You’ve got to love the SARB governor

Inter-regulatory collaboration between the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA) is essential for South Africa’s long-term financial stability. In his keynote address to the inaugural FSCA Industry-wide Conference 2024, South African Reserve Bank (SARB) Governor, Lesetja Kganyago said that the SARB could not operate in isolation in delivering on its mandate to ensure financial stability.

“We rely on other authorities such as the National Treasury (NT), the Financial Intelligence Centre (FIC), the National Credit Regulator (NCR) and, of course, the FSCA [with] cooperation between these institutions [being] institutionalised through the Financial Sector Oversight Committee (FSOC) and the Financial Sector Contingency Forum (FSCF),” he said. PS, for those who have the time, the full speech is available here, and it is well worth reading. This writer enjoyed the SARB Governor’s no-nonsense, rational approach to all matters prudential. 

A cocktail of regulatory topics

The two-day conference programme was loaded with panel discussion and presentations covering important market conduct and prudential regulatory topics, all with a twin peaks framework ‘skew’, and at all times keeping consumer protection top of mind. Aside from the SARB Governor’s keynote address, the dual in-person and virtual audience were treated to intense discussions on culture, governance and accountability; artificial intelligence (AI) and consumer protection; inter-regulatory collaboration under twin peaks; and grey listing, to name a few. This newsletter focuses on the Governor’s keynote address. 

Kganyago was full of praise for the twin peaks model which he labelled  “a comparatively robust model, especially for a highly concentrated financial sector with a small number of large players…” He conceded that the model was not yet fully bedded down, adding that it would take until April 2026 for collective investment schemes (CIS) and pension funds to ‘move’ to the PA. The Governor also reminded the audience that the SARB, which incorporates the PA, had ultimate responsibility for financial stability. “The FSCA is the apex authority for market conduct; there is a clear separation [between its mandate and that of the PA],” he said. 

Financial stability and conduct are inter-connected

Inter-regulatory collaboration emerged as a strong theme over the two-day conference. “Twin Peaks clearly assigns market conduct issues to the FSCA, but that hardly means we at the SARB can ignore conduct issues; indeed, financial stability and conduct issues are ultimately connected,” Kganyago said. His contention, which few will dispute, is that a financial market rife with misconduct is by definition unstable. Consider, for example, the financial shenanigans perpetrated by United States’ (US) banks and insurers in the run-up to the 2008-9 Global Financial Crisis (GFC). 

According to the Governor, the global narrative on financial regulation changed following the GFC. “Before 2008, finance was widely considered an industry where light-touch regulation would free smart people to generate astonishing wealth; this narrative had the most traction in the advanced economies,” he said. Post crisis, it became clear that the private sector “was plainly guilty of excessive risk-taking and bad judgement”. This writer enjoyed the technocratic versus populist version of post-GFC financial sector regulation narratives that the Governor shared. 

The former focused on “re-engineering finance to make another GFC impossible” whereas the populist narrative obsessed over how highly paid bankers brought the US economy to its knees, without punishment. “The lesson we must take from this [populist versus technocrat debate] is that financial stability is not just an engineering problem,” said Kganyago, who then made a telling observation re the challenge of installing a sensible policy regime to ensure financial stability in the context of democracy. In his view, financial stability is impossible sans an effective regime for regulating conduct. Put differently, people who feel betrayed by the financial sector cannot be placated by technocratic mumblings about variables such as liquidity coverage ratios. 

Emotive mis-directions

“The political discussion will centre on moral outrage and that will drain the oxygen out of technocratic debates,” he said. You will witness these types of debates daily in South Africa, as evidenced by repeated calls from certain parties for the nationalisation of the SARB, among others. As these calls mount, the common sense reasoning for the SARB’s financial stability mandate becomes lost in emotive mis-directions like ‘expropriation without compensation’ and ‘monopoly capital’. 

The Governor also noted that financial crises were near-impossible to resolve without collaboration across civil society, government and the private sector because once “trust has been burnt up by misconduct” it became difficult to get policy right. His talk described the global macroeconomic outlook entering 2024 as difficult, with little margin for error. 

Key issues include the upshift in geopolitical tensions, exacerbated by the Russia-Ukraine war and Israel-Hamas conflict; the worst global inflation surge in a generation; and the high number of countries holding elections between March and December, including South Africa on 29 May and the US on 5 November. “Just a few years ago the monetary policy debate in the advanced economies was about inflation that was too low, about deflation risk, about tools for providing stimulus when interest rates are as low as they can go,” Kganyago said. 

Today, consumers and monetary policy decision makers face significantly higher and persistently-sticky inflation, with the latest numbers from both South Africa and the US pointing to a higher-for-longer interest rate environment too. The inflation and interest rate outlook contributes to financial stress, especially in Africa were some countries risk losing access to global bond markets. 

The rich ironies in the derivatives debate

The talk also touched on the rich ironies that exhibited following the US Silicon Valley Bank (SVB) collapse in March 2023. The Governor explained: “Among the lessons of the GFC was that complex derivatives and risky assets were contributing causes of bank failures; in SVB we had a failed bank that got in trouble because of its holdings of the world’s classic safe asset [the US dollar] which it failed to hedge using derivatives”. This observation supports that market conduct is as much a part of financial market contagion as financial product. 

Although not fully insulated from global geopolitics, ordinary South Africans are likely more concerned by the country’s lacklustre economic growth and falling living standards. “Since 1994, there have been only a few years with worse growth [than the 0.6% in 2023] … one was the 1998 emerging market crisis, one was GFC-related, in 2009; and one was the 2020 COVID-19 crisis,” Kganyago said. “And the gap between South African growth and world growth is now double its longer-term average”. Growth constraints, oft-lamented by FAnews, include electricity supply and poorly functioning rail and port infrastructure. 

For some good news, the Governor said he was confident that South Africa would be removed from the Financial Action Task Force (FATF) grey list by its next review date in 2025. “The lesson [in addressing the grey listing] include that joint efforts are required to look after the integrity of SA’s financial system; we all suffer when this is compromised,” he said. 

Overall, the country’s financial outlook remains resilient, with capital buffers holding up despite shocks caused by the 2020-21 pandemic. One concern, however, is that the financial sector has a poor public image, as illustrated by the furore around banks manipulating the exchange rate of the rand. The Competition Appeal Court has since ruled there was “no evidence of a general conspiracy” by the implicated banks. 

Connectedness, trust for financial stability

Earlier in this piece, this writer underlined the phrase financial stability and conduct issues are ultimately connected. This was the first of two comments that the Governor made that really resonated; the second which featured in his closing comment reads: trust is every bit as valuable as financial capital. And on that note, dear reader, we close this newsletter with the Governor’s parting thoughts. 

“The FSCA, are the guardians of the financial sector’s moral capital; I do not know how you devise a capital adequacy ratio to measure whether we have enough, but trust is every bit as valuable as financial capital,” he said. “We are at the top of two different peaks, [the FSCA] leads on market conduct, and [the PA] leads on financial stability, and we need each other to succeed”. 

Writer’s thoughts:

It can be difficult to remain optimistic in the context of high inflation, rising interest rates, slow growth and unemployment, but at least the twin peaks regulators seem to be getting the basics right. Are you happy with the financial stability delivered jointly by the FSCA and PA? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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