SARB interventions help financial sector weather economic shock of Covid-19
CAPE TOWN – South African Reserve Bank (SARB) policy interventions and risk management by financial companies helped the sector weather the initial economic shock of the Covid-19 pandemic, but stability risk to the sector remains elevated.
The twice yearly SARB Financial Stability Review said on Wednesday that the risks had remained higher because the duration and severity of Covid-19’s impact on economic activity was uncertain.
The SARB intended to monitor the risks closely and implement additional policy measures, if required, according to the review.
In the coming months, in line with the weakening economy, increases in non-performing loans held by banks and other intermediaries was likely,
The insurance sector was likely to face higher policy lapse rates, as well as higher payout costs for claims for, among other things, business interruption, income protection, travel insurance, and death and morbidity.
Asset growth across the insurance sector is also expected to be curtailed. Withdrawals from investment funds were likely to increase.
“Cumulatively, the effects of Covid-19 are likely to drive down the profitability of financial firms,” the review said.
So far this year, there had been a sharp decline in economic activity, there was illiquidity and signs of dysfunction in the government and corporate bond markets, and there had been significant financial asset price declines.
A large number of loans had to be restructured, and insurance premium holidays had been provided. A preference for cash on the part of asset managers had also made it difficult for banks to source term funding, the review said.
However, financial firms had built up significant capital and liquidity buffers, which could be used to absorb funding stress in these extraordinary times.
Also, banks had improved their capital and liquidity levels, while the SARB had put policies into place to reduce foreign exchange and market risks.
These measures included making additional liquidity available to the banking sector by increasing the size and duration of repo facilities. The Bank had also purchased government bonds to address signs of dysfunction in that market.
The liquidity coverage ratio requirement for banks had been reduced to 80 percent from 100, and bank capital requirements had been temporarily eased.