framework for the systemically important financial institutions and markets in south africa. the definition of financial stability has also been refined to the following statement : “ financial stability refers to a financial system that is resilient to systemic shocks, facilitates efficient financial intermediation and minimises the macroeconomic costs of disruptions in such a way that confidence in the system is maintained. ” this edition of the financial stability review covers the six - month period ending june 2014, but also takes into account some events up to the point of publication. it consists of three main sections. the first section provides a reassessment of financial stability risks that were identified as potential risks in the march 2014 edition of the financial stability review. in the second section the main financial stability developments and trends over the period under review are analysed from a global and domestic perspective. the final section provides a review of the developments in the domestic and international financial and regulatory environment. this edition also includes three boxes on the following topics : bis central bankers ’ speeches - the curatorship and resolution of african bank ; - debt ratings - shadow banking in south africa ; and the south african banking sector remained sound with adequate levels of capital, increased levels of high - quality liquid assets, good asset quality and profitability that compares favorably with other jurisdictions. the sector ’ s total capital adequacy ratio of 14, 6 per cent remained well above the regulatory requirement of 10 per cent. the soundness of the banking sector was achieved despite a deteriorating domestic economic growth outlook and the first significant bank resolution in almost a decade when african bank limited was placed under curatorship in august 2014. the sarb managed the resolution of african bank limited in a speedily and decisive manner, limiting the potential risk of contagion to the rest of the banking sector. as part of this process the bank put in place a package of measures which are in line with the key attributes of effective resolution regimes of the financial stability board ( fsb ), enabling the institution to continue operating. although the intervention of the bank managed to avoid systemic risk materialising and there were no significant adverse effects on the rest of the banking sector, the broader financial markets and or the economy, some limited spillovers did occur. the limited contagion to other parts of the financial system occurred mainly as a result of the wholesale nature of african bank limited ’ s funding model. coordinated interventions by the authorities, regulators and the private sector contained these spillovers and ensured the continued stability of

, as the priority, but rather to target the pass - through from the exchange rate to inflation. the bank ’ s normal estimate of this is 20 %, meaning about a fifth of the change in the currency ’ s value shows up in the cpi. the scale of the pass - through varies from time to time, however, and at present it appears to be lower, probably as a consequence of reduced pricing power in a subdued economy. although inflation moved outside the target during the third quarter it has since returned to the target band, as forecast, registering 6 % in september and 5. 5 % in october. we have bis central bankers ’ speeches therefore not changed rates so far this year, nor have we introduced other policy measures to influence the exchange rate. this contrasts with the responses seen elsewhere. brazil has raised rates by 225 points this year, indonesia by 150 and india by 50 points. central banks have also resorted to less orthodox policies including tightening overnight rates, implementing some capital controls and creating new swap auctions – essentially, opening forward books. comparing the performance of the rand with the currencies of these other countries, we see little evidence that a more activist and experimental approach would have changed the rand ’ s direction in a meaningful way. furthermore, there are advantages to our approach, not the least of which is a less volatile output, inflation and interest rates. conclusion in essence, south africa is not a fragile country. rather, our system is anti - fragile, like a welldesigned building in an earthquake zone : it moves with the shocks so it doesn ’ t collapse. – our monetary policy stance is clear and appropriate ; – fiscal policy is vigilant in anticipation of the normalization of interest rates ; – a sudden stop is relatively unlikely for south africa ; – the end of qe is not plainly bad for sa, and could be a good thing if it heralds a return to growth in the advanced economies. thank you. bis central bankers ’ speeches