A stable and well-functioning financial system contributes significantly towards balanced and sustainable economic growth. When the risks and vulnerabilities affecting the financial system are mitigated, systemic events are less likely to occur. Systemic events are likely to negatively affect ‘real’ economic variables such as gross domestic product growth and unemployment, and may reduce public trust and confidence in the financial system.
Financial stability refers to a financial system that inspires confidence through its resilience to systemic risks and its ability to efficiently intermediate funds.
The Financial Sector Regulation Act 9 of 2017 (FSR Act) as amended makes the SARB responsible for protecting and enhancing financial stability in South Africa. If systemic events occur, the SARB will manage them and lead efforts to restore financial stability.
The SARB is not the sole custodian of this mandate. In addition to its own contributions, the SARB coordinates the efforts of government, financial sector regulators, organs of state, self-regulatory bodies, financial market participants and other stakeholders to protect financial stability. To achieve this goal, the Governor of the SARB and the Minister of Finance have agreed on a policy framework that outlines:
There are many risks that could significantly damage the financial system, or impede its stability and efficiency. By compromising the core functions of the system, these risks could reduce its resilience and significantly erode public confidence.
This is primarily done by applying the SARB’s macroprudential monitoring framework, which includes stress-testing financial institutions. The SARB regularly stress tests individual financial institutions by simulating a significant and plausible economic downturn that would stress funding markets. These tests help the SARB to understand the system's resilience to large-scale risks and they help institutions to understand risks and assess their risk management frameworks.
Every two years, the SARB conducts common scenario stress tests across the banking sector. The test results are published in the SARB’s Financial Stability Review, which is published every six months. A stress-testing framework for the insurance sector is being developed and will in time be expanded to financial market infrastructure and asset management firms.
The Financial Stability Committee (FSC) is responsible for macroprudential policy in the SARB. The FSC was established in 2000 and is the SARB’s policymaking committee on financial stability. It comprises the Governor, who chairs the committee, the Deputy Governors, the members of the Monetary Policy Committee and up to seven SARB officials. If rising vulnerabilities are identified, a macroprudential policy decision-making process is applied, by:
The SARB has developed a macroprudential toolkit, which the committee can use to address the build-up of risks and vulnerabilities. This toolkit is continuously being enhanced and developed further.
Financial stability includes the ability of financial institutions to continue providing their services and products. If large and complex financial institutions are interrupted from providing these, that may pose an even greater systemic risk. As a result, the FSR Act enables the Governor to designate certain financial institutions as systemically important. The SARB, after consulting with the Prudential Authority, can set additional requirements for these institutions. The methodology for designating such institutions, and the six currently designated banks, is explained and discussed in the November 2019 edition of the Financial Stability Review.
The SARB oversees and monitors all financial market infrastructures (FMIs). These infrastructures support economic activity by providing a platform to transfer funds and settle transactions. FMIs are deemed systemically important because the concentration of financial transactions within these infrastructures poses a potential systemic risk to the financial system.
The SARB benchmarks the South African financial system’s regulatory framework against the Financial Stability Board’s 15 key international standards and codes. In addition, the SARB contributes to the global discussion on the minimum standards to enhance financial stability, primarily through the G20 and the Financial Stability Board.
After consulting with the Minister of Finance, the Governor of the SARB may determine that a specific event is a systemic event or an imminent systemic event. In this case, the SARB may use its powers, or direct financial sector regulators to exercise their powers, to manage the event.
Establishing and refining the legislation, policies and other legal instruments necessary to manage a financial crisis and to resolve failing financial institutions effectively is an ongoing process. Current developments include designing a resolution framework and establishing a deposit insurance scheme.
The Financial Sector Laws Amendment Bill 2018 will, once enacted, amend the FSR Act to designate the SARB as the resolution authority responsible for:
The SARB publishes the Financial Stability Review (FSR) twice a year. The objective of the FSR is to communicate the SARB’s views on the potential risks to financial system stability and the policy actions being taken to address these risks. The FSR is the primary channel through which the SARB communicates with the public about financial stability related matters.