Botswana: Financial Sector Assessment Program-Technical Note on Assessment of Systemic Risks and Vulnerabilities for Banks

BOTSWANA IMFCountryReportNo.24/63 March2024 FINANCIALSECTORASSESSMENTPROGRAM TECHNICALNOTEONSYSTEMICRISKSANDVULNERABILITIESFORBANKS ThispaperonBotswanawaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJanuary18,2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.org InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund January18,2024 BOTSWANA FINANCIALSECTORASSESSMENTPROGRAM TECHNICALNOTE ASSESSMENTOFSYSTEMICRISKSANDVULNERABILITIESFORBANKS ThisTechnicalNotewaspreparedbyIMFstaffinthecontextoftheFinancialSectorAssessmentPrograminBotswana.ItcontainstechnicalanalysisanddetailedinformationunderpinningtheFSAP’sfindingsandrecommendations.FurtherinformationontheFSAPcanbefoundathttp://www.imf.org/external/np/fsap/fssa.aspx PreparedBy MonetaryandCapitalMarketsDepartment BOTSWANA CONTENTS Glossary4EXECUTIVESUMMARY5BACKGROUND9 A.FinancialSectorLandscape9 B.BankingSectorRiskandVulnerabilities12 C.ScopeofStressTestsandRiskAnalysis18 TOP-DOWNBANKSOLVENCYSTRESSTEST19 A.Overview19 B.Scenarios19 C.ModelsandMethodologiestoBalanceSheetandIncomeProjections21 D.StressTestResults23 E.SingleFactorSensitivityAnalysis25 F.PolicyRecommendations28 TOP-DOWNBANKLIQUIDITYSTRESSTEST29 A.Overview29 B.Methodology29 C.StressTestResult32 D.LCRSensitivityAnalysis33 E.PolicyRecommendations34 INTERCONNECTEDNESSANDCONTAGIONANALYSIS35 A.Interconnectedness35 B.ContagionRisks36 C.PolicyRecommendations38 BOXES 1.TrendsinHouseholdIndebtedness14 2.HurdleRates23 3.MacroprudentialPolicyTools27 4.StatusofLCRandNSFRforCommercialBanks35 2INTERNATIONALMONETARYFUND BOTSWANA FIGURES 1.FinancialSectorStructure10 2.MacrofinancialContext11 3.BroadCreditConditions12 4.BankingSystemAssetDecompositionandCreditRiskProfile13 5.NPLsintheBankingSystem16 6.MaturityStructureofAssetsandLiabilitiesintheBankingBook17 7.BankDepositsbyMaturityandHolder18 8.MacroScenarios20 9.SolvencyStressTestResults24 10.SensitivityAnalysis25 11.HQLADecomposition30 12.LCR-ProxyStressTestResult32 13.LCRSensitivityAnalysis33 14.ContagionAnalysis37 TABLES 1.KeyRecommendationsforBankSystemicRiskAnalysis8 2.SensitivityAnalysisResultsforConcentrationofCreditRisk26 3.LCRFactorsandScenarios31 APPENDICES I.NPLRatiosSatelliteModelandProxyPD39 II.SatelliteModels—InterestIncomeandInterestExpense42 III.DetailedResultsfromSolvencyStressTest45 IV.RiskAssessmentMatrix47 V.StressTestMatrix49 VI.FinancialStabilityandMacroprudentialPolicyFramework54 VII.LCRDataMapping(BaselIItoBaselIII)59 INTERNATIONALMONETARYFUND3 BOTSWANA Glossary AfSAvailableforSale BoBBankofBotswana CARCapitalAdequacyRatio CET1CommonEquityTier1 D-SIBDomesticSystemicallyImportantBankEADExposureatDefault FSAPFinancialSectorAssessmentProgramFSGMFlexibleSystemofGlobalModels FSIFinancialSoundnessIndicators FXForeignCurrency GDPGrossDomesticProduct HfTHeldforTrading HQLAHigh-QualityLiquidAssets IMFInternationalMonetaryFund IRRBBInterestRateRiskintheBankingBookLARLiquidAssetsRatio LCRLiquidityCoverageRatio LGDLossGivenDefault MCMMonetaryandCapitalMarkets MoPRMonetaryPolicyRate NBFINon-BankFinancialInstitutions NBFIRANon-BankFinancialInstitutionsRegulatoryAuthorityNIINetInterestIncome NPLNonperformingLoans NSFRNetStableFundingRatio OLSOrdinaryLeastSquares PDProbabilityofDefault PRRPrimaryReservesRequirement RAMRiskAssessmentMatrix RWARisk-WeightedAssets SREPSupervisoryReviewandEvaluationProcessTATechnicalAssistance USUnitedStates USDU.S.Dollar WBWorldBank WEOWorldEconomicOutlook 4INTERNATIONALMONETARYFUND EXECUTIVESUMMARY1 BOTSWANA Botswanaisasmall,openeconomywithahighlyconcentratedfinancialsectorcomprisingbanksandsizeablenon-bankfinancialinstitutions(NBFIs).Financialinstitutionsholdadequatecapitalandliquidityandshowmoderateprofitability.TheinterconnectednessbetweenbanksandNBFIs,andbanks’largeexposurestounsecuredhouseholddebtcouldincreasefinancialsectorvulnerability. ThesystemicriskanalysiswasconductedintheaftermathoftheCOVID-19pandemic.Thefinancialsectorwithstoodthepandemicwell,giventhesectors’strongfinancialpositionandowing,inpart,topolicymeasures.Bankcapitalappearsadequate,andalthoughliquidityisample,banks’balancesheetsreflectahighconcentrationoflumpyshort-termdepositsfromthenon-banksector,includingNBFIsandcorporates. Thefinancialsectorisvulnerabletothreemainrisks:geo-politicaldevelopmentsmayslowglobalgrowthandreducediamonddemandthatadverselyimpactseconomicperformanceinBotswana;sustainedfoodandenergycostpressurescouldfurtherpushinflation;andthetighteningofglobalfinancialconditionsasmajoreconomiescontinuetoincreasepolicyratescouldleadtotighterdomesticfinancialconditions.Thecombinationofshockscoulddelayeconomicrecoveryandprolongtheperiodofhighinflationleadingtotighterdomesticmonetarypolicy—potentiallyimpactingfinancialinstitutions.F