daniel mminele : financial market and reserve management challenges in south africa address by mr daniel mminele, deputy governor of the south african reserve bank, at the 7th annual financial markets department cocktail, south african reserve bank, pretoria, 30 may 2013. * 1. * * introduction good evening and welcome to the south african reserve bank. it gives me great pleasure to welcome you all to the 7th annual cocktail function of the financial markets department. as usual there are two reasons for this function tonight. the first one is to update you on the financial market department ’ s ( fmd ) market operations and to inform you about the progress made with regard to various initiatives we are involved in, which are aimed at developing our markets and making them more efficient. the second reason is to thank you for your co - operation during the past financial year and to provide an opportunity to exchange notes and interact with one another. you will be glad to know that i am the only speaker, the rest of the programme should be fine and entertaining. i will try and be relatively brief, because they say it ’ s best to leave your audience before your audience leaves you. allow me to formally introduce the new head of the fmd, who is well known to most of you. leon myburgh joined the bank on 1 march 2013, to take up this very challenging but rewarding role, and we wish him every success. i have no doubt that he can count on your support and cooperation. i don ’ t think it would be appropriate to address a financial markets cocktail function and not at least touch on the latest developments. i would like to spend just a few minutes taking stock of the economic and financial market landscape, before turning to matters related to the department and market development initiatives. when we last met in may 2012, the key challenges we faced related mostly to an uncertain and fragile global economic and financial markets environment, in particular the euro zone crisis and the us fiscal situation. even if we can ’ t quite declare victory, the global economy and financial markets have witnessed some improvement since then, as continued action by the world ’ s major central banks to provide the necessary liquidity to sustain the global economic recovery has largely removed the “ tail risks ” that unsettled global markets. while these actions have removed acute financial stability risks, the transmission mechanism into the real economy remains generally impaired, resulting in what continues to be a slow, unbalanced and fragile recovery. as you are aware, possible risks attached to

as it was when the bank earned interest on loans to banking institutions, it is an expense item because the bank must now pay high deposit interest to financial institutions and the treasury. to be sure, the central bank does have foreign assets – mostly foreign bank deposits or foreign government bonds – and earns interest on them. but the interest rate on those assets is far below the rate the bank must pay on krona - denominated deposits. in 2023, the bank's interest balance was negative by 9. 4 b. kr. actually, it has been negative every year since 2015, apart from 2020, when the policy rate was historically low. although central banks are not profit - driven and, technically speaking, cannot become insolvent in their home currency, their financial position does affect their credibility. sometimes central banks'capital has been viewed as a standard for the value of the currency they issue. but in any event, it is clear that operating a central bank at a loss entails a transfer of wealth into the economy. it is because of this that there are accepted international benchmarks emphasising that central banks should preserve their capital – partly to ensure credibility. the central bank of iceland's capital target, endorsed by the supervisory board by law, is 150 b. kr., but at the end of 2023 the bank's capital was 101 b. kr. by the end of q1 / 2024, it had fallen to 95 b. kr., which puts it 55 b. kr. below the target. the central bank of iceland is not alone in operating at a loss. most, if not all, western central banks currently have negative interest rate differentials, the result of large - scale quantitative easing ( qe ) during the aftermath of the 2008 financial crisis. qe entails that central banks print money by buying government bonds, and even corporate bonds and equities. the qe policy was prevalent for about a decade, and now most leading central banks are left with bloated asset portfolios that have tumbled in value since interest rates started rising. efforts to unwind these asset portfolios must be undertaken with care in order not to destabilize markets into utter disarray. the excess of liquidity prevailing in most western countries has caused the central banks concerned to mop up liquidity by offering deposit accounts. this is very costly. in the recent past, central banks have adopted a range of measures