Governor, South African Reserve Bank
The South African Reserve Bank releases the Financial Stability Review (FSR) - 10 June 2026
The South African Reserve Bank releases the Financial Stability Review (FSR), which provides readers with the SARB’s assessment of the stability of the South African financial system. The Financial Stability Review is a document mandated by the Financial Sector Regulation Act, which requires the SARB to assess and communicate the stability of the South African financial system. The FSR is released twice a year.
About Lesetja Kganyago
Lesetja Kganyago, Governor of the South African Reserve Bank (SARB), has been active in public engagements over the past two months, addressing the economic impact of the Middle East conflict that began in late February 2026. On 28 May, the Monetary Policy Committee (MPC), which he chairs, raised the repo rate by 25 basis points to 7%, effective 29 May. Kganyago stated that the committee decided to increase the policy rate due to a "painful combination of higher global uncertainty and reduced disposable income," noting that oil prices had fluctuated around $100 per barrel and that the Strait of Hormuz was still largely closed. He described the situation as "the biggest jump in fuel price inflation in the history of inflation targeting" and said the SARB's priority was to prevent the shock from becoming persistent, reiterating a commitment to bringing inflation back to the 3% target. In a public lecture at Rhodes University on 1 May, Kganyago discussed the pitfalls of "looking through" supply shocks, arguing that central banks must manage second-round effects to prevent temporary price increases from becoming entrenched. He contrasted the current shock with the 2022 inflation surge, noting that South Africa entered this crisis with inflation at the 3% target, a restrictive monetary policy stance, and improved fiscal fundamentals. At the IMF and World Bank Spring Meetings in April, he warned that higher oil prices would translate into increased fuel and food costs, and that rising fertilizer prices posed an additional risk to food inflation later in the year. Kganyago also hosted the inaugural Tito Mboweni Memorial Lecture on 4 June, where he described the late former governor as a "giant in the world of policy" and noted that Mboweni would likely have had much to say about the rise of protectionism and attacks on multilateralism.
Transcript (22 segments)
✨ AI-enhanced transcript with speaker attribution
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Host1:08
The stability review. The review is part of our statutory mandate to protect and enhance financial stability in South Africa. Through the FSR, the South African Reserve Bank communicates the assessment of South Africa's financial system over the past six months, as well as the risk and vulnerabilities facing the financial system over the next 12 months. We also provide an overview of the recent policy steps taken by the SAB in this regard. This afternoon, Governor Lesetja Kganyago will give us his opening remarks and then he'll be followed by Dr. Erik Stain, who's the editor of the Financial Stability Review. At the end of that presentation, we'll have a question and answer session for all of those who are in the room here as well as those who are following us via livestream. And now I'll hand over to the governor.
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Lesetja Kganyago1:59
Thank you very much. Good afternoon, ladies and gentlemen, and welcome to the release of the first edition of the Financial Stability Review in 2026. Before I get into the substance, we are one deputy governor short. Deputy Governor Chasivana is traveling on bank business, so she couldn't join us. The Financial Stability Review is our six-monthly financial system barometer, giving our read on financial sector pressures. When we released the previous edition of the FSR in November last year, the outlook was positive. South Africa had been removed from the FATF gray list. We had our first sovereign credit rating upgrade in almost two decades. There was growing evidence of progress in implementing structural reforms and fiscal dynamics were improving. It felt like everything was going well. We are not used to everything going well. So the positive assessment felt a little unreal. Still, the facts were there and they were compelling. Unfortunately, facts change. And as Keynes reminded us, when facts change, it is wise to change your mind. The Middle East crisis that began in late February is just one of those exogenous shocks like COVID and the Ukraine war that you can't really forecast but which nonetheless transform the outlook. We had oil at $60 a barrel, inflation at 3%, and we were cutting rates. Now we have oil around $100 a barrel. Inflation is at 4% and rising. And we have raised rates. So last week I made the point that uncertainty had declined lately, but only because things have become decidedly worse. And the one thing we were certain about was that uncertainty is going to be with us. We must now accept that oil prices will not be back at February levels anytime soon. The world economy is in for a bumpy ride, taking South Africa along with it. This reality unfortunately suggests we will see pressure building up in the financial system in the coming months. The outlook is therefore more adverse than it was last November. There isn't much we