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IMF Country Report No. 22/136
WEST AFRICAN ECONOMIC AND MONETARY UNION
FINANCIAL SECTOR ASSESSMENT PROGRAM FINANCIAL SYSTEM STABILITY ASSESSMENT
May 2022
This paper on the West African Economic and Monetary Union (WAEMU) was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the Union. It is based on the information available at the time it was completed in May 2022.
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Press Release
PR22/151
West African Economic and Monetary Union (WAEMU)— Financial Sector Assessment Program and Financial Sector Stability Assessment
FOR IMMEDIATE RELEASE
WASHINGTON, DC – May 12, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Financial Sector Assessment Program (FSAP)1 with the WAEMU on April 27, 2022, without convening formal discussions.2 The Financial Sector Stability Assessment (FSSA) report was completed on April 13, 2022. The report is based on the work of joint IMF/World Bank FSAP virtual missions to the WAEMU completed between January 2021 and February 2022.
The FSSA concluded that the WAEMU’s financial system functions within an improved regulatory framework. Furthermore, despite political instability in several member states, the policy response to the COVID-19 pandemic has been effective. Banks have withstood the crisis well, helped by liquidity support from Central Bank of West African States (BCEAO) and policies to support domestic demand.
The report found that the banking sector is largely resilient to macroeconomic shocks. Yet vulnerabilities remain. Banks’ capital buffers do not adequately consider exposure concentrations. Particularly, a marked increase in sovereign exposures has exacerbated credit concentration and interest rate risks. The FSSA report recommended the use of capital surcharge requirements under Basel Pillar 2 to address these risks. Liquidity risks are also amplified by the underdevelopment of the regional bond market, which needs to be developed further. A timely introduction of the Basel III liquidity requirements would help banks internalize liquidity risks.
An ambitious regulatory reform has consolidated the prudential base and established the conditions for a further strengthening of banking supervision. The FSAP found that the supervisory framework has become more risk oriented, but enforcement should be strengthened, supervisory resources increased, and the supervisor’s independence statutorily assured.
Further critical reforms need to be introduced. A bank resolution framework has been established but not implemented. The FSSA recommended that the framework be applied promptly to address already undercapitalized, nonviable institutions. Other recommendations addressed establishing procedures for the BCEAO emergency liquidity assistance (ELA) and measures to mitigate balance sheet risks. The supervisory program for Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) also needs to be further reformed to fully adopt a risk-based approach and enhance onsite inspections.
Title page
WEST AFRICAN ECONOMIC AND MONETARY UNION
FINANCIAL SYSTEM STABILITY ASSESSMENT
April 13, 2022
KEY ISSUES
Context: The Financial Sector Assessment Program (FSAP) was conducted amid an economic rebound two years into the COVID-19 pandemic that had a limited impact on the financial sector. Several member states have experienced political instability, with coups in Burkina Faso and Mali leading to economic sanctions for the latter, and an attempted coup in Guinea-Bissau. Yet, short of further political deterioration, economic recovery is expected to persist. The last FSAP was conducted in 2008.
Findings: The banking sector appears resilient to shocks to economic growth and inflation, but banks’ capital buffers are not commensurate with factors that amplify credit risk, including exposure concentration and interbank linkages. Banks’ risk exposures, quality of risk management, and buffer availability are highly heterogeneous. Sovereign exposures have increased considerably since the 2008 FSAP and exacerbate the sovereign-bank nexus. Some banks are now also highly dependent on refinancing from the Central Bank of West African States (BCEAO). Bank regulation has been largely aligned with the Basel framework, supervision has become more risk oriented, and a resolution framework was introduced. However, certain banks’ persistent non-compliance with solvency regulations is yet to be addressed decisively.
Policies: The authorities should introduce targeted Pillar 2 capital surcharges and liquidity requirements for banks most exposed to concentration and liquidity risks. A more consistent use of sanctions and, whenever needed, resolution/liquidation tools is warranted to address compliance issues on a timely basis. Supervisory independence should be enhanced via a revision of the Banking Commission (CBU) statutes and supervisory resources should continue to be reinforced. The BCEAO should introduce an emergency liquidity assistance (ELA) framework backed by appropriate risk mitigation mechanisms and conditions for ELA use.
The FSAP team was led by Romain Veyrune (International Monetary Fund, IMF) and Pierre-Laurent Chatain (World Bank, WB), and included deputy mission chiefs Silvia Iorgova (IMF) and Jean Michel Lobet (WB); Thierry Bayle, Stéphane Couderc, André Kahn, Romain Lafarguette, Moustapha Mbohou Mama, and Alice Mugnier (all IMF); Tulu Balkir, Antoine Bavandi, Alex Berg, Caroline Cerruti, Dorothée Delort, Chiara Teresa Maria Lunetti, Fredesvinda Fatima Montes, Graciela Miralles Murciego, Antonia Menezes Preciosa, Ou (Owen) Nie, Tanjit Sandhu Kaur (all WB); external experts Gonçalo Coelho, Sophie Imani Poinsot, Jay Purcell, Philippe Roussel-Galle, Maria Chiara Malaguti, Patrice Berge Vincent, and Jean-Marie Weck.
