Since the release of the November 2025 Financial Stability Review (FSR), the global environment has been shaped by the escalation of the Middle East conflict that started on 28 February 2026.

^{10 June 2026} 

This shock has contributed to a sharp rise in oil prices, tighter global financial conditions, higher market volatility and a deterioration in the global growth outlook. At the same time, rapid advances in frontier artificial intelligence (AI), combined with ongoing concerns over elevated sovereign debt levels, stretched asset valuations and liquidity mismatches in private credit, have left the global financial stability outlook more uncertain. 

Global financial markets have adjusted to the geopolitical shock in an orderly manner thus far, but underlying vulnerabilities have increased. Tighter financial conditions could exert downward pressure on elevated asset prices and increase the risk of sharp repricing, while high public debt levels, rising refinancing needs and higher government bond yields leave sovereigns exposed to shifts in investor sentiment and borrowing costs. Advances in AI are increasing financial stability risk through two distinct channels. First, by lowering the technical barriers to sophisticated attacks and compressing the time needed to identify and exploit vulnerabilities, frontier AI models heighten the risk of systemic cyber incidents affecting critical systems and infrastructure. Second, the broader expansion of AI capabilities has fuelled a run-up in technology-related share prices, raising concerns over stretched valuations and the potential for a disorderly correction.

Domestically, financial conditions have tightened since the previous FSR, albeit from a historically loose base, and remain close to their long-term average. While tightening is evident, conditions remain well within the range observed during previous episodes of global stress. The SARB’s Financial Conditions Index (FCI) indicates that this has been driven by higher equity market volatility, changes in exchange rate dynamics and the repricing of risk following the onset of the Middle East conflict. The credit-to-GDP gap remained marginally positive and well below levels that would signal strong credit growth. Tighter financial conditions and the more uncertain external risk environment will continue to test financial system resilience for the remainder of 2026.

Compared with the November 2025 FSR, the residual vulnerability of the domestic financial system has increased across several risk categories. Geopolitical conflict and policy uncertainty have intensified sharply and now act as a broad amplifier of other vulnerabilities primarily through the real economy, as weaker growth, higher inflation, rising costs and tighter financial conditions weigh on household and corporate balance sheets and credit performance. These pressures carry direct implications for sovereign risk dynamics. Specifically, vulnerability to volatile capital flows has increased as non-resident investors sell domestic assets in search of safe havens, contributing to greater rand volatility. The risk of unsustainable fiscal dynamics has risen due to the interaction between higher borrowing costs, weaker growth prospects and elevated debt redemptions in coming years. Household distress has also increased as the inflationary implications of higher fuel and transport costs erode real incomes and prolong pressure on indebted households. At the same time, changes in domestic interest rate expectations since the start of the conflict suggest that relief for interest rate-sensitive households is unlikely to materialise as expected at the beginning of the year.

Structural vulnerabilities related to low growth, unemployment, market concentration and financial exclusion are likely to be reinforced by a weaker macroeconomic outlook. Climate-related vulnerability has increased marginally as concerns around energy security and affordability constrain the near-term pace of transition, despite stronger longer-term incentives for renewable energy adoption. Operational vulnerability has risen materially, driven in large part by the financial stability risks posed by frontier AI models.

Despite these risks, the South African financial system remains resilient overall. Systemically important financial institutions are well-capitalised and liquid, and the broader financial system continues to be supported by ongoing policy and regulatory initiatives and efforts to strengthen crisis preparedness and operational resilience. One of these initiatives is the SARB’s intention to provide deposit facilities to central counterparties as announced in this edition of the FSR.