Implementation of risk-based supervision

26. The BCC now has the basic tools available to implement genuine risk-based supervision in line with the 2014 FSAP recommendations. The BCC has implemented a bank rating system (SYSNOB) inspired by international best practices. An operational system was tested on all banks in the summer of 2021. The DSIF must move toward full integration of SYSNOB in the permanent control process. Ratings should inform the BCC’s actions in defining prudential supervision measures, with appropriate modalities and intensity, and be integrated into the Supervisory Review and Evaluation Process (SREP) in the context of the upcoming implementation of Pillar 2. In addition to the new framework for bank resolution (see ¶42), a key priority is to build the operational capacities of the BCC with regard to early intervention in institutions that are showing the first signs of weakness and to adopt corrective actions. The SYSNOB tool should be adapted to the risks on a regular basis. In the next update, the issue of creating a specific criterion for risk concentration (by beneficiary and sector) could be studied. In parallel, TA could be provided to support the updating of the guidance manuals for onsite supervisors.

27. The DSIF needs to enhance its qualitative reporting on risk management. The drafting of the template for the annual report on internal control and risk management, which the banks are required to send to the BCC, will provide supervisors with the information they need to answer questionnaires on the application of prudential regulations and standards, and good risk management and control practices. In addition, this framework, which reveals the regulator’s expectations in terms of risk management systems, will enable banks to make progress within the framework of the internal capital adequacy assessment process/internal liquidity adequacy assessment process (ICAAP/ILAAP), in formalizing their risk appetite and in assessing capital adequacy relative to their risk exposure. The DSIF has not yet incorporated stress-testing as a tool of risk-based supervision.

NPLs and the lifting of COVID-19 measures

28. Assessment of the quality of the credit portfolio is hampered by weaknesses in the identification of NPLs, which have become more pronounced since the regulatory easing measures of 2020. Loans in the DRC are classified at five levels, according to refunding capacities and days in default (see Table 3). For example, sound receivables, after deducting collateral, must be provisioned at a flat rate of 1 percent. An AFC TA mission is scheduled for Q1 2022 to bring the reference Instruction 16 in line with IFRS 9. Under Instruction 44 of March 2020, banks have been allowed to restructure loans without restructuring affecting their classification. The amendment of Instruction 44 in December 2021 limits the number of restructurings to two in the future. These first unwinding measures were adopted by the BCC following TA provided by AFC in 2021, which discussed specifically MCM’s Special COVID-19 Note on Unwinding COVID-19 Policy Interventions for Banking Systems,⁴ and recommended measures such as enhanced supervisory monitoring and additional interaction with the industry.

29. As soon as public health conditions allow, onsite inspections should be performed. The aim of these missions will be to check how the option to restructure loans has been used, how banks are showing due regard for the classification criteria and the impact of expected credit losses on capital. A TA should be urgently provided to the DSIF to assist it in the preparation and follow-up of these missions (constitution of loan-tapes, selection of loans for audit, analytical guide, formalism of repayments).

Consistency of the legislative and regulatory frameworks

30. Prudential regulations will have to be reviewed to align with the future banking law. In particular, this new law will specify the obligations of credit institutions in terms of licensing and authorization of their activities, governance, internal control, and risk management systems. The instructions issued by the BCC on these subjects will have to be reviewed to make sure they comply with the new legislative framework, prioritizing the strengthening of licensing and governance requirements.

Regulation of transactions with related parties

31. An instruction could consolidate all rules applicable to the banks’ transactions with their related parties. Transactions between banks and related parties are addressed in various regulatory texts, and this fragmentation makes it difficult to ensure that the criteria for sound management of this risk are well integrated by the banks. The risk inherent in transactions with related parties (shareholders and managers, as well as legal entities or individuals related to them) is not a theoretical risk in the DRC, as evidenced by several recent experiences. A consolidation would also make it possible to include all the criteria in point 20 of the Basel Core Principles for Effective Banking Supervision (BCPs).

Other prudential standards

32. The quantitative prudential standards on solvency were redefined in 2019 to converge with the Basel standards. For the solvency ratio, set at a minimum of 10 percent, banks are not allowed to use internal models. It should be noted that, when included in the denominator of the ratio, the market and operational risk requirements are multiplied only by 10 and not by 12.5. Three types of capital buffers are required: capital conservation, countercyclical, and for systemic institutions. As of end-2021, only the 2.5 percent capital conservation buffer had been activated. Activation of the other two was postponed because of the pandemic, even though the BCC decided that four institutions are systemically important and should have a buffer of between 1 percent and 2 percent. The minimum leverage ratio is set at 5 percent.

