The South African Reserve Bank

The South African Reserve Bank

 

The South African Reserve Bank is the central bank of the Republic of South Africa. The primary purpose of the Bank is to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa. Together with other institutions, it also plays a pivotal role in ensuring financial stability.

 

The Reserve Bank is responsible for:

    formulating and implementing monetary policy;

    issuing banknotes and coin;

    supervising the banking sector;

    ensuring the effective functioning of the national payment system;

    managing official gold and foreign-exchange reserves;

    acting as banker to the government;

    administering the country's remaining exchange controls;

    acting as lender of the last resort in exceptional circumstances.

 

History

Owing to its unique role as a central bank, some people are under the impression that the Reserve Bank was the first banking institution to be established in South Africa.  This, is not the case however.  The first bank to be established in South Africa was the Lombaard Bank in Cape Town, which opened its doors for business on 23 April 1793.

The earliest proposals for the establishment of a central bank in South Africa were made as far back as 1879 - calls that were repeated for the following few years, until a select committee, consisting of the ten members of Parliament was established on 31 March 1920 to examine the practicalities of establishing a central bank.

Following on the recommendations of the committee, the South African Reserve Bank opened for business on 30 June 1921, making it the oldest central bank in Africa. The first banknotes were issued to the public by the Bank on 19 April 1922.

The Reserve Bank is the central bank of the Republic of South Africa.  The Bank was established in 1921 in terms of a special Act of Parliament, the Currency and Banking Act, 1920 (Act No. 31 of 1920). 

Prior to the Bank's establishment, commercial banks in South Africa issued banknotes to the public. There was however no uniformity in the legislation providing for the issuance of banknotes by commercial banks. The only requirement was that issuing banks were obliged to convert notes held by the public into gold when banknotes were tendered at their branches.

After the First World War (1914 - 1918), the price of gold in the United Kingdom rose above its price in South Africa and a profit could be made by converting banknotes into gold in South Africa and selling the gold in London. Commercial banks had to buy gold at a higher price in London (for re-import into South Africa to back their banknotes in issue) than the price at which they converted their banknotes into gold. This "obligation to trade at a loss" posed a serious threat to the ability of banks to continue meeting their obligations.

To protect their financial viability, the commercial banks requested the Government to release them from the obligation to convert their banknotes into gold on demand. This led to the Gold Conference of October 1919. Following the recommendations of the Conference, a Select Committee of Parliament recommended the establishment of a central bank to assume, among other responsibilities, responsibility for the issuing of banknotes and for taking over the gold held by commercial banks.

The South African Parliament accepted the recommendation of the Select Committee on the creation of a central bank and promulgated in December 1920 the Currency and Banking Act, which provided for the establishment of the Bank. Effect was given to its various provisions in the course of the next six months and the Reserve Bank opened its doors for business for the first time on 30 June 1921.

At present, sections 223 to 225 of the Constitution of the Republic of South Africa, 1996; the South African Reserve Bank Act, 1991, and the regulations framed in terms of this Act, provide the enabling framework for the Reserve Bank's operations. 

The Bank enjoys a considerable degree of autonomy in the execution of its duties. In terms of section 224 of the Constitution, 1996, "the 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, 1996.

The Bank has been entrusted with the overarching monetary policy goal of containing inflation and can use any instruments of monetary policy at its disposal to achieve this monetary policy goal. This implies that the Bank has instrument independence in monetary policy implementation, but not goal independence in the selection of a monetary policy goal.

The Governor holds regular discussions with the Minister of Finance, and meets periodically with members of the Parliamentary Portfolio and Select Committees on Finance.  In terms of section 32 of the Act, the Bank publishes a monthly statement of its assets and liabilities, and submits its Annual Report to Parliament.  The Bank is, therefore, ultimately accountable to Parliament.

When the Bank was established in 1921, the majority of central banks worldwide had private shareholders (or ‘stockholders’  as they were occasionally called).  A similar structure was introduced in South Africa.

