• Intervention procedures for the BCEAO in the area of supervision should be clarified in the context of the new banking law. More specifically, the regulatory provisions that give the BCEAO the option to initiate on-site supervision should be specified by providing that the BCEAO should initiate on-site supervision activities as required for the conduct of its missions.

• Appeal for supervised parties in connection with penalties or for member countries in the case of opinions should be limited to Court of Justice of the Union, taking into account the current practice of the supervised parties being permitted to appeal to this jurisdiction.

• Differentiated prudential regulations should be applied, particularly under Pillar 2, to consolidate the supervision approach for credit institutions.

• The regulations of the Union should be aligned more quickly with international standards.

• The ceiling established for fines should be reviewed to make them more deterrent.

• The level of independence of the Supervision Board vis-à-vis the governments should be strengthened (i) by including in the Supervision Board only members appointed by the Council of Ministers on the proposal of the Governor, or by introducing participation without voting rights for members appointed by the countries; and (ii) by introducing into the Annex to the Convention Governing the CBU the principle that the Supervision Board should be independent from the countries.

• The process of divestiture from the last bank in which the BCEAO is a shareholder should be completed and the BCEAO should be prohibited from acquiring stakes in credit institutions and decentralized financial systems.

• The requirement should be introduced into the regulatory texts to publicly disclose the reasons for the removal from office of the members of the decision-making bodies of the CBU and BCEAO, and the cases in which the members of the CBU appointed by the Council of Ministers can be removed from office should be specified in the law.

• A transparent, competitive procedure should be established for the appointment and selection of the members of the CBU appointed by the Council of Ministers, with specific requirements in terms of training, experience, and specialization in connection with an organized, transparent, and competitive selection process, including an interview with a panel of experts.

• The frequency of the sessions of the Supervision Board should be increased by introducing sessions between the general session focusing on a specific risk, for example.

• The mechanism for the supervisory authority to report on its performance should be improved.

• Staffing of the SGCB assigned to supervision functions should be increased, particularly in the area of off-site supervision, and a budget should be provided for the use of external consultants for short-term assignments.

• The rule requiring staff to observe a period of two years in order to work in a financial institution should be limited to the institutions the officer has recently supervised; and

• The legal protection for the CBU and staff members of the SGCB responsible for supervision functions should be strengthened.

• The establishment of cooperation agreements with supervision authorities of the home countries of foreign groups located in the WAMU and the host countries of cross-border groups from the WAMU should be continued.

• Periodic bilateral meetings should be planned with each of the three supervision authorities (the Regional Public Savings and Financial Markets Board—CREPMF, the Inter-African Conference of Insurance Markets—CIMA, and the Inter-African Conference on Social Welfare—CIPRES) to address individual cases of banks having linkages with insurance companies, management and intermediation companies, or pension funds.

• Structured surveillance of the “abuse” of the word “bank” should be established.

• The financial soundness of the cases and projections under the prudential rules should be analyzed, taking into account the most conservative assumptions of the applicants, as required, and applying discounts. The instruction guide should be amended accordingly.

• The regulatory texts should include the possibility of accompanying the issue of licenses with qualitative conditions, and licenses should be revoked if any false information is submitted.

• The instruction on procedures for preparing license applications should be amended to require the collection of data on the beneficial owners when the license applications are filed, and these data should be examined.

• Meetings should be systematically organized with the sponsors and future senior managers and attended by the supervision authority and BCEAO staff responsible for prudential supervision.

• For license applications from applicants outside of the Union, possibilities for the consultation of supervisors from the host country should be strengthened with continued efforts to promote the signing of cooperation agreements.

• A reduced threshold of 10 percent should be introduced for approval by the supervisory authority of a change in shareholders.

• An internal procedure should be established for the grouping of shares to more effectively identify the persons acting in collaboration by defining the rules applicable to individuals as well as to legal entities.

