FINANCIAL STABILITY REVIEW
Second edition2022

www.resbank.co.za

FINANCIAL STABILITY REVIEW
Second edition
2022

ii

Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability© South African Reserve BankAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, without fully acknowledging
the Financial Stability Review of the South African Reserve Bank (SARB) as the source.
The contents of this publication are intended for general information purposes only and are not intended to serve
as financial or other advice. While every precaution is taken to ensure the accuracy of information, the SARB shallnot be liable to any person for inaccurate information and/or opinions contained in this publication. Unless indicatedotherwise, data were supplied by the SARB.
Comments and enquiries relating to this Financial Stability Review are welcomed and should be addressed to:
Head: Financial Stability Department
South African Reserve BankP O Box 427
Pretoria
0001
Tel. +27 12 313 3601
Email: sarbfsr@resbank.co.za
www.resbank.co.za					ISSN: 1811-2226

Printed by the Publishing Section of the South African Reserve BankFINANCIAL STABILITY REVIEW November 2022

Annexures

iii

Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Contents
Background to the Financial Stability Review................................................................. iv
Legal basis and purpose of the Financial Stability Review............................................

v

Key terms used....................................................................................................................... vi
Executive summary...............................................................................................................

1

Chapter 1: Overview..............................................................................................................

3

Introduction...........................................................................................................................................

3

Indicators of domestic financial stability...................................................................................

7

Chapter 2: Domestic financial stability conjuncture, outlook and assessment.........

9

Financial stability heatmap..............................................................................................................

9

Financial markets................................................................................................................................. 10
Banking sector......................................................................................................................................

11

Insurance sector................................................................................................................................... 12
Non-bank financial institutions....................................................................................................... 12
Non-financial corporates.................................................................................................................. 13
Household sector................................................................................................................................. 13
Real estate.............................................................................................................................................. 14
Government finances......................................................................................................................... 14
Outlook for financial stability.......................................................................................................... 15
Assessment of financial stability conditions............................................................................. 19	Policy actions and initiatives undertaken to enhance domestic
financial stability.................................................................................................................................. 19
Chapter 3: In focus: briefings on selected topics relevant to financial stability........ 20
Update on the FATF ME and remedial actions implemented............................................ 20
Reflecting on the promise of crypto: 14 years on................................................................... 21
Overview of South African financial stability coordination structures.......................... 25
Zaronia .................................................................................................................................................... 26
References.............................................................................................................................. 31
Abbreviations......................................................................................................................... 32
Annexure A: South African financial stability heatmap elements and indicators..... 33
Annexure B: Banking and insurance sector indicators................................................... 34

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Background to the Financial
Stability Review
The mandate for financial stability
The primary mandate of the South African Reserve Bank (SARB), as stated in
the Constitution of the Republic of South Africa Act 108 of 1996 (Constitution),is to achieve and maintain price stability in the interest of balanced andsustainable economic growth in South Africa. The Financial Sector Regulation
Act 9 of 2017 (FSR Act) assigns a statutory mandate to the SARB to protect
and enhance financial stability in South Africa. The SARB’s primary andstatutory mandates culminate in the SARB’s vision of leading in serving
the economic well-being of South Africans through maintaining price andfinancial stability.

Defining ‘financial stability’Section 4 of the FSR Act defines ‘financial stability’ as meaning that:•	financial institutions and market infrastructures are capable of (i) providing
financial products and financial services; and (ii) performing their functions
and duties in terms of financial sector laws, without interruption and despitechanges in economic circumstances; and•	there is general confidence in the ability of financial institutions and market
infrastructures to keep providing the said products and services, and to
perform their functions and duties.
Phrased differently, ‘financial stability’ refers to a financial system that isresilient to systemic risks and shocks and that can efficiently intermediate
funds, even in adverse conditions, thereby bolstering confidence in thefinancial system and financial institutions. Financial stability is not an end in
itself, but a precondition for balanced and sustainable economic growth.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to 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 natureand extent of those risks, as well as the strengths and weaknesses of thefinancial system; and•	take steps to mitigate risks to financial stability, including advising thefinancial sector regulators and any other organs of state of the steps totake to mitigate those risks.
Section 13 of the FSR Act requires the SARB to assess the stability of theSouth 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-monthreview 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 the financial sector
regulators to identify and manage the risks and vulnerabilities in thefinancial system; and•	an overview of the recommendations made by the SARB and the Financial
Stability Oversight Committee (FSOC) during the period under review, andthe 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 for each edition is the six months following the publicationof the previous edition until at least the next 12 months. For this edition, theperiod under review is from May to November 2022, while the forecast period
is until at least November 2023.
The FSR is aimed at all South Africans, although it is principally targeted at
the Members of Parliament of South Africa, and specifically the Standing
Committee on Finance, through which the SARB is accountable to the peopleof South Africa. The report is also relevant to a broader readership interested
in how the SARB implements its financial stability mandate, including but
not limited to participants in the financial sector, international central bankpeers, rating agencies, international financial institutions, standard-setting
bodies and academia. The FSR aims to stimulate debate on pertinent issuesof relevance to financial stability in South Africa.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Key terms used
Drawing on the definitions used by the Financial Stability Board (2021),
the frequently used terms in the FSR are defined as follows:
Shock: An event that may cause disruption to, or the partial failure of, thefinancial system.
Vulnerability: A property of the financial system that (i) reflects theexistence or accumulation of imbalances; (ii) may increase the likelihoodof a shock; and (iii) when impacted by a shock, may lead to systemic
disruption.
Residual vulnerability: The remaining or net vulnerability after considering
the identified mitigating factors and actions.
Transmission channels or mechanisms: Also referred to as ‘propagation
mechanisms’, these are the channels through which vulnerabilities maylead to the actual disruption of the financial system, should a shock occur.
Resilience: This refers to the ability of a financial system to deal withshocks and prevent financial instability.
Systemic event: According to the FSR Act, a systemic event means ‘anevent or circumstance, including one that occurs or arises outside theRepublic [of South Africa], that may reasonably be expected to have asubstantial adverse effect on the financial system or on economic activity
in the Republic, including an event or circumstance that leads to a lossof confidence that operators of, or participants in, payment systems,
settlement systems or financial markets, or financial institutions, are able
to continue to provide financial products or financial services, or services
provided by a market infrastructure’.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Executive summary
The SARB’s assessment of the stability of the South African financial system
during the period under review is that despite an increase in global systemic
risk, the domestic financial system continued to be resilient under highly
challenging global and domestic conditions. Prudentially regulated domestic
financial institutions remained resilient, partly owing to their ability to maintainadequate capital buffers to absorb the impact of shocks. This resilience is
expected to be sustained over the forecast period.
Since the release of the May 2022 edition of the FSR, concerns over global
stagflation and the consequent tightening of financial conditions havematerialised, while fears of a global recession have continued to grow. This,
coupled with the impact of the ongoing Russia−Ukraine war and evidence of
escalating global conflict and geopolitical polarisation, contributed to evenhigher levels of uncertainty and volatility than communicated in the May 2022
FSR. South Africa remains vulnerable to spillover effects from global events.
Domestically, slow and inequitable domestic economic growth presents
an unfavourable operating environment for the financial sector. This was
exacerbated by increased load-shedding during the review period, which
had the dual impact of negatively influencing investor sentiment towards
South Africa and detrimentally affecting business productivity. Insufficientand unreliable electricity supply is likely to threaten the viability of some
corporates, especially small and medium-sized enterprises (SMEs), for theforeseeable future, with losses potentially spilling over into the financial sector.
Should South Africa fail to demonstrate sufficient progress in remediating
the deficiencies identified in the Financial Action Task Force (FATF) Mutual
Evaluation (ME) Report of South Africa, the consequences of the adverse
findings could hold far-reaching implications for the domestic financial sector,
particularly from a reputational risk perspective.
Despite the better-than-expected fiscal outcomes announced in the October
2022 Medium Term Budget Policy Statement (MTBPS), the financial sector’shigh level of exposure to government debt continues to pose a risk todomestic financial stability, particularly should there be a shock that leads
to further volatility and a sharp repricing in the value of government debt.
The increased incidence of state-owned enterprises’ (SOEs) debt being takenover by government exacerbates this vulnerability.
During the period under review, the SARB undertook the following initiatives
and policy actions to enhance financial stability:•	The SARB continued to collaborate with FSOC members to address someof the key risks to financial stability as identified in this edition of the FSR.
•	
Through cross-sectoral collaboration within the Financial Sector
Contingency Forum (FSCF), the SARB continued to identify and consider
risks that could result in potential systemic events.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability•	The SARB’s FSC maintained the countercyclical capital buffer (CCyB) at
0% at its October 2022 meeting.
•	Work continued on the implementation of the resolution and deposit
insurance frameworks enacted by the Financial Sector Laws Amendment
Act 23 of 2021.
The structure of this edition of the FSR is somewhat different fromprevious editions. Chapter 1 provides an overview of global developments
and the impact on financial stability conditions, and considers the potential
implications thereof for financial stability in South Africa. Chapter 2 outlines
the current domestic financial stability conjuncture based on developments
over the review period, considers the outlook for domestic financial stability,and provides the SARB’s assessment of prevailing financial stability conditions.
Discussions in Chapter 2 are primarily based on the financial stability heatmap
and the SARB’s Risk and Vulnerability Matrix (RVM). Chapter 3 focuses on aselection of topical issues and potential emerging risks to domestic financial
stability. The topics covered in this edition of the FSR include an update on
the FATF ME of South Africa, the financial stability implications of crypto
assets, an overview of the structures and committees that assist the SARB in
executing its financial stability mandate, and an overview of the South African
Overnight Index Average (Zaronia).

