IMF published its staff report and selected issues report under the regional consultation with West African Economic and Monetary Union (WAEMU). Directors welcomed the smooth introduction of new Basel II/III prudential regulations and bank accounting standards in 2018. Directors highlighted the importance of increasing bank capital and reducing concentration risks and non-performing loans (NPLs) to foster confidence in the banking sector. They also encouraged the authorities to promptly resolve ailing banks, implement the new resolution framework, improve supervision of banking groups, and identify criteria for defining systemic institutions.
The staff report highlighted that significant efforts were made to meet new banking solvency requirements but pockets of weaknesses remain in the sector. In the banking sector, important reforms were implemented in 2018, most notably the move to Basel II/III prudential standards (with a five-year phasing period), new bank accounting rules, banking supervision based on a risk-sensitive consolidated approach to groups, and steps to implement the new resolution framework for the Banking Commission (the regional banking supervisory authority). The move to the new prudential regulation aligned to Basel II/III and new bank accounting standards proceeded smoothly in 2018. Furthermore, the regional central bank (BCEAO) has run more demanding stress-tests exercises to assess the resilience of the sector in the last two years. In terms of performance, banks were able to sustain strong credit growth in 2018, estimated at 8%, though at a slightly less strong pace than in 2017, possibly reflecting adjustments to new prudential rules.
The capital base of the banking sector increased significantly, with the ratio of capital to risk-weighted assets (CAR) at 10.0% under Basel II/III at the end of June 2018 (which is above the 8.625% required by the end of 2018). Banks will have to continue to increase capital to meet the 11.5% CAR targeted at the end of 2022. The banking sector remains subject to concentration, credit, and liquidity risks. A quarter of the banks do not meet the new and tighter applicable norm for division of risks. NPLs remained high, at 12.9% of total loans at the end of June 2018, although they have been declining and provisioning covers two-third of the loans. Despite gradual deleveraging, bank reliance on BCEAO refinancing was still equivalent to about 40% of the sovereign bond exposure at the end of 2018 and this reflects the structural liquidity deficit in the banking system. The report further notes that the new prudential regime and its associated risk-based supervision framework should allow for stronger bank balance sheets through proactive supervision; this should reduce segmentation where detrimental, foster confidence in the banking sector, and allow it to better finance private sector-led growth.
In the context of the implementation of resolution framework, weak banks should be rapidly restructured, as the Banking Commission now has the powers to require needed adjustments. The weak banks will need to raise more capital by mobilizing additional shareholder resources, reducing the distribution of dividends, and/or streamlining their asset portfolios. The supervisor should ensure that bank concentration risks are gradually reduced, as prudential norms are tightened—with individual risk limits reduced from 75% of bank equity under Basel I to 25% in 2022 under Basel II/III. Banks have started to address NPLs, which declined in the first half of 2018, despite more stringent classification and provisioning rules. Likewise, the forthcoming calibration of liquidity ratios under Basel II/III should contribute to improving structural liquidity. The Banking Commission has also started to assess cross-border groups on a consolidated basis and to review bank behavior based on specific risk patterns. The IMF staff recommends that supervision of banking groups should be further improved through the Colleges of Supervisors and the preparation of recovery plans.
Keywords: Middle East and Africa, West Africa, WAEMU, Banking, Capital Adequacy, NPLs, Resolution Framework, Basel III, Basel, Stress Testing, IMF
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EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS published a statement guidance on dividend distribution by banks.
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.