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IMF Country Report No. 22/281

WEST AFRICAN ECONOMIC AND MONETARY UNION

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE ON FINANCIAL SAFETY NET AND CRISIS PREPAREDNESS

August 2022

This technical note on Bank Stress Test for Climate Change Risks was prepared by a staff team of the International Monetary Fund and World Bank in the context of a joint IMF-World Bank Financial Sector Assessment Program (FSAP). It is based on the information available at the time it was completed in July 2022.

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WEST AFRICAN ECONOMIC AND MONETARY UNION

FINANCIAL SECTOR ASSESSMENT PROGRAM

July 20, 2022

TECHNICAL NOTE

FINANCIAL SAFETY NET AND CRISIS PREPAREDNESS

Prepared by

Monetary and Capital Markets Department (MCM)

Contents

• Glossary

• EXECUTIVE SUMMARY

• INTRODUCTION

• OVERALL FRAMEWORK

• FINANCIAL SAFETY NET

• A. Early Intervention and Recovery Planning

• B. Resolution Regime and Resolution Plans

• C. Deposit Insurance and Resolution Funding

• EMERGENCY PLANS AND PREPARATION FOR CRISIS MANAGEMENT

• A. Institutional Framework

• B. Crisis Management Plans and Crisis Simulation Exercises

• TABLES

• 1. Table of Recommendations

• 2. Functions Performed by the BCEAO Governor

• 3. Early Intervention Mechanism

• 4. Proportion of Noncompliant Credit Institutions

• 5. Proportion of Noncompliant Decentralized Financial Systems

Glossary

Executive Summary

The institutional and legal frameworks for financial stability in the West African Economic and Monetary Union (WAEMU) have seen significant progress since the previous Financial Sector Assessment Program (FSAP) in 2008.¹ The institutional reform of the WAEMU and the Central Bank of West African States (BCEAO) in 2010 clarified the respective mandates and responsibilities of the latter and the WAEMU Banking Commission (CBU), and it strengthened the CBU’s legal autonomy and enforcement powers. A new banking law adopted in 2010 established an overall framework for the operation and supervision of banking activities, which has been rendered more proactive and risk based with the gradual implementation of the Basel II/III mechanism initiated in 2016. A bank resolution regime was introduced in 2015 and the mandate of the deposit guarantee fund, created in 2014, was expanded to bank resolution funding in 2018. A macroprudential policy framework, including for monitoring systemic financial sector risks, was developed around the BCEAO and the Financial Stability Committee (CSF-UMOA) in 2010. This series of reforms has greatly enhanced the robustness of the financial safety net via its four components: the early intervention mechanism, the bank resolution regime, the deposit insurance system, and the emergency liquidity assistance (ELA) mechanism.

However, numerous steps still need to be completed to ensure that financial safety net mechanisms, which were recently instituted and remain untested, become fully effective. In particular, this FSAP’s review of violation reports and CBU-applied administrative measures and disciplinary sanctions in recent years show that some credit institutions persistently struggle to operate in accordance with their license terms. In this context, it is noteworthy that no resolution measures have yet been taken, even for entities whose failure could have a systemic impact. The FSAP’s analysis of the resolution regime and its funding modalities revealed numerous issues that need to be addressed.

The preparation of bank resolution plans is a key operational priority. Despite the adoption of the bank resolution regime in 2015 and its underlying framework in 2017, the process of preparing resolution plans remains incomplete. The required implementation texts, published in 2020, provided a pathway for credit institutions (including systemic institutions and financial companies) to prepare preventative recovery plans, however, delays persist. Plans were expected by end-2021, but drafting was still ongoing in March 2022. Furthermore, these plans will not be final until the completion of a final CBU review. The FSAP team stresses the urgency of this task and the need to coordinate with resolution authorities in each country. Meeting this timeline and the need for cross-border dialogue requires mobilization of adequate human resources at the CBU.

