South Africa: Technical Assistance Report-Stress Testing the Central Bank Balance Sheet and Calibrating Risk-based Capital Buffers
Technical Assistance Reports, May 7, 2025
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Bibliographic details
- Published: May 7, 2025
- Series: Technical Assistance Reports
- DOI: https://doi.org/10.5089/9798229009522.019
Overview
- Central bank balance sheet stress testing (CBST) models support central banks in determining appropriate capital levels and informing decisions on dividend distribution.
- Policy solvency is defined as a central bank's ability to generate realized earnings over time that exceed its monetary policy and operational costs.
- The mission proposed a CBST model specifically tailored for the South African Reserve Bank (SARB).
- Context: the SARB and National Treasury (NT) established a new financial framework focusing on the Gold and Foreign Exchange Contingency Reserve Account (GFECRA). A key principle is to prevent GFECRA distributions from undermining the SARB’s policy solvency.
CBST model features
- Forecasting balance sheet under macroeconomic scenarios to ensure robustness to external adverse shocks.
- Value-at-Risk approach for foreign exchange (FX) revaluation losses.
- Assessment of equity buffer adequacy under combined FX-at-Risk and Inflation-at-Risk scenarios.
- Designed to enable the SARB to institutionalize a process for balance sheet forecasting and buffer calibration.
Key findings
- The CBST model can inform decisions on dividend distribution consistent with maintaining policy solvency.
- FX revaluation risk is material and is addressed through a Value-at-Risk methodology within the model.
- Combined FX-at-Risk and Inflation-at-Risk scenarios are necessary to assess the adequacy of equity buffers.
- Given the SARB’s public commitment to annually recalibrate the two buffers, institutionalizing and publicly communicating the underlying methodologies is important.
Policy recommendations
- Institutionalize the CBST process to ensure regular forecasting of the SARB balance sheet under plausible macroeconomic scenarios.
- Publicly communicate the methodologies underpinning buffer calibration to enhance transparency, given the commitment to annually recalibrate the two buffers.
- Ensure GFECRA distribution rules explicitly preserve the SARB’s policy solvency.
Operational recommendations
- Adopt the Value-at-Risk approach for FX revaluation losses within routine stress-testing practice.
- Combine FX-at-Risk and Inflation-at-Risk scenario analysis when assessing equity buffer adequacy.
- Integrate the CBST outputs into decision-making on dividend distribution and buffer recalibration cycles.
Source: South Africa: Technical Assistance Report-Stress Testing the Central Bank Balance Sheet and Calibrating Risk-based Capital Buffers (IMF).
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