Financial Stability

The SARB has a mandate to protect and enhance financial stability. It monitors the environment and mitigates systemic risks that might disrupt the financial system.

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 stability mandate

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:

the SARB’s responsibility for mitigating the build-up of risks and vulnerabilities that could threaten the stability of the domestic financial system; and
a crisis management framework for systemic risks and events.

A safer financial sector for SA

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IMF note on macroprudential policy

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Macroprudential regulation and policy

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Monitoring risks to financial stability

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.

The SARB continuously monitors the strengths and weaknesses of the financial system, including the nature and extent of any risks to stability.

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 designed to stress any underlying vulnerabilities. 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 and insurance sectors. The test results are published in the SARB’s Financial Stability Review, which is published every six months. In time the SARB's stress testing frameworks may be expanded to include 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:

conducting a systemic risk assessment;
building a case for macroprudential intervention; and
selecting and implementing macroprudential instruments to mitigate risks.

Macroprudential policy framework

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.

Designating systemically important financial institutions

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.

Implementing a systemic surveillance framework for all financial market infrastructures

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.

International benchmarking and cooperation to enhance financial resilience

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:

resolving failing banks and systemically important financial institutions;
mitigating any contagion risk; and
mitigating the effects of these failures on financial stability.

Legal basis and purpose of the Financial Stability Review

Section 12 of the FSR Act requires the SARB to:

monitor and review any risks to financial stability, including the nature and extent of those risks as well as the strengths and weaknesses of the financial system; and
take steps to mitigate risks to financial stability, including advising the financial sector regulators and any other organ of state of the steps to take in order to mitigate those risks.

Section 13 of the FSR Act requires the SARB to assess the stability of the South African financial system at least every six months and to communicate its assessment in the Financial Stability Review (FSR). Among other things, the SARB is required to include the following in the FSR:

its assessment of the stability of the financial system during the six-month review period;
its identification and assessment of the risks to financial stability in at least the next 12 months;
an overview of the steps taken by the SARB and financial sector regulators to identify and manage identified risks and vulnerabilities in the financial system; and
an overview of the recommendations made by the SARB and the Financial Stability Oversight Committee (FSOC) during the period under review, and progress made in implementing those recommendations.

The SARB assesses financial stability as part of its ongoing operations, and its Financial Stability Committee (FSC) reviews the financial stability conjuncture and outlook at four meetings per year. The FSR provides readers with the SARB’s assessment of the stability of the South African financial system. The period under review is six months, while the forecast period is at least the next 12 months.

The FSR is tabled in Parliament and is targeted at the Members of Parliament (MPs), participants in the financial sector, international central bank peers, ratings agencies, international financial institutions, standard-setting bodies and academia. The FSR aims to stimulate debate on pertinent issues related to financial stability in South Africa.

Herewith the link to the FSR Publications: Financial Stability Review