Internationally, however, this approach has changed since the 1930s.  Nationalisation of central banks during the period of economic hardship in the midst of the Great Depression commenced with the nationalisation of the central banks of New Zealand in 1935 and Denmark in 1936.  After World War II in the wake of state ownership of key industries in numerous countries nationalisation of central banks continued.

The structure of shareholding in the Bank has however not been amended since its inception and it is a juristic person in terms of its own Act.  The South African Reserve Bank and seven other central banks (Belgium, Greece, Italy, Japan, Switzerland, Turkey and US) have shareholders other than the governments of their respective countries.

The Bank currently has some 650 shareholders.  Shares were delisted from the JSE on 2 May 2002 as amendments to the listings requirements of the JSE made continued listing impossible.  Since delisting, the shares are predominantly traded on an over-the-counter trading and transfer facility.  Except for the provision of the Act that no shareholder shall hold, or hold in aggregate with his, her or its Associates, more than 10 000 shares of the total number of 2 000 000 issued shares, there are no other limitations on shareholding.  The dividend payable to shareholders is limited to 10c per share per annum (in total R200 000 per annum).

The Bank annually holds an ordinary meeting of shareholders at its Head Office building in Pretoria.  On this occasion the Governor, as Chairperson, delivers an annual address on matters covering the state of the economy, certain aspects of monetary policy and the operations of the Bank. At this meeting the Bank tables a comprehensive "Annual Report" on its operations and finances for approval by shareholders.  The "Annual Report" also contains a discussion of monetary policy.

Since 1921, the Bank has been served by eight Governors. The current Governor, Gill Marcus, is the first woman to lead the Bank.

The Bank's previous Governors were:

Mr W H Clegg, 17 December 1920 to 31 December 1931

Dr J Postmus, 1 January 1932 to 30 June 1945

Dr M H de Kock, 1 July 1945 to 30 June 1962

Dr G Rissik, 1 July 1962 to 30 June 1967

Dr T W de Jongh, 1 July 1967 to 31 December 1980

Dr G P C de Kock, 1 January 1981 to 7 August 1989 (the only person who died while still serving as Governor)

Dr C L Stals, 8 August 1989 to 7 August 1999

Mr T T Mboweni, 8 August 1999 to 8 November 2009

 

The Reserve Bank is required to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa.

The achievement of price stability is quantified by the setting of an inflation target by Government that serves as a yardstick against which price stability is measured. The achievement of price stability is underpinned by the stability of the financial system and financial markets. For this reason, the Bank is obliged to actively promote financial stability as one of the important determinants of financial system stability.

At present, sections 223 to 225 of the Constitution of the Republic of South Africa, 1996, the South African Reserve Bank Act, 1989 as amended and the regulations framed in terms of this Act, provide the enabling framework for the Bank's operations. The Bank has a considerable degree of autonomy in the execution of its duties.

In terms of section 224 of the Constitution, 1996, "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 has been entrusted with the overarching monetary policy goal of containing inflation. The Bank can use any instruments of monetary policy at its disposal to achieve this monetary policy goal. This implies that the Bank has instrument independence in monetary policy implementation but not goal independence in the selection of a monetary policy goal.

The Governor of the Bank holds regular discussions with the Minister of Finance and meets periodically with members of the Parliamentary Portfolio and Select Committees on Finance. In terms of section 32 of the South African Reserve Bank Act, 1989, the Bank publishes a monthly statement of its assets and liabilities and submits its Annual Report to Parliament. The Bank is therefore ultimately accountable to Parliament.

The primary function of the Reserve Bank is to protect the value of South Africa's currency.

In discharging this role, it takes responsibility for:

    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.

Business Philosophy

The Bank accepts that the credibility of its policy and actions is a prerequisite for the attainment of its goals and that such credibility can only be achieved and maintained through independent action, firmness of principle, resoluteness and fixed intent.

The Bank ensures, through the application of modern management practices and technology, that all its activities are conducted effectively and efficiently.

Personnel Philosophy

The Bank believes that its employees should find working for the Bank a stimulating and personally enriching experience, and consequently accepts co-responsibility for the development of each employee's full potential. Career progress is based primarily on the contribution made by the individual towards the fulfilment of the responsibilities of the Bank.