Increasing the independence of key stakeholders in the financial safety net is a key institutional priority. This issue concerns the independence of the CBU’s Resolution Board from its Supervisory Board and national authorities, as well as the independence of the Deposit Guarantee and Resolution Fund (FGDR-UMOA) from the CBU, the BCEAO, and the banking industry. Specifically:

• For the CBU, the difference in the membership of its two boards (Supervisory and Resolution) does not rule out a significant overlap when resolution-related decisions have to be taken. Furthermore, the mandate to initiate a bank resolution currently lies exclusively with the Supervisory Board. This appears to limit the autonomy of the Resolution Board, whose independence is also jeopardized by the large number of ex officio state representatives on its board, and by the jurisdiction of the Council of Ministers of the WAEMU (CM) to hear appeals to its decisions. To address these concerns, the Resolution Board should have powers to initiate bank resolutions (exercised jointly with the Supervisory Board). In addition, the CM should increase the number of Resolution Board members appointed by virtue of qualifications (“intuitu personae”). Finally, appeals of Resolution Board decisions should be submitted to the WAEMU Court of Justice rather than to the CM. Evaluation and accountability mechanisms providing for independent assessment of the effectiveness of the Resolution Board’s decisions (or lack of decision) should also be instituted.

• For the FGDR-UMOA, strengthened independence is also advisable. The current powers of its board of directors appear too limited in several key areas of the Fund’s mandate, to the benefit of the CM. Even more significant, the fund’s independence is jeopardized by the participation of active members of the banking industry, whose representatives make up half of the board, and the board’s chairmanship by the governor of the BCEAO.

Strengthening the modalities of bank resolution funding is another operational priority. In the event a bank is resolved, the first line of defense should come from internal resources of the failing institution. However, the current inadequate level of such resources makes a resolution by bail-in unrealistic. The FGDR-UMOA’s available funds are also insufficient and, at least in the medium term, do not permit it to contribute substantially to resolution funding without compromising its ability to fulfill its core mandate (guaranteeing deposits in the event of a bank’s liquidation). Until credit institutions strengthen their loss-absorption capacity, a strategy must be developed to ensure the FGDR-UMOA can quickly attain target ratios and thus accelerate the pace of reserve accumulation (buffers). The strategy should also establish a backstop mechanism for the FGDR-UMOA to tap member states or the Financial Stability Fund (FSF) to ensure quick mobilization of bank resolution funds.

Finally, improving the mechanisms for cooperation and coordination among stakeholders in the financial safety net is another institutional priority. In this regard, the CSF-UMOA, which is already involved in the surveillance of macroprudential risks, would benefit from a strengthened formal role in crisis management. With this extension of its mandate, the CSF-UMOA would turn into the central hub of multilateral coordination in crisis situations. This would also formalize its involvement in the preparation of crisis management plans and simulation exercises at the regional level and, in the longer term, when cooperating with authorities outside the WAEMU. An alternative mechanism, such as a new committee exclusively dedicated to coordination between financial safety net stakeholders, might be contemplated.

The mission also proposed improvements in numerous other areas. These generally relate to the need to strengthen the operational preparedness of the various regional institutions and the legal robustness of their interventions.

Table 1.

WAEMU: Table of Recommendations

^*ST: short term (1-2 years); MT: medium term (3-5 years).

Table 1.

