It’s often forgotten that the Reserve Bank has two mandates: price stability and the stability of SA’s financial system.
Its first, monetary policy responsibility, tends to get all the attention. But its second, the financial stability mandate, is just as important, even if in some ways more complex. The outcomes may be far harder to judge than the bottom line for monetary policy — which is the inflation rate. But if the Bank didn’t do its job on safeguarding financial stability, we’d know all about it.
Even so, inflation targeting and the intricacies of monetary policy and interest rates are by far the more sexy topic for markets and consumers. And when the Bank first began its twice-a-year financial stability forums a few years ago, they struggled to attract the kind of audiences the Bank’s monetary policy forums attracted.
That is starting to change, as the audience of senior bankers, treasurers and other financial system players at last week’s financial stability forum suggested. And no wonder. In a world in which uncertainty is the only certainty — to borrow a line from governor Lesetja Kganyago — the risks are significant, and it’s harder than before to predict whether and when they might materialise.
The Bank, like its central bank colleagues in the global financial stability forum that was set up by the G20 after the 2008/09 global financial crisis, is monitoring the system closely. It is putting extra measures in place to manage and mitigate risks. But at a time like this it is particularly important that the Bank shares its take on the outlook for the financial system as widely as possible and engages with all concerned.
The financial stability mandate is not just about regulating the soundness of SA’s banks, insurers and other financial institutions — though it is that too. It is much wider, as are its implications. And the list of risks is long — from geopolitical tension and policy uncertainty globally, to capital outflows, climate, cyber, infrastructure failure, public debt, and debt distress in households as well as businesses. At least the Financial Action Task Force has a good chance of falling off the risk list this year.
The financial stability mandate is not just about regulating the soundness of SA’s banks, insurers and other financial institutions — though it is that too. It is much wider, as are its implications.
One risk that the Bank has consistently highlighted in recent years’ market, is the so-called “bank sovereign nexus”. Banks have ramped up their holdings of government bonds, acting as almost a buyer of last resort after foreign investors fled SA’s local bond market after their interest peaked in the early days of “Ramaphoria”.
The Moody’s downgrade as the Covid-19 pandemic struck was the last straw. Government upped its borrowing; banks absorbed much of that, as did pension funds. The result is that while banks’ holdings of SA’s domestic government debt aren’t at anything like danger levels, they are significant. The risk to their balance sheets is not that government will default, which is exceptionally unlikely. Rather it is that when investors turn risk averse and bond yields shoot up, bond prices fall and with them the value of banks’ holdings, reducing their capital and other key ratios.
There’s another side to that though, one that also came up at last week’s forum. It is that the more banks buy government bonds at generous but risk-free yields, the less likely they are to do what banks are supposed to do, which is the more difficult and risky business of lending to businesses and households. That’s not good for economic growth and investment — it’s a classic way in which high levels of government borrowing “crowd” out private sector borrowing.
The Bank wants them to be doing more lending to oil the wheels of the economy and there is often understandable pressure from politicians for it to encourage that. But the money banks lend is depositors’ money — the nation’s savings. As banking and financial stability regulator the Bank must safeguard that too and prevent banking and financial crises. It’s a complex, multilayered business.
The Bank leaves it to banks to run their own businesses and make their own decisions, unless it needs to intervene. But it rightly keeps a careful eye — and its regular forums and meetings with stakeholders should help to keep them, and the Bank, alert to the risks.
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