Page 181 - SARB: 100-Year Journey

pandemic also had adverse implications for credit extension to households and businesses by the banking sector, the key conduit for lending in the real economy. Here, too, the central bank stepped in and deployed tools at its disposal. In so doing, the SARB provided regulatory relief to free up liquidity. The SARB worked with the National Treasury and the banking sector to put in place a Loan Guarantee Scheme.
“We deployed old-style market operations; going to the bond market, buying bonds and injecting cash. We picked up that there were stresses in the financial system; that people were no longer showing each other prices, both in the money market and in the bond market,” explained Kganyago.
“We were able to deploy our instruments in both markets. On the money market side, we used our repo facilities to get the liquidity going. On the capital markets side, we were able to do our bond purchases. That was the second component of the response from the central bank. The third response of the central bank was relaxing our regulatory buffers – what is sometimes referred to as microprudential buffers,” Kganyago added.
This was an intense exercise that took place mostly between March and April 2020, and which necessitated constant work and vigilance at all hours. “We didn’t have a clock because we were watching the Asian markets, the US markets, the South African markets, all at the same time,” Tshazibana said.
According to Tshazibana: “The SARB had to be watching, every single day, whether there were signs of stress, so that we would be ready to step in the secondary market if we thought that there was some level of dysfunction.”
“Now, some people misunderstood what ... the SARB [did]. They thought the SARB steps in, makes sure government pays less, [and] the yields on the bonds are a lot lower. That is not the reason we were there. We were there to make sure that capital markets, which are a big source of funding for corporates and government, function,” she clarified.
Cassim said: “Functional financial markets matter a lot for the way the monetary policy transmission mechanism works.” The SARB’s actions in the secondary bond market
were intended “to make sure the markets are working well .... so that, at the very least, you prevent financial markets’ dislocation. Dysfunctional financial markets can prove more devastating to an economy.”
Naidoo drew attention to the fact that: “In the last financial crisis, we did not have to inject liquidity into the market – not once. I do think that we had been bolder in our actions because of lessons from other parts of the world and from previous crises.”
At around the same time, the Prudential Authority provided regulatory relief to the banking sector, as well as co-designed the R200 billion COVID-19 Loan Guarantee Scheme. The scheme is the outcome of collaboration among the SARB, the National Treasury, business and the banking sector.
The regulatory relief came in the form of a temporary relaxation to banks’ capital requirement, which effectively meant a reduction in the stipulated minimum in capital and reserve funds. The rationale was that this would sustain lending to the real economy. In addition, the Prudential Authority would allow banks to draw down against capital conservation buffers.
Said Kganyago: “We were able to relax the buffers so that banks could utilise their capital and liquidity buffers to continue lending in the real economy. Even with that, we were aware credit might not be able to flow into other areas. That is where fiscal and monetary policy coordination came in.” The coordination kicked in, in the co-design of the Loan Guarantee Scheme.
“It is important to understand that the Treasury provides a guarantee if the loans go bad. The banks have got a duty to their customers to continue to lend. The Reserve Bank has a duty to continue to provide liquidity to the system. But we provide liquidity to the system by using our repo facility. Our special repo facility – that is what we call the ‘bazooka’ of the central bank,” Kganyago pointed out.
The full effects of the SARB’s collective actions are yet to be measured or appreciated in a historical context. What is clear, however, is that monetary policy came to the fore in a resounding and impactful manner to ensure that the depth of the economic downturn was minimised and the recovery would be quicker.
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