Oradea Journal of Business and Economics (Mar 2024)
RATIONALE OF FINANCIAL STABILITY IN SOUTH AFRICA: CONSTRUCTING A FINANCIAL STRESS INDEX
Abstract
The need for financial stability became apparent after the devastating events of the 2008 financial crisis. It was around this time that central banks around the world started to construct and implement scientific methods to assess financial stability. This research gives a comprehensive understanding of financial stability and makes use of scientific methodology by constructing the financial stress index for South Africa from periods 2006 through 2015 to predict and attain financial stability. After the 2008 global financial crisis, South African policymakers have put in place some policies and tools to enhance financial stability. To complement these policies, a new financial framework was developed, that is, the twin peaks model to continuously gather data and asses financial stability on a continuous basis. To put this framework into practice the financial stress indicator or index acted as a single comprehensive tool to measure and monitor stability. Included in this index are indicators that capture the different dimensions of the banking sector. The results gathered from this index contribute to the understanding of financial stability and how it is measured. It was found that the volatility or patterns of the financial stress index could be used as predictions and early warning tools for policymakers or the Central Bank to step in and contain potential risks. Moreover, from the empirical data collected the financial stability policies in South Africa are effective, as the financial stability index after the period of crises remained stable.