• The concept of beneficial owner should be introduced and defined in the banking law and information should be collected to track and approve significant changes in control involving the beneficial owners.

• An explicit requirement should be included for banks to submit to the supervisory authority any significant information that may have a negative impact on the acceptability of a major shareholder or shareholder having controlling interest.

• Provisions should be introduced into the regulatory texts that the CBU has power, when required, to cancel or modify changes in shareholders made without its authorization, or on the basis of false information provided to the supervisory authority.

• In connection with the review of the banking law, the categories and amounts of acquisitions and holdings requiring prior authorization from the CBU and those for which it is sufficient to report their execution after the fact should be introduced; and An implementing text should specify the mechanisms for authorizing major acquisitions and investments, particularly the criteria that should be used to assess proposals.

The methodology of the rating system for credit institutions (SNEC) should be updated and an ex-post review exercises should be conducted on at least a semiannual basis.

The rating process should be consolidated with the establishment of specific rating tools for groups.

Assess the capacity of banks to implement robust and credible strategies for orderly resolution. Formalize, after analysis and evaluation of the solvency of the institutions, a program for the development of recovery plans organizing the conditions and modalities of their financial stabilization, along with a timetable for implementation.

The frequency of cross analyses and mapping of systemic risks should be increased to gain a better understanding of risk accumulation and trends in the sector, so that they can be more effectively managed.

Continue development of expertise (DERI, DSF) in the conduct of stress tests so as to better support the banks on the methodological level in introducing such tools (introducing a development outline).

• The quality control approach, as has been established for on-site supervision, should be extended to off-site supervision.

• The work of the internal and external supervision functions should be put to greater use for systemic institutions by (i) reflecting the internal audit missions the institutions have scheduled in preparing the schedule of on-site supervision missions; (ii) ensuring that the findings of internal audits are systematically obtained; (iii) planning regular meetings between the internal and external control functions of the institutions and off-site supervision for vulnerable and systemic institutions;

• The frequency of meetings between the SGCB, senior management, and the board of directors (including the independent directors) of supervised institutions should be strengthened and a minimum frequency should be established for vulnerable and systemic institutions.

• The multiple review process for the report should be streamlined to reduce the time allocated to the drafting phase and to allow more time for on-site investigations.

• A minimum frequency should be established for on-site supervision, and the distinction should be made between vulnerable, systemic, and lower risk institutions.

• The frequency of on-site missions should be increased to monitor implementation of the recommendations in the follow-up letters.

• Banks should be required to report any substantial changes in their overall situation and activities to the CBU in advance.

• The effort to improve the tools available to the SGCB should be continued by (i) improving the computer system available for off-site supervision; (ii) developing comparisons between counterpart banks; (iii) updating the off-site supervision methodology and template for the analysis of compliance, risk management, and internal supervision reports; and (iv) finalizing the system the CBU uses to conduct its own stress tests, with the relevant improvements (a better database with time series, more granular information, and macroeconomic model), while ensuring that the results of stress tests are integrated more effectively into the supervision activities.

• A quarterly periodicity should be established for the submission of prudential statements, particularly systemic ones.

• A survey of institutions should be prepared using an internal model for valuation of the trading book, and the necessary steps should be taken to verify the regulatory requirements.

• It should be ensured that the system of penalties for delays in receiving reporting statements is properly applied.

• It should be ensured that an effective policy of penalties is in place. The full range of penalties provided should be applied, with the more frequent use of fines, and those issued against institutions should be published for deterrent purposes.

• The issue of several consecutive deferrals in connection with the same case should be avoided so that decisions can be made as quickly as possible.

• Extraordinary sessions should be used so that cases can be subject to special supervision.

• The authorities should formally establish the use of votes to adopt decisions on individual cases when no consensual solution has been found.

• The files for the institutions whose situations meet the acceptance criteria should be transferred to the Resolution Board.

• The establishment of a maximum period should be considered for provisional administrators' assignments.