can do to stop global shocks, but we can nurture resilience so the system survives shocks and keeps on working. The current shocks seem to be reiterating the lesson we have learned over many previous shocks. South Africa's financial system is highly resilient. Our big institutions are well capitalized and liquid. The improved fiscal outlook is helping relieve the bank sovereign nexus which has worried us for many years. With modest external debt, minimal external imbalances and record foreign exchange reserves, our external vulnerabilities are also limited. In addition, I am happy to report that we used the period when things were most stable to enhance resilience further. The main example here is our new 3% inflation target which has already helped reduce longer-term borrowing costs and lower inflation expectations. In addition, we undertook two other initiatives, both with a narrower financial stability focus. First, the SARB increased the countercyclical capital buffer, the CCYB. For years we have had this tool set at 0%. But it was increased to 1% with effect from the 1st of January 2026, following the 12-month phase-in period that ended on the 31st of December 2025. This gives us a buffer to release if conditions deteriorate significantly. I'm glad we could build this up during a period of looser financial conditions, including rising credit extension. And with hindsight, the timing worked out well. The second initiative, which I'm happy to announce for the first time today, is to make the SARB deposit facilities available to central counterparties, the CCPs. The 2008 global financial crisis revealed problems with over-the-counter markets and the G20 embraced central clearing as a solution. Central clearing promotes transparency, supports sound market practices such as adequate margining and facilitates efficient capital management through netting, whereby institutions maintain a single net exposure to a central counterparty rather than multiple exposures to numerous counterparties. As the stock phrase has it, CCPs become the buyer to every seller and they become seller to every buyer. At the same time, there is a problem which is that central clearing creates highly systemic institutions. Whereas systemically important banks had become systemic through growth, central counterparties became systemic through regulation. And that means that they are not necessarily too big to fail, but rather too interconnected to fail. To help manage this risk, CCPs collect margin funds from their counterparties to absorb possible losses. But this money is mainly collected from banks and it also gets deposited back in banks which creates wrong-way risk. Various jurisdictions thus have offered CCPs central banking facilities to address this and we will be doing the same during this year. There is no safer and more liquid asset than a central bank deposit. So this step will make our system just that little bit safer. Before I hand over to the chaps who actually do the work led by Dr. Erik Stain, who will present an overview of the FSR, let me offer a few concluding messages. The first message is that the world is getting riskier. The list of major vulnerabilities is long and growing. We have rising sovereign debt levels in major economies. Global imbalances have widened again. And as Professor Axel Weber warned at this year's inaugural Tito Mboweni memorial lecture last week, asset valuations remain stretched, especially for AI companies with ample scope for correction. Global conflict levels by some measures are also at their worst since World War II, and we face intensifying climate change. All this makes for a challenging global environment. My second message is that operational resilience has become a key part of financial stability. We are all used to the traditional risks like bad loans and bank runs, but the next financial crisis may well result from an operational incident rather than a financial one. Top of mind at the moment is the risk from new AI models and the possibilities they can break into systems once deemed secure. My third and final message is about macro resilience. In absolute terms, things are worse than they were six months ago. Or should I say they are less good than they were six months ago. But in relative terms, South Africa is not faring so badly. The exchange rate has been surprisingly stable. Our terms of trade are still quite favorable unlike those of some of our peers. Our long-term borrowing costs are trending down, not up, in contrast to those of most rich countries. Our sovereign debt trajectory is expected to decline, not rise indefinitely. Our credit ratings are on the up. Our financial system is nothing if not battle tested. The famous American economist Hyman Minsky used to say that stability is destabilizing because complacency kicks in. I can say confidently we have not had this problem. We are resilient and we have proven this repeatedly. South Africa's biggest problem is that our growth capacity is very low. This is slowly being addressed with reforms that get cities working again, that get network industries like rail and electricity functioning like they should and that control costs. As this reform agenda raises potential growth, the base is there to support sustained development. With these messages, I now turn over to Dr. Erik Stain who will present an overview of the FSR. You can come and take the podium, sir.
