The South African twin peaks model as mechanism to promote and maintain financial stability

Abstract

It is an undeniable fact that the 2008 Global Financial Crisis (GFC) shocked the financial world, as the world slumped into one of the worst recessions and everybody was affected by this crisis. The Crisis led to deep reflection regarding the appropriate approach to financial regulation among economists and financial experts who failed to foresee the Crisis and regulators who did not heed the warning signs. The Crisis resulted in the world to this day still being in pursuit of financial stability in order to anticipate and prevent another similar financial crisis. Prior to the GFC, regulation was based on sound monetary policy and micro-prudential supervision which was considered as sufficient in maintaining financial stability. This was, however, proven to be inadequate during the GFC which showed that promoting and maintaining financial stability requires a holistic macroprudential approach supported by sound microprudential regulation and supervision as well as conduct of business regulation and supervision, and also clear governance structures and principles. The GFC emphasized the importance of implementing various mechanisms in order to promote and maintain financial stability. South Africa was not as severely impacted by the GFC as some other countries, at least not to the extent of financial collapse. Nevertheless, it did suffer some serious implications such as nearly one million job losses. The GFC also caused South Africa, as a member of the G20, to commit to align its approach to financial regulation with various international reforms. Prior to the GFC the South African financial system was characterized by a silo and fragmented approach to financial regulation. The South African Government, however, realized that this approach posed many gaps and in 2017 replaced it with a Twin Peaks model of financial regulation. The Twin Peaks model was introduced by the Financial Sector Regulation Act 9 of 2017. This dissertation focuses on the reasons why it was necessary to implement the Twin Peaks model in South Africa by looking into the causes of the GFC, and interrogating the role is of the Twin Peaks model as a mechanism to promote and maintain financial stability. In particular it considers the Twin Peaks model and whether the institutional framework it creates is likely to contribute to the promotion and maintenance of financial stability in the country.