The mission met with the BCEAO, the Secretariat General of the CBU (SGCB),1 CBU Supervisory Board members, the Securities Agency of the WAEMU (UT), the Regional Public Investment and Financial Markets Board (CREPMF), the Deposit Guarantee and Resolution Fund (FGDR-UMOA), the Credit Reporting Bureau (BIC), and representatives of other public sector institutions, financial institutions, industry organizations, and the private sector.
FSAPs assess the stability of the financial system as a whole and not that of individual institutions. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.
This report was prepared by Romain Veyrune and Silvia Iorgova, with contributions from the FSAP team members.
Approved By
May Khamis (MCM) and Annalisa Fedelino (AFR)
Prepared By
Monetary and Capital Markets Department
This report is based on the work of the Financial Sector Assessment Program (FSAP) mission conducted remotely from January 2021 to February 2022. The FSAP findings were discussed with the authorities in January 2022.
Contents
GLOSSARY
EXECUTIVE SUMMARY
CONTEXT
A. Macrofinancial Developments
B. Financial Sector Structure
C. Recommendations of the 2008 FSAP
FINANCIAL STABILITY ASSESSMENT
A. Financial Sector Risks and Vulnerabilities
B. Banking System Stress Tests
C. Policies to Reduce Vulnerabilities
FINANCIAL SECTOR SUPERVISORY FRAMEWORK
A. System-level Oversight
B. Banking Supervision and Regulation
C. Supervision of Money Laundering and Terrorism Financing Risks
SYSTEMIC LIQUIDITY
CRISIS MANAGEMENT AND BANK RESOLUTION
FINANCIAL SECTOR DEVELOPMENT
AUTHORITIES’ VIEWS
FIGURES
1. Key Macrofinancial Developments
2. Structure of the Financial Sector
3. Concentration Risk
4. Channels of Interconnectedness
5. Banking Sector Soundness
6. Banks’ Liquidity Profiles
7. Solvency Stress Tests
8. Interbank Contagion Stress Tests
9. Interest Rate Risk Stress Tests
10. Liquidity Risk Stress Tests
11. Calibration of Capital Surcharges for Sovereign Concentration Risk
TABLES
1. FSAP Key Recommendations
2. Selected Economic and Social Indicators
3. Measures for Managing COVID-19 Impact
4. Implementation of the 2008 FSAP Recommendations
5. Financial Stability Indicators
6. Stress Testing Framework
7. Assumptions and Results of Contagion Stress Tests
8. Run-off Rates in Liquidity Stress Test Scenarios
9. Assumed Asset Haircuts in Liquidity Stress Tests
APPENDICES
I. Stress Testing Matrix of the Banking Sector
II. Risk Assessment Matrix
Glossary
| AML/C FT | Anti-Money Laundering/Combatting the Financing of Terrorism |
| BCEAO | Central Bank of West African States (In French: Banque Centrale des États de l’Afrique de l’Ouest) |
| BIC | Credit Reporting Bureau (In French: Bureaux d’information sur le crédit) |
| BOAD | West African Development Bank (In French: Banque Ouest-Africaine de Développement) |
| CBU | Banking Commission of the West African Monetary Union (In French: Commission Bancaire de l’UMOA) |
| CM | Council of Ministers of the WAEMU |
| CREPMF | Regional Public Investment and Financial Markets Board (In French: Conseil Régional de l’épargne publique et des marchés financiers) |
| CSF-UMOA | Financial Stability Committee of the WAEMU (In French: Comité de Stabilité Financière dans l’UEMOA) |
| ECOWAS | Economic Community of West African States |
| ELA | Emergency Liquidity Assistance |
| FGDR-UMOA | Deposit Guarantee and Resolution Fund (In French: Fonds de Garantie des Dépôts et de Résolution) |
| FSAP | Financial Sector Assessment Program |
| HQLA | High Quality Liquid Assets |
| IMF | International Monetary Fund |
| LCR | Liquidity Coverage Ratio |
| ML/TF | Money Laundering and Terrorism Financing |
| NPL | Nonperforming Loan |
| PEP | Politically Exposed Person |
| RAM | Risk Assessment Matrix |
| SGCB | General Secretariat of the CBU (In French: Secrétariat General de la CBU) |
| SME | Small and Medium-sized Enterprise |
| SVT | Primary Dealers in Treasury Securities (In French: Spécialistes en Valeurs du Trésor) |
| UT | Securities Agency of the WAEMU (In French: UMOA-Titres) |
| WAEMU | West African Economic and Monetary Union |
The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 47 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA).
The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
The CBU is the common banking supervisor for the WAEMU.