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Erik Stain14:29
Thank you very much Governor and indeed a very good afternoon to all our esteemed guests. We have just had word that Didi Fundi has indeed managed to join us online, so also a very warm welcome to Didi Fundi. I'm waiting for the slide. It doesn't seem the slides are moving. Unfortunately, you can cut. Ah, there we go. Excellent. Thank you very much to whoever provided that assistance. So today I will briefly cover the legal basis for the Financial Stability Review and the SARB's approach to assessing financial stability before getting to the SARB's assessment of key risks to domestic financial stability and the SARB's financial stability assessment. So the Financial Sector Regulation Act, number 9 of 2017, mandates the SARB to protect and enhance financial stability and to report on its assessment of the stability of the domestic financial system every six months through the FSR. So the SARB's approach to deliver on its statutory financial stability mandate is depicted using this graphic. The watering can depicts the broader environmental context and developments from where the key developments of direct relevance to financial stability are derived. From here, the next stage in the filtration process is to identify, monitor and assess risks to domestic financial stability. However, because the risk universe is vast and dynamic, we impose a further more granular filter depicted by the charcoal pieces to distill the key risks to domestic financial stability in line with the statutory mandate. These risks are then categorized into cyclical, structural, perpetual and operational and event risks. And this is essentially what is depicted on the SARB's RVM or the SARB's residual vulnerability matrix. So moving to the key developments of relevance to financial stability since the release of the previous FSR in November 2025. Two developments stand out: the release of frontier AI models such as Anthropic's Claude Mythos and the Middle East conflict. With regard to the Middle East conflict, the closing of the Strait of Hormuz, targeted attacks on oil infrastructure in the Middle East and declining strategic stockpiles mean that oil supply and associated prices will not revert to pre-conflict levels anytime soon. As also noted by the governor, we see the ongoing conflict having potential downstream implications for financial stability through three main channels. First, we expect global and domestic financial conditions to tighten further, meaning that individuals, businesses and governments may find it more difficult and more expensive to gain access to finance in the coming months. Global public debt was at elevated levels prior to the conflict and a prolonged conflict is expected to put pressure on sovereign bond yields going forward. Second, the conflict has already started to weigh on global economic growth prospects. Without growth, banks have fewer viable clients to extend credit to. The gold line in the graph depicts South Africa's credit to GDP gap which turned positive in the beginning of 2025 and remained so up to the end of the first quarter in 2026, indicating strong credit extension. However, as the impact of a prolonged conflict is felt, credit extension could slow in coming months despite remaining robust as per the latest data point at the end of April 2026. Then third, the conflict has prompted a marked divergence in South Africa's monetary policy outlook prior to and after the start of the conflict. And similarly, the SARB's QPM or quarterly projection model which pointed to rate cuts in 2026 prior to the Middle East conflict now suggests another rate increase in 2026 following the 25 basis point announced on 28th May. Then moving to advances in AI capability. The Mythos release is part of a broader trend of rapidly improving AI offensive capability. So to benchmark these advances, the United Kingdom's Artificial Intelligence Security Institute developed a 32-step corporate network attack simulation to test different AI models' performance against a consistent set of criteria. The 32 steps range from basic cyber vulnerability identification to full system compromise, with model capability measured against the number of steps successfully completed. So over the last two years, frontier AI model performance in the UK's AI Security Institute's test environment increased from under two steps to almost 10 steps. Mythos was the first AI model tested to autonomously sequence tasks into an end-to-end cyber attack, completing all 32 steps in three out of 10 attempts. The near-term implications are pronounced with the deployment of Mythos. A sophisticated multi-step attack that previously required scarce elite human expertise can now be attempted for approximately $80 with no technical sophistication from the operator. So while we do not see AI-related developments as presenting a permanent shift in the residual vulnerability of the financial system to cyber attacks, we do see heightened vulnerability over the near term as defensive capabilities catch up. Then moving to the key risks to domestic financial stability as depicted on the SARB residual vulnerability matrix or RVM. The largest increase in residual vulnerability was prompted by advances in AI model capability which notably increased the vulnerability of the domestic financial system to a disruption in critical financial infrastructure or services as per the arrow on the left. The other key development in the