FINANCIAL STABILITY REVIEW November 2022

AnnexuresExecutive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Chapter 1: Overview
Introduction
This chapter identifies and assesses the risks to the global financial system,
and considers the potential implications thereof for financial stability in South
Africa. It does so through the monitoring of global and domestic indicatorsof financial stability.
Since the May 2022 edition of the FSR, a deteriorating global inflation
outlook, increasing fears of a global recession and the intensification ofgeopolitical tensions have continued to weigh on investor sentiment andcontributed to heightened financial market volatility. Financial conditions
have continued to tighten significantly following aggressive interest rate hikes
by central banks in both advanced and emerging economies. The averagepolicy rate in advanced economies has increased by 200 basis points since
the beginning of 2022,1 while financial markets are pricing in a further averageincrease of 150 basis points over the next 12 months (Figure 1), with the highest
increases expected in the United Kingdom (UK) and the eurozone.
Figure 1: Expected change in policy rates in advanced economies
over the next 12 months*
400

Basis points

350
300
250
200
150
100

Japan

CanadaSwitzerland

United States

Australia

New ZealandSweden0Eurozone

50
United Kingdom

3* As at 30 September 2022
Source: Bloomberg

1	Advanced economies are the United States, eurozone, United Kingdom, Switzerland, Sweden, Australia,
New Zealand, Japan and Canada.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Globally, total debt levels remain very high relative to historic averages,
increasing the vulnerability to rising debt-servicing costs. After peaking
at 360% of global gross domestic product (GDP) in 2020, total global debt
levels decreased to 351% in 2021 and continued to moderate marginally during
the period under review to 350% of global GDP. However, the Institute ofInternational Finance (IIF) expects the total global debt ratio to rise to 352%
of GDP by the end of 2022. 2
The probability of a global recession occurring within the next 12 months
has increased sharply since the previous edition of the FSR. The risk ismore pronounced in Europe because of the region’s energy crisis which was
triggered by the Russia−Ukraine war. The average probability of the UnitedStates (US) and UK economies falling into recession in the next 12 months
increased sharply over the review period (Figure 2), while the outlook for
Chinese growth deteriorated significantly due to continued severe lockdown
measures to contain the spread of the coronavirus disease 2019 (COVID-19)
and the contraction of the property sector. Figure 2 depicts the probabilityof a recession occurring in select advanced economies in the next 12 months.
Figure 2: Recession probabilities in select advanced economies
100

Per cent

80

60

40

20

0

2019
United States

2021

2020
Eurozone

2022
United Kingdom

Source: Bloomberg

During the period under review, increases in the US Federal Reserve
policy rate and heightened growth vulnerabilities, both within and outsideof the US, gave rise to an increase in portfolio inflows into the US and a
resultant sharp appreciation in the US dollar relative to other currencies.
The US dollar has strengthened to levels last observed in 2000, with wideranging macroeconomic implications for most other countries. 3 As a result,emerging markets are confronted with the dual challenge of addressing
domestic inflation while considering the implications and pass-through effects
of developments in advanced economies.

2	IIF, Global Debt Monitor: Growing Risks for Emerging Markets, 14 September 2022. https://www.iif.
com/Key-Topics/Debt/Monitors3	The International Monetary Fund (2022) notes that, given the US dollar’s dominance in international
trade and finance, the estimated average pass-through effect of a 10% US dollar appreciation to othercountries’ domestic inflation rate is 1%, on average.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

The May 2022 edition of the FSR highlighted the significant increase inglobal financial market volatility, which intensified during the period
under review. In particular, US Treasury bills, global equities and major foreign
currency markets exhibited increased volatility during the review period, while
volatility in emerging market currencies remained largely unchanged, albeit
at high levels (Figure 3). Rand volatility has remained relatively unchanged
since the previous FSR, increasing marginally by 0.04%.
Figure 3: Percentage change in volatility indicators
60

Per cent

50
40
30
20
10
0

MOVE

G7 FX

EM VIX

Previous FSR

VIX

Gold

EM FX

SAVI

ZAR

Current

MOVE = Merrill Lynch Option Volatility Estimate
G7 FX = G7 Foreign Currency Volatility Index
EM VIX = Emerging Market Volatility Index
VIX = Chicago Board Options Exchange (CBOE) Volatility Index
Gold = Gold Volatility Index
EM FX = Emerging Market Foreign Currency Volatility Index
SAVI = South African Volatility Index
ZAR = 3-month implied volatility on the USD/ZAR exchange rate
Source: Bloomberg

In its latest Global Financial Stability Report,4 the International Monetary
Fund (IMF) notes that market liquidity has declined globally across all
asset classes – including equity markets, sovereign and corporate bondmarkets, and foreign exchange markets – which contributed to the heightened
volatility observed. Since the release of the May 2022 FSR, market depth has
worsened significantly while liquidity premiums have increased, resulting inlower investor risk appetite. Illiquidity in financial markets can serve as a shock
amplifier through forced selling and the rapid deleveraging of leveraged
positions, which in turn could threaten broader market functioning and,ultimately, financial stability.
From an emerging market perspective, the main risks facing emerging
market borrowers are the strong US dollar, rising global funding costs,
deteriorating global growth prospects, and the increased preference forcash and safe-haven investments among global investors. The increase inadvanced economy policy rates has lifted emerging markets’ US dollar funding
costs to levels not seen since the onset of the global financial crisis (Figure 4),
with sustained upward pressure on the aggregate emerging market funding
cost expected over the short to medium term.
4

See https://www.imf.org/-/media/Files/Publications/GFSR/2022/October/English/text.ashx

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Figure 4: Emerging markets' US dollar funding cost14

Per cent

12
10
8
6
4
2
0
2008

2010

2012

2016

2014

Emerging markets' aggregate US funding yield

2018

2020

2022

US Federal Reserve policy rate

Source: Bloomberg

Emerging markets’ dollar funding challenges are exacerbated by the factthat the largest proportion of several emerging markets’ domestic andforeign currency government debt maturing over the next nine years
falls due in 2023 (Figure 5). This implies that these emerging markets will
likely refinance these debts at a relatively higher cost, which will result inhigher interest repayments and have a negative impact on emerging market
governments’ discretionary spending. The bulk of South African government
debt is maturing in 2026.
Figure 5: Emerging markets' government debt maturity profile
900

US$ billions

800
700
600
500
400
300
200
100
0

2022

2023

2024

Colombia
Kenya
Indonesia
Source: Bloomberg

FINANCIAL STABILITY REVIEW November 2022

2025

2026

BrazilGhana
Mexico

2027

2028

2029

2030

South Africa
Egypt
India

Annexures

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Executive summary

Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Indicators of domestic financial stability
In South Africa, the credit-to-GDP gap – defined as the difference between
the bank credit-to-GDP ratio and its long-term trend – remained negative
and widened from its long-term trend in the second quarter of 2022
(Figure 6). The wider and negative credit-to-GDP gap reflects relatively lower
credit growth compared to pre-pandemic levels, although credit extension isstarting to grow as both household and corporate credit have reboundedstrongly amid normalising economic activity in the wake of the COVID-19
pandemic, rising inflationary pressures and tightening financial conditions.
Figure 6: South Africa's credit-to-GDP gap
50

Percentage points

Per cent

90
80

40

70
60

30

50
20

40
30

10

20
10

0

0
-10

2006

2008

2010

Gap

2012

2014

2016

Credit-to-GDP ratio (rhs)

2018

2020

-10
2022

Trend (rhs)

Source: SARBThe South African financial cycle remained in an upward phase amid rising
equity and house prices, and a normalisation in credit extension. As aresult, the credit component of the financial cycle moved into an upward
phase during the period under review for the first time since the first quarterof 2018 (Figure 7). House price growth was supported by the low interest rateenvironment, although this impact is expected to taper off as interest rates
increase. The SARB has increased the policy rate by a cumulative 350 basis
points since November 2021.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Figure 7: The South African financial cycle
15

Per cent year on year

10
5
0
-5
-10
-15
1982

1985 1988 1991 1994
CreditFinancial cycle

Source: SARBFINANCIAL STABILITY REVIEW November 2022

1997 2000 2003 2006 2009 2012 2015 2018
Equity prices
Downward phases of thefinancial cycle

2022

House prices
Downward phases ofthe business cycle

Annexures

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Executive summary

Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Chapter 2: Domestic financial
stability conjuncture,
outlook and assessment
Against the broader context provided in Chapter 1, this chapter discusses(i) the current domestic financial stability conjuncture based on developments
over the review period; (ii) the outlook for domestic financial stability; and(iii) the SARB’s assessment of prevailing financial stability conditions. These
three focus areas are discussed primarily based on the financial stability
heatmap and the SARB’s RVM. The chapter concludes with an overview of thepolicy actions undertaken by the SARB to enhance domestic financial stability.

Financial stability heatmap
The South African financial stability heatmap (heatmap) provides aconsolidated view of a range of financial stability indicators across various
components of the financial and non-financial sectors. The heatmap showsa range of indicators of domestic financial stability conditions against their
historic averages, and is used as a basis from which to conduct more qualitativeand forward-looking assessments. 5 The heatmap is discussed under thebroad categories of financial markets, the banking and insurance sectors,
non-bank financial institutions (NBFIs) (i.e. collective investment schemes
and retirement funds), non-financial corporates (NFCs), the household sector,
commercial and residential real estate, and government finances.
Figure 8: The financial stability heatmap
Residential real estate
Commercial real estate
Global investor sentiment
Banking sector: leverage andasset growth
Banking sector: funding
Banking sector: concentration
Insurance: leverage andasset growth
Insurance: capital strength
NBFIs: leverage andasset growthRetirement funds: asset growthHouseholds: debt service
Households: credit growthHouseholds: leverage
NFCs: leverage
NFCs: credit growth
Government: leverage

2008

2010
Low

2012

2014

2016

2018

2020

2022

High

Source: SARB

5	Refer to Annexure A for an overview of how the South African financial stability heatmap is composed,
including the indicators underlying the various heatmap elements. In an effort to continually improve
the reliability of the indicators used in the heatmap and to keep them relevant, they are reviewed andupdated from time to time.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Financial markets
South Africa’s financial markets traded largely in tandem with the prevailingglobal sentiment, with the exchange value of the rand depreciating against
the US dollar from R15.20 on 9 June 2022 to R18.45 on 25 October 2022
before recovering somewhat to R16.96 on 24 November 2022. The rand also
depreciated by 5% and 2.5% against the euro and British pound respectively.
The main drivers of the broader-based depreciation in the exchange value ofthe rand were negative investor sentiment and capital outflows, in line with
global trends but exacerbated by domestic factors such as increased loadshedding and a deterioration in the current account.
During the review period, the South African government bond (SAGB)
yield curve remained steep and shifted higher across all maturities. In linewith those of other emerging markets, rand- and dollar-denominated South
African government debt spreads widened, broadly reflecting the prevailing
negative global risk sentiment. Liquidity conditions in the domestic government
bond market also deteriorated during the review period, with widening bidoffer spreads across all maturities mainly reflecting global risk aversion andreduced appetite by non-resident investors. Liquidity in the SAGB market is
discussed in detail in the May 2022 FSR,6 which noted that although the SARB
had taken various steps to restore and maintain smooth market functioning
since the onset of the COVID-19-induced shock, the decline in SAGB market
liquidity had prevailed beyond the initial shock. When considered alongside
the bank-sovereign nexus, as discussed in detail in the first edition of the2021 FSR, liquidity in the SAGB market will continue to be monitored from afinancial stability perspective.
Non-resident investors were net sellers of R8 billion worth of SAGBs,
resulting in a continued decline in non-resident holdings of SAGBs during
the review period from 28.1% to 26.8% of total SAGBs outstanding – a level
last seen in June 2011 (Figure 9). Banks, which accumulated large volumesof bonds during the onset of COVID-19, topped the list of buyers during
the review period, acquiring R47.7 billion, or 54%, of the net primary market
issuance of SAGBs. The increased take-up by banks of SAGBs contributed tolower liquidity in the secondary market for SAGBs, as several banks follow a
buy-and-hold strategy for SAGBs as part of their investment portfolios.

