Financial system remains strong

The South African financial system continued to be sound during the first half of the year, according to the latest edition of the Financial Stability Review, released by the SA Reserve Bank (SARB).

The publication, which focuses on the six months to June 2007, is part of SARB’s efforts to encourage debate on financial stability issues and enhance the understanding of the financial system by highlighting its strengths and weaknesses.

According to the Financial Stability Review, the resilience of financial markets globally was severely tested during the past few months following the widespread impact of negative developments in the United States’ housing market, and the subprime mortgage market in particular.

Global markets generally experienced considerable volatility and illiquidity and there are signs that borrowers will face tighter terms and conditions, which could harm global economic growth.

Emerging market economies in general have proven to be resilient to the financial market turmoil following the subprime crisis, SARB said it review.

South African financial institutions have very little exposure to the United States’ subprime lending industry or to securities with subprime loans as underlying assets. Any direct impact of the subprime mortgage turmoil on the South African financial system is likely to be negligible.

Based on an analysis of selected financial soundness indicators, SARB found that the South African financial system remained sound during the period under review. Overall confidence in the financial services sector remained high and confidence in the banking sector was confirmed by the high level of the retail banking confidence index.

SARB believes that South African banks were well capitalised, but the country’s banking sector remained highly concentrated. The insurance industry remained strong although there are concerns about deteriorating profitability and a high loss ratio. Despite strong growth in household indebtedness the financial position of households remained sound given strong growth in disposable income and financial assets.

The moderation in the level of activity in the residential property market continued and could be extended further by the relatively high level of household debt that is limiting the ability of households to accumulate more debt.

The review concluded that the South African financial regulatory system is undergoing continuous change and legislative reform in an effort to maintain an appropriate level of financial regulation.

Useful links

  • SA Reserve Bank: www.reservebank.co.za