33. The minimum capital required of banks will be increased from US$30 million to US$50 million. Owing to the pandemic, the BCC postponed application of this measure to January 1, 2025 (originally January 1, 2022), with minimum increments (US$5 million on January 1, 2023, US$5 million on January 1, 2024, and US$10 million on January 1, 2025). As of end-September 2021, four banks had own funds of more than US$50 million, but seven had not yet attained US$30 million. When a regulator decides to raise the minimum capital requirement, four issues should be considered: (i) if the increase is substantial, small, profitable banks would have a staggered phase of three to five years; (ii) the same amount should apply to larger banks—which is the case in the DRC; (iii) the credibility of the exercise is stronger with a well-functioning bank resolution framework in place, in case some banks fail to meet the target; and (iv) the minimum capital requirement is not a substitute for effective supervision and solvency requirements. The undercapitalized banks should provide credible capital restoration plans.

34. Risks arising from financial dollarization are taken into account by prudential regulations. Banks can record certain elements of their capital in US dollars to neutralize the exchange rate effect. From 2022 onward, reserve requirements on foreign currency deposits will be constituted in dollars. In terms of credit risk, the banks are transferring the currency risk to their customers, particularly households, by encouraging them to take on debt in foreign currency for loans of more than 12 months while households’ resources are mainly in Congolese francs (CDF) (shorter-term credits to households are to be provided in CDF). However, the Labor Code requires that monthly loan payments should not exceed 30 percent of income. Once the new macroprudential powers are fully in place, the BCC should assess whether additional measures, such as additional capital buffers, are needed. For the most commonly used currencies (e.g., US dollar), the foreign exchange position is limited to 10 percent of the banks’ long or short foreign exchange positions relative to equity. The liquidity ratio must be calculated in three ways, including an exclusively foreign currency calculation. Foreign exchange risk is also monitored under each bank’s qualitive risk management and monitored by the board of directors. The new US dollar-indexed bills issued by the treasury since 2021 are simply treated as a foreign currency exposure for credit risk, with a weighting according to the credit grades for sovereign borrowers. This means a prudential weighting of 100 percent for the DRC.

35. The BCC wants to move to Basel III-type liquidity ratios. The current ratio, calculated in domestic and foreign currency, in addition to an overall ratio, compares realizable assets and current liabilities over the ensuing 30 days. It is not a forward-looking ratio that could provide information on the bank’s capacity to withstand a liquidity shock for one month. Given the absence of financial markets in the DRC, and in particular the absence of high-quality liquid assets (HQLA), implementation of this ratio will have to be prepared through impact studies, with a multi-year adaptation period.

IT risk and cyber risk

36. Credit institutions, including electronic money institutions (EMIs), are required to report cyberattacks to the BCC. To date, there have been no reports, although some banks have increased their digital services since the COVID-19 crisis. Frauds continue to be “classic” frauds on bank cards.

37. The BCC has strengthened prudential requirements relating to the control of IT risk for credit institutions as a part of operational risk. It has defined best practices for managing this risk and has reiterated the requirements for setting up a business continuity plan. A methodological guide covering the IT risk issues to be reviewed during an onsite audit was drafted in conjunction with AFC. The training event to present this guide to DSIF supervisors was postponed to February 2022, owing to pandemic-related constraints.

38. An update of the guide and the publication of guidelines specifying the regulator’s expectations for banks in terms of operational risk and IT risk management should be considered. These actions could be carried out once the first onsite audits on this topic have been organized using the new guide, and on the basis of the reports that have been written.

Nonbank sector—Payment institutions

39. Payment institutions, the status of which should be specified in the new banking law, need appropriate prudential regulation. A Law of July 09, 2018, relating to payment and securities settlement systems was drafted with WB support, but it does not cover categories of payment services providers and their prudential rules. The creation of a payment institution category, which would encompass the EMIs and current “financial messaging” companies (money remitters), is under discussion. Whatever the outcome (integration with credit institutions or creation of a specific payment institutions category), specific prudential regulations will need to be adopted. TA can be scheduled as soon as the banking law has been promulgated and the roadmap requested by AFC has been drafted. A training workshop could be organized.

