alternate tiers of banking.