The Bank recognises that equal opportunities for all, irrespective of ethnicity, race, gender, disability or religion, should be pursued. The Bank accepts that only through the loyalty and dedication of its employees will it be able to achieve its goal and fulfil its mandate.

Banker to Government

The Bank provides banking services to the central Government, although this function has been trimmed down after the Government began holding cash balances with other banks. The Bank does not provide banking services to provincial governments, local authorities or state enterprises.

The Bank is, however, responsible for the movement of government balances to, from and between other banks. Such movements have an effect on the cash holdings of banks and, therefore, serve as a convenient additional instrument for managing the liquidity of banks.

The Minister of Finance has delegated to the Governor and/or a Deputy Governor as well as to the General Manager of the Financial Surveillance Department (and to other officials in the Department), all the powers, functions and duties assigned to and imposed on the Treasury under the Exchange Control Regulations (with certain exceptions).

Administration of Exchange Controls

The Financial Surveillance Department is responsible for the day-to-day administration of exchange control.

The Minister of Finance has also appointed certain banks to act as Authorised Dealers in foreign exchange.  This appointment gives these banks the right to buy and sell foreign exchange, subject to conditions and within limits prescribed by the Financial Surveillance Department.  Authorised Dealers are not agents for the Financial Surveillance Department but act on behalf of their customers.

Exchange control policy is determined by the Minister of Finance (or even Government/cabinet in the broader sense).  The Bank, therefore, merely acts as an advisor to the Minister of Finance.

There are a number of key roles that the Bank plays in the management of the South African money and banking system. These are:

Formulation and implementation of monetary policy

The Bank is responsible for the monetary policy of South Africa. Monetary policy can be defined as the measures taken by monetary authorities to influence the quantity of money and the rate of interest in a country, with a view to achieving stable prices and facilitating full employment and sustainable economic growth.

South Africa's monetary policy is conducted within an inflation targeting framework and the refinancing system is the mechanism used by the Bank for the implementation of monetary policy.

Provision of Liquidity to Banks

The Reserve Bank provides liquidity to banks during periods of temporary shortages of cash. This function is referred to as the Bank’s “lender-of-last-resort lending activities”.

This function implies giving assistance to a bank facing liquidity problems. Such assistance is only given after a full analysis of the problems afflicting such a bank and the reasons they arose. The assistance will only be given on specific conditions, and its purpose is to prevent the bankruptcy of the bank receiving assistance, and/or avoid the danger of problems spreading to other banks through a “run on the bank”.'

A bankrupt bank will often not be able to repay its depositors, and the main purpose of special assistance is therefore to protect depositors. However, such assistance is never guaranteed or given automatically, and banks may accordingly go bankrupt, leading to severe hardships for depositors who lose their deposits at such a bank. The maintenance of stability in the banking system is, therefore, of the utmost importance to any country.

Banknotes and Coin

 

The Reserve Bank has the sole right to make, issue and destroy banknotes and coin in South Africa. The SA Mint Company, a subsidiary of the Bank, mints all the coins on behalf of the Reserve Bank. The SA Bank Note Company, another subsidiary of the Bank, prints all banknotes on behalf of the Bank.

The Reserve Bank is responsible for the wholesale distribution of banknotes and coin, whereas banks distribute banknotes and coin to their branch offices to ensure availability to the public. In order to perform this function, the Reserve Bank has seven branch offices (Bloemfontein, Cape Town, Durban, East London, Johannesburg, Port Elizabeth and Pretoria North). These branches are responsible for ensuring the availability and an adequate supply of good quality notes to meet the public’s demand, and to replace soiled notes. The branches also settle claims for mutilated banknotes.

The branches of the Bank, the South African Police Service and the commercial banks also work together to combat the counterfeiting of banknotes.

Banker of other Banks

The Reserve Bank acts as custodian of the cash reserves that banks are legally required to hold as well as those they prefer to hold voluntarily with the Bank. The Bank has the authority to change the minimum cash reserves that banks are required to hold and can use such adjustments to influence bank liquidity and the amount of money in circulation.