form of the Middle East conflict has also led to a marked increase in the residual vulnerability to geopolitical conflict and policy uncertainty. Developments in the Middle East hold potential downstream implications for most of the other risks on the RVM. Then just to note that the RVM essentially performs two key functions. It firstly provides the SARB's assessment of how the residual vulnerability of the domestic financial system to key risks has changed based on developments over the last six months. And secondly, it embeds a forward-looking component into how financial system vulnerability might be affected over the next 12 months. I will spend one slide on each of the RVM risks. The JSE's strongest annual performance in almost two decades as depicted in the left-hand graph was largely attributable to commodity-linked companies, as per the graph on the right, particularly precious metals mining companies which outperformed local oriented sectors such as financials and retailers. This left the domestic equity market exposed to a sharp correction in the event of a shock which was duly provided in the form of the Middle East conflict. The graph on the left shows that non-resident investors were net buyers of South African government bonds in the three months before the start of the Middle East conflict on 28th February. These purchases were largely driven by repurchase transactions rather than outright demand, suggesting that non-resident activity was driven less by a structural increase in the demand for local assets, as may have been the case had South Africa still been at investment grade, but potentially rather more speculative short-term market positions. Following the start of the conflict, however, global investor sentiment deteriorated sharply and triggered a sharp repricing of risk. This resulted in the largest one-month sell-off of South African bonds on record. One mitigant against volatile capital flows is a country's foreign exchange or FX reserves, with the graph on the right showing that South Africa's gross gold and foreign exchange reserves have grown notably since 2000 and are now over 16% of GDP. This is the highest level recorded since data became available in the 1960s. And we have included a box in the FSR on developments as it relates to South Africa's FX reserves. When we released the previous edition of the FSR in November, several encouraging developments had supported our more positive outlook as mentioned by the governor. While there have been further positive developments in 2026, notably the sovereign credit outlook upgrade by Moody's and a sustained downward trend in South Africa's sovereign bond yield as per the left-hand graph, the Middle East conflict has slowed the momentum built up in recent months. Sovereign bond yields have recovered after the initial sell-off in the wake of the Middle East conflict but they remain above pre-conflict levels, while the temporary reduction in the general fuel levy will also have a direct negative impact on fiscal revenues. The graph on the right shows National Treasury's debt maturity schedule. The foreign currency component of these redemptions is depicted in green and is higher than it was at the time of the 2026 budget, reflecting the impact of a weaker rand exchange rate. On balance, the residual vulnerability of the domestic financial system to the risk of unsustainable fiscal dynamics has increased marginally, reflecting the interaction between weaker revenues, high borrowing costs, and elevated debt redemptions. The longer the Middle East conflict persists, the greater its inflationary impact is likely to be as higher oil prices affect almost every component of domestic supply chains. The figure on the left shows the increases in domestic petrol and diesel prices since the onset of the conflict. Given that the average household allocates around 16% of expenditure to transport, further increases in fuel prices are likely to place additional strain on household finances. These pressures could spill over to the financial sector if increased household distress leads to an increase in banks' non-performing loans or NPLs. While NPLs were expected to continue to decline gradually before the Middle East conflict, they are now expected to remain above their long-term average for longer. We've covered the financial stability risks associated with the disruption in critical physical infrastructure extensively in recent editions of the FSR, so I won't spend much time on this. However, as observed once again from the chart on the left, the amounts of electricity consumed and produced by Eskom continued to trend downwards with Eskom consistently producing more electricity than what is consumed by its customers. A contributing factor here is the sustained growth in private generation capacity relative to electricity price increases in excess of inflation observed in recent years as per the graph on the right. So similarly, this risk has been covered extensively in recent editions of the FSR. So I will perhaps just reiterate that the combination of low GDP growth, high levels of unemployment, pockets of financial exclusion, a largely stagnant tax base and a growing number of social grant recipients presents a persistent longer-term risk to financial stability. Then moving to climate change, the elevated energy prices following the start of the Middle East conflict are likely to strengthen long-term incentives for the transition to renewable energy. However, country responses