be more suitable for, or may have been calibrated to be more applicable in, developed markets ; they may not always be fit - for - purpose in emerging markets such as south africa. the large banking groups regulated by the sarb mainly have operations on the african continent and / or in other emerging markets. some supervisors on the continent and in other emerging markets where south african banks have operations have yet to implement the regulatory reforms. this imposes an obligation on the sarb, which is the only african member of the basel committee on banking supervision, to effectively supervise the subsidiaries of south african banks in the rest of the african continent and other emerging markets. failure to do this creates inconsistencies in how regulatory capital and other risks are measured, and in how supervisory standards are applied. another example of an inconsistent application of international standards is different supervisory expectations in africa of the same international standards relating to the use of risk models under the advanced measurement approaches. although there is a need for more standardisation and comparability of risk - weighted assets across banks and jurisdictions, the sarb believes that there remains a need for banks to be able to apply quantitative risk models to adequately measure risk across portfolios and / or risk types. if the expectation is to reduce the use of risk models in measuring regulatory capital, then banks will become less inclined to invest in the use of test requirements imposed under basel ii. the sarb believes that the use of test requirements has made a significant positive contribution to the way in which banks measure and manage risk, and that this has led to improved risk management and pricing of risk across the regulated entities. the sarb supports the risk models under the advanced measurement approaches to be used. the regulatory framework is beginning to succeed in meeting its objective of addressing the ‘ too big to fail ’ problem as g - sibs are in general adjusting their balance sheets and evaluating their complex business models to meet strengthened regulatory demands in many areas, especially in respect of higher - quality capital ratios and the difficult economic environment we are currently facing. as you know, these developments have spilled over into south africa when a g - sib headquartered in the uk2 announced its partial withdrawal from a domestic systemically important bank, or d - sib, mainly due to global regulatory pressures. as a result, we might face various policy considerations going forward as we need to carefully assess the effect and potential impact of home regulatory requirements on local markets and if we are not perhaps importing structural instability ( uncertainty

a six percent target, then interest rates will be exactly three per cent higher in the country with the higher target. if that country raises its target to nine per cent, then interest rates will end up rising another three percent. and if that country simply stops trying to control inflation at all, then it will become harder to borrow in its currency, with lenders switching to some other currency with more predictable inflation. in the short run, you can get lower interest rates by page 8 of 10 surprising people with higher inflation. but once they wake up – and investors aren ’ t slow to see higher inflation – interest rates have to rise. for this reason, one of the most effective ways for lowering interest rates is to keep inflation low and predictable. looking around the world, the evidence is very clear that low inflation countries have low interest rates and high inflation countries have high interest rates. in the extreme cases, such as sweden, inflation is so low they even have negative interest rates. sweden ’ s repo rate, for example, is currently at - 0. 5 per cent. by contrast, in countries with much higher inflation, like argentina or nigeria, policy rates are much higher. nigeria ’ s is currently 14 per cent. argentina ’ s is 26. 25 per cent. 12 so although it is the case that interest rates typically rise in response to higher inflation, on average interest rates are lower because of lower inflation. this is why inflation targeting is a way to get lower rates over time. this sets the context for our current policy settings. inflation in south africa has moderated in recent months. we now have a good chance of getting inflation down well within the middle part of the target. inflation is likely to move in this direction because of declining food inflation, our policy communications, the stronger exchange rate, and the sensitivity of price and wage setters to weak economic conditions. if we can keep inflation lower, anchoring inflation expectations, that should in turn generate a lower rate of interest to support the economy. unfortunately, we also have to worry about higher inflation if things go wrong – that is, if the exchange rate begins depreciating again, if wage settlements are excessive, or if our monetary policy communication isn ’ t heard, loud and clear. these factors limit our policy space. 13 the ratings agencies have been clear that the effectiveness of the central bank is one of the strongest pillars supporting this economy – a claim that speaks to both our price and financial stability mandates. we will