Sequential and proportionate implementation of the new crisis prevention and resolution framework

41. The current legislative framework in the DRC has proven insufficient to cope with banking crises, and the outcome of bank liquidations is often opaque. The BCC website lists 15 banks that have been struck off or closed down, without specifying the relevant dates or circumstances. Generally speaking, bank liquidations in the DRC take many years to complete. Five are still in progress, the first of which was started in 1998. If a provisional administrator is appointed, the board of directors is removed from office, but shareholders retain their rights. In some cases, shareholder opposition has derailed the subsequent resolution process. Recent bank liquidations have not resulted in public disclosure of results and details of compensation. The draft banking law will improve on a number of points. The implementation of the new law will require new regulatory instructions and operating procedures. Making a banking crisis prevention and management regime effective is a lengthy process, requiring significant human resources and rare expertise.

42. The mission recommends a gradual and realistic approach, taking available capacity into account. As soon as the law is adopted, the banks should proceed with the preparation of preventive recovery plans following BCC instructions. Relying on annual assessment exercises, the BCC will be able to develop its new banking resolution tools, prioritizing those that are adapted to the development level of the DRC’s banking system. Following a gradual and realistic approach, the mission recommends that priority is given to the operationalization of transfer and liquidation powers.⁵

Managing conflicts of interest through separation of functions

43. The creation of a resolution function in a central bank raises the issue of conflicts of interest. The Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs) emphasize the need for operational independence of the resolution authority and for governance arrangements that address conflicts of interest. When a single authority, such as the BCC, performs the functions of supervision, resolution, and ELA, these functions must be kept operationally separate, and safeguards need to be put in place to minimize conflicts of interest. The latter typically arise when the same central bank acts as the resolution authority, carrying out the transfer of part of a failing bank, and also as the supervisor of the purchasing bank and as creditor, having provided emergency liquidity to the failing bank.⁶ Conflicts of interest are often resolved by a separation of functions, assigning each of these three functions to separate organizational units that report to the central bank’s decision-making body (e.g. the board of directors) through separate lines of reporting.⁷ The BCC does not currently have separate reporting lines for these three functions. The BCC should balance the costs of the creation of a new unit in terms of resources with the benefits in terms of governance. Building capacity first within an existing unit is often preferable in low-capacity environments.

Recovery planning should integrate the scenario of loss of CBRs

44. The fragility of CBRs poses a systemic threat to the banking sector. The problems that exist with the CBRs could cause their already narrow number to shrink further, disrupting international trade that plays a key role for the DRC both on the export and import sides. The United States Treasury noted in 2019 that the BCC has developed a charter to improve compliance with applicable international rules, which has been accepted by the country’s banks; but this has not been sufficient to prevent the loss of two of its three CBRs, and currently Citigroup is its only one.⁸ The Anti-Money Laundering Task Force in Central Africa (Groupe d’Action contre le blanchiment d’Argent en Afrique Centrale (GABAC)) published an evaluation report on the DRC in April 2021. The report draws attention to high risks, including significant threats that are not mitigated, including within the banking sector.

45. The systemic importance of the CBRs justifies their inclusion in the scenarios of bank recovery plans. If another negative assessment of the situation in the DRC led to CBR losses, the damages in terms of a systemic operational crisis could be profound. The FSSR does not have AML/CFT in its mandate, but the systemic nature of the loss of CBRs would justify including this scenario in the preventive recovery plans that the banks will be required to draft under the new banking law.

Updating cross-border cooperation agreements on recovery and resolution planning

46. The banking sector is heavily dependent on foreign capital. Twelve of the 15 banks are owned by foreign legal entities, 9 of which are banking groups supervised by their home-country prudential authorities, with varying degrees of cooperation with the BCC. Most subsidiaries in the DRC are integrated into their group’s systems, including IT and accounting systems. Cash management is usually centralized, and parent companies bill their DRC subsidiaries for services rendered. In the event of a crisis, the main risk is contagion from the parent company. A second risk is that if a foreign bank subsidiary in the DRC runs into difficulties, the parent company could be reluctant to provide support.

47. A review of cooperation agreements is needed. The BCC should conduct an internal review of cross-border cooperation agreements, notably to consider liquidity stress scenarios in recovery plans and the articulation between recovery and resolution plans at the group level and at the level of the DRC subsidiary. TA could be provided on international standards and best practices.

Resolution funding mechanism

48. Resolution tools need a resolution funding mechanism. By the time a bank has failed or is close to failure, its capital and liquidity will have been seriously eroded. The use of budgetary funds to finance the resolution of a bank should be a last resort—only when financial stability is seriously threatened, and subject to strict conditions, in particular full recognition of losses and their absorption by the failing bank’s shareholders.