6	See https://www.resbank.co.za/content/dam/sarb/publications/reviews/finstab-review/2022/financialstability-review/first-edition-2022-financial-stability-review/FSR%20May%202022%201st%20edition.pdf

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Executive summary

Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Figure 9: South African portfolio flows and non-resident holdings ofgovernment bonds
40

R billions

Per cent

20

30

29

0
28
-20
27
-40
26

-60
-80

Jan
Equities

Feb

Mar

Apr

May
Jun
2022

Government bonds

Sources: National Treasury, JSE, Strate and SARB

Cumulative total

Jul

Aug

Sep

25

Non-resident
holdings of government
bonds (rhs)

Banking sector
As economic activity normalises in the wake of the COVID-19 pandemic,
the banking sector is extending credit to corporates, the sovereign
and retail asset classes. The banking sector’s equity ratio7 has decreased
marginally by 47 basis points since the previous FSR, mainly due to anincrease in total assets, which in turn was largely driven by growth in credit
assets. Banks’ credit exposures increased notably during the review period
and are normalising to pre-COVID-19 levels. Of the almost R1 trillion in credit
extended by banks from January to July 2022, almost half (R441 billion) was tocorporates, R214 billion to retail portfolios (mostly for residential mortgages),
R183 billion to other banks and R151 billion to the sovereign. The phasing out of
the COVID-19 restrictions contributed notably to increased economic activity,with resultant increases in the demand for corporate credit and residential
mortgages. Overall, despite the broad increase in credit growth, credit risk inthe banking sector remains relatively benign, as indicated by the modest levelof non-performing loans for the sector. 8
The banking sector has sufficient cash and liquid assets to finance expected
withdrawals of cash. The regulatory liquidity coverage ratio (LCR) for the
total banking sector has remained above 140% since 2019, well in excessof the regulatory minimum of 100%. The loan-to-deposit ratio,9 anothermeasure of liquidity, declined as the increase in loans was outpaced by aneven higher increase in deposits, with the largest increase noted in negotiablecertificates of deposit (NCDs). The sector’s loan-to-deposit ratio declined by7	The equity ratio is expressed as total equity as a percentage of total assets. An increase in banking
system leverage (as indicated by a decline in this ratio) could increase the vulnerability of the banking
system to shocks by reducing buffers and could signal excessive growth in lending.
8	One indicator of non-performing loans is the ratio of impaired advances to gross loans and advances,as depicted in Annexure B. This ratio is currently at 4.5%, down from 4.9% in 2021.
9	This ratio relates total loans granted by banks to total deposits received from customers and is acommon indicator of the stability of bank funding. A higher loan-to-deposit ratio implies greater
maturity transformation and potential vulnerabilities resulting from liquidity risk in the banking system.

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Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

2% from January 2022 to 87% in July 2022, and remains well below its longterm average of 94%, which is well below the 100% level that indicates aheightened risk of maturity mismatch and market illiquidity. On aggregate,liquidity conditions in the banking sector are not considered to be a threat todomestic financial stability at this time.
Concentration within the banking sector and interconnectedness withother sectors are potential vulnerabilities. As reflected by the heatmap,
banking sector concentration, as measured by the sector’s exposure tohouseholds10 and the sovereign,11 remains high. The concentration measuresused in the heatmap mainly reflect an increase in banks’ exposure to thesovereign, as the banking sector’s holdings of SAGBs and credit exposure to
public sector entities and local municipalities continued to grow.

Insurance sector
Profitability in the insurance sector came under some pressure during theperiod under review. In the life segment, profitability was negatively impacted
by a reduction in net premiums and lower unrealised gains on investment
portfolios. Net claims paid continued to moderate during the period underreview, reflecting a reduction in the number of COVID-19-related claims.
By contrast, net claims in the non-life segment increased during the review
period, predominantly due to an increase in claims related to motor vehicle
and property insurance. The increase in claims in the earlier part of 2022 wascaused by the floods in KwaZulu-Natal and higher levels of load-shedding
and power outages, while the rise in the number of claims for motor vehicle
insurance reflects the normalisation of traffic volumes after the COVID-19
lockdowns.
Despite the challenging macroeconomic environment, both the lifeand non-life insurance segments maintained adequate solvency capitalrequirement (SCR) ratios of 1.7 and 1.6 respectively during the period
under review, well above the minimum requirement of 1. In general, lower
growth prospects and rising interest rates are expected to add pressure topremium growth over the medium term. Although the number of claimsin the life segment has been decreasing due to rising immunity to, andmilder variants of, the COVID-19 virus, volatile financial market performance
may negatively impact investment income. The non-life segment remains
vulnerable to an increase in claims related to power surges associated withload-shedding, increasing climate-related risks, motor vehicle claims (given
the normalisation of economic activity) and higher reinsurance premium rates(largely in response to the July 2021 civil unrest).

Non-bank financial institutions
Collective investment schemes
The value of assets under management of collective investment schemes (CIS)
decreased from R3 139 billion to R2 985 billion during the review period. As a
subcomponent of the CIS sector, the assets under management of money market
funds (MMFs) decreased from R372 billion to R361 billion. MMFs increased their
exposure to banks, mainly by taking up NCDs, and decreased their exposure toTreasury bills. Lower MMF exposure to Treasury bills could decrease liquidity risk
10	E xposure to households is calculated as home loans as a share of gross loans and advances. This
indicator shows the level of concentration in banks’ exposures to the residential mortgage market.
Systemic risk from a number of previous financial crises has arisen from exuberant credit extension andasset growth in the residential housing market.
11	Government and government-guaranteed securities in proportion to gross loans and advances areused as an indicator for measuring exposure to the sovereign.
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Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

for MMFs as Treasury bills have a relatively illiquid secondary market comparedto NCDs, which are commonly issued by banks.
MMFs and the banking sector are highly interconnected, and liquidity
stress in MMFs can spill over to individual banks. Should MMFs experiencelarge and unexpected redemptions during periods of distress, they could
be forced to make large withdrawals from their bank deposits, thus shifting
liquidity risk to the banking sector.

Retirement funds
Retirement funds continued to exhibit modest growth in the fair value of
total assets, which exceeded R6 trillion for the first time in 2022. Although
the retirement fund sector continues to recover in the aftermath of the
COVID-19 pandemic, growth remains muted due to lower investment returns,
for reasons discussed earlier in this edition of the FSR.

Non-financial corporates
South African NFCs’ debt-to-GDP ratio continued to moderate, decreasing
marginally from 33.8% to 33.5% during the review period. While this slightmoderation in indebtedness can be seen as an early sign of lower vulnerability
in the sector, the lagging effects of COVID-19 and a challenging operating
environment are reflected in the increase in liquidated companies and close
corporations. Liquidations increased by 11.8% year on year in September
2022, down from the 44.8% year-on-year increase recorded in August2022. Increased load-shedding negatively impacts business productivity inparticular, and is likely to threaten the viability of some corporates, especiallySMEs, for the foreseeable future.
Higher interest rates increase NFCs’ debt-servicing costs. The NFC sector’s
total interest coverage ratio (ICR) – a measure of how easily firms can pay
interest on their outstanding debt – decreased from 5.1 to 4.8 during thereview period, which is largely reflective of higher interest rates. However, theratio remained well above the IMF benchmark of 2. Going forward, the global
growth outlook and higher interest rates may further erode the ICR, with avaried impact across sectors and firm sizes.

Household sector
The increase in unsecured credit to households, albeit from a low base,could be an early sign of distressed borrowing by households to cover living
expenses. Credit extended to households by banks increased by 6.8% year
on year to June 2022, driven mainly by growth of 10.6% in unsecured credit
and 8.6% in instalment sales credit. Higher interest rates increase households’
debt-servicing costs and put further strain on households, especially highly
indebted ones. Households’ debt-servicing costs, expressed as a percentage
of household income, increased marginally from 7.3% to 7.5% over the review
period. Adding to the pressure on household budgets, the growth in theirreal disposable income slowed from 3% to 0.5% during the review period,
reflecting the effects of higher inflation, in particular from elevated food andfuel prices.

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conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Real estate
Commercial real estate
There are signs of improvement in the commercial property market
following the removal of pandemic-related economic restrictions, but
the sector remains under pressure. There was a marginal decrease in thenumber of commercial tenants in good standing during the review period,
while more than 10% of commercial tenants did not fully meet their rental
payment obligations. Since the first quarter of 2020, there has been an
increase of almost 17% in commercial tenants making partial payments or not
paying at all. Increases in interest and municipal rates reduce the return on
investment in the commercial property sector if owners are unable to pass onthese costs to tenants, and the ability of leveraged investors to service theirdebt may come under pressure.

Residential real estate
Rising interest rates and lower demand for housing resulted in slower
growth in house prices over the review period. However, the residential
rental market has improved, as reflected by lower vacancy ratios and higher
rental yields. The residential vacancy ratio declined from a high of 13% in
2021 to 7.2% at the end of June 2022, as rising interest rates increased theaffordability of renting relative to buying. The higher rental occupancy in turnleads to rising rental yields. However, there are signs of consumer strain as the
portion of partially paying and non-paying tenants remains high. Residential
mortgage defaults also remain elevated, despite a slight decline during thereview period.

