Introductory remarks by Francois Groepe,
Deputy Governor of the South African Reserve Bank,
at the Financial Stability Forum and release of the first edition
of the Financial Stability Review for 2018
South African Reserve Bank, Pretoria
25 April 2018
Members of the press, guests and colleagues, ladies and gentlemen.
Welcome to the release of the first edition of the Financial Stability Review (FSR) for
2018. The FSR has been published twice a year since 2004. Through this publication,
the South African Reserve Bank (SARB) communicates its assessment of systemic
risk in the domestic financial system.
Your presence at this Financial Stability Forum is appreciated, as the forum intends to
encourage informed debate on, and therefore to enhance the understanding of, the
complex and challenging matters related to financial stability.
Consensus is growing globally that regulatory frameworks should focus more on
mitigating the risks to the financial system as a whole, as significant risks can build up
and threaten the stability of the financial system while individual financial institutions
seem stable and sound. In pursuing this goal, the Financial Sector Regulation Act 9 of
2017 (FSR Act) confers on the SARB an explicit statutory mandate to protect and
enhance financial stability. The SARB and National Treasury have consequently
developed new legislation that will facilitate the orderly resolution of systemically
important financial institutions that are failing, which is an important pillar of the
SARB's expanded
mandate. This legislation will be effected through amendments to
the FSR Act. A key component of the resolution framework is the establishment of an
explicit deposit insurance scheme for banks in order to protect depositors from losses
in the event of a bank failure.
FSR
Overall, the message of this is that the stability of the financial system in South
Africa has improved notably since the previous FSR. This is based on a more
synchonised and more sustained economic recovery in the advanced economies, a
more positive (albeit still a challenging) domestic economic growth outlook, as well as
improved levels of confidence domestically following positive political developments
and ratings outcomes. Against this background, the SARB has assessed the risks to
financial stability with a view to identifying and mitigating any vulnerabilities in the
domestic financial system; it has also analysed the probabilities and potential impacts
of these risks in the FSR. In the presentation to follow, Dr Greg Farrell will share a
more detailed assessment of these risks.
During the reporting period, a number of event risks occurred that proved not to be
systemic in nature but which had potential financial stability implications. These risks
included the announcement of an investigation into accounting irregularities at
Steinhoff International Holdings in December 2017, followed by the resignation of their
share price
Chief Executive Officer and Chairman. The Group's subsequently declined
by more than 80%, which resulted in a short-term liquidity crisis within the Group. To
date, the Group has taken various actions in an effort to stabilise its finances and
operations in the medium term. Any potential financial implications arising from this
event would most likely be the result of some form of default risk in respect to the
Group and related parties' debt obligations
that the financial sector may be exposed
to. While such a default could cause losses for banks, lenders and investors, it is
unlikely to result in financial instability as most of the exposure to the Group and related
parties' lies with
foreign banks. Developments relating to this situation are,
nevertheless, closely monitored.
Furthermore, since December 2017 we have observed an increase in the volatility of
selected equities listed on the JSE Limited. The sharp, though brief, decline in the
triggered by a
share price of Capitec Bank (Capitec) was likely been 'short-selling'
strategy applied by certain investors. The common traits of such a 'short-selling'
strategy include influencing market participants'
perceptions by means of extensive
use of social media platforms and potentially, running an ongoing campaign against
the targeted entity.
This type of 'short-selling' strategy has the potential to create financial instability,
especially if the targeted company is a deposit-taking institution. Although a decline in
a bank's share price does not necessarily create systemic risk, there may be a risk to
financial stability. This could transpire if the information being spread by the
'short-selling' campaign, whether it be true or not, results in a negative feedback loop
between lower investor confidence, as reflected in a decline in the equity price of the
targeted institution and a loss of depositors' and lenders'
confidence in the targeted
in a decline in deposits or a 'run'
deposit-taking institution. This may ultimately result
on the bank. The negative feedback loop can exacerbate the circumstances even if
the trigger event was based on inaccurate information. In the Capitec case, statements
by the SARB and appropriate responses by Capitec calmed fears and led to a recovery
in Capitec's share price.
