Implication of the global financial crisis for financial regulation in South Africa

Abstract

The Global Financial Crisis occurred in 2008, and although a large number of regulations have been put in place since then, a future global financial crisis is possible due to the cyclical nature of markets, which will have an effect on South Africa. I address the causes of the 2008 Global Financial Crisis, which occurred amongst other reasons due to a credit bubble that manifested itself through the real estate market in the United States. It occurred because of rapid financial innovation, too little regulation, and a deterioration in lending standards, causing a boom or rapid expansion in the worldwide credit market. Subsequent regulatory reform to curb this lending has been enacted in order to limit future risk. These are the international standards of Basel III, the United States Dodd-Frank Act, and the recent Financial Services Regulation Act in South Africa, which aims to identify and stringently regulate “Too Big To Fail” financial institutions in the context of the new South African Twin Peaks approach that seeks to preserve and strengthen financial stability, safety and soundness and market discipline within South African financial institutions. The South African financial system was partly protected from the fallout of the crisis due to the implementation of the National Credit Act prior to the crisis which reigned in the extension of reckless credit, ring fenced banks, and regulate the exposure to foreign assets as well as conservative and prudent management at South African banks. It is envisaged that the implementation of new legislation in South Africa, such as the Financial Sector Regulation Act, will ensure additional resilience to the South African financial system to withstand financial problems. These financial problems are looming on the horizon: another credit bubble with global repercussions is possible because the free market system remains prone to crisis, and large mountains of nonperforming loans still exist throughout the developed world, as well as a huge amount of debt and structural problems in the Chinese real estate market. However stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management has been implemented in many economies of the world including South Africa subsequent to the 2008 Global Financial Crisis in order to better protect the global economy against such a crisis, ensuring the future resilience of financial systems.