Government finances
Government revenue increased during the review period, with tax
collections exceeding projections across most tax categories. At the endof June 2022, South Africa’s national government gross loan debt-to-GDP
ratio stood at 70.1% and is expected to stabilise at 71.4% of GDP by the end of
the 2022/23 fiscal year, as announced in the October 2022 MTBPS.12 This islower than the 72.8% projected in the February 2022 Budget Review, in partdue to higher-than-expected revenue collections. However, as evidenced by
the MTBPS, the potential need for the government to provide further financial
support to SOEs remains a threat to government finances.
Interest spending on national government debt continued to increase,growing by 13.4% year on year to the end of September 2022, notably higher
than the annual growth rate of 10.7% communicated in the May 2022 FSR.
Higher interest payments on government debt come at the expense of
growth-supporting spending priorities.

12	The MTBPS is available at http://www.treasury.gov.za/documents/mtbps/2022/mtbps/FullMTBPS.
pdf.

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Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Outlook for financial stability
The SARB’s RVM provides a forward-looking assessment of the key risks tofinancial stability in South Africa over the short, medium and longer term
(Figure 10). The key risks are identified based on the current conjuncture,
but also take into account possible future developments and the vulnerabilityof the financial system to such developments, after considering existing
mitigating factors and policy actions. The colours in the RVM represent theresidual vulnerability of the financial system to each risk. Risks with a lower
residual vulnerability are the ones where the financial system is relatively wellplaced to absorb a shock without a broader spillover of distress across thesystem. Risks with a higher residual vulnerability are more likely to lead tofinancial instability if no or insufficient mitigating actions are taken.
Figure 10: SARB Risk and Vulnerability Matrix
High
Globalstagflation
and rapid tighteningof financial
conditions

Likelihood

15

Cyberattacks
on keyfinancial
infrastructures

Insufficientandunreliable
electricity
supplyConsequencesof the adverse findingsof the FATF ME of
South Africa

Escalating
globalconflictandgeopoliticalpolarisation

Sharp
repricing ingovernment
debt

Slow andinequitable
domestic
growthClimatechange:physicalandtransition
risks

Low
Near termTime frame

Longer termHigh vulnerability
Moderate vulnerability

The RVM is supported by Table 1, which (i) identifies the risks to South African
financial stability; (ii) highlights the associated domestic vulnerabilities
through which the risk could manifest in a shock to the South African financial
system; (iii) identifies the mitigating factors and actions that alleviate theexpected impact of a shock; and (iv) describes the likely residual impact onfinancial stability in South Africa (i.e. the potential net impact the risk would
have, should it materialise as a shock, after the identified mitigating factors
and actions have been accounted for). The RVM and accompanying table
represent the SARB’s overall assessment of the residual vulnerability of thedomestic financial system to the identified risks, after mitigating factors andactions have been accounted for.

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Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Table 1: Financial stability risks, vulnerabilities, mitigating factors/actions and residual vulnerability
Risk

Associated domestic
vulnerabilities

Mitigating factors/actions

Residual financial stability
vulnerability (high, moderate or
limited vulnerability)

Slow andinequitable
domestic
growth•	Weak economic growthaffects the operating
environment and long-term
prospects of financial
institutions through various
channels.
•	Unemployment and low
income dampen the demand
for financial services, credit
and access to finance.
•	Inequitable growth raises therisk of populist policies andsocial instability, which inturn may have a negative
impact on investor
confidence, funding costs,
insurance claims andoperational costs.

•	Extension of COVID-19
social grants•	Relatively high capital/
solvency buffers•	Comprehensive
supervisory oversightof lending standards
and provisioning•	Increasing profitabilityof the banking sector•	Limited progress on
implementing structuralreforms leaves the economy
vulnerable to an extended
period of weak, inequitable
growth.
•	Muted new business growth
may lead to increasedrisk-taking to increase
profits.
•	Insurance and reinsurance
may become unaffordable
or even uninsurable for risk
events that become too
frequent.
•	If Sasria reserves become
depleted, there is apossibility that unrestrelated risks may not becovered by insurance.

Mediumterm•	Aggressive policy tightening
in advanced economies
makes domestic bonds
relatively less attractive to
foreign investors and could
cause further capital outflows
and currency depreciation for
emerging markets.
•	Tighter financial conditions
increase the debt-servicing
costs of borrowers and thecredit risk of lenders.
•	Lower global growth willaffect domestic economic
activity and weaken thefinancial position of financial
institution customers.
•	Higher levels of risk-taking toboost profits may result inasset overvaluation andexcessive leverage.

•	Flexible exchange rate
and adequate level offoreign exchange (FX)
reserves•	Low FX mismatches onbank and sovereignbalance sheets•	Domestic inflation
expectations stillanchored•	Foreign exposure limits
on financial institutions
encourage therepatriation of FX
during periods ofbalance of payments
stress•	The high level ofinterconnectedness in theSouth African financial
system means that a shockin one part of the system
could easily spill over toother parts.
•	Tighter financial conditions
could interact with low
growth to weaken balance
sheets.
•	Increased capital outflows
could lead to a depreciationin the exchange value of therand, and declines incommodity prices could
affect financial sector
liquidity and profitability.
•	The limited regulation ofcertain investment fundactivities potentially makes
them vulnerable to risks.

Short
term

•	Sustained load-shedding
negatively impacts domestic
economic growth and investor
sentiment, exacerbating otherpre-existing vulnerabilities.
•	Battery recharge constraints
for automated teller machines(ATMs) and cellular network
towers during stages of
longer load-shedding could
affect the effectivefunctioning of key
infrastructure necessary forthe financial system.
•	Increased insurance claims
from households and firms
due to power surge damage,fires and crime could in turnlead to higher insurance andexcess costs.
•	An extended period of
unavailability of electricity(blackout), although unlikely,
will make it impossible for thefinancial system to continuefunctioning as normal.

Presidential announcementof actions to address theenergy crisis,* specificallyplans to:•	improve theperformance ofEskom’s existing fleetof power stations;•	accelerate theprocurement of new
generation capacity;•	incentivise private
investment inalternative energy
sources; and•	fundamentallytransform theelectricity sector to beboth environmentallyand financiallysustainable.

•	More severe load-shedding
stages may not be fully
priced into the market, even
as local investors appear
more pessimistic about
South Africa.
•	Severe load-shedding is not
a common event, therefore it
is not economically viable toplan for or mitigate against.
•	In an environment of alreadylow and inequitable growth,
extended load-shedding
puts severe strain on
businesses and economic
activity, with spillover effects
to the financial system.

Globalstagflation andrapid
tightening offinancialconditions

Insufficientand unreliable
electricity
supplyChangesinceprevious
FSR

New risk

Time
frame

Short tomediumterm*	President Cyril Ramaphosa’s address to the nation on the energy crisis is available at https://www.gov.za/speeches/presidentcyril-ramaphosa-address-nation-energy-crisis-25-jul-2022-0000

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Executive summary

Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Table 1: Financial stability risks, vulnerabilities, mitigating factors/actions and residual vulnerability
Risk

Associated domestic
vulnerabilities

Mitigating factors/actions

Residual financial stability
vulnerability (high, moderate or
limited vulnerability)

Consequencesof the adverse
findings of the
FATF ME of
South Africa•	A potential ‘greylisting’ ofSouth Africa will result inhigher transactional,
administrative and funding
costs for domestic financial
institutions and reduce theavailability of foreign funding•	Restricted cross-bordertransactional ability willaffect trading and hedging
activities, with real economic
consequences•	Reputational damage toSouth Africa’s financial
system could have negative
capital flows and exchange
rate implications•	A potential decline incorrespondent banking
relationships for South
African banks, with regional
spillover effects•	Coordinated responseto address the
deficiencies identified
through agovernment-led
interdepartmental
committee on
anti-money launderingand combating thefinancing of terrorism(AML/CFT), as well ascombatingproliferation financing
to coordinate South
Africa’s response•	Good progress in thefinancial sector inparticular to address
the FATF ME findings•	Some remedial actions toaddress the adverse
findings of the FATF may
not be implemented
timeously.

•	Growing dependency on
information technology (IT)for transactions andcommunication•	Financial services firms areamong the most attractive
targets•	Work-from-homearrangements haveincreased staff interactions
with IT systems andinterfaces•	Growing reliance onthird-party IT service
providers and increased
centralisation of IT
infrastructure globally•	Increased risk of disruptive
attacks on major global
financial market
infrastructures that are also
used by South African
financial institutions, as
retaliation for sanctions
against Russia•	Large IT security
spending and focus in
the financial sector•	Enhanced structures
to ensure acoordinated approachto prevention, timely
detection, response
and recovery by the
SARB and thefinancial sector•	Promulgation of the
Cybercrimes Act 19 of2020•	Large tail risks areassociated with even asingle successful
cyberattack•	Smaller financial institutions
and third-party service
providers may be mostvulnerable given limited
skills and resources toaddress cyber-risk•	Exposure to global financial
market infrastructures atrisk of cyberattacks
introduces risk into thedomestic financial system,with limited mitigation
possibilities•	The ongoing Russia−Ukraine
war has contributed to aflight to safety and capitaloutflows from emerging
markets.
•	A possible reversal inglobalisation could
significantly change both thelevel and direction of existing
trade and financial flows,with uncertain implications
for a small, open economy
such as South Africa.
•	Supply chain shortages andinterruptions fuel global
inflation and contribute totightening global financial
conditions.

•	Anchored domestic
inflation expectations•	Well-regulated
financial sector•	Prudentially regulated
financial institutions
remain adequately
liquid and capitalised•	Many events are beyond
South Africa’s control, andthe scope and space forpolicy responses are limited.

Cyberattacks
on keyfinancial
infrastructures

Escalating
global conflictandgeopoliticalpolarisation

FINANCIAL STABILITY REVIEW November 2022

Changesinceprevious
FSR

Time
frame

Short tomediumterm

Short tomediumterm

New risk

Short tomediumterm

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Executive summary

Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Table 1: Financial stability risks, vulnerabilities, mitigating factors/actions and residual vulnerability
Risk

Associated domestic
vulnerabilities

Mitigating factors/actions

Residual financial stability
vulnerability (high, moderate or
limited vulnerability)

Sharp
repricing ingovernment
debt•	Despite a notable
improvement in the outlook
for government finances inrecent months, vulnerabilities
remain due to the high levelof debt and committed
spending items.
•	The financial sector, inparticular banks, has highexposures to government
debt, and sharp spikes inyields may lead to significant
losses.
•	Lower liquidity in the SAGB
and Treasury bills market
affects the ability of financial
institutions to raise liquidity
by selling securities in timesof stress.
•	Crowding out of private
investment and savings byhigh public borrowing
affects the growth potentialof the economy.
•	The orderly functioning of
the government bondmarket can be disrupted,
potentially requiring
repeated episodes of
support by authorities.