to previous energy shocks have typically prioritized energy security and affordability, reinforcing reliance on fossil fuels and associated infrastructure. So the two graphs show that South Africa's domestic energy mix remains heavily concentrated in fossil fuels with our fossil fuel share of total energy consumption remaining persistently high relative to both peers and the global average. While the renewable energy share has risen materially at the global level and among upper middle income peers, South Africa's renewable share remains comparatively low with the gap widening in recent years. These trends highlight the relatively slow pace of structural adjustment in the domestic energy mix and imply limited flexibility in responding to changing global energy dynamics and evolving transition pathways. Coupled with geopolitical fragmentation, including the ongoing conflict in the Middle East, shifting policy commitments and a weakening of multilateral climate cooperation have amplified divergence in global energy pathways, and this may delay or disrupt the transition to a greener economy. While crypto assets and stablecoin activity does not currently pose a systemic risk to the domestic financial system, this continues to monitor developments given the pace of growth in global stablecoin activity and evolving cross-border linkages. Tether remains the preferred stablecoin domestically as depicted in the graph on the left with on-chain transactions involving Tether across the major domestic trading platforms reaching almost 27 billion rand in the four months to 30 April. However, rand stablecoin activity remains muted with the total value of stablecoins in circulation reaching approximately 176 million rand at the end of January 2026. So in conclusion, the increase in the positive cycle neutral or PCN countercyclical capital buffer or CCYB first announced by the SARB at the end of 2024 was fully phased in by 1 January 2026. So what this does is it affords the SARB the discretion to release the buffer to enable banks to continue to support lending to the real economy should circumstances so warrant. The first FLAC instruments were also issued in January 2026. These instruments play a key role in ensuring adequate loss absorption capacity and recapitalization of failing systemically important financial institutions. As the governor mentioned, we are pleased to announce the SARB's decision to make deposit facilities available to central counterparties by the end of the year. And then finally, the SARB through the Financial Sector Contingency Forum or FSCF continued to strengthen system-wide operational resilience and to prepare for extreme disruption scenarios. I conclude by quoting the governor, 'Our financial system is nothing if not battle tested and we are resilient and we have proven this repeatedly.' Despite a long and growing list of vulnerabilities weighing on the financial stability outlook relative to our assessment in November last year, the South African financial system remains resilient. And with that, I thank you and I hand you back to the governor.
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Lesetja Kganyago31:19
Thank you very much for that succinct presentation. It's much appreciated. At this stage, I invite you to ask any questions that you might have and then I will ask the panel here to respond. If the question is too complex, we will refer it back to Erik.
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Audience Member32:00
Thank you. I have sympathy with Dr. Stain who couldn't get the system going. I couldn't get this going either. Governor, my first question is about the consultation paper on the prime and repo rate that the Reserve Bank published in February of this year and there was an opportunity for comment by the 17th of March and since then we've just heard nothing about it, except that the name of the repo rate changed to the policy rate. So will we hear something of it? What will come of it? Is it too early to ask the next steps? I mean, to be quite honest, we didn't even get as far as I can see acknowledgement of receipt of our submissions. So I don't know what happened to those things. That's my first question. My second question is about page 34 of the FSR report on the draft capital flow management regulations published about April. There was an opportunity for comment that has now been expanded, I think to the end of June. And what worries me about those regulations, they are more draconian than the regulations we have at the moment. Things are smuggled into that like control over assets. And people have to declare assets when it's under their control even though they do not own it. And if anybody comes into South Africa, they have to declare all their foreign assets whether they are residents or non-residents. Is it therefore no longer our policy to abolish exchange control? Don't we have confidence in our policies and therefore we have to go back to exchange control because our policies can't carry us through? But really with the draft regulations, it's more draconian than what we have at the moment. We should rather keep what we have at the moment. For instance, any official can ask you to open your cell phone or your computer to see whether you have cryptocurrency in terms of the new regulations. Now, I don't know whether the Reserve Bank will give me a certificate to say I don't own crypto. Will I show that I don't own crypto? So, really, I'm very concerned. Thank you, Governor.
