Financial stability is not an end in itself, but, like price stability, is generally regarded as an important precondition for sustainable economic growth and employment creation.
‘Financial stability’ is defined as the smooth operation of the system of financial intermediation between households, firms and the government through a range of financial institutions. Stability in the financial system would be evidenced by, firstly, an effective regulatory infrastructure, secondly, effective and well-developed financial markets and, thirdly, effective and sound financial institutions. In its pursuit of financial stability, the Bank relies on market forces to the fullest possible extent and believes that any of its actions taken to contain systemic risk should be at the minimum level required to be effective.
Financial instability, conversely, could manifest through banking failures, intense assetprice volatility or a collapse of market liquidity and, ultimately, in a disruption in the payment and settlement system. Financial instability affects the real sector due to its links to the financial sector. It has the potential to cause significant macroeconomic costs, as it interferes with production, consumption and investment, and, therefore, defeats national goals of broader economic growth and development.
The Reserve Bank’s Financial Stability Review
The Reserve Bank is developing a new policy framework to reduce the risks in the financial system and help smooth the effect of economic cycles, one of the Bank’s deputy governors, Xolile Guma, said.
The “macroprudential policy framework” will aim to reduce the build-up of potential excess credit risk in the financial system. Its formulation comes amid global debate about the need to improve the resilience of the financial system.
Guma's remarks were made at the launch of the Bank's Financial Stability Review.
The Reserve Bank’s financial stability role
Following the international financial crisis, the financial stability responsibilities of various central banks have become more explicit. The financial crisis has demonstrated, in general, that although microprudential supervision makes a valuable and indispensable contribution to financial stability, it may be insufficient on its own to ensure systemic financial stability. For this reason, a macroprudential approach to policy formulation may be helpful in complementing microprudential supervision and monetary policy. The aim of such a policy would be to smooth out the impact of the economic cycle on the financial system and contain the build-up of systemic risks in the financial system as a whole. Macroprudential policy instruments need to be developed to reduce systemic risks or imbalances, while distinguishing them from conventional policy instruments. Macroprudential policy should nevertheless be harmonised with microprudential policy and monetary policy. (See Box 2 “Generic attributes of macroprudential policy instruments”.)
The Bank’s primary objective, as entrenched in the Constitution of South Africa, is to protect the value of the currency in the interest of balanced and sustainable growth. The Minister of Finance recently issued a statement regarding the Bank’s mandate36 stating, among other things, that balanced and sustainable growth should not give rise to an unsustainable balance-of-payments position or unsustainable debt burdens for the private and public sectors. The Minister emphasised the importance of a stable and wellregulated financial sector, and the need for central banks to have a deeper understanding of the banking sector and financial stability, which requires greater focus on macro- and microprudential analysis, regulation and supervision. The role of the Bank in overseeing and maintaining financial stability was thus clearly reaffirmed.
As the monetary authority and the ultimate provider of liquidity to South Africa’s financial system, the Bank has an interest in promoting the safety and efficiency of the financial system in order to withstand shocks. The regulation and supervision of banks, the oversight of the national payment system (NPS), the administration of exchange controls, the provision of emergency liquidity assistance and the daily management of liquidity conditions in the money market give the Bank considerable influence on macroprudential policy matters. The Bank is, therefore, in the process of developing an integrated framework for a macroprudential policy approach to achieve its financial stability objectives.
However, the achievement of financial stability, whether domestically or internationally, will always have to be a co-operative and joint effort by the various stakeholders, making it a shared responsibility.
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