SA's financial sector "strong and stable"

Thursday, April 26, 2018

South Africa’s financial sector is strong and stable, says Reserve Bank Deputy Governor Francois Groepe.

“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,” said the Deputy Governor on Wednesday.

Speaking at the release of the of the first edition of the Financial Stability Review (FSR) for 2018 at the Reserve Bank premises in Tshwane, Groepe said the stability of the financial system in South Africa has improved since the previous FSR due to a more synchronised and more sustained economic recovery in advanced economies.

The improvement is also due to a more positive, albeit challenging, domestic economic growth outlook, as well as improved levels of confidence domestically following positive political developments and ratings outcomes.

During the reporting period, the Reserve Bank found that a number of event risks occurred that proved not to be systematic in nature but had potential financial stability implications.

These risks include the announcement of an investigation into accounting irregularities at Steinhoff International Holdings in December 2017, followed by the resignation of their CEO and chairman. 

The group’s share price subsequently declined by more than 80%, which resulted in a short‑term liquidity crisis. To date, Steinhoff 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,” said Groepe.

Focus on Capitec, VBS

Since December 2017, the Reserve Bank has observed an increase in the volatility of selected equities listed on the JSE Limited. These include the sharp, though brief, decline in the share price of Capitec Bank, which was likely to have been triggered by a ‘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.

The Reserve Bank said 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,” said Groepe.

Groepe also focused his attention on VBS Mutual Bank, which was placed under curatorship on 11 March 2018 in order to maintain the functioning of the bank and to promote the safety of depositors’ funds.

He said the intervention was necessary to, among other objectives, preserve depositors’ confidence and trust in the South African banking system.

The Deputy Governor said South African banks are well-capitalised and profitable.

“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.” - SAnews.gov.za

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