Settlement of interbank claims

The Reserve Bank provides for final real-time electronic settlement of interbank obligations, emanating from non-cash payments (e.g. cheques) made in the economy, via the South African Multiple Option Settlement (SAMOS) system. In addition, the Bank oversees the safety and soundness of the payment system through the introduction of settlement risk reduction measures as and when required.

The settlement risk reduction measures are aimed at minimising possible systemic risk emanating from, inter alia, the settlement default (inability or lack of funds to settle obligations) of one or more settlement banks.

Bank 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 (No. 94 of 1990), or the Mutual Banks Act (No. 124 of 1993) and the regulations relating thereto. 

Owing to the unique role and functions of the Bank, risk management is not simply based on institutional risk and return considerations, but also takes into account national interest, in line with the statutory and constitutional responsibility of the Bank. The Bank also functions within an environment characterised by continuous change and uncertainty. This requires constant monitoring and analysis of, and appropriate response to, potential and actual risks emanating from the global political and economic environment.

In common with most central banks, the Bank is a risk averse institution. This reflects the view that satisfactory fulfilment of its role and responsibilities could be seriously jeopardised if there were to be significant disruptions to its operations and/or damage to its reputation.

 

The executive management of the Bank is intensely aware of the high performance standards that all role-players outside the Bank expect of the central bank. The Bank views risk management as an integral part and an essential element of good corporate governance.

The Bank has established a risk management policy to ensure that risks are managed in a co-ordinated, comprehensive and systematic manner that is consistent with internationally accepted standards and guidelines.

This policy regulates all risk management initiatives and activities, and facilitates their alignment with the Bank’s strategic and operational objectives to ensure that the risks threatening the achievement of these objectives are adequately and effectively managed at acceptable levels. The policy governs the full spectrum of strategic, financial (including credit, market and liquidity), reputational and operational risk management in the Bank. Furthermore, it specifies the risk management governance structures, general risk management principles, the Bank’s risk appetite and tolerance, impact and likelihood requirements, risk management framework and processes, and the roles and responsibilities of all stakeholders.

Since its establishment, the Reserve Bank has always been privately owned. Today the Bank has more than 660 shareholders and its shares are traded on an Over- the-Counter Share Transfer Facility market (OTCSTF market) co-ordinated within the Reserve Bank. Except for the provision of the SA Reserve Bank Act that no shareholder shall hold, or hold in aggregate with his, her or its associates, 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. The Bank's operations are therefore not driven by a profit motive, but by serving the best interests of all the people in South Africa.

The Bank was delisted from the JSE Securities Exchange South Africa on 2 May 2002 and a live trading facility for its shares introduced on 1 October 2005.  The live trading facility operates in terms of the OTCSTF rules.  As such, it is not an on screen trading facility, but rather operates by means of postal, facsimile, hand delivery or e-mail communication only.

The Reserve Bank is an organisation that has come into being through statute. The Bank cannot amend or change its founding structure; this can only be effected by Parliament.

The South Reserve Bank Act, 1989 (Act 90 of 1989), granted management powers of the Bank to the Board of the Bank.

The Reserve Bank Amendment Act, 2010 (Act No.4 of 2010) states that the Bank's Board is responsible only for the governance of the Bank. All powers and authorities not vested in the Board vest in the Governor and Deputy Governors, i.e. it is the Governor and Deputy Governors of the Bank who are responsible for the management of the Bank.

The SA Reserve Bank Act, 1989, as amended, provides for a board of directors consisting of 15 directors. Among them are the Governor and three Deputy Governors, who are appointed by the President of the Republic of South Africa, after consultation with the Minister of Finance and the Board, initially for five-year terms. On reappointment the terms may be less than five years.

 

Four other directors are appointed by the President, after consultation with the Minister, for three-year terms.

The remaining seven directors, of whom one needs to have knowledge and skill in the field of  agriculture, one in the field of labour, one in the field of mining, two in the field of industry and two in the field of commerce or finance, are elected by shareholders at an ordinary general meeting (OGM) of shareholders.

