South Africa: Technical Assistance Report-Stress Testing the Central Bank Balance Sheet and Calibrating Risk-based Capital Buffers

South Africa

WASHINGTON, 07 May 2025 / PRN Africa / -- Summary

Central bank balance sheet stress testing (CBST) models are designed to support central banks in determining appropriate capital levels and informing decisions on dividend distribution. A key concept in this context is policy solvency, which refers to a central bank's ability to generate realized earnings over time that exceed its monetary policy and operational costs. This mission proposed a CBST model specifically tailored for the South African Reserve Bank (SARB). The background is that the SARB and National Treasury (NT) have 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. The mission demonstrated the CBST model to enable the SARB to institutionalize a process for forecasting its balance sheet under macroeconomic scenarios, ensuring robustness despite external adverse shocks. The CBST model includes a Value-at-Risk approach for foreign exchange (FX) revaluation losses and assesses the adequacy of equity buffers under combined FX-at-Risk and Inflation-at-Risk scenarios. Given the SARB’s public commitment to annually recalibrate the two buffers, it is important for the SARB to institutionalize and publicly communicate the methodologies underpinning the process.

SOURCE International Monetary Fund (IMF)