The banking sector, financial crises and the promotion of financial stability. 

These are some of the issues Prof Francois Groepe, Deputy Governor of the South African Reserve Bank (SARB) and honorary professor in the Department of Economics, touched on during a special lecture in the department on Thursday, 22 February.

The title of his talk was: “The special case of banks and the promotion of financial system-wide stability."

Prof Groepe, an alumnus of Stellenbosch University's Faculty of Economic and Management Sciences, explained, for example, how mob psychology and mass hysteria could lead to a bank crisis.

Although some people believe this could happen randomly, there are empirical studies that suggest that these panics are related to the business cycle.

“If depositors believe there is an impending downturn, they will anticipate difficulties in the banking sector and try to withdraw their funds which precipitates a crisis.

“When people lose confidence in a bank and start withdrawing their deposits, it causes liquidity issues which could lead to insolvency issues," Prof Groepe added.

A real-estate bubble could also precipitate a bank crisis.

“After the bubble has burst, many people who borrowed money to buy assets at inflated prices, default. If the default is widely spread, it could lead to a crisis."

Prof Groepe also mentioned the role of the lender of last resort. A lender of last resort is an institution, usually a country's central bank that offers loans to banks or other eligible institutions that are experiencing financial difficulty.

The South African Reserve Bank's primary objective is to protect the value of the currency in the interest of balanced and sustainable economic growth in South Africa.

In addition to this, the Bank also has a role in protecting and enhancing financial stability in South Africa.

“Financial stability refers to a financial system that is resilient to systemic shocks, facilitates efficient financial intermediation and mitigates the macroeconomic costs of disruptions in such a way that confidence in the system is maintained," Prof Groepe explained.

He mentioned that the aggregate capital levels of South African banks – the total amount of capital that banks have available – are quite high, standing at 15/16% compared to a global average of 8%.

“Our banking system is quite resilient," said Prof Groepe.

Photo by Hennie Rudman