A comparative analysis of the role of the central bank in promoting and maintaining financial stability in South Africa

Abstract

The 2008 Global Financial Crisis shook financial systems worldwide to their roots and set regulators on a new course post Crisis where the pursuit of financial stability emerged as apex regulatory objective. This new regulatory paradigm resulted in an expanded financial stability mandate for central banks. Given the “fuzziness” of the concept of financial stability it is quite challenging to regulate this new mandate. Inevitably it also entails considering which model of financial regulation is the optimal model within which to locate the central bank and its expanded mandate. Pertinently it needs to be considered how the appropriate legislative and institutional framework can be designed in order to specifically enable effective execution of the financial stability mandate of the central bank and also enable the promotion of financial stability in the broader regulatory context via prudential and market conduct regulation of financial institutions. This thesis thus trails the evolution of central banks and their various roles that are relevant in the context of financial stability. It considers the impact of the GFC on regulation and ponders the concept of financial stability as core regulatory objective, post GFC, and how it has had an impact on the role of the central bank in this regard. It further considers the main models of financial regulation focusing specifically on Twin Peaks, given that that is the model that has been selected by South Africa, and in which the South African Reserve Bank and its expanded financial stability mandate will be positioned. The study delves deeper into the role of the South African central bank in respect of the promotion and maintenance of financial stability, and considers how this role has changed in the context of the Twin Peaks model (as set out in the Financial Sector Regulation Act) that South Africa recently adopted in August 2017. A comparative investigation is then undertaken of the Twin Peaks models, adopted in Australia and the Netherlands respectively. These comparative investigations focus specifically on the role of the central bank in the Twin Peaks context, insofar as promotion and maintenance of financial stability is concerned, but also more broadly into Twin Peaks as a regulatory model that enables financial stability on a broader scale. The study is concluded with recommendations for future reform and research.