49. Only one of the three internationally recognized resolution funding mechanisms would be appropriate for the DRC. The KAs propose three forms of resolution financing mechanisms (KA 6.3): (i) a deposit guarantee mechanism financed by the banking industry; (ii) a special resolution fund; and (iii) a financing mechanism in which the public costs of temporary financing provided by the government are recovered ex post from the financial industry. In the DRC situation, the first mechanism does not exist, the second is totally disproportionate, and the third seems the most proportionate to the context but probably requires legislative action. The mission notes that it is never a central bank’s job to finance resolution measures; the central bank’s role is limited to the temporary provision of liquidity in specific and well-defined cases.

ELA and liquidity in resolution

50. The current situation in the DRC is paradoxical in terms of ELA and liquidity in resolution. On the one hand, there is currently a support mechanism for banks in difficulty that was not designed to fulfill the ELA role. Article 20 of the 2018 Central Bank Charter authorizes the BCC to extend “special credits” to banks facing insolvency on behalf of the State, with an explicit guarantee by the State to the BCC when the latter provides solvency support to a bank, but these credits do not have an ELA role. On the other hand, there is no formal framework based on international best practices for the BCC to grant ELA. An ELA framework should be prepared, with particular attention paid to guarantees in the central bank’s favor, the availability of foreign currency liquidity in a highly dollarized system, and cooperation with the home-country authorities.

Deposit insurance

51. The establishment of a credible and viable deposit insurance system is a strategic objective for the BCC but should be subject to preconditions. The mission considers that the necessary preconditions for the success of a deposit insurance system, which are more complex due to dollarization, have not yet been met (notably, effective prudential regulation, supervision, and bank resolution; strong legal and judicial frameworks and accounting and disclosure systems). The suggestions for reform in all parts of this report will contribute indirectly to preparing for the establishment of a deposit insurance system. In the long term, progress in this direction could be assessed, taking into account the additional difficulty of extreme dollarization.

Basic diagnostics

56. The BCC has already done work to identify financial stability risks. The DSIF is now responsible within the BCC for micro- and macroprudential missions and, despite limited staffing, has been able to: (i) publish financial stability reports since 2015; (ii) prepare the work of the Internal Financial Stability Committee (IFSC) created in 2019; and (iii) prepare the compilation of FSIs, thanks to the Financial System Risk Monitoring Division within the DSIF. However, staffing levels are insufficient to set up a genuine financial stability function, and much work remains to be done to establish one.

57. The BCC has a statutory mandate for financial stability and has made inroads into developing this function but lacks an explicit mandate for macroprudential policy as well as operational capacity in this area. The draft banking law envisages giving the BCC a macroprudential task and dedicated instruments. The financial stability function is not yet developed at the BCC, which also lacks an operational mechanism for macroprudential policies. The implementation of these policies, which rely on risk monitoring and surveillance tools, requires an effort to collect high-quality granular data, develop information systems, and deploy suitable staff.

58. The BCC has been working with STA since 2013 to align the compilation of the FSIs with international standards. The BCC planned to start for the first-time regular transmission of FSIs for publication on the IMF website starting in May 2020. The date of the first transmission was postponed because of persistent difficulties in extracting primary data from the BCC database. This was due, partly, to the unavailability or delays in data transmission by banks, but also because of work to comply with the 2019 edition of the IMF’s FSI Compilation Guide. The BCC has set a goal of finalizing the FSI system in 2022 after the work done to improve reporting has been validated by an STA mission scheduled for February 2022.

59. Experiences in countries comparable to the DRC have shown how an effective credit register provides a good understanding of the banking sector and its practices and risks. Increased information needs have increased the importance of credit data sharing infrastructure as a tool for both financial authorities and lenders. In the DRC, the credit register suffers from several shortcomings related to the reliability, completeness, and relevance of available data. The International Finance Corporation conducted a diagnostic mission in December 2021 to relaunch the project for a credit register that meets the standards.

Main recommendations

60. The BCC should build capacity to implement macroprudential policy. The availability and quality of the relevant data are essential. Staff with the right profiles and information systems capable of producing vulnerability tools and indicators are also required.

61. The various steps required to establish a macroprudential supervisory framework that contributes to financial stability must be adhered to:

• 1) Start of the work of the Financial Stability Committee created under the agreement signed between the Ministry of Finance and the BCC pursuant to the provisions of Law 2018/027. It is necessary to: (i) appoint the chair of the FSC Technical Secretariat; and (ii) publish the order of the Minister of Finance that lists the financial sector data to be provided to the FSC Technical Secretariat aimed at providing the widest access to information.

