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    IMF Issues Reports on Financial Surveillance of West African EMU

    April 25, 2018

    IMF issued its staff report and selected issues report resulting from discussions with the regional institutions of the West African Economic and Monetary Union (WAEMU). The regional perspective of such discussions is intended to strengthen the bilateral discussions that IMF holds with the members in the region under Article IV of the Articles of Agreement of IMF. The staff report highlights that an ambitious set of reforms were undertaken in the region in 2017 to modernize financial sector regulations, including a gradual increase in minimum capital requirements in line with the Basel II/III principles. Other reforms include moving to consolidated supervision of bank groups, strengthening the resolution framework, and setting up a deposit guarantee fund.

    The staff report reveals that prudential regulation has moved to Basel II/III standards in January 2018, with changes phased in over a five-year period. Banks should have capital in excess of 8.6% of risk-weighted assets at the end of 2018. Banks have been prepared by policymakers and supervisors to ensure compliance. At 15% of total loans at the end of June 2017, gross nonperforming loans (NPLs) remain elevated, although they are covered by provisions for two-third. Moreover, stress tests run by the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) have confirmed that equity would be adversely affected in the event of a strong shock on credit quality. The Banking Commission is adopting new criteria in line with Pillar 2 of Basel standards. It has launched the consolidated supervision of cross-border groups and has readied its tools to that end. The Banking Commission has been endowed with new resolution powers in late 2017. Two state-owned banks in Togo and a private one in Guinea Bissau are of national systemic importance and should be resolved.

    Furthermore, the authorities are rolling out a financial safety net to protect against systemic risk. This safety net includes a bank deposit guarantee scheme and a bank resolution fund, which should be backed by a creditor bail-in mechanism. The assessment of systemic risks has started and a committee for financial stability includes the BCEAO, the Banking Commission, and the financial market regulator (CREPMF). Staff emphasized that policymakers should, among others, bring vulnerable banks to deleverage and strengthen their capital and liquidity buffers and to diversify their bond portfolios, to contain risk concentration. Overall, conditions in the banking system remain somewhat challenging. Credit and concentration risks are important and the gross non-performing loan ratio remains high while some troubled banks remain unresolved. Directors encouraged the authorities to take steps to further reduce the banking system’s dependence on refinancing, improve liquidity management, energize the interbank market, and deepen financial markets. They highlighted the importance of operationalizing the financial safety net and using upgraded bank supervision and resolution tools to address vulnerabilities in the banking system.

    The selected issues report examines the WAEMU banking system’s soundness and traces its macro-financial linkages. Stress test results confirmed that the banking system can withstand various shocks, but highlighted that default of the largest borrowers and deterioration of the banks’ loan portfolios are the most important risks, particularly for weak public banks. The report highlights the importance of enforcing compliance with prudential norms, recapitalizing or resolving problem banks, and addressing pockets of vulnerabilities in the banking system. The banking sector in WAEMU had 140 credit institutions in 2017, of which there were 125 banks (including 17 bank branches) and 15 non-bank credit institutions (including 4 branches). Excluding branches and classifying credit institutions by their major owner, 94 were foreign-owned, 12 were public, and 13 were privately held regional credit institutions. Classifying active credit institutions by size and relative importance, 31 could be considered as large (accounting for over 10% of banking sector assets in their country of operation), 25 as average (over 5% of assets), and the remaining 63 as relatively small.

     

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    Keywords: Middle East and Africa, WAEMU, Banking, Basel II/III, Concentration Risk, NPLs, Stress Testing, Resolution, IMF

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