The South African Reserve Bank: Blowing winds of change (Part 2)

• Jurisdiction: South Africa
• Citation: (2013) 25 SA Merc LJ 492
• Author: Johann De Jager
• Published date: 25 May 2019
• Date: 25 May 2019
• Pages: 492-512

THE SOUTH AFRICAN RESERVE BANK:

BLOWING WINDS OF CHANGE (PART 2)

JOHANN DE JAGER*

General Counsel, South African Reserve Bank

[The f‌irst part of this article appeared in (2013) 25 SA Merc LJ

342–361.]**

III THE GLOBAL FINANCIAL CRISIS

The global f‌inancial crisis, which started in about August 2007 and

appears to have peaked in September 2008, could be regarded as a phase

of the evolution of f‌inancial markets under the radical f‌inancial deregu-

lation process that began in the late 1970s, predominantly in overseas

countries.

(a) General

This evolution took the form of cycles in which deregulation, accompa-

nied by rapid f‌inancial innovation, stimulated powerful f‌inancial booms

that ended in crisis. Government bailouts in response to these crises

caused new expansions, resulting in larger f‌inancial markets and larger

f‌inancial crises, threatening whole f‌inancial systems and societies.

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* Dip Iuris B Iuris LLB (Unisa) LLM LLD (RAU). General Counsel of the South African

Reserve Bank, Advocate of the High Court of South Africa and Extraordinary Professor,

Department of Mercantile Law, University of Pretoria. Any opinions and views expressed in

this article are the writer’s own and do not necessarily represent the opinions and views of the

South African Reserve Bank (SARB or Bank).

** Part 1 of this article described the substantial changes to the South African Reserve

Bank Act 90 of 1989 (SARB Act) that were introduced by the South African Reserve Bank

Amendment Act 4 of 2010 (Amendment Act). Thus the concept of ‘associates’ prevents

shareholders from circumventing the limits of shareholding by individuals. The revised

structure of the SARB Board, though increasing governmental control, broadens the

knowledge and skills base of the Board and allows for public nomination of elected directors

of the Bank. To clarify the duties of the Bank directors, the SARB Act imposes on, and def‌ines

a duty of care and skill for, these directors. A panel called by the Governor of the Bank

evaluates nominees as potential non-executive directors of the Bank. Grounds for disqualif‌i-

cation of directors now appear in the SARB Act. In addition, following modern trends,

the Board is responsible for implementing measures pertaining to corporate governance

while the executive off‌icers (the Governors), exercising vast decentralised original powers,

manage the day-to-day business of the Bank.

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See James Crotty ‘Structural causes of the global f‌inancial crisis: A critical assessment of

the ‘‘new f‌inancial architecture’’’ (2009) 33(4) Cambridge Journal of Economics 563; Stephanie

Blankenburg & José Gabriel Palma ‘Introduction: The global f‌inancial crisis’ (2009) 33(4)

492

(2013) 25 SA Merc LJ 492

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The most recent global f‌inancial crisis was rooted in global imbalances

in savings and consumption characterised by large savings in emerging

economies and unsustainable levels of debt-f‌inanced consumption in

some advanced economies, coupled with rapid rises in asset prices

(especially in the housing market). In many countries, but particularly

in the United States of America, abundant credit and scant regulation

led to debt rising to unsound levels. The risks in indiscriminate credit

extension were amplif‌ied by the innovation of sophisticated f‌inancial

products and inappropriate risk management systems. Through securi-

tisation, mortgage-related products were repackaged into securities that

were sold to investors throughout the world, and toxic mortgages

became deeply rooted in the global f‌inancial system. When the housing

bubble f‌inally burst, the total exposure of f‌inancial institutions world-

wide because of mortgage-backed securities ran into trillions of dollars.

As a result of the ensuing panic and uncertainty, f‌inancial institutions

became unwilling to lend to each other, and liquidity in the interbank

funding market dried up. Stock markets around the world collapsed,

household wealth was virtually wiped out, and interbank lending and

lending to corporations came to a grinding halt. It very nearly led to the

widespread collapse of f‌inancial systems worldwide.

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(b) Effect on Central Banks

The f‌inancial crisis constituted a sharp reminder of how much a

well-functioning economy depends on a stable f‌inancial infrastructure

and how fragile this infrastructure is. Its stability depends largely on the

preservation of conf‌idence in different elements, such as maintaining

the value of the currency, the reliability of payment and settlement

mechanisms, and the ability of f‌inancial intermediaries to provide,

without disruption, intermediation between borrowers and lenders at

costs that reasonably ref‌lect risks. Authorities were reminded that they

needed to consider all these requirements simultaneously and continu-

ously, should they wish to conduct adequate regulation and supervi-

sion.

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Cambridge Journal of Economics 531; Claudio Borio & Ilhyok Shim ‘What can (macro)pru-

dential policy do to support monetary policy?’ (2007) BIS Working Paper No. 242 (December

2007) 8; Erland Walter Nier ‘Financial stability frameworks and the role of central banks:

Lessons from the crisis’ (2009) IMF Working Paper WP/09/70 7.

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National Treasury of the Republic of South Africa A Safer Financial Sector to Serve South

Africa Better (2011) 9.

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H Davies & David Green Banking on the Future: The Fall and Rise of Central Banking

(2010) 285.

SOUTH AFRICAN RESERVE BANK 493

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