BIS (2017): The regulatory treatment of sovereign exposures – Discussion Paper Basel Committee on Banking Supervision, Bank for International Settlements, December.
Jason Harris, Alberto Soler, Mohamed Afzal Norat, Sybi Hida and Matthew Appleby (2017) The Gambia Fiscal Stress Test, Technical Assistance Report, October 2017, International Monetary Fund, Washington DC.
Bernard Mendy and Frank Wu (2018), Financial Benchmarking of The Gambia, Selected Issues Paper, International Monetary Fund, Washington DC.
Torsten Wezel (2018), The Gambia: The Assessment of Macrofinancial Linkages. Selected Issues Paper, International Monetary Fund, Washington DC.
This work is based mainly on a Technical Assistance (TA) Report The Gambia Fiscal Stress Test by Jason Harris, Alberto Soler, Mohamed Afzal Norat, Sybi Hida and Matthew Appleby, October 2017 as well as additional analytical work on macrofinancial linkages and additional linked fiscal-financial stress tests based on recent views from the Basel Committee on Banking Supervision on sovereign exposures and risks (BIS 2017).
The baseline used here is from The Gambia: 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. http://www.imf.org/en/Publications/CR/Issues/2017/07/03/The-Gambia-Request-for-Disbursement-Under-the-Rapid-Credit-Facility-and-Proposal-for-a-Staff-45020.
The contingent liabilities quantified below are provided as a share of 2017 GDP and are consistent with the direct impact of around 20 percent of GDP presented in paragraph 42.
Latest estimate is 14.2 billion GMD as of January 2018.
On the other hand, banks can also act as shock absorbers in times of distress when they act as stable and willing investors in sovereign debt. Furthermore, sovereign defaults may be less likely to occur in countries where domestic agents/banks hold more domestic sovereign debt, as this concentrates the costs of a government default on resident citizens and banks, thus creating a commitment device for the sovereign. In addition, a high proportion of sovereign debt held domestically reduces the dependence on external investors, who are typically more prone to taking flight in the presence of shocks, thus potentially subjecting governments to refinancing risk.
Some banks gain from gains due to increased interest rates and depreciation given their balance sheet assets and exposures other banks lose, in net terms across all banks losses are greater than gains.
“The existing regulatory treatment of sovereign exposures is more favorable than other asset classes. 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 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”. Basel Committee on Banking Supervision, Discussion Paper, “The regulatory Treatment of Sovereign Exposures,” December 2017, (BIS 2017).
“Sovereign exposures are used by banks for liquidity management, credit risk mitigation, asset pricing, financial intermediation and investment purposes. Banks’ holdings of sovereign exposures also play an important role as part of monetary policy operationalization. As banks are generally one of the main investors in government debt, they also play a role in the operationalization of fiscal policy.” (BIS 2017).
See BIS 2017 for full details of Pillar I, II and III revised measures as they pertain to the regulatory treatment of sovereign exposures and how to operationalize them.
The NAWEC bond is now serviced by the GoTG.
Sovereign debt exposure concentrations for Gambian banks range from 0–733 percent, with median concentration of 295 percent.