BIS (2017): “The regulatory treatment of sovereign exposures”—Discussion Paper Basel Committee on Banking Supervision, Bank for International Settlements, December.
IMF (2015): “The Gambia 2015 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for The Gambia,” IMF Country Report No. 15/272.
IMF (2017b): “Request for Disbursement under the Rapid Credit Facility, and Proposal for a Staff-Monitored Program—Press Release; Staff Report; and Statement by the Executive Director for The Gambia,” IMF Country Report No. 17/179.
Prepared by Torsten Wezel (AFR).
The focus here is on vulnerabilities to and from the financial and other sectors as re-enforcing adverse (vicious) loops. However, theses feedback effects can also be virtuous and re-enforcing if they reflect strength in sectors or a beneficial shock.
SOEs competing with private sector providers, notably GAMTEL/GAMCEL, complain about a lack of investment that has led to an erosion of their market share and thus to the operational deficits.
A first assessment of embezzlement by the old regime pointed to annual amounts of 4 percent of GDP during mid-2014 to end-2016.
The amount of net arrears between private firms and government/SOEs is not available. All data are as of November 2017 except data on NPLs which are as of end-September 2017.
Total SOE debt in arrears with SSHFC may be as high as GMD 2.03bn according to the latest numbers.
The sovereign-bank nexus can serve both as an amplifier or absorber of shocks at times of stress.
There was a lack of supervisory data for the third quarter of 2016. Missing observations were dealt with by interpolation.
The time series of T-bills is available at a weekly frequency only from 2013.
Keeping the combined value of corporate and government exposures the same, additional loans are assumed to be funded by reducing holdings of government securities so that the two amounts are equal. RWA were increased by the amount of the new loans, since under the Basel I framework applied in The Gambia loans to the private sector carry a 100 percent risk weight at all time. As it is evident that the additional loans carry credit risk, a provision of 5.3 percent on those loans was assumed (the 18-year average of provisions to total loans is 7.8 percent less a tax shield provided by the statutory corporate income tax of 30 percent) and the resulting provisioning amount subtracted from regulatory capital.
Most notably, the risk-weighted framework includes a national discretion that allows jurisdictions to apply a zero percent risk weight for sovereign exposures denominated and funded in domestic currency, regardless of their inherent risk. This discretion is currently exercised by all members of the Basel Committee. Sovereign exposures are also currently exempted from the large exposures framework. Moreover, no limits or haircuts are applied to domestic sovereign exposures that are eligible as high-quality liquid assets in meeting the liquidity standards. In contrast, sovereign exposures are included as part of the leverage ratio framework.
For this scenario to be consistent, the first two individual impacts on RWA and capital were summed up and then combined with the third one where the additional RWA are calculated only on the reduced stock of government securities resulting from the first sensitivity test.
Even after decreasing liquid assets in favor of bank loans under the first test, all banks’ liquidity ratios remain well above the required minimum. However, this does not necessarily mean that they would comply with more risk-based liquidity measures such as the Basel III Liquidity Coverage Ratio.
Faced with asymmetric information banks may prefer to reject applicants, including creditworthy ones. On the other hand, low-efficiency banks may lend to risky clients at high rates to prop up results in the short run while incurring credit risk in the longer run. In either case, suboptimal credit allocation ensues.