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Lesetja Kganyago34:17
We might give you a certificate that you do own a cell phone. On prime and repo, you said you didn't get the acknowledgement. What we tend to do with our paper is that we release the thing, we take the comments. Bear in mind your comments might be contradicting other submissions. But when we update the document with the papers with the comments, they will be accompanied by a schedule that says this is the comment we got from so-and-so, this is how we have incorporated it or we have not incorporated it because of the following reason. But I will find out from DG Kasim why he didn't acknowledge your thing. He can't say that your acknowledgement is in the post because he uses email. I know that. Okay. On the capital flow measures, comments are they draconian? Have we lost confidence? We have definitely lost. No, we have not lost confidence. Let me start from this. The end state of exchange controls is going to be South Africa's compliance with the OECD code on capital account liberalization. That is the standard. That is what is used. So once we are fully compliant with it, we will say to you whatever we do is compliant with that and that's what we get evaluated. The key in that framework is to remove what is called a negative bias. So our regulations have always almost been framed as 'thou shalt not do the following', whereas the OECD says it shall be positively formulated. 'You are able to do the following.' So when you say you can do the following, then it follows that the opposite of what you are allowed to do is what you should not be doing. The world has changed and regulation has to change. And the truth of the matter is that globally there is concern about stablecoins and crypto assets. They can be positive for innovation in the financial sector. But like all financial instruments, there are also bad actors. To deal with the bad actors, there needs to be in place a regulatory framework that protects the good actors and separate distinguish them from the bad actors. Are they draconian? They've got to be consistent with what is happening globally. Unless the world has become draconian, we cannot quite characterize them as being draconian. But it looks like the word you used, 'are we becoming draconian', had sparked an interest from somebody who is actually outside the country and I hope you didn't pay for your flight with crypto assets.
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Erik Stain38:16
Governor, I actually work for a central bank that actually has money. So yes, I think it's useful to reflect on the importance of consultation. So we've come to consult so we can hear your views. At the end of the consultation process, we'll reflect and then we will finalize what will be the end state regulations. I hope that helps you. So what you said today, you can share with us further in writing during the extended period.
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Lesetja Kganyago39:04
Olano, where are you? You want to say something about people getting into people's cell phones or something? Whatever you want to add to what I have said. Olano is the head of the financial surveillance department. He is also struggling to find the on button on the mic.
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Olano39:33
Good afternoon everyone and thank you Governor. So as the DG has said, we have extended the commentary period and people should be free to provide us with further comments. I think it's important to understand where we are coming from. We are talking about 1961 regulations here, right? And actually we haven't changed much, except to introduce for example cryptos. And as the governor was saying, it is an area that we see people are trying to get around some of the regulations using cryptos, and so it's only fair that we cover that area. We haven't said that we will be banning cryptos per se. We are just saying that there needs to be a level playing field. Now as the governor has rightly said, we have been advised that South African law can only be drafted in a negative bias form which is that thou shalt not do unless given permission. So what we will do is to provide for various exemptions and thresholds to transition into a positive bias. So yes, you might be worried as you read these 1961 regulations, they look a little bit intense, and again to emphasize, we haven't changed much. These regulations had been there since 1961. But to allay that concern and fear, we have committed to move towards a positive bias that will be given effect through the various exemptions as you will see them running through the various exchange control manuals. I hope that helps to a certain extent.
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Lesetja Kganyago41:29
Rashad, is there anything you still want to say about prime?
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Rashad41:38
So the fact that you have not been acknowledged receipt should be a subject of investigation, but I mean that in all theory. I'm sorry that you didn't get acknowledged receipt. But let me just say that we got feedback. Some of the people who have given us feedback wanted actual meetings. Some of the big players, other government players, other banks wanted actual sessions. So we prioritized and it's a long process. Where we are at the moment is the internal process is more or less complete. It goes to the general executive committee which is a committee with the governors very soon, and that's where it will be discussed and then the market and the public will get feedback on the outcome. Thanks.
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Lesetja Kganyago42:27
Okay. Third row and at the back. Yes, you sir.
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Audience Member42:37
Thanks governor. From my side, what I'd like to know is pertaining to the reserves specifically. So I see that since the gold price is up by roughly 25%, as a result the gold accounts for a bigger proportion in terms of the reserves. Is there a specific or optimal asset allocation between the major currencies and the gold reserves? And I'm asking that because I've noticed also the report highlights that there's been no new ounces bought since 2003. Is that part of the strategy of balancing this asset allocation or is it by coincidence? So is there a specific proportion that gold should amount to? And maybe the second part of the question is in addition to the reserves being adequate as per IMF rules, are there any plans or optimal reserve that we should have, say as a proportion of our external debts or maybe as a proportion of imports? Thank you.
Hi there, Governor. I'm Michael Portka from ETM Analytics. We tend to look at markets mostly. So this is linked to financial market risks. It seems like fiscal risk in the United States is rising. China's selling treasuries, oil's very high. And quite recently, the US 10-year was marked at 4.5%. The risk is obviously that the S&P 500 collapses, for example, or falls substantially, and that'll have quite a few knock-on effects to South Africa's asset markets. Do you think that the market is currently fearing an acceleration in US inflation? Thank you.