These directors hold office for a period commencing on the first day after the date of their election at the OGM until the first day after the date of the OGM held during the third calendar year following the date of the OGM at which they were elected.

The Governor and Deputy Governors manage the daily affairs of the Bank, since they have in terms of the Act been tasked with this responsibility. They are the only executive directors on the Board and are on a full time basis ultimately responsible for the day-to-day management of the South African Reserve Bank.

The board of directors meets regularly to ensure that it fulfils its role of ensuring corporate governance of the Bank. The Board ensures compliance with principles of good corporate governance by, amongst other things, adopting rules and determining policies for the sound accounting, administration and functioning of the Bank, as well as by exercising the other tasks reserved for it in terms of the Act. In the process the Board utilises various committees and subcommittees, chaired by non-executive directors.

The South African Reserve Bank has fifteen departments, including the Reserve Bank college. Each Head of Department reports to either the Governor or a Deputy Governor. Collectively, the departments ensure the smooth running of the Bank and the implementation of the Bank's mandate.

International memberships

The G-20

The G-20 consists of 20 systemically important countries and the European Union. The forum was formed in 1999, after the Asian crises, and South Africa has been a member of the forum since its inception. Finance Ministers and Central Bank Governors meet a few times a year to discuss global economic, financial markets and financial stability issues, as well as risks to the global economy. Since 2008, when G-20 Heads of State convened to discuss the global financial crisis, as well as the actions and strategies needed to facilitate the exit from the crisis, the G-20 has become the world’s premier global economic and financial forum. As an active participant in the forum, South Africa has played a vital role in a number of key areas in these discussions, including the reform of the International Monetary Fund (IMF), financial regulation and supervision, financial inclusion and, more recently, development.

The International Monetary Fund (IMF)

South Africa was a founding member of the IMF at its inception in 1944. The major functions of the IMF include surveillance of the global economy and of member countries, providing liquidity to countries that may experience balance-of-payments problems, and technical assistance to countries on request. The Reserve Bank participates in the biennial meetings of the IMF as well as in various IMF initiatives to enhance IMF surveillance. This includes the IMF’s financial sector programmes.

The Bank for International Settlements (BIS)

The BIS is an international organisation which fosters international monetary and financial cooperation. It also serves as a bank for central banks. South Africa is a shareholder of the BIS and the Reserve Bank is an active participant in the bi-monthly meetings of Governors. These meetings aim to promote discussion and policy analysis among central banks. The Bank is also a member of various BIS committees which monitor, and develop policy on, central bank activities. Currently, the South African reserve Bank serves on the following Committees: the Basel Committee on Banking Supervision, the Committee on Payments and Settlement Systems, the Irving Fisher Committee on Statistics, the Internal Audit Committee and the Central Bank Governance Network. The South African Reserve Bank joined the BIS in June 1971.

Committee of Central Bank Governors (CCBG) in the Southern African Development Community (SADC)

The creation of the CCBG in SADC was approved by the SADC Council in August 1995.  The main reason for the establishment of the CCBG was the need for a specialised body in SADC to promote, and achieve, closer co operation among central banks within the Community.

The CCBG deals with, among other things, the development of well managed financial institutions and markets, closer cooperation among central banks in the areas of monetary policy and monetary policy instruments, bank supervision, money and capital markets, payment, clearing and settlement systems and training.

Since its inception, the Governor of the Reserve Bank has acted as Chairperson of the CCBG. A Secretariat for the CCBG, hosted by the South African Reserve Bank, was created in November 1995. The CCBG plays a crucial role in particular, in the promotion of financial and economic development, by way of pursuing policies that enhance financial and macroeconomic stability.

Inflation Targeting Framework

South Africa formally introduced inflation targeting in February 2000, after announcing the intention to adopt the framework in August 1999. Prior to adopting the inflation-targeting framework, the Bank had adopted a number of frameworks. Between 1960 and 1998, these included exchange-rate targeting, discretionary monetary policy, monetary-aggregate targeting and an eclectic approach.

