The South African Reserve Bank is the central bank of South Africa. It was established in 1921 after Parliament passed an act, the "Currency and Bank Act of 10 August 1920," as a direct result of the abnormal monetary and financial conditions which World War I had brought.

The SARB was only the fourth central bank established outside the United Kingdom and Europe, the others being the USA, Japan and Java. Unlike the Bank of England, which provided the model for establishing the SARB, the SARB is privately owned.

The South African Reserve Bank is the central bank of the Republic of South Africa. The primary purpose of the Bank is to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa. Together with other institutions, it also plays a pivotal role in ensuring financial stability.

History

Owing to its unique role as a central bank, some people are under the impression that the Reserve Bank was the first banking institution to be established in South Africa. This, is not the case however. The first bank to be established in South Africa was the Lombaard Bank in Cape Town, which opened its doors for business on 23 April 1793.

The earliest proposals for the establishment of a central bank in South Africa were made as far back as 1879 - calls that were repeated for the following few years, until a select committee, consisting of the ten members of Parliament was established on 31 March 1920 to examine the practicalities of establishing a central bank.

Following on the recommendations of the committee, the South African Reserve Bank opened for business on 30 June 1921, making it the oldest central bank in Africa. The first banknotes were issued to the public by the Bank on 19 April 1922.

Functions

The Reserve Bank is responsible for:

• Formulating and implementing monetary policy;
• Issuing banknotes and coin;
• Supervising the banking sector;
• Ensuring the effective functioning of the national payment system;
• Managing official gold and foreign-exchange reserves; acting as banker to the government;
• Administering the country's remaining exchange controls;
• Acting as lender of the last resort in exceptional circumstances.

The primary function of the Reserve Bank is to protect the value of South Africa's currency.

In discharging this role, it takes responsibility for:

• Ensuring that the South African money, banking and financial system as a whole is sound, meets the requirements of the community and keeps abreast of international developments;
• Assisting the South African government, as well as other members of the economic community of southern Africa, with data relevant to the formulation and implementation of macroeconomic policy;
• Informing the South African community and all stakeholders abroad about monetary policy and the South African economic situation.

Structure

The Reserve Bank is an organisation that has come into being through statute. The Bank cannot amend or change its founding structure; this can only be effected by Parliament.

The South Reserve Bank Act, 1989 (Act 90 of 1989), granted management powers of the Bank to the Board of the Bank.

The Reserve Bank Amendment Act, 2010 (Act No.4 of 2010) states that the Bank's Board is responsible only for the governance of the Bank. All powers and authorities not vested in the Board vest in the Governor and Deputy Governors, i.e. it is the Governor and Deputy Governors of the Bank who are responsible for the management of the Bank.

The SA Reserve Bank Act, 1989, as amended, provides for a board of directors consisting of 15 directors. Among them are the Governor and three Deputy Governors, who are appointed by the President of the Republic of South Africa, after consultation with the Minister of Finance and the Board, initially for five-year terms. On reappointment the terms may be less than five years.

Four other directors are appointed by the President, after consultation with the Minister, for three-year terms.

The remaining seven directors, of whom one needs to have knowledge and skill in the field of agriculture, one in the field of labour, one in the field of mining, two in the field of industry and two in the field of commerce or finance, are elected by shareholders at an ordinary general meeting (OGM) of shareholders.

These directors hold office for a period commencing on the first day after the date of their election at the OGM until the first day after the date of the OGM held during the third calendar year following the date of the OGM at which they were elected.

The Governor and Deputy Governors manage the daily affairs of the Bank, since they have in terms of the Act been tasked with this responsibility. They are the only executive directors on the Board and are on a full time basis ultimately responsible for the day-to-day management of the South African Reserve Bank.

The board of directors meets regularly to ensure that it fulfills its role of ensuring corporate governance of the Bank. The Board ensures compliance with principles of good corporate governance by, amongst other things, adopting rules and determining policies for the sound accounting, administration and functioning of the Bank, as well as by exercising the other tasks reserved for it in terms of the Act. In the process the Board utilizes various committees and subcommittees, chaired by non-executive directors.

Monetary Policy

The primary objective of monetary policy in South Africa is to achieve and maintain price stability in the interest of sustainable and balanced economic development and growth. Price stability reduces uncertainty in the economy and, therefore, provides a favourable environment for growth and employment creation. Furthermore, low inflation contributes to the protection of the purchasing power of all South Africans, particularly the poor who have no means of defending themselves against continually rising prices.

The Bank has full operational autonomy. Monetary policy is set by the Bank’s Monetary Policy Committee (MPC), which conducts monetary policy within a flexible inflation-targeting framework. This allows for inflation to be out of the target range as a result of first-round effects of a supply shock and for the Bank to determine the appropriate time horizon for restoring inflation to within the target range.

