What is the Reserve Bank?

Series preface

In light of recent criticism of economic policy in South Africa, particularly the role and responsibilities of the South African Reserve Bank, this series of briefs will provide background and discuss the issues.

The series will cover the following:

1. The South African Reserve Bank currently
2. Monetary policy
   
   
   1. and  the provision of liquidity
   2. and inflation targeting
   3. and the promotion of economic growth and employment
   4. versus fiscal policy and the budget deficit
   
   
3. Exchange rate intervention, eg to stimulate exports
4. Monitoring of asset prices
5. Promotion of Johannesburg as a financial centre

This first brief looks at the current role and responsibilities of the Bank.

Core responsibilities

The Bank, in the pursuance of its primary goal, the realisation of its business philosophy and the fulfillment of its responsibilities, assumes responsibility for:

• formulating and implementing monetary policy in such a way that the primary goal of the Bank will be achieved in the interest of the whole community that it serves;
• ensuring that the South African money, banking and financial system as a whole is sound, meets the requirements of the community and keeps abreast of international developments;
• assisting the South African government, as well as other members of the economic community of southern Africa, with data relevant to the formulation and implementation of macroeconomic policy; and
• informing the South African community and all stakeholders abroad about monetary policy and the South African economic situation.

Monetary policy

The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. The Bank has a floating exchange rate policy and there are no exchange rate targets. The increased move internationally towards the establishment of integrated financial regulators has caused central banks to focus more on financial stability through macroprudential analysis. The SARB regards “the achievement and maintenance of financial stability”, in the broad sense of the word, that is, including monetary and financial system stability, as its primary goal.

Financial stability

Financial stability can be described as the absence of the macroeconomic costs of disturbances in the system of financial exchange between households, businesses and financial-service firms.
Stability would be evidenced by, firstly, an effective regulatory infrastructure, secondly, effective financial markets and thirdly, effective and sound financial institutions. The increased move internationally towards the establishment of integrated financial regulators has caused central banks to focus more on financial stability through macroprudential analysis. The SARB regards “the achievement and maintenance of financial stability”, in the broad sense of the word, that is, including monetary and financial system stability, as its primary goal.

• The inflation-targeting monetary policy framework is primarily concerned with one element of financial stability, i.e. price stability. For overall financial stability it is important that the Reserve Bank:
• ensures the availability of high quality currency in circulation in various denominations to serve as a reliable means to execute financial transactions in the economy;
• facilitates the development and maintenance of an efficient national payment, clearing and settlement system;
• encourages the development and efficient functioning of the money, capital and foreign exchange markets;
• monitors the financial risks of banks and supports the development of sound and well-managed banking institutions; and
• where appropriate acts as lender-of-last-resort assistance providing assistance to solvent banks to safeguard the system from systemic risks arising from temporary liquidity shortages.

Payment systems and oversight

Responsibility for the national payment system, NPS, and its oversight are entrenched in law. The South African Reserve Bank Act, No. 90 of 1989 (SARB Act) was amended in 1996 to clarify the role and responsibility of the Bank in the domestic payment system. Section 10(1)(c)(i) of the SARB Act empowers the Bank to “perform such functions, implement such rules and procedures and, in general take such steps as may be necessary to establish, conduct, monitor, regulate and supervise the payment, clearing and/or settlement systems”. The Bank has been given the power to govern the entire process, from the moment that a payment is initiated until such time as the beneficiary receives the money. The NPS Act enables the Bank to perform the functions as provided for in the SARB Act. The authority to perform these functions is vested in the Bank’s National Payment System Department. The NPS Act also provides for the regulatory and supervisory powers of the Bank to manage and control all payment-related risks. The settlement network: The core of the South African settlement system is the SAMOS system, which is owned and operated by the Bank. The Continuous Linked Settlement network, CLS: The link between the domestic and international payment system networks. The settlement of foreign-exchange transactions between South African rand and that of other foreign currencies takes place simultaneously.

Other responsibilities

Bank regulation and supervision: The Reserve Bank is responsible for bank regulation and supervision in South Africa. The purpose is to achieve a sound, efficient banking system in the interest of the depositors of banks and the economy as a whole. This function is performed by issuing banking licences to banking institutions, and monitoring their activities in terms of either the Banks Act, 1990, or the Mutual Banks Act, 1993. The introduction of the Co-operative Banks Act seeks to create a development strategy and a regulatory environment for deposit-taking financial services co-operatives. The supervisor within the South African Reserve Bank has the authority to exercise the powers and perform the functions conferred on the supervisor by or in terms of the Act in respect of primary co-operative banks that hold deposits in excess of 20 million Rand, secondary co-operative banks and tertiary co-operative banks. Exchange control: The Minister of Finance has delegated to the Bank all the powers, functions and duties assigned to and imposed on the Treasury under the Exchange Control Regulations.

Structure

The Bank has been given an important degree of autonomy for the execution of its duties. In terms of the Constitution "the South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters". The independence and autonomy of the Bank are, therefore, entrenched in the Constitution. The Bank publishes a monthly statement of its assets and liabilities, and submits an annual report to Parliament. The Bank is therefore accountable to Parliament as the representative body of all the people in South Africa. This also ensures that the Government cannot exercise undue influence over the Bank in furthering any party-political agenda. The Governor of the Reserve Bank holds regular discussions with the Minister of Finance, and has periodic discussions with members of the Parliamentary Standing Committee on Finance.

Governors/directors

The Reserve Bank Act provides for a Board of directors with 14 members. Among them are the Governor and three deputy governors, who are appointed by the President of the Republic for five-year terms. Three other directors are appointed by the President for a period of three years. The remaining seven directors, of whom one represents agriculture, two industry and four commerce or finance, are elected by shareholders for a period of three years. The Governor and deputy governors manage the daily affairs of the Bank, as they are the most senior executives with full-time responsibility for the workings of the Bank.

Ownership

Since its establishment, the Reserve Bank has always been privately owned. Today the Bank has more than 630 shareholders and its shares are traded on an over-the-counter share transfer facility coordinated within the Reserve Bank. Except for the provision that no individual shareholder may hold more than 10 000 shares of the total number of 2 000 000 issued shares, there is no limitation on shareholding. After allowing for certain provisions, payment of company tax on profits, transfers to reserves and dividend payments of not more than 10 cents per share to shareholders, the surplus of the Bank's earnings is paid to the Government.

South African Reserve Bank, SARB

www.reservebank.co.za