Inflation targeting is a monetary policy framework in which the central bank announces an explicit inflation target and implements policy to achieve this target directly. One of the features of an inflation-targeting framework is the greater degree of transparency it brings to monetary policy.

Inflation targeting has been adopted in a number of countries. The choice of the target varies across countries. Some countries have opted for target ranges in specifying their inflation targets, while others prefer a point target or a point target combined with a range. The trade-off in this regard is essentially between the simplicity of a point target and the degree of flexibility for absorbing shocks outside the control of the authorities which a target range allows.

It is acknowledged that monetary policy cannot contribute directly to economic growth and employment creation in the long run. However, by creating a stable financial environment, monetary policy fulfils an important precondition for the attainment of economic development.

Monetary Policy Committee

In monetary policy decision-making processes, committees are preferred above individuals. Not one central bank has replaced a committee with a single decision-maker, a fact that has both theoretical and empirical support; the ability to draw diverse viewpoints from constituent members in committees ensures that there is likely to be some moderation of extreme positions and policies and more even policymaking.

South Africa is part of this trend and the decision on the appropriate monetary policy stance is taken by the Monetary Policy Committee (MPC). This committee was constituted shortly before South Africa adopted the inflation-targeting framework. The MPC meetings are chaired by the Governor of the Bank. It consists of eight members of the Bank: the Governor, three deputy governors and four senior officials of the Bank.

Monetary Policy Communication

The Bank’s commitment to transparent monetary policy has resulted in several initiatives to improve the communication of its policies to the public.

At the conclusion of every MPC meeting, an MPC statement is issued through a press conference by the Governor of the Bank explaining the reasons for the MPC’s policy stance.  This press conference is broadcast live on national television and at  the same time the MPC statement is released on the Bank’s website.

The Bank also publishes its Monetary Policy Review (MPR) twice a year. This Review is aimed at broadening the understanding of the intentions and conduct of monetary policy. Moreover, the Review analyses the domestic and international developments that have impacted on inflation and motivates the monetary policy reaction to these developments. An assessment of the future outlook for the factors determining inflation as well as the Bank’s forecast of the future path of inflation is provided in the MPR. The Bank also publishes other material from time to time, to increase awareness and understanding of its monetary policy function.

Monetary Policy Forums (MPFs) are also convened by the Bank in order to develop a better understanding of monetary policy. These forums are held twice a year in the major centres of South Africa across all provinces, and representatives of the labour movement, business, government and academic institutions are invited to attend.

The inflation-targeting framework also improves the accountability of the Bank because it provides a yardstick that can be used to measure the Bank’s performance. The Governor of the Bank is required to submit annually a report on the implementation of monetary policy to the Minister of Finance. The Governor also appears regularly in Parliament before the Portfolio and Select Committees on Finance to explain the monetary policy stance adopted by the MPC.

Monetary Policy Implementation

The Financial Markets Department of the Bank is responsible for the implementation of monetary policy. The Bank has opted for a classical cash reserve system as a framework for its monetary policy implementation. In this framework an appropriate liquidity requirement or structural money market shortage is created by levying a cash reserve requirement on banks.

The main refinancing operation is the weekly seven day repurchase auction, which is conducted with the commercial banks, at the repo (policy) rate as determined by the Monetary Policy Committee. The Bank lends funds to the banks against eligible collateral, which comprises assets that also qualify as liquid assets in terms of the prudential liquid asset requirement.

In addition to the main repo facility, the Bank offers a range of end-of-day facilities for the commercial banks to square-off the daily positions on their settlement accounts, e.g. access to their cash reserve balances held with the Bank, supplementary repos/ reverse repos conducted at the repo rate and an automated standing facility whereby the end-of-day balances on the banks' settlement accounts are automatically settled at a rate of 100 basis points below or above the policy rate.

A range of open market operations are also conducted to manage the liquidity in the market in order to give effect to the Bank's monetary policy stance. The open market operations include the issuance of SARB debentures, reverse repos, the movement of public sector funds between the market and the Bank and the conducting of money market swaps in the foreign exchange market.