• The procedures for the signing of cooperation agreements should be continued, and it should be ensured that all parties involved in the resolution processes are properly identified for cross-border groups or foreign institutions, and they should be contractually included in the cooperation agreements.

• The supervision of groups should be strengthened (i) through establishing a rating system for groups in the framework of the SNEC; (ii) by increasing the frequency of meetings between the SGCB, senior managers, and the board of directors of the groups, with the establishment of a minimum frequency for systemic groups; (iii) by strengthening the on-site supervision of financial companies and establishing on-site supervision of major foreign subsidiaries of local cross-border groups.

• More coercive measures should be applied to groups that do not meet the requirements on a consolidated basis.

• Financial companies should be taken into account in the future draft banking law.

• An internal policy and methodology should be established to determine cases in which the establishment of an intermediary financial holding company is not required (verification of the existence of consolidated supervision, assessment of the quality of supervision, existence of a memorandum of understanding with the home foreign authority, regular sharing of information on the different entities in the group, size criterion, systemic nature, etc.) along with the method for monitoring these groups.

• Regular analyses should be conducted for groups not monitored on a consolidated basis, with regard to the defined methodology, and those for which consolidated monitoring would be required.

• Information sharing and coordination agreements executed by the CBU with foreign supervision and resolution authorities should include an explicit coordination commitment in addressing banking difficulties and crisis resolution situations as well as cooperation in the preparation of resolution plans, at least for systemically important banking institutions.

• Information sharing and cooperation with foreign supervision and resolution authorities on management of crisis situations and the preparation resolution plans for systemic cross-border groups should be strengthened.

• The provisions on governance should be supplemented in the area of remuneration, and more specifically, remuneration in connection with supervision functions.

• An audit cycle should be programmed on governance of public banks in order to verify the correct breakdown of the principles of the Circular.

• A governance reporting template should be finalized as soon as possible, to provide information on compliance with the requirements that is useful to the DSP.

• DCPME inspectors should be encouraged to conduct more comprehensive investigations on the involvement of executive and legislative bodies in strategic and operational steering and risk supervision and control. Longer mission should be used, as required.

• The credit institution rating system should be supplemented with a questionnaire on the business model and strategic planning for banks.

• Investigations of the development, use, and governance of stress tests (in the credit, liquidity, and market areas) that are useful to the institutions should be expanded.

• More on-site supervision activities should be conducted on the subject of risk management and steering. In particular, investigations into the involvement of the decision-making bodies in the definition of risk appetite and on risk supervision should be enhanced and more stringent penalties should be applied in the event of noncompliance.

• Institutions that do not have internal expertise in the area of information systems security should be ordered to have external audits conducted.

• Regulations on information system security should be strengthened, including, for example, the conduct of intrusion tests at regular intervals by external audit firms.

• A system should be established to ensure that recovery plans are formally established and regularly updated.

• Regulatory texts in connection with the implementation of Basel II/Basel III should be completed as follows: (i) the regulatory texts relating to certain mechanisms should be finalized: the threshold for triggering conversion/ depreciation of additional Tier 1 capital indirect holdings; (ii) the provisions required for the establishment of the countercyclical buffer should be finalized; (iii) the banking law should be updated, in particular, to include the introduction of new categories of capital, and to reflect Pillar 2 and 3 requirements.

• Regulated provisions that do not meet the Basel III eligibility criteria should be excluded from the definition of capital.

• The prudential provisions relating to Islamic finance should be introduced, and the SGCB should be given human resources specializing in this area.

• The implementing texts relating to ICAAP, and stress tests should be finalized, and methodologies should be established to ensure comprehensive supervision by the SGCB in these areas.

• The capacities to supervise off-site supervision in connection with the new ratios should be enhanced with the establishment of supervision methodologies.

• The introduction of the more granular treatment under the Basel III standard approach should be considered (December 2017) for certain unrated counterparties.