• 2) Establishment by the BCC of a genuine financial stability function to fulfill the task specified by law. In a first stage, creation of a dedicated financial stability unit which is called upon to articulate resource needs (data, human resources profile, software); and, in a second stage, to create an enlarged structure that will receive contributions from the various departments. This new structure will be responsible for developing a strategy to establish the financial stability function and setting up the operational framework for macroprudential policy, which will be divided into five stages:

  • i. Selection of relevant indicators for the national context, preparation of dashboards to monitor the trend of macroeconomic and financial sector performance indicators, development of forecasting models, undertaking of stress testing-exercises;

  • ii. Risk identification and vulnerability assessment using the tools developed above;

  • iii. Selection and calibration of shock prevention and mitigation and crisis management instruments;

  • iv. Implementation of these macroprudential instruments; and

  • v. Evaluation and adjustment of the measures.

62. The positioning of a new Financial Stability Department in the central bank’s organizational structure should be considered. In central banks, there are three main options: (i) in the macroeconomics and monetary policy branch; (ii) within the banking supervision function; and (iii) as an autonomous function reporting directly to the central bank’s decision-making bodies. The process of creating a new financial stability structure should begin as soon as possible at the BCC to fulfill the financial stability mandate. A decision to create an autonomous department would be in line with international best practice (Banque de France, Bank El Maghreb, Central Bank of Tunisia, etc.). Indeed, this financial stability department is called upon to independently analyze the impact of the monetary, microprudential, budgetary, and economic policies on financial stability and their interactions. Also, the output of an autonomous department will likely get more traction with top policy makers.

Main recommendations

69. The BCC must continue to strengthen the supervision of nonbank financial institutions (microfinance, payment and e-money institutions), which do not currently pose a systemic risk but could constitute emerging risks, unless adequately supervised.⁹

70. The public sector should also prepare a contingency plan for the loss of CBRs of systemic dimension. The fragility of CBRs has already been discussed as a systemic threat to the banking sector (see II.B). In addition to actions recommended on the private sector, the BCC should prepare a contingency plan in the event that banks’ CBRs shrink by an amount that has systemic impact. MCM has already issued recommendations and could provide TA.¹⁰

Main recommendations

76. The recommendations made in this section recognize that the BCC has many competing priorities but limited resources. Accordingly, the recommendations focus, in the short term, on initial steps to integrate available GDD into the BCC’s internal policies and existing supervision activities; and, in the medium to long term, to improve its consumer protection and set of GDD.

77. The first recommendation is to use the previous TA on gender equality to define the BCC’s internal gender equality policies, particularly for moving toward parity in staff policies and senior management. This would provide a “quick win” in highlighting BCC leadership, and it would enhance the credibility of work in this area for the supervision of regulated FSPs.

78. The second recommendation is to analyze the data on board composition that the BCC already possesses and integrate it into the existing supervision process. This would only use data already collected and would entail minor adjustments to the supervision processes, helping to make them more risk based. TA would focus on how to analyze the data and use it in supervisory assessments (e.g., introducing this criterion into the rating system).

79. The third recommendation is to use TA to mainstream gender into the implementation of consumer protection supervision. TA in this area could combine work on developing a comprehensive supervision approach, capitalizing on the GDD already available, with areas such as complaints and product design/governance. Both of these areas are important to the BCC’s consumer protection mandate and should contribute to financial inclusion.

80. The final recommendation is to use TA to support the review and implementation of the GDD changes as compiled. This would help the BCC complete its internal review of GDD and resume reporting to the FAS.

81. The proposed TA would require a visible commitment to the concept of gender-aware supervision from the BCC leadership, but with limited use of resources. TA is more likely to be effective if a commitment to gender equality and the value of gender-aware supervision is communicated by the governor to BCC directors, recognizing that what can be done in practice will have to take resource constraints and other priorities into account. The BCC should also appoint a relatively experienced contact person to work with the TA provider and advocate for the work within the BCC. The recommendations are based on one physical mission per year to provide TA on these new topics to the BCC contact point, and a small group of core staff, and to allow for follow-up on topics covered in previous years. It would be possible to provide a second mission each year if the BCC so requests and has allocated resources for the development of consumer protection supervision.

82. TA for the recommendations could be provided by the Toronto Centre, possibly in partnership with STA. The Toronto Centre has found that a collaborative approach with an internal coordinator can tailor deployment of the toolkit more closely to the needs of the authority. With respect to data collection, it would be useful to involve STA to ensure that FAS expertise and requirements are taken into account.