PRETORIA– 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, he said here Wednesday.
Speaking at the release of the first edition of the Financial Stability Review (FSR) for 2018 here, Groepe said the stability of the financial system in South Africa had improved since the previous FSR because of a more synchronized and more sustained economic recovery in advanced economies.
The improvement is also because of a more positive, albeit still challenging, domestic economic growth outlook, as well as improved levels of confidence within the country following positive political developments and ratings outcomes. During the latest reporting period, the central bank found that a number of event risks occurred which proved to be not systematic in nature but had potential financial stability implications.
These risks include the announcement of an investigation into accounting irregularities at furniture and retail goods retailer Steinhoff International Holdings in December 2017, followed by the resignation of its chief executive officer and chairperson.
The group’s share price subsequently declined by more than 80 per cent, 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.
Since December 2017, the Reserve Bank has observed an increase in the volatility of selected equities listed on the Johannesburg Stock Exchange (JSE). 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, who also focused his attention on VBS Mutual Bank, which was placed under curatorship on March 11, 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.
Source: NAM NEWS NETWORK