Key Banking System Risks in the WAEMU
KeyBankingSystemRisksintheWAEMU KnarikAyvazyan SIP/2024/014 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonMarch1,2024.ThispaperisalsopublishedseparatelyasIMFCountryReportNo24/091. 2024 MAY ©2024InternationalMonetaryFundSIP/2024/014 IMFSelectedIssuesPaper AfricanDepartment KeyBankingSystemRisksintheWAEMUPreparedbyKnarikAyvazyan AuthorizedfordistributionbyLucaAntonioRicci May2024 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonMarch1,2024.ThispaperisalsopublishedseparatelyasIMFCountryReportNo24/091. ABSTRACT:ThegradualalignmentofprudentialregulationsonBaselII/IIIstandardssince2018,aswellasimprovementsinbankingsupervisionandmacroprudentialsurveillance,havecontributedtotheWAEMU’sbankingsystem’sresiliencetorecentglobalandregionalshocks.However,whilecyclicalvulnerabilitieshavebeencontained,bankcreditportfoliosremainhighlyconcentrated,andtheirexposuretosovereignriskshasgrownsubstantiallyinrecentyears,togetherwithliquidityrisks.Furtherreformsbuildingonthoserecentlyimplementedinlinewithrecommendationsfromthe2022FinancialSectorAssessmentProgram(FSAP),includingtoenhancemacroprudentialpolicy’seffectivenessandbankingsupervisionframeworks,willhelpaddresssuchvulnerabilities. RECOMMENDEDCITATION:KnarikAyvazyan,KeyBankingSystemRisksintheWAEMU.IMFSelectedIssuesPaper(SIP/2024/014).Washington,DC:InternationalMonetaryFund JELClassificationNumbers: G18,G2,G21,E51,E58 Keywords: WAEMU,banks,risk,stresstest,financialstability,creditgap Author’sE-MailAddress: kayvazyan@imf.org WESTAFRICANECONOMICANDMONETARYUNION SELECTEDISSUESPAPERS KeyBankingSystemRisksintheWAEMU WAEMU PreparedbyKnarikAyvazyan1 1PreparedbyKnarikAyvazyan,withhelpfulcommentsandinputsfromLucaAntonioRicci,AlainFeler,AnnalisaFedelino,LjubicaDordevic,LawrenceNorton,andthestaffoftheBCEAO. March1,2024 WESTAFRICANECONOMICANDMONETARYUNION SELECTEDISSUES PreparedByKnarikAyvazyan. ApprovedBy AfricanDepartment CONTENTS KEYBANKINGSYSTEMRISKSINTHEWAEMU3 A.Introduction3 B.CreditRisks5 C.ConcentrationRisks8 D.LiquidityRisks10 E.InterestRateRisks12 F.SovereignBankNexusRisks13 G.ConclusionsandPolicyImplications20 FIGURES 1.SystemicVulnerabilityHeatmap,2010–225 2.Credit-to-GDPGapEstimates6 3.Banks’SolvencyRatios7 4.WAEMUandSelectedSub-SaharanAfricanCountries:8 5.ConcentrationofBankAssetsandLiabilities9 6.Banks’LiquidityBuffers11 7.Banks'ExposuretoThePublic13 8.EvolutionofBalanceSheetExposures14 9.KeyChannelsoftheSovereign-BankAdverseFeedbackLoopintheWAEMU14 11.Banks’SovereignExposuresandAssociatedRisks16 12.NumberofBanksWithInsufficientCapitalBufferstoCoverSovereignDefault17 13.LossesandAdditionalCapitalRequirements18 14.AssessmentofTheRiskstoDebtSustainabilityofWAEMUCountries1915:AnnualChangeinPublicandPrivate19 ANNEXES I.MacroprudentialMeasuresintheWAEMU22 II.TheRegulatoryTreatmentofBanks’SovereignExposuresintheWAEMU25 References28 KEYBANKINGSYSTEMRISKSINTHEWAEMU1 TheWAEMU’sfinancialsystemisdominatedbybanks.ThegradualalignmentofprudentialregulationsonBaselII/IIIstandardssince2018,aswellasimprovementsinbankingsupervisionandmacroprudentialsurveillance,havecontributedtotheWAEMU’sbankingsystem’sresiliencetorecentglobalandregionalshocks.However,whilecyclicalvulnerabilitieshavebeencontained,bankcreditportfoliosremainhighlyconcentrated,andtheirexposuretosovereignriskshasgrownsubstantiallyinrecentyears,togetherwithliquidityrisks.Furtherreformsbuildingonthoserecentlyimplementedinlinewithrecommendationsfromthe2022FinancialSectorAssessmentProgram(FSAP),includingtoenhancemacroprudentialpolicy’seffectivenessandbankingsupervisionframeworks,willhelpaddresssuchvulnerabilities. A.Introduction 1.TheWAEMU’sfinancialsystemisdominatedbybanks,whichhadtotalassetsofCFAF64trillion—or58percentofregionalGDP—atend-2022.Thebankingsectoraccountsforaround72percentofthefinancialsystem(basedon2020data),whileotherfinancialinstitutions(microfinance,insurance,andpensionfunds,aswellassecuritiescustodians)accountforaround28percentofthefinancialsystem’sassets.Ofthe155creditinstitutionsoperatingintheWAEMUatend-2022,132werebanks.Theirassets’geographicconcentrationisbroadlyinlinewiththatofeconomicactivity,withoverhalfheldbycreditinstitutionsintheWAEMUtwolargesteconomies,Côted’IvoireandSenegal(34percentand19percent,respectively).Regionalbankinggroups(34)haveemergedaskeyplayers,holdingnearly85percentofbankingsectorassets.Theotherplayersaresmallerunaffiliateddomesticprivateandpublicbanks,accountingforfour-fifthsandone-fifthofbanks’capitalrespectively.The13bankswhicharemajoritypubliclyowned(withpublicownershipover50percentoftotalcapital),hold10percentofbankingassetsand13percentofbankingcapitalintheWAEMU. 2.Banksfollowatraditionalbusinessmodel.Atend-2022,about58percentofbankingassetsconsistedofmostlyshorttomedium-termloanstonon-financialcorporations,35percentofsecurities(mostlyi
