IMF published its staff report and selected issues report under 2019 Article IV consultation with Mauritius. The IMF Directors stressed the importance of implementing the outstanding Financial Sector Assessment Program (FSAP) recommendations for further strengthening financial stability. Directors also encouraged the authorities to continue to improve data quality and efforts to contain excess liquidity in the banking system.
The staff report highlighted that the financial soundness indicators point to continued financial sector stability. Bank capital is well above the regulatory minimum and banks meet enhanced liquidity requirements under Basel III (that is, the new liquidity coverage ratio or LCR). Banks have increased exposure to the region and BOM has strengthened cross-border supervision and cooperation with foreign supervisors. The non-performing loan (NPL) ratio has declined from 7.8% at end-2016 to 6.4% at the end of the third quarter of 2018 and is expected to fall further with the transfer of a majority of state-owned Maubank’s NPLs to a special purpose vehicle and the requirement for banks to accelerate write-offs, in line with previous recommendations. The results of the BOM stress tests, using severe scenarios proposed by staff, suggest that banks’ capital is adequate to absorb sizable shocks to NPLs, while liquidity and market risks also appear manageable. Furthermore, the non-bank financial institutions have been growing by double digits, spurred by pent-up demand for pension and insurance services, and are being monitored for stability risks by the Financial Services Commission (FSC).
The staff noted that outstanding issues in the financial supervisory and regulatory frameworks need to be addressed. While several recommendations of the last FSAP have been adopted, other recommendations—including implementation of risk-based and consolidated supervision, adoption of the remaining Basel III instruments, legal changes to upgrade the financial safety net, and establishing a macro-prudential authority—should also be followed. As the loan-to-value ratio was effectively suspended in mid-2018, staff advised close monitoring of credit and property market developments to periodically evaluate the need for its re-introduction. Mauritius aspires to become a regional hub for fintech activities. A regulatory sandbox licensing (RSL) regime for fintech start-ups has already been set up, along with a National RSL Committee to coordinate and assess all fintech-related RSL applications. Within the fintech domain, the authorities are initially focusing on activities relating to digital assets, but a more detailed fintech strategy, including for mobile money and payments, should be informed by an assessment of comparative strengths and limitations.
The selected issues report discusses about the Financial Conditions Index (FCI) for Mauritius—an instrument to gauge the operational state of the financial sector and predict real economic activity. The report assesses the usefulness of the FCI for informing macro-prudential policy, examining whether an FCI could be used as a trigger in activating the Basel III countercyclical capital buffer (CCyB). The FCI could be used to help inform the setting of CCyB. While it is challenging to give concrete guidance on setting the CCyB based on only one recent episode of mild banking distress, the Mauritian authorities will have to devise a buffer guide if they introduce the CCyB. Given the shorter financial cycles and the experience of a sudden NPL hike in the country, the authorities could opt for an earlier or more accelerated buffer build-up than advised by the BCBS guidance (2010). An important consideration in this regard should be the weakness of the credit gap in timely predicting the past credit boom or bust episodes. An analysis of the credit gap could thus be usefully complemented with the FCI (and possibly other indicators such as development in credit standards and asset prices).
Keywords: Middle East and Africa, Mauritius, Banking, Insurance, Basel III, FSAP, Article IV, Macro-Prudential Policy, NPLs, CCyB, BOM, IMF
Previous ArticleFSB Publishes Peer Review on Bank Resolution Planning
APRA updated the lists of the Direct to APRA (D2A) validation and derivation rules for authorized deposit-taking institutions, insurers, and superannuation entities.
EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience.
ECB published an opinion (CON/2020/22) on proposals for regulations amending the securitization framework of EU, in response to the COVID-19 pandemic.
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.
MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.
FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.
ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021.
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.