Regulation and Supervision

The Bank assesses on a continuous basis the stability and efficiency of key components of the South African financial system.

The Bank's approach to financial system stability places considerable reliance on market forces to achieve financial system stability.  Any intervention should, therefore, be at the minimum level needed to contain systemic risk.  Safeguarding of financial system stability requires adequate information about the behaviour of financial market participants, regardless of the institutional arrangements.

The prudential regulation and supervision of banks assist and complement the Bank in its pursuit of financial system stability.  It has, however, become increasingly clear that the financial system may be vulnerable as a result of inherent imbalances between the real and financial sectors of the economy.  Such vulnerabilities would not be revealed by the supervision of individual institutions.

For this reason the Bank and other central banks have gradually placed increased emphasis on macroprudential aspects of financial stability.  Financial system stability cannot be achieved by the Bank in isolation.  All financial system participants should act in ways that enhance the robustness of the financial system, which requires good and reliable information about trends and developments in the financial system.

Notwithstanding the best efforts of central banks and other regulators to detect and prevent instability, financial sector crises can still occur.  Under these circumstances the Bank liaises with the National Treasury and other regulators such as the FSB in planning and co-ordinating the responses of the authorities to alleviate the impact of financial crises on the real economy.

This includes the development and maintenance of safety-net policies and procedures, and the co-ordination of contingency planning for systemic crisis resolution.  The social cost of financial system failure usually exceeds the private costs, which justifies the role of central banks as the source of emergency liquidity assistance in times of banking liquidity problems.

Financial Stability

Monetary stability relates directly to the stability of the price level and the value of the currency.  The concept of financial stability is, in general, more controversial, less quantifiable and more difficult to define.  Several attempts have been made to come up with a generally acceptable definition.

What financial stability means in broad terms is: the joint stability of the key financial institutions and the financial markets in which they operate.  For financial institutions, this generally means that they are sound, i.e. that they have sufficient capital to absorb normal, (and at times abnormal) losses, and sufficient liquidity to manage operations and volatility in normal periods.  Financial market stability means less excessive and disruptive volatility, which should have positive real economic consequences.  In addition, financial stability would be evidenced by an effective regulatory infrastructure including the laws, regulations, standards and practices that constitute a robust financial regulatory environment.  Other elements that would add to financial stability are public confidence and an efficient process of macroprudential surveillance.

 

The concept of financial stability is most often thought of in terms of avoiding financial crises or managing systemic financial risk.  If systemic risk is managed well, that is, firstly by market participants through their private risk management, and secondly by the authorities through their banking supervision, market surveillance and systemic risk management, then systemic financial crises are less likely to occur, or will be more easily managed if they do.

One way of defining financial stability is in terms of the requirements to achieve it.  It requires a robust financial system, which may be defined as a system having the ability to prevent, predict and withstand shocks under all types of domestic and international market conditions. Financial stability can further be described as the absence of macroeconomic costs of disturbances in the system of financial exchange between households, businesses and financial-service firms.  Another definition used by some commentators is that financial stability is a sustained condition of stability in the financial system that ensures the efficient functioning of institutions and markets and low volatility in prices, interest rates and exchange rates.  When the whole or an important part of the financial sector is at risk, the situation can be described as financially unstable.

Financial instability would ultimately manifest itself through systemic risk, banking failures, intense asset-price volatility, interest and exchange rate volatility, and a collapse of market liquidity.  The disruption of the payment and settlement system could be a result of these manifestations.

Reserves Management

The official gold and foreign exchange reserves of the Republic of South Africa are held and managed by the Bank. The Financial Markets Department is responsible for the management of the reserves in accordance with the criteria set out in the Bank's Investment Policy and Guidelines.

Reserves play a key role in ensuring that the country will be able to:

    Cover its external operational needs;

    Service the country’s foreign exchange liabilities;

    Cover any foreign currency net imbalances in the balance of payments, and

    Maintain confidence in the country’s monetary and exchange rate policies.