This flexibility does not relieve the Bank of its responsibility with respect to returning inflation to within the target range but allows for interest rate smoothing over the cycle, which may mitigate any output variability from the monetary policy response to the shock.

Financial Stability

Monetary stability relates directly to the stability of the price level and the value of the currency. The concept of financial stability is, in general, more controversial, less quantifiable and more difficult to define. Several attempts have been made to come up with a generally acceptable definition.

What financial stability means in broad terms is: the joint stability of the key financial institutions and the financial markets in which they operate. For financial institutions, this generally means that they are sound, i.e. that they have sufficient capital to absorb normal, (and at times abnormal) losses, and sufficient liquidity to manage operations and volatility in normal periods.

Financial market stability means less excessive and disruptive volatility, which should have positive real economic consequences. In addition, financial stability would be evidenced by an effective regulatory infrastructure including the laws, regulations, standards and practices that constitute a robust financial regulatory environment. Other elements that would add to financial stability are public confidence and an efficient process of macro-prudential surveillance.

The concept of financial stability is most often thought of in terms of avoiding financial crises or managing systemic financial risk. If systemic risk is managed well, that is, firstly by market participants through their private risk management, and secondly by the authorities through their banking supervision, market surveillance and systemic risk management, then systemic financial crises are less likely to occur, or will be more easily managed if they do.

One way of defining financial stability is in terms of the requirements to achieve it. It requires a robust financial system, which may be defined as a system having the ability to prevent, predict and withstand shocks under all types of domestic and international market conditions.

Financial stability can further be described as the absence of macroeconomic costs of disturbances in the system of financial exchange between households, businesses and financial-service firms. Another definition used by some commentators is that financial stability is a sustained condition of stability in the financial system that ensures the efficient functioning of institutions and markets and low volatility in prices, interest rates and exchange rates. When the whole or an important part of the financial sector is at risk, the situation can be described as financially unstable.

Financial instability would ultimately manifest itself through systemic risk, banking failures, intense asset-price volatility, interest and exchange rate volatility, and a collapse of market liquidity. The disruption of the payment and settlement system could be a result of these manifestations.

International Cooperation

The G-20

The G-20 consists of 20 systemically important countries and the European Union. The forum was formed in 1999, after the Asian crises, and South Africa has been a member of the forum since its inception. Finance Ministers and Central Bank Governors meet a few times a year to discuss global economic, financial markets and financial stability issues, as well as risks to the global economy.

Since 2008, when G-20 Heads of State convened to discuss the global financial crisis, as well as the actions and strategies needed to facilitate the exit from the crisis, the G-20 has become the world’s premier global economic and financial forum. As an active participant in the forum, South Africa has played a vital role in a number of key areas in these discussions, including the reform of the International Monetary Fund (IMF), financial regulation and supervision, financial inclusion and, more recently, development.

The International Monetary Fund (IMF)

South Africa was a founding member of the IMF at its inception in 1944. The major functions of the IMF include surveillance of the global economy and of member countries, providing liquidity to countries that may experience balance-of-payments problems, and technical assistance to countries on request. The Reserve Bank participates in the biennial meetings of the IMF as well as in various IMF initiatives to enhance IMF surveillance. This includes the IMF’s financial sector programmes.

The Bank for International Settlements (BIS)

The BIS is an international organisation which fosters international monetary and financial cooperation. It also serves as a bank for central banks. South Africa is a shareholder of the BIS and the Reserve Bank is an active participant in the bi-monthly meetings of Governors. These meetings aim to promote discussion and policy analysis among central banks.

The Bank is also a member of various BIS committees which monitor, and develop policy on, central bank activities. Currently, the South African reserve Bank serves on the following Committees: the Basel Committee on Banking Supervision, the Committee on Payments and Settlement Systems, the Irving Fisher Committee on Statistics, the Internal Audit Committee and the Central Bank Governance Network. The South African Reserve Bank joined the BIS in June 1971.

Committee of Central Bank Governors (CCBG) in the Southern African Development Community (SADC)

The creation of the CCBG in SADC was approved by the SADC Council in August 1995. The main reason for the establishment of the CCBG was the need for a specialized body in SADC to promote, and achieve, closer co operation among central banks within the Community.

The CCBG deals with, among other things, the development of well managed financial institutions and markets, closer cooperation among central banks in the areas of monetary policy and monetary policy instruments, bank supervision, money and capital markets, payment, clearing and settlement systems and training.

Since its inception, the Governor of the Reserve Bank has acted as Chairperson of the CCBG. A Secretariat for the CCBG, hosted by the South African Reserve Bank, was created in November 1995. The CCBG plays a crucial role in particular, in the promotion of financial and economic development, by way of pursuing policies that enhance financial and macroeconomic stability.

Useful links

Currency of South Africa:

South African rand

List of Central Banks:

Central Banks

Official website of South African Reserve Bank:

www.resbank.co.za

Minister of Finance of the Republic of South Africa:

www.treasury.gov.za