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Lesetja Kganyago44:43
One more.
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Audience Member44:46
Thank you, Governor. In your opening comments, as well as in Dr. Stain's presentation, he touched on the risks from sophisticated AI models to the financial system. There's some very helpful commentary to describe some of those risks in the FSR. I'm hoping to get some insights from you and your team as to what specific safety measures or interventions are being put in place in the South African context to guard against this risk.
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Lesetja Kganyago45:32
I'm actually tired of answering this question on reserves. I'm going to give it to you because the answer is the same and I'm trying to look for a different answer. Can you give a different answer? Let me try hard to give a different answer. So box 3 in the report has a discussion of different measures of reserves. So let me just say that firstly why does the central bank want gold in its foreign reserve makeup? It's not like we want to make money from gold. We want gold as part of our diversification strategy. So we don't have much equities, we mostly have bonds, some indirect equities maybe, but we mostly use gold as a diversification strategy. It is the case that before the gold price shot up, we thought that our gold around 10-12% made a lot of sense in terms of an allocation. It turns out that because the gold price has gone up, the gold allocation has increased to 20% plus. So there was really no need to buy more gold because we felt that we more or less had the right exposure. So we never bought gold other than a valuation effect. Many other countries who bought gold had much lower exposure and as a result, the acquisition of gold in other central banks were driven by two things. One is we need more gold exposure. The other is, you know, some of the more sanctioned countries were busy loading up on gold. As to the optimal level of reserves, that is a debate that the governor likes saying he's had since he's joined the bank and before he joined the bank, his previous incarnation: what's the optimum level of reserves? I think that by IMF criteria, we're more or less there. Sometimes we go above, sometimes we go below. So I think we have the optimal level of reserves that is seen in combination with other buffers in the system. We have a FIMA facility with the Fed. We have a swap arrangement with the Chinese. We have a contingency reserve arrangement in the BRICS alliance. And on top of that, we have commercial banks who have all sorts of facilities for dollars and so on. So I guess in that sense, we're about where we think we should be. We can increase a bit more. In some countries, the value is partly dependent if you're actively involved in buying and selling of reserves. We don't sell much reserves and when the time is right at the margins we try to accumulate a bit of reserves. So I think we more or less have, if such a thing exists, an optimal level of reserves. Thank you.
DJ Mo, you always worry about operational risk, you and Nikolai. So you can decide between the two of you who deals with the safety measures on the AI. The important thing is that we are also trying to figure out what this animal is, right? But they are paid to worry. So I pass the question to the two of them.
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DJ Mo49:26
Thanks Governor. I think the most recent experience has taught us that this animal is bigger than what we think and it's moving much faster than what we think. I'm referring to the Mythos issue. When we first heard of it, we had industry consultation and we did this through the Financial Sector Contingency Forum where we called different stakeholders in the financial sector to try and understand: one, are they aware of the risk? Two, if they are aware, how are they dealing with it? Are they testing their systems? Are they introducing new patch deadlines? Are they intensifying assessment of their AI models and what safeguards are they putting in place? Of course, you don't want to be an alarmist and say everything is falling apart. But I think what we then did was to agree on how do we assist those who are not at a level where they're comfortable that they have enough guardrails in their AI systems and how do we then learn from the bigger players who have implemented those guardrails. And we also worked with the SARB internal team to understand what we are doing as the SARB so that we can also help industry. These engagements are taking place continuously. When we first heard of Mythos, we met almost every other day. But now we are giving industry time to do those assessments and then see how they can strengthen their AI tools. And then we are meeting, I think in August, just to get a sense from industry back and then see how we move forward. But this is work in progress and things change all the time. We issued regulations, no, we issued standards last year with PA and FSCA on cyber risk and what the banks should look for. We did look at those, in principle they still fine, but I think the key is how fast can these banks or industry respond to these vulnerabilities and that's something that we continuously work on.