WAEMU: Table of Recommendations

Recommendations	Authority	Priority*
Finalize resolution plans for systemic banks and financial companies.	CBU	ST
Increase the number of CBU staff dedicated to resolutions.	CBU	ST
Provide the CBU Resolution Board with powers to initiate bank resolutions (to be exercised jointly with the Supervisory Board).	CBU/BCEAO	MT
Strengthen the independence of the Resolution Board by increasing the number of members appointed by the CM based on subject-matter expertise and integrity.	CBU/BCEAO	MT
Submit appeals of resolution decisions to the sole jurisdiction of the WAEMU Court of Justice, while limiting these appeals to claims for financial compensation except in cases where the CBU decision was adopted in bad faith or is contrary to law.	CBU/BCEAO	MT
In the Annex to the Convention, clarify that in the context of a resolution, a creditor should receive treatment no worse than would have been received in a liquidation.	CBU/BCEAO	MT
In the Annex to the Convention, clarify that the application of the resolution measure should respect the priority of claims in liquidation in accordance with international standards.	CBU/BCEAO	MT
Amend the banking law to clarify that in liquidation proceedings, the priority ranking of depositors does not entail a limit.	BCEAO	MT
Initiate a plan to strengthen systemic entities’ bail-in buffers.	CBU	MT
Prohibit industry representatives on the FGDR-UMOA’s board from holding an active position (or establishing a business relationship) with a member of the fund during their terms of office.	FGDR	MT
Increase the institutions’ contributions to the FGDR-UMOA to ensure that it achieves the target ratio in the medium term (three to four years).	FGDR	MT
Include a requirement for a “least-cost” intervention in the FGDR-UMOA’s contributions to bank resolution funding, including in determining the contribution amounts.	FGDR	MT
Establish a financial backstop mechanism enabling the FGDR-UMOA to resort to member state or FSF funding for bank resolutions in case of need.	FGDR	MT
Establish the CSF-UMOA, or a new committee yet to be created, as the lead entity on multilateral coordination in crisis situations.	CSF	MT
Incorporate the FGDR-UMOA in the composition of the CSF-UMOA (or the new Committee yet to be created).	CSF	MT

^*ST: short term (1-2 years); MT: medium term (3-5 years).

View Table

Table 1.

WAEMU: Table of Recommendations

Recommendations	Authority	Priority*
Finalize resolution plans for systemic banks and financial companies.	CBU	ST
Increase the number of CBU staff dedicated to resolutions.	CBU	ST
Provide the CBU Resolution Board with powers to initiate bank resolutions (to be exercised jointly with the Supervisory Board).	CBU/BCEAO	MT
Strengthen the independence of the Resolution Board by increasing the number of members appointed by the CM based on subject-matter expertise and integrity.	CBU/BCEAO	MT
Submit appeals of resolution decisions to the sole jurisdiction of the WAEMU Court of Justice, while limiting these appeals to claims for financial compensation except in cases where the CBU decision was adopted in bad faith or is contrary to law.	CBU/BCEAO	MT
In the Annex to the Convention, clarify that in the context of a resolution, a creditor should receive treatment no worse than would have been received in a liquidation.	CBU/BCEAO	MT
In the Annex to the Convention, clarify that the application of the resolution measure should respect the priority of claims in liquidation in accordance with international standards.	CBU/BCEAO	MT
Amend the banking law to clarify that in liquidation proceedings, the priority ranking of depositors does not entail a limit.	BCEAO	MT
Initiate a plan to strengthen systemic entities’ bail-in buffers.	CBU	MT
Prohibit industry representatives on the FGDR-UMOA’s board from holding an active position (or establishing a business relationship) with a member of the fund during their terms of office.	FGDR	MT
Increase the institutions’ contributions to the FGDR-UMOA to ensure that it achieves the target ratio in the medium term (three to four years).	FGDR	MT
Include a requirement for a “least-cost” intervention in the FGDR-UMOA’s contributions to bank resolution funding, including in determining the contribution amounts.	FGDR	MT
Establish a financial backstop mechanism enabling the FGDR-UMOA to resort to member state or FSF funding for bank resolutions in case of need.	FGDR	MT
Establish the CSF-UMOA, or a new committee yet to be created, as the lead entity on multilateral coordination in crisis situations.	CSF	MT
Incorporate the FGDR-UMOA in the composition of the CSF-UMOA (or the new Committee yet to be created).	CSF	MT

^*ST: short term (1-2 years); MT: medium term (3-5 years).