VBS Mutual Bank (VBS) was placed under curatorship on 11 March 2018 in order to
depositors' funds.
maintain the functioning of the bank and to promote the safety of
This intervention was deemed necessary to, among other objectives, preserve
depositors'
confidence and trust in the South African banking system. After a thorough
VBS's
assessment of VBS, the curator recommended that an independent review of
business conduct be undertaken, after which the SARB commissioned a forensic
investigation into the affairs of the bank.
Other potentially systemic events that occurred during the reporting period included
two settlement failures at domestic financial market infrastructures causing certain
trades to either fail or remain in an unsettled state in the securities market. These
events were reported via the Financial Sector Contingency Forum and then managed
by the SARB through its interaction with market participants. A review of these
settlement disruptions has been commissioned, and they will be addressed and
monitored in future.
Globally, economic conditions continued to improve during the second half of 2017,
and it appears that a broad-based cyclical recovery is underway. In January 2018, the
revised upwards most countries' economic growth
International Monetary Fund (IMF)
outlooks for 2018 and 2019, but also warned against possible risks to economic growth
recovery, including subdued productivity, increased protectionism, higher geopolitical
pressures, and the possibility of sharp financial market corrections in cases where
asset valuations were overextended.
Institutional soundness remains a feature of the financial system in South Africa. The
analysis presented in this FSR confirms that banks are well-capitalised and profitable,
and that they hold sufficient levels of liquidity. Although impaired advances and credit
impairments increased in January 2018, this was largely a result of the implementation
of International Financial Reporting Standard 9 (IFRS 9). It inter alia specifies how an
entity should classify and measure financial assets and liabilities and one of the
fundamental changes that IFRS 9 introduces is the concept of Expected Credit Loss
(ECL) provisioning. This new principle replaces the current incurred losses model and
has materially changed the way in which companies, and in particular banks, are
required to account for impairments for credit losses.
Similarly, the insurance sector seems to be sound. A selection of indicators commonly
used to identify macroprudential risks in the industry did not reveal any significant
concerns from a systemic risk perspective despite the subdued level of economic
the insurance industry's
growth and which impacts negatively on premium income,
lapses and surrenders. Pension funds are subject to risks stemming from a sovereign
credit rating downgrade because of the size of their bond holdings. Their large
exposure to this asset class does not, however, present a financial stability risk as
pension funds normally hold these bonds to maturity.
A healthy, well-functioning financial system is integral to an environment in which
structural, fiscal and monetary policies can be most effective. Recent assessments of
the South African financial system by the IMF claim that regulatory reform has made
the system relatively safer. Designated procedures for systemically important financial
institutions have been put in place; stress testing has become a regular part of the
supervisory toolkit; capital buffers have been increased; new rules to address liquidity
vulnerabilities have been introduced; resolution frameworks have been strengthened;
and over-the-counter derivative regulation has been enhanced.
There are important areas where more progress is still required, including the full
implementation of strengthened resolution frameworks, measures to increase the
resilience of central counterparties, and measures to address the systemic risk
emanating from asset management activities. New challenges are emerging from
technological changes and innovation, such as the digitisation of finance. Ongoing
financial innovation, changes in business models, and strengthened bank regulation
have all supported an increasing shift from bank lending to market-based finance, and
the importance of non-banks has continued to grow.
have become
In conclusion, it is clear that the global and domestic financial systems'
FSR
more resilience since the publication of the previous in November 2017. Some
global uncertainties caused by a number of economic and financial developments
remain, including faster-than-expected monetary policy normalisation in the advanced
economies, as well as protectionist measures and possible retaliatory actions by
others.
Despite these challenges, the South African financial system continues to efficiently
facilitate financial intermediation and mitigate negative spillovers and disruptions.
Overall, despite some headwinds from a moderate economic growth scenario and
some remaining fiscal challenges, the South African financial sector is assessed as
strong and stable. The sector is characterised by well-regulated, highly capitalised,
liquid and profitable financial institutions, supported by a robust regulatory and
financial infrastructure.
I have briefly highlighted the key issues raised in this FSR. More detailed analyses are
available in the publication itself, and some of these will be highlighted in the
presentation by my colleague, Dr Farrell. I trust that you will find these interesting,
stimulating, and relevant to the current environment, and I invite you to share your
views as part of the all-important process of ongoing debate on financial stability.
Thank you.