Discuss how South African’s central bank (SARB) can influence aggregate demand (AD) and inflation by adjusting the asset requirement of commercial banks.
Answers
Explanation:
1. Financial integration in Africa: implications for monetary
policy and financial stability
Over the past five years, cross-border capital flows into Africa have been driven up
both by easy global monetary conditions and by the continent’s own improved
macroeconomic performance. As banks in advanced economies shed assets and
risks, a greater share of cross-border bank flows into Africa has come from banks
domiciled in major EMEs such as Brazil, China and India. Another new development,
discussed in the paper by Benedicte Christensen in this volume, is the spread of
pan-African banking groups (those domiciled in Africa with subsidiaries in several
African countries). Pan-African banks typically bring expertise and competition to
the host country, improving the functioning of interbank and foreign exchange
markets and broadening access to banking services. At the same time, host country
supervisors are well aware of the new financial stability risks that could arise from
the global operations of these banks. To deal with such risks and monitor them,
improvements in the regulatory and supervisory framework are required. They need
more timely information about the health of foreign banks. Host supervisors also
face the challenge of devising appropriate cross-border contingency plans for
winding down unviable or failed banks. Moral hazard issues need to be carefully
taken into account when designing the lender-of-last-resort assistance to
pan-African banks.
The paper by Sarah Alade, Deputy Governor of the Central Bank of Nigeria,
notes the challenges from the home country perspective. The rapid growth in the
operations of Nigerian banks in the rest of Africa has prompted the central bank to
introduce a new regulatory and supervisory system. Deputy Governor Alade
highlights two basic aspects of supervision: first, all foreign banks should be subject
to supervision and, second, supervision should be consistent with international
standards. In addition, all foreign operations of domestic banks must be brought
under consolidated supervision. She notes that in Nigeria all banks – whether
domestic and foreign – are treated equally and supervised under a uniform
framework. In the event of a liquidity crisis, the central bank is the lender of last
resort to all banks operating in Nigeria.
In evaluating the importance of intra-regional financial integration, the
discussions highlighted a cautious view that, while greater financial integration is
beneficial to Africa, it should not be pursued with the goal of establishing a single
currency or monetary union. The experience of the existing monetary unions in
Africa suggested that strong fiscal discipline and a banking union is required to
sustain them. These are the elements that differentiate the Central and Western
African monetary unions, for instance, from the euro area.
The supervisory challenges posed by international banks were mentioned by
many African central banks. Active information-sharing among supervisors is critical.
In many cases, home and host countries have signed Memoranda of Understanding
for consolidated supervision. However, the effectiveness of such agreements during
times of stress is yet to be tested. Some argued for the establishment of crossborder crisis resolution frameworks. Others warned that major pan-African banks
could become a threat to financial stability on account of their scale and equity
cross-holdings. In crisis situations, the host central bank may have little choice but
to act as the lender of last resort.