This is the financial sector you write business in
The recent unravelling at international banks like Credit Suisse, First Republic Bank and Silicon Valley Bank (SVB) may have sent ripples through global financial markets, but they do not appear to have the scale to trigger a repeat of the 2008-9 Global Financial Crisis (GFC). This view emerged during a #ThinkBigPSG webinar on the future credibility of South Africa’s financial sector, featuring chair designate at Nedbank, Daniel Mminele. “The SVB collapse came out of the blue and as a shock to the markets; it was, therefore, not surprising that we [saw] nervousness, volatility and in some instances ‘near panic’ in terms of the sell-off in financial markets,” he said.
Basel III to the rescue
The clearest signal that global financial systems would withstand the current crisis was that central banks did not consider these events significant enough to diverge from their respective monetary policy paths. The widespread adoption of the Basel III framework post-GFC meant that most global banks had better capital and liquidity buffers than in 2007-8. This framework introduces measures such as liquidity coverage ratios and net stable funding ratios to prevent the circumstances that led to the SVB collapse. There is some irony in the fact that US regulatory authorities watered down certain regulatory provisions that directly contributed to the bank’s failure. SVB, which was highly concentrated in the start-up industry, became victim of liquidity and interest rate mismatches and large unrealised losses on its security portfolio, among other shortcomings.
“I do not think we have to worry about a 2008 style GFC,” said Mminele. “SVB was a unique case while the problems at Credit Suisse had been building over time … the good thing is that both institutions are now the subject of orderly resolutions that are being facilitated by the relevant regulatory authorities”. His comment preceded the failure of First Republic Bank but would likely remain the same. The question that South African financial advisers and investors are more concerned over is whether contagion in global banks could filter into the domestic market. Financial journalist Alishia Seckham, who facilitated the PSG event, asked about the sector’s credibility in the context of global bank failures; low domestic GDP; and the country’s recent grey listing by the Financial Action Task Force (FATF).
Well capitalised, with sufficient liquidity
The good news is that South Africa’s large retail banks are well capitalised and have sufficient liquidity to ride out short-term financial market storms. After commending local banks for their resilience through the GFC, Mminele reminded the audience that local regulatory authorities had “fully participated in all the initiatives that followed the GFC to make the financial system safer”. The pinnacle of their response was arguably the migration of the country’s regulatory framework to a Twin Peaks system of regulation comprising the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA). “Our banks are in an even better position [today] than they were back in 2008 … [they] have remained vigilant to ensure that they are well-prepared for potential pressures down the road, whatever the origin may be,” he said.
It is impossible, nowadays, to discuss the integrity of the domestic financial sector without the topic of grey listing being raised. Seckham pointed out that this sanction was not an indictment on the banking sector, but rather a result of broader, systemic failings. “The banking sector was not where the main issues lay, and good progress had been made in addressing some of the findings in that sector,” agreed Mminele. He conceded that the grey listing was somewhat self-inflicted due to the country’s slow progress in addressing issues in the legislative and criminal justice environs. Yes, South Africa passed two key pieces of legislation moments before the deadline; but the necessary speed and urgency was not always evident. Going forward, failure to stick with the FATF implementation plan stands out as a big risk to the credibility of the country’s financial sector.
SARB should weather the independence storm
The South African Reserve Bank (SARB) has been in the spotlight in recent years, with calls for its nationalisation and arguments for it to abandon its inflation targeting mandate. Seckham felt that ongoing attacks against the country’s central bank could have a destabilising effect. Mminele said that the current high inflation, high interest rate environment had contributed to questions about the role and responsibilities of central banks. He added that the independence of the SARB centred on three points, including its mandate; how it executed on that mandate; and its ownership structure. PS, readers should note that Mminele served two five-year terms as Deputy Governor of the SARB, making him well-qualified to comment here.
“Contrary to what many believe, the SARB shareholding structure does not result in its shareholders having any influence or control over the key responsibilities of the bank as they relate to monetary policy, financial stability, prudential supervision, oversight of the payment systems or the monetary rights of issue when it comes to notes and coin,” he said. He also pointed out that the nationalisation of the SARB would not necessarily lead to changes in its independence or mandate, as these are set out in the Constitution. We hope you enjoy the following ‘lesson’ on why the central bank exists. The Constitution clearly states that the primary objective of the SARB is to protect the value of the currency in the interest of balance and sustainable growth; price stability is not an end in itself but is pursued in the interest of balanced and sustainable growth, and by implication, job creation.
The twin ‘growth and leadership’ concern
It does not matter how well run your financial sector is if the country is unable to keep up with the global GDP growth curve. Unfortunately, South Africa is on the backfoot at the moment, with the latest International Monetary Fund estimate of just 0.1% GDP growth for 2023. Given the country’s population growth rate of around 1.6%, we are backsliding on a GDP per capita measure. “The fortunes of the banking sector are inextricably intertwined with those of the domestic growth outlook, and we certainly have to worry based on the kind of growth numbers we have been registering,” Mminele said. He warned that the country was “in a deep crisis’ due, among other issues, to electricity supply constraints; rail and port infrastructure bottlenecks; and rampant crime and corruption.
As for the future, there needs to be a collaborative approach between the public and private sectors to revive the ailing economy. “We need strong and decisive leadership to ensure that we tackle the most pressing issues … we need a higher sense of urgency … and much stronger implementation and accountability frameworks,” concluded
Mminele. “Otherwise, we are indeed, as many have said, running a risk of becoming a failed state”.
Writer’s thoughts:
I thoroughly enjoy the #ThinkBigPSG series, which deserves praise for exploring domestic economic, political and social issues through a thought leadership lens. The latest discussion on the future credibility of the financial sector left its mark, with the real question being whether our banks and insurers can endure a multi-year economic growth and political leadership ‘winter’. Failed state or not? Your thoughts? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