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Nikolai51:55
I can add a little bit from the meetings which I mostly attend. It's maybe helpful to understand also what the reserve bank is doing. Firstly, let me say that we don't think we can mitigate this thing absolutely in the short term. So part of what we do is crisis preparedness. Some things you can't predict and you can't avoid and you don't know whether it's going to strike or not. The best second best thing is to be ready to respond quickly. So part of our work is focused on that. But there are things that we do and that we advise financial industry to also do. One is that AI can detect weaknesses or gaps in your systems that you have not been aware of previously. We had a list of gaps which have to be patched. So in the past where we took a couple of weeks to patch something, the patch cycle now has reduced to a couple of days. It's not yet fast enough but it's what we can do. Second thing is to prioritize. So Mythos has made available through Project Glasswing the software to the big service providers that most of us use: Microsoft, Oracle, Google. So they are patching their systems and when you upgrade your own systems you will automatically have those. Where the risk lies though is in legacy systems and systems that are self-developed or adaptations. So you have to prioritize. We prioritize externally facing systems with potentially confidential information, the more confidential the information, the more we prioritize it. Some of the old legacy things wouldn't matter so much if they break through it. But the fact remains that access to Project Glasswing was limited to advanced economies. Emerging markets don't have access to that. I've read this morning in The Economist that Anthropic has actually now released what they call Fable 5. So they won't release it to the public. It's released to a couple of defending companies and Fable 5 has got more or less the same capabilities but with a lot more safeguards. So we're not necessarily, I mean, that's a credible company. We are worried that the technology is not exclusive to them and you may find the same from anywhere in the world, not regulated, not, but still able to do that. So yes, part of it is the old remedy: patch what you know about, do it quickly. The other part is be prepared. Thank you.
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Lesetja Kganyago55:18
Okay. Market and US inflation. So in 2021, Latin American central banks said that inflation is coming and they started adjusting policy rates, and the advanced economies were busy convincing themselves that inflation is transitory and not persistent. In November of that year, South Africa decided that we must adjust policy because inflation it is coming. And roughly during that period, every central bank said inflation will return to target in two years time, meaning in 2023. And came 2022, inflation really accelerated and by April, it was clear that it is on the rise. But still, central banks were talking about inflation will return to target in two years, but no longer 2023, but 2024. I guess you get the pattern. If you look at the US even this year, inflation will return to target in two years. So every year, inflation is returning to target in two years. And with a central bank with credibility, I suppose inflation expectations continue to be anchored. But there's a difference between 2022 and 2026. When the 2022 inflation shock came, the public and the price setters in the developed world were used to low and stable inflation, actually with a fear that inflation would drop to zero. And that was after they had experienced low inflation for decades. And actually in 2022 when that inflation set in, there was almost a whole generation that didn't know what it is like to live under an environment of high inflation. What makes 2026 different is that it is only four years since the great inflation and that when 2026 set in, bar for the ECB, the rest of the developed economy central banks were outside of their targets. They were far away from target and that should be a concern. But you are worried about the markets. I'm not in the market so I can't tell whether the markets are pricing this adequately or not. What I can say is that this is also taking place at the time when governments in the developed world are increasing deficits to meet defense expenditures and all of that stuff. Inflation is outside of target. Debt levels are elevated and you have got significant amounts of sovereign debt in the advanced economies that is maturing within the next three years. That has got to be a point of concern. I'm throwing this stuff from the recent OECD global debt report. It's available. You can look it up. So the debt situation, which is what we are highlighting in the FSR, that rising debt levels in the developed world is a concern. The markets adjust, they decline and then some figure gets released and then they rise again because they believe in that figure. And for me, when you see markets continuously reacting to a one figure that had just been released, it tells me there is so much uncertainty that anything can move the market. There is a deal in the Middle East and the markets get excited. There is no deal and then the markets go the other way. So it's a very uncertain environment. Are there any questions online? Okay, that gives everybody in the room an opportunity to have a second bite. Let's take the last round of questions if there are any. Well done. There are no further questions. Thank you very much for your attendance.
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Host40:56
Okay, so that brings us to the end of the release of the first edition of the 2026 Financial Stability Review. Thank you so much to everyone for joining us. Please enjoy the copy that you will have received as you walked into the auditorium and you can also obtain the online copy on the South African Reserve Bank's website. So please join us again for the release of the second edition later in the year. But don't leave too early. Let's network outside at the end of the event. Thank you everyone. Bye!