•	Government debt islargely domestic
currency-denominatedwith long maturities•	Fiscal consolidation is
supported by aneconomic recovery
and higher commodity
prices•	Large, diversifiedbanks are lessexposed togovernment debt andbetter hedged against
adverse events•	The fiscal outlook isimproving with
better-than-expected
revenue collections
and a commitment tofiscal consolidation•	Bank exposures to thesovereign remain elevated, inparticular among smallerbanks, and not all institutions
may be sufficiently
capitalised to withstand asevere sovereign debt shock
event.
•	The risk of dysfunction in the
SAGB market is exacerbatedby high exposure,concentration and lower
liquidity.
•	Failure in fiscal consolidation
can lead to unsustainable
government debt levels.

•	A high concentration ofcarbon-intensive activities inSouth Africa may lead to large
exposures of financial
institutions to stranded assets
in the future•	The rising risk of climaterelated damage to property
and infrastructure has anegative impact on non-life
insurers•	Changing policies, technologies
and preferences could increasefinancing cost and availability•	A lack of clarity around thefinancial sector’s exposures tounsustainable assets,
incomparable taxonomies andinconsistent voluntary reporting
limit the ability of regulators tomeasure and regulate
climate-related risks•	Voluntary disclosures bysome financial institutions
give some insight tosupervisors•	The introduction ofclimate stress testing by
the SARB is prompting
industry to define andquantify risks•	The establishment of the
Presidential Climate
Financial Task Teamshould lead to policy
certainty•	The annual repricing of
non-life insurance
premiums reflects higher
risk•	South African carbon tax
implemented in June2019 is estimated toincrease to at least
US$30 per tonne by2030•	The South African economy
could experience a loss ofcompetitiveness as the world
shifts towards carbon
neutrality•	Financial institutions that fundunsustainable assets could facehigher funding costs and otherbarriers•	The physical impact of climatechange appears to beworsening•	The increasing cost of
short-term insurance could
lead to a reluctance to provide
cover against climate-relatedrisks

Climatechange:physical andtransition risks

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Changesinceprevious
FSR

Time
frame

Mediumtolongerterm

Mediumto longer
term

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Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Assessment of financial stability conditions
On the basis of the risks, vulnerabilities and mitigating factors and actions
identified, the SARB’s assessment of the stability of the financial system is asfollows:•	Systemic risk increased during the period under review, mainly due to an
environment of persistent inflation and global monetary policy tightening,
recession fears, geopolitical tensions, volatile financial markets anddownward revisions of growth projections, both for major economies andSouth Africa.
•	Despite the increase in systemic risk, the South African financial system
continues to be resilient under highly challenging global and domestic
conditions. This resilience is expected to be sustained over the forecast
period.
•	Against a backdrop of continuing slow and inequitable domestic economic
growth, factors such as insufficient and unreliable electricity supply, thepotential consequences of the adverse findings of the FATF ME of South
Africa, the risk of cyberattacks and the effects of climate change put
additional pressure on the financial sector.
•	
Nevertheless, prudentially regulated domestic financial institutions, inaggregate, remain resilient, as measured by their ability to maintainadequate capital and liquidity buffers to absorb the impact of shocks.

Policy actions and initiatives undertaken to enhancedomestic financial stability•	The SARB continued to collaborate with FSOC members to addresssome of the key risks to financial stability as identified in this edition of
the FSR.
•	
Through cross-sectoral collaboration within the FSCF, the SARB
continued to identify and consider risks that could result in potential
systemic events.
•	
The SARB’s FSC maintained the CCyB13 at 0% at its October 2022
meeting. In line with ongoing work by the Bank for International Settlements(BIS) on the CCyB,14 the SARB will assess the most appropriate neutrallevel for the CCyB for South Africa.
•	Work continued on the implementation of the resolution and deposit
insurance frameworks enacted by the Financial Sector Laws Amendment
Act 23 of 2021 (FSLAA). Most notably, the first regulatory standards forresolution have been published for public comment.

13	The CCyB is designed to increase the level of capital in the banking sector during upswings in thefinancial cycle (at times when credit growth and risk-taking are outpacing underlying economic
conditions). This helps to ensure that banks build additional buffers during an upswing period to absorb
losses during a subsequent downswing period. The CCyB also assists in containing excessive growth inbroader credit extension. The CCyB has been maintained at a level of zero since 2019, which limits theability of the SARB to use it in a countercyclical way.
14	The issue of positive cycle-neutral CCyB rates is considered in detail in a recent newsletter by the BIS,
available at https://www.bis.org/publ/bcbs_nl30.htm
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Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Chapter 3: In focus: briefings on selected
topics relevant to financial stability
This chapter is dedicated to short, stand-alone briefings on relevant topics andpossible emerging risks to domestic financial stability, with the dual objectiveof stimulating debate and informing FSR readers of the latest developments
on a selection of topics.

Update on the FATF ME and remedial actions
implemented
Background to the current conjunctureSouth Africa has been a member of the FATF since 2003 and is also amember of the Eastern and Southern Africa Anti-Money Laundering Group(ESAAMLG). The IMF led the FATF ME of South Africa in 2019, during whichtime South Africa was assessed in accordance with the FATF Methodology
for assessing technical compliance with the FATF Recommendations andthe effectiveness of the domestic anti-money laundering and combating thefinancing of terrorism (AML/CFT) regime. The ensuing FATF ME Report forSouth Africa (report) was published on 7 October 2021.15
Owing to the low ratings achieved in the report, South Africa qualified for areview and was placed under a 12-month observation period which began in
October 2021. During this period, all affected stakeholders were required toundertake the requisite remedial actions and demonstrate progress to address
the deficiencies identified in the report. Failure to demonstrate sufficient
progress will result in South Africa being subject to increased monitoringby the FATF.16 To address this risk, South Africa has established a Cabinetapproved interdepartmental working group (IDWG) to address the findingsof the report. Membership of the IDWG consists of law enforcement agencies,
financial sector regulators and supervisors, and government departments andministries. Each immediate outcome has a dedicated workstream to focus on
making progress in addressing the main findings of the report.
The South African authorities continued to work towards completingthe post-observation progress report during the period under review.
In January 2023, the FATF’s designated Joint Group of the International
Cooperation Review Group will discuss South Africa’s progress inaddressing the deficiencies with the South African authorities. The FATF
Plenary meeting will decide at its meeting in February 2023 whether
South Africa has made satisfactory progress in remediating the identified

15	The FATF ME of South Africa is available at https://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-south-africa-2021.html
16	While not an official term, the informal term ‘greylisting’ is frequently used to indicate that a jurisdiction
is subject to increased monitoring by the FATF.

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conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

deficiencies. If South Africa is deemed not to have made satisfactory progress,
it would result in the country receiving an action plan from the FATF andofficially being regarded as a jurisdiction under increased monitoring – a socalled ‘greylisting’.

Considerations for domestic financial stability
Should South Africa be greylisted by the FATF, it will likely result in higher
transactional, compliance and funding costs for domestic financial and nonfinancial institutions, and reduce the availability of foreign funding. Suchincreased costs could contribute to de-risking, where international banks
terminate relationships with customers in high-risk jurisdictions as the risingcost of compliance makes such relationships unviable from an economic
perspective. In turn, a potential decline in correspondent banking relationships
for South African banks could have significant regional spillover effects. Froma reputational perspective, the effect of a FATF greylisting could also weighnegatively on investor sentiment, with resultant implications for capital flows
and the exchange value of the rand.
A recent paper by the IMF 17 found that a greylisting by the FATF has asignificant negative impact on:• capital flows, declining by an average of 7.6% following a greylisting;•	foreign direct investment inflows, decreasing by an average of 3% of GDP;• portfolio inflows, declining by an average of 2.9% of GDP; and• other investment inflows, decreasing by an average 3.6% of GDP.
In view of the risks and vulnerabilities identified in the RVM in Chapter 2,
a greylisting by the FATF would likely contribute to slow and inequitable
domestic economic growth, mainly as a result of higher costs for domestic
financial institutions in the face of reduced and more expensive foreign funding.
Coupled with the reputational impact of a greylisting and the concomitanteffect on investor sentiment, the South African economy could experiencea loss of competitiveness, with potentially far-reaching repercussions from a
regional perspective.

Reflecting on the promise of crypto: 14 years on
Following the publication of the Bitcoin white paper on 28 October 2008,
the first transaction on the Bitcoin network took place on 3 January 2009.
Almost 14 years later, crypto assets’ original use case of being a ‘peer-to-peer
electronic cash system’ remains muted.18 As observed from figures 11 and 12,
over the past 12 months the number of confirmed daily transactions on the
Bitcoin and Ethereum networks varied between 240 000 and 280 000, and
900 000 and 1 700 000 respectively. By contrast, Visa processes an averageof 637 million transactions per day.19

17	M Kida and S Paetzold, ‘The impact of gray-listing on capital flows: an analysis using machine learning’,
IMF Working Paper Series No. 2021/153, 27 May 2021. https://www.imf.org/-/media/Files/Publications/
WP/2021/English/wpiea2021153-print-pdf.ashx
18 S Nakamoto, ‘Bitcoin: a peer-to-peer electronic cash system’, 2008, p 1. https://bitcoin.org/bitcoin.pdf
19 As per Visa’s Annual Report for 2021, available at https://annualreport.visa.com/home/default.aspx

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Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Figure 11: Number of confirmed daily transactions on the Bitcoin network
280 000

No. of daily transactions

270 000

260 000

250 000

240 000
Oct Nov

Dec

Jan

Feb

Mar

Apr

2021

May

Jun

Jul

Aug

Sep

Oct

Sep

Oct

2022

Source: Blockchain.com (2022)

Figure 12: Number of confirmed daily transactions on the
Ethereum network
2 000 000

No. of daily transactions

1 500 000

1 000 000

500 000
Oct Nov

Dec

Jan

Feb

2021

Mar

Apr

May

Jun

Jul

Aug

2022

Source: Etherscan (2022)

In view of the above, crypto assets have not yet become a widespread medium
of exchange, thus limiting the short-term financial stability threat arisingfrom their use for payment and settlement. While other use cases continue
to grow and evolve, they do not pose a risk to financial stability at current
levels of market capitalisation and adoption. However, as recently notedby the Financial Stability Board (FSB), 20 several structural vulnerabilities incrypto asset markets were exposed during 2022, including but not limited toinappropriate business models, maturity and liquidity mismatches, excessive
leverage and significant interconnectedness in the crypto asset ecosystem.
Although the turmoil observed in crypto asset markets resulted in limited
spillovers to the traditional financial system, interconnections between the
20	See https://www.fsb.org/2022/10/international-regulation-of-crypto-asset-activities-a-proposed-frameworkquestions-for-consultation/

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Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Annexures

crypto asset and traditional financial system continue to grow, and the SARB
continues to closely monitor developments to identify any potential financial
stability risks arising from crypto assets.

A snapshot of key domestic crypto assets statistics
According to Chainalysis’ Global Crypto Adoption Index, South Africa wasranked 7th globally for crypto asset adoption in 2020, 16th in 2021 and 30thin 2022. 21 Based on data provided by the four largest domestic crypto asset
trading platforms22 for the 12 months ended 31 March 2022, the total numberof customers grew by 769 084, from 2 851 172 to 3 620 256, between 1 April
2021 and 31 March 2022. 23
Table 2: Monthly rand value of crypto assets tradedMonth

R millions

April 2021

28 500

May 2021

32 936

June 2021

15 529July 2021

12 217

August 2021

19 213September 2021

18 401

October 2021

22 014

November 2021

19 262

December 2021

17 076

January 2022

14 997

February 2022

14 428March 2022

15 475

Total for the 12 months ended 31 March 2022
Monthly average

230 053
19 171

Source: Luno, VALR, AltCoinTrader and Ovex

Based on previous research conducted using 2018 and 2019 data, 24 themonthly rand values of crypto assets traded continued to fluctuate over the
12 months ended 31 March 2022, but within a notably smaller range compared
to 2018 and 2019. While daily rand trading volumes fluctuated between
R100 million and R2 billion in 2018 and 2019, the most recent data indicatethat the daily rand value of crypto assets traded oscillated between
R500 million and R1.5 billion, although there are outliers during periods ofextreme market volatility.

21	https://blog.chainalysis.com/reports/2022-global-crypto-adoption-index/,
https://blog.chainalysis.
com/reports/2021-global-crypto-adoption-index/ and https://blog.chainalysis.com/reports/2020global-cryptocurrency-adoption-index-2020/22	These are Luno, VALR, AltCoinTrader and Ovex. The SARB expresses its gratitude to the four crypto
asset trading platforms for providing the data on a voluntary basis.
23	The total number reflected likely contains duplicates as some customers have accounts at multiple
crypto asset trading platforms.
24	Refer to the SARB’s June 2021 edition of the Financial Stability Focus for the topical briefing note titled‘The financial stability implications of crypto assets in South Africa’, available at https://www.resbank.
co.za/content/dam/sarb/what-we-do/financial-stability/topical-briefings---june-2021/Topical%20
Briefings%20-%20June%202021.pdf

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Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

The road to regulation: progress made in bringing
crypto assets within the domestic regulatory remit
Although domestic crypto asset trading activity is not currently sizeable
enough to be seen as a financial stability vulnerability, there are areas relating
to consumer protection, AML/CFT and cross-border financial flows that
require an explicit regulatory framework for crypto assets. Such a framework
will also enable the monitoring of domestic crypto asset-related developments
to identify the potential build-up of risk. To address this regulatory gap, theIntergovernmental Fintech Working Group (IFWG), through the Crypto
Assets Regulatory Working Group (CAR WG), published a position paperon crypto assets in June 2021 (position paper). 25 The position paper makes
25 recommendations on how to bring crypto assets into the South African
regulatory remit in a phased and structured approach, across the following
three main areas:
1.	Anti-money laundering and combating the financing of terrorism: The
FATF has revised Recommendation 15 in respect of new technologies, 26
which now explicitly requires jurisdictions to regulate crypto assets andcrypto asset service providers (CASPs) for AML/CFT purposes.
2.	Cross-border financial flows: The current Exchange Control Regulations,
1961, do not explicitly cater for crypto assets, with the implication that the
SARB’s Financial Surveillance Department does not have explicit powers torequire South African crypto asset trading platforms to report transactions
involving crypto assets. Daily crypto asset trading values in South Africa
exceeded R2 billion for the first time in January 2021, providing some
anecdotal evidence that there may be significant value moving into crypto
assets without the Financial Surveillance Department having oversightover such flows, or the requisite powers to direct market behaviour as
appropriate for South Africa.
3.	Consumer protection, and advisory and intermediary services related to
crypto assets: Given the increasing retail interest in crypto assets, growing
instances of consumer abuse, fraud and market misconduct have been
noted both internationally and in South Africa. Recent schemes highlighted
in the media emphasise the need for the South African authorities,
predominantly through the Financial Sector Conduct Authority (FSCA),
to take action against the growing tendency for market abuse under theguise of crypto assets. On 19 October 2022, the FSCA declared crypto
assets to be a financial product in terms of the Financial Advisory andIntermediary Services Act 37 of 2002, 27 marking the first step in bringing
crypto assets within the South African regulatory remit.
The position paper notes that crypto asset-related activities are likely toincrease, and that inaction by the South African financial regulators may
potentially accelerate the creation of unregulated parallel systems. This could
prevent authorities from having ‘line of sight’ of crypto asset-related activities
and developments. By gradually bringing crypto assets into the South African

25	The IFWG’s CAR WG ‘Position paper on crypto assets’ is available at https://www.ifwg.co.za/Reports/
Position%20Paper%20on%20Crypto%20Assets.pdf
26	The updated guidance is available at https://www.fatf-gafi.org/media/fatf/documents/recommendations/
Updated-Guidance-VA-VASP.pdf
27	The declaration is available at https://www.fsca.co.za/Regulatory%20Frameworks/Temp/Policy%20
Document%20supporting%20the%20Declaration%20of%20crypto%20assets%20as%20a%20
financial%20product.pdf

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Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Annexures

regulatory purview, the most pertinent and immediate risks that have been
identified around AML/CFT, cross-border financial flows and consumer
protection will be addressed. The South African regulators will continue tomonitor developments and develop mitigating measures as new risks emerge.

Overview of South African financial stability
coordination structures
Although the FSR Act assigns the main legal responsibility for preserving
financial stability to the SARB, it also recognises the fact that it is not a
mandate that can be achieved by one authority alone. The broad scope of thefinancial stability mandate requires a high degree of interagency coordinationand cooperation. The FSR Act makes provision for such interaction throughthe establishment of the FSOC and the FSCF. In addition, the SARB has
established an internal, non-statutory committee − the FSC – to facilitate
cooperation among its various line functions in the execution of its financial
stability mandate. The composition and functions of these three coordination
structures are set out in Table 3.
Table 3: South African financial stability structures
Structure

Description and objectives

Membership composition

Functions

FSOC•	The FSOC is a statutory
committee in terms of the
FSR Act.
•	It advises the Governor on
matters relating to financial
stability.
•	The FSOC was established on
1 April 2018.
•	The primary objectives of thecommittee are to (i) support
the SARB when it performs its
functions in relation to financial
stability; and (ii) facilitate
cooperation and collaboration
between the SARB and otherfinancial sector regulators.
•	The FSOC meets twice a year,
or as required.
•	The Governor may convene ameeting of the FSOC at any
time and must convene ameeting if requested to do soby the financial sector
regulators.

The FSOC consists of:•
the Governor as Chairperson;•	the Deputy Governor
responsible for financial
stability matters;•	the Chief Executive Officer(CEO) of the Prudential
Authority;•	the Commissioner of the
FSCA;•	the CEO of the National
Credit Regulator (NCR);•	the Director-General of
National Treasury;•	the Director of the Financial
Intelligence Centre (FIC); and•	up to three additional officialsof the SARB appointed by
the Governor.

•	Serves as a forum for SARB
representatives and financial
sector regulators to be
informed, and to exchange
views on issues surrounding
financial stability•	Makes recommendations to
the Governor on thedesignation of systemicallyimportant financial
institutions•	Advises the Minister ofFinance and the SARB on(i) steps to be taken to
promote, protect ormaintain, or to manage or
prevent risks to financial
stability; and (ii) mattersrelating to crisis
management andprevention•	Makes recommendations toother organs of state
regarding steps that areappropriate for them to taketo assist in promoting,protecting or maintaining, ormanaging or preventing
risks to financial stability.
•	Any other function
conferred on it in terms ofapplicable legislation

FSC•	The FSC is an internal policy
committee of the SARB.
•	It was established in 2000 and
restructured and elevated in2010 in terms of its
membership andresponsibilities.
•	The purpose of the FSC is toformulate financial stability
policy on behalf of the SARB insupport of its financial stability
mandate.
•	The FSC meets four times ayear or as required.

The FSC consists of:•
the Governor as Chairperson;•	the SARB deputy governors;
and•	the heads of the SARB’s line
departments.*•	Through the FSC, the SARB
fulfils its responsibility tomonitor and review thestrengths and weaknesses ofthe financial system and any
risks to financial stability, andtake the necessary steps tomitigate these risks.
•	The FSC monitors global
and domestic financial
vulnerabilities, considers
their possible implications
for domestic financial
stability, and decides
whether any mitigating
measures need to be taken.

*	
These are the Financial Stability Department, Financial Markets Department, Financial Surveillance
Department, National Payment System Department, Economic Statistics Department, Economic Research
Department and the four departments comprising the Prudential Authority.
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Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Table 3: South African financial stability structures
Structure

Description and objectives

Membership composition

Functions

FSCF•	The FSCF was createdfollowing the events that
occurred in New York on 9
September 2001 (i.e. ‘9/11’).
•	The FSCF was formed toensure broad participation andengagement of stakeholder
groups in defining andcoordinating approaches tocrisis management.
•	Its primary objective is to assist
the FSOC with theidentification of risks that could
result in potential systemic
events; and the coordination of
appropriate plans, mechanisms
and structures to mitigate
those risks.
•	It fulfils its objective byfacilitating cross-sectoral
cooperation in the identificationof potential threats to thestability of the South African
financial sector.

•	The FSCF is chaired by the
SARB Deputy Governor
responsible for financial
stability.
•	The FSCF is comprised ofrepresentatives of the SARB,
financial sector regulators,
financial sector industry
associations and organs ofstate.
•	There are currently 17 active
FSCF members.
The FSCF has two
subcommittees:•	the Operational Risk
Subcommittee (ORS), whichdevelops contingency
measures for events that
could severely disrupt
operational continuity in thefinancial sector; and•	the Financial Sector Cyber
Resilience Subcommittee(CRS), which focuses on
industry-wide efforts toincrease the resilience of thefinancial sector tocyberattacks.

•	Through the establishmentof a coordinated network ofcontingency planning
contacts throughout thefinancial services industry,
the FSCF functions as aconduit for dealing withtactical situations that havethe potential to affectmultiple organisations
across the ecosystem at any
given time.
•	The FSCF does not play anactive role in managing
systemic events, but rather
supports the development
and testing of contingency
plans and works as anestablished network forcoordinating interventions
and communicating
effectively during a systemic
event.

The objectives and functions of the FSOC, FSC and FSCF are therefore welldefined, and their membership spans across the various financial sector
regulators to promote interagency collaboration and coordination. However,
although there is overlapping membership across the three structures, work
is continuing to better leverage efforts and share information more effectively
between the FSOC, FSC and FSCF. Closer coordination between the threestructures would therefore aid cooperation should a systemic event occur,
particularly in cases where authorities may want to use policy instrumentsthat span across the mandates of different regulatory agencies.

Zaronia
Overview and background: what is Zaronia?
The South African Rand Overnight Index Average (Zaronia) is the reformed
version of the South African Benchmark Overnight Rate (Sabor), which aims
to measure the interest rate at which rand-denominated overnight wholesale
funds in South Africa are obtained by commercial banks. 28 In a significant
step towards strengthening the stability of the domestic financial system,
the SARB officially began publishing Zaronia in November 2022. Market
participants are expected to observe the rate and evaluate the impact of
adopting it as a replacement rate for the Johannesburg Interbank Average
Rate (Jibar). Certain design elements of Jibar render it susceptible to market
manipulation, which poses financial stability risks akin to the London Interbank
Offered Rate (Libor). 29 To this end, the SARB communicated its intention to28	Zaronia is different from the South African Interbank Overnight Rate (Zaribor) in that Zaronia includes
all transactions concluded with all wholesale counterparty types, except for central banks, whereas
Zaribor filters for interbank transactions only.
29	For a more detailed overview of the ongoing international work relating to the transition away from
Libor, refer to https://www.fsb.org/work-of-the-fsb/market-and-institutional-resilience/libor-andother-benchmarks/

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Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

discontinue the Jibar in 2020, while the Market Practitioners Group (MPG)30
endorsed Zaronia as the preferred successor rate that should replace it.
The shift away from Jibar to Zaronia is a significant change for domestic
financial markets as Jibar underpins a large number of financial contracts.
The most recent survey of Jibar-related exposures suggests that there wereapproximately 1.7 million financial contracts underlying a total of R27.1 trillion
worth of outstanding exposures as at 31 December 2021. Unsurprisingly,
derivatives contracts constituted the largest portion of the outstanding
exposures. While the survey focused largely on financial institutions,particularly commercial banks, the impact of the transition from Jibar to
Zaronia will not be limited to financial institutions – it will impact all companies.
Figure 13: Jibar-related exposure of the derivatives market
Gross outstanding exposure in
South African rand
Per cent
Derivatives
86%
R23.4 trillion

Assets9%
R2.4 trillion

Outstanding derivatives exposures
25

Liabilities
5%
R1.3 trillion

R trillions

20

15

10

2022
2025

2023
Post-2025

Nonfinancial
corporates

Assetmanagers

Foreignbanks

0Insurers

5

Local banks

27

2024

The publication of Zaronia marks a significant milestone in the ongoing
efforts by the SARB and market participants to design and operationaliserobust and reliable benchmarks that could be used for different purposes infinancial markets. In June 2020, the SARB proposed five benchmarks, whichwere described in a technical specification paper titled ‘Draft statementof methodology and policies governing SARB-administered interest ratebenchmarks’. 31 Following a public comment period, the SARB back-tested
the benchmarks using a sample of five-year historical transactions data
and found that only Zaronia and its interbank-focused subset, the South30	The MPG is a joint public and private sector body, comprising representatives from the SARB, theFSCA, and senior professionals from a variety of institutions from different market interest groups
active in the domestic money market. The primary purpose of the MPG is to facilitate final decisions
on the choice of interest rate benchmarks to be used as reference interest rates for financial andderivative contracts, and to direct market participants through an orderly transition towards the useof those benchmark rates. For more information, refer to https://www.resbank.co.za/en/home/whatwe-do/financial-markets/financial-markets-market-practitioners-group#:~:text=The%20Market%20
Practitioners%20Group%20(MPG,in%20the%20domestic%20money%20market
31	The technical specification paper is available at https://www.resbank.co.za/en/home/publications/publication-detail-pages/markets-consultation-paper/2020/10021
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conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

African Interbank Overnight Rate (Zaribor), were viable for use as reference
rates. These benchmarks largely satisfied the design and data sufficiency
requirements contained in the International Organization of Securities
Commissions (IOSCO) paper titled ‘Principles for financial benchmarks’. 32 The
results of the back-testing exercise and public consultation were summarised
and published in the feedback report, 33 which indicated that the SARB would
implement a robust production process for determining and publishing thesebenchmarks.

Zaronia observation period
Following the successful deployment of the data collection and benchmark
determination technology in August 2022, the SARB started collecting eligible
transactions data to calculate and publish Zaronia in beta mode on the SARB
website34 to monitor the full benchmark determination process and allow allreporting institutions to be onboarded, which process is referred to as the‘observation period’. Figure 14 displays the calculated benchmark rates andthe volume of transactions that underpin them. The recent performance ofZaronia is largely satisfactory: the rate follows the SARB’s policy rate (i.e. therepurchase or ‘repo’ rate) closely, as would be expected of a short-term rate.
Furthermore, Zaronia seems to be largely responsive to policy rate changes
as observed from Figure 14(a), where the rate increased sharply after the
SARB’s Monetary Policy Committee decision to increase the policy rate by
75 basis points on 22 September 2022.
Some market participants were concerned that pre-Zaronia rates, publishedafter the benchmark back-testing exercise, were volatile, which suggested
that the benchmark may be less predictable and unsuitable as a reference
rate. The SARB mainly attributed the volatility to the overnight deposit
market being largely obscured over the sample period. Volatility is expected
to decline once the benchmark is published and used by market participants.
The publication of Zaronia constitutes a common point of reference thatshould shape the pricing behaviour of banks. Figure 14(a) shows that Zaronia
has been broadly stable since its publication on 1 August 2022.
In line with global overnight rates, such as the Sterling Overnight Index
Average (Sonia) and the euro short-term rate (€STR), Zaronia tended to belower than the SARB’s policy rate. The spread between the repo rate andZaronia averaged 11 basis points (see Figure 14(b)), which is a considerable
decline from the 36 basis point average observed during the back-testing
exercise. Furthermore, the variability of the spread tended to be contained
within one standard deviation from its mean, meaning that it oscillated withina range of 8 to 14 basis points, except on those days where weekly seasonality
drove the Zaronia rate higher.

32 The IOSCO paper is available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf
33	The feedback report is available at https://www.resbank.co.za/en/home/publications/publicationdetail-pages/media-releases/2021/Feedback-on-the-statement-of-methodology-and-policiesgoverning-the-SARB-administered-benchmarks
34	See https://www.resbank.co.za/en/home/what-we-do/financial-markets/south-african-overnight-indexaverage

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and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Figure 14: Results from the Zaronia observation period(a) Zaronia and percentiles
7.5(b) Repo rate: Zaronia spread

Per cent

25

Basis points

7.0
6.5

20

6.0
5.5

15

5.0
4.5

10

4.0
3.5

5

3.0
2.5
Aug

Sep

0

Oct

Aug

2022
10th–90th percentile
Zaronia

Policy rate

FridayWednesday(d) Zaronia compared to its one-week
average compounded in arrears

No. of transactions
4 500

R billions

Oct

Policy rate: Zaronia spread
Average(c) Value and number of transactions
underlying Zaronia
700

Sep
2022

Per cent

4 000

600

6.3
6.1

3 500
500

5.9

3 000

400

2 500

5.7

300

2 000

5.5

1 500

200

5.3

1 000
100
0

5.1

500
0
Aug

Sep

Oct

Aug

Sep

Oct

4.9

2022

2022
Value

Zaronia

Number of transactions (rhs)

1-week compounded Zaronia average

Sabor

The decline in the volatility of recently calculated Zaronia rates also suggeststhat data quality plays a major role in ensuring the stability of the rate. Since
the back-testing exercise, the SARB has implemented three layers of data
quality checks, which include automated structural and content validations
that ensure that submitted transactions files comply with the SARB’s
requirements. File submissions that fail any of the validation rules are rejectedin their entirety, while successful submissions are subjected to plausibility
checks that are designed to detect outliers and possible duplicates, which aresubsequently queried. Reporting institutions have also invested significant
capital and human resources to develop the capabilities to extract, transmit
and validate their daily transactions data.
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Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

What happens next?
The SARB will continue to publish the Zaronia for market observation, a period
in which the use of Zaronia in financial contracts is strongly discouraged. The
exact duration of the observation period will depend on the finalisation of
the MPG’s transition plan, the readiness of market infrastructures to facilitate
trading and settlements in new products that reference Zaronia, and the
SARB’s decision regarding the cessation date for the Jibar.
The MPG expects the derivatives market to lead the adoption of Zaronia as
the rate can be readily used in the pricing and valuation of securities that
require a risk-neutral or near risk-free rate. This may necessitate a review of
the role of the JSE’s Initial Interest on Margin, which is commonly referred toas the South African Futures Exchange (SAFEX) Overnight Rate and is widelyused in the derivatives market. The MPG will consult widely on the design ofproducts and market conventions for Zaronia in the first half of 2023.
A sustainable, forward-looking Zaronia term rate is unlikely to be fully
developed by the time the Jibar cessation and subsequent transitioncommences. The term rate would need to be derived from the overnight index
swap market, which is likely to require some time to develop before there issufficient market liquidity to support the determination of a daily term rate.
Consequently, the cash market may be required to use Zaronia averages thatare compounded in arrears rather than wait for the development of Jibarequivalent term rates. The SARB aims to calculate the compounded Zaronia
averages during the observation period.
The MPG will soon publish its transition plan, which will enable market
participants to consider and prepare for the Jibar transition. Preparations will
likely require significant effort from most firms which may need to employ
multidisciplinary teams to map out the firms’ current Jibar exposures andnegotiate changes to contracts, systems and processes. The MPG will provide
guidance on the salient aspects of the transition, including fallback languagethat may be used in certain legal contracts.

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Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

References
Blockchain.com. 2022. Transactions. https://www.blockchain.com/explorer/
charts/n-transactions (accessed on 19 October 2022).
Brownlees, C and Engle, R. 2017. ‘SRISK: a conditional capital shortfall measureof systemic risk’. Review of Financial Studies 30(1): 48−79. https://bse.eu/
research/publications/srisk-conditional-capital-shortfall-measure-systemicrisk.
Chainanalysis. 2020. ‘The 2020 Global Crypto Adoption Index: cryptocurrency
is a global phenomenon’. https://blog.chainalysis.com/reports/2020-globalcryptocurrency-adoption-index-2020/ (accessed on 20 October 2022).
Chainanalysis. 2021. ‘The 2021 Global Crypto Adoption Index: worldwide
adoption jumps over 880% with P2P platforms driving cryptocurrency usage
in emerging markets’. https://blog.chainalysis.com/reports/2021-globalcrypto-adoption-index/ (accessed on 20 October 2022).
Chainanalysis. 2022. ‘How cryptocurrency meets residents’ economic
needs in sub-Saharan Africa’. https://blog.chainalysis.com/reports/subsaharan-africa-cryptocurrency-geography-report-2022-preview/ (accessedon 20 October 2022).
Etherscan. 2022. Ethereum Daily Transactions Chart. https://etherscan.io/
chart/tx (accessed on 19 October 2022).
Financial Stability Board. 2021. FSB Financial Stability Surveillance Framework.
30 September. https://www.fsb.org/wp-content/uploads/P300921.pdf.
Institute of International Finance. 2022. Global Debt Monitor: Growing Risks
for Emerging Markets. https://www.iif.com/Key-Topics/Debt/Monitors.
International Monetary Fund. 2022. ‘How countries should respond to thestrong dollar’. IMF blog. 14 October 2022. https://www.imf.org/en/Blogs/
Articles/2022/10/14/how-countries-should-respond-to-the-strong-dollar.
V-Lab. 2022. Systemic Risk Analysis (Global Dynamic MES) of World Financials.
Volatility Laboratory at NYU Stern. https://vlab.stern.nyu.edu/srisk/RISK.
WORLDFIN-MR.GMES (accessed on 15 October 2022).

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conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Abbreviations
AML
BIS
CAR WG
CCyB
CEO
CFT
CIS
COVID-19
FATF
FSC
FSCA
FSCF
FSOC
FSR
FSR Act
FX
GDP
ICR
IDWG
IFWG
IIF
IMF
IOSCO
IT
Jibar
JSE
Libor
ME
MMF
MPG
MTBPS
NBFI
NCD
NFC
repo (rate)
RVM
Sabor
SAGB
SARB
SME
SOE
UK
US
USD
ZAR
Zaribor
Zaroniaanti-money laundering
Bank for International Settlements
Crypto Assets Regulatory Working Groupcountercyclical capital buffer
Chief Executive Officer
combating the financing of terrorism
collective investment scheme
coronavirus disease 2019
Financial Action Task Force
Financial Stability Committee
Financial Sector Conduct Authority
Financial Sector Contingency Forum
Financial Stability Oversight Committee
Financial Stability Review
Financial Sector Regulation Act 9 of 2017
foreign exchangegross domestic productinterest coverage ratio
interdepartmental working group
Intergovernmental Fintech Working Group
Institute of International FinanceInternational Monetary FundInternational Organization of Securities Commissions
information technology
Johannesburg Interbank Average Rate
JSE Limited
London Interbank Offered Rate
Mutual Evaluation
money market fundMarket Practitioners Group
Medium Term Budget Policy Statement
non-bank financial institution
negotiable certificate of deposit
non-financial corporate
repurchase (rate)
Risk and Vulnerability Matrix
South African Benchmark Overnight Rate
South African government bondSouth African Reserve Bank
small- and medium-sized enterprisestate-owned enterprise
United Kingdom
United States
United States dollar
South African randSouth African Interbank Overnight Rate
South African Rand Overnight Index Average

FINANCIAL STABILITY REVIEW November 2022

Annexures

33

Executive summary

Domestic financial stability
conjuncture, outlook
and assessment

Overview

In focus: briefings on
selected topics relevant
to financial stability

Annexure A: South African financial
stability heatmap elements
and indicators
The financial stability heatmap is composed by (i) identifying various financial
stability elements; and (ii) assigning a weighted colour rating to the identified
elements by using predefined indicators. The elements comprising thefinancial stability heatmap and the corresponding financial stability indicators
underlying the colours on the heatmap are presented in Table A.1 below.
Table A.1: South African financial stability heatmap elements and indicators
Heatmap element

Indicator(s)Residential real estate market••

Commercial real estate market•	Commercial real estate loans divided by gross loans andadvances

Global investor sentiment•	
Chicago Board Options Exchange (CBOE) Volatility
Index (VIX)

Banking sector•	Averages for the sector-wide value of assets to equity•	Impaired advances to gross loans and advances• Liquidity coverage ratio (LCR)• Assets-to-GDP gap• Credit-to-GDP gap•	Home loans as a share of gross loans and advances•	Government and government-guaranteed securities as ashare of gross loans and advances

Insurance sector• Assets-to-GDP gap•	Combined ratio, that is, underwriting profit calculated as
net claims and expenses incurred, divided by net
premiums written (non-life)•	Growth in gross written premiums (life and non-life)• Individual lapse ratio (life)•	Solvency capital requirement (SCR) (life and non-life)

Household sector•••

Debt-service-cost-to-disposable-income ratio
Debt-to-disposable-income ratio
Debt-to-GDP ratio

Corporate sector•••

Debt-to-GDP ratio
Debt-to-net-operating-profit ratio
Interest coverage ratio

Government sector•

Gross government debt-to-GDP ratio

FINANCIAL STABILITY REVIEW November 2022

BIS House Price Index
Mortgage loans as a share of total loans

Annexures

34

Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Annexure B: Banking andinsurance sector indicators
Table B.1: Banking sector indicators*
2018

2019

2020

2021

2022***

Market share in terms of assets (five largest banks)

90.24

90.37

89.99

89.84

89.60

Gini concentration index

83.40

83.21

83.11

82.68

82.53

0.18

0.18

0.18

0.18

0.18

5 311.4

5 769.3

6 457.3

6 562.3

6 892.5

6.09

8.63

11.93

1.74

5.96

3 944.7

4 249.5

4 542.5

4 643.1

4 899.5- Year-on-year percentage change

4.05

7.75

6.90

2.24

6.65

Total capital adequacy ratio

16.39

16.53

16.21

17.49

17.82

Tier 1 capital adequacy ratio

13.32

13.45

13.14

14.47

15.09

Common equity tier 1 capital adequacy ratio

12.79

12.69

12.33

13.30

13.75

Impaired advances (R billions)**

137.10161.70211.90229.20220.20

Impaired advances to gross loans and advances

3.47

3.81

4.66

4.94

4.49

Specific credit impairments (R billions)

60.80

73.60

92.20

105.50107.60Specific credit impairments to impaired advances

44.27

45.51

43.56

46.07

48.90

Specific credit impairments to gross loans and advances

1.54

1.73

2.03

2.27

2.20

Return on assets (smoothed)

1.31

1.24

0.79

0.81

1.11

Return on equity (smoothed)

15.84

15.31

10.22

10.62

14.04

Interest margin to gross income (smoothed)

56.74

56.80

58.17

58.65

58.57

Operating expenses to gross income (smoothed)

57.19

58.22

58.26

58.73

58.39

Liquid assets to total assets (liquid assets ratio)

10.23

11.05

12.18

13.33

13.75

Liquid assets to short-term liabilities

20.49

22.43

24.05

24.10

24.60

Liquidity coverage ratio

125.13146.92

142.21144.11144.06

Herfindahl-Hirschman Index (H-index)

Total assets (R billions)- Year-on-year percentage change
Total loans and advances (R billions)* Updated as at 5 October 2022. All figures are in percentages unless indicated otherwise.
** Impaired advances are advances in respect of which a bank has raised a specific impairment, and include any advance or restructured
credit exposure subject to amended terms, conditions and/or concessions that are not formalised in writing.
*** 2022 includes data up to August 2022.
Source: Prudential Authority

FINANCIAL STABILITY REVIEW November 2022

35

Executive summary

Overview

Domestic financial stability
conjuncture, outlook
and assessment

In focus: briefings on
selected topics relevant
to financial stability

Annexures

Table B.2: Insurance sector indicators
2017

2018

2019

2020

2021

2022

Market share in terms of assets (five largest life insurers)

73

73

74

73

72

72

Market share in terms of gross written premiums (five largest
non-life insurers)

47

46

48

47

47

50

2 928 973

3 011 459

3 143 872

3 254 815 3 724 257

3 520 916

160 976

196 726

206 831

Balance sheet
Total assets: life insurers (R millions)
Total assets: non-life insurers (R millions)

Total liabilities: life insurers (R millions)
Total liabilities: non-life insurers (R millions)239 132

260 616264 541

2 769 335 2 638 347 2 760 773 2 909 562 3 359 563 3 184 984
98 152114 828

117 377

141 422178 516174 747

485 507529 741551 175

564 327620 821287 908

489 618520 919578 716

253 91545 06745 373

11 76648 731

4 131

63.0

61.0

91.1

66.0

77.0

69.8

136 774

144 265

159 548

158 632

169 846

88 73058 52059 93496 38537 859Profitability
Gross written premiums: life insurers (R millions)
Net claims paid: life insurers (R millions)
Net profit before tax and dividends: life insurers (R millions)Individual lapse ratio: life insurers

Gross written premiums: non-life insurers (R millions)
Net claims paid: non-life insurers (R millions)
Combined ratio: non-life insurers (%)

77.0

97.0

97.0

113.0

119.0

109.7

Operating profit ratio: non-life insurers (%)

22.0

15.0

23.0

16.0

-14.4

-18.7

Solvency capital requirement cover ratio (median): life insurers

1.9

2.0

1.9

1.7

1.7

Minimum capital requirement cover ratio (median): life insurers

4.3

4.2

4.3

4.2

4.2

Solvency capital requirement cover ratio (median): non-life insurers

1.8

1.8

1.9

1.8

1.6

Minimum capital requirement cover ratio (median): non-life insurers

3.9

4.0

4.4

3.8

3.5

Solvency and capital** These returns are only available from 2018 due to changes in reporting requirements.
Source: Prudential Authority

FINANCIAL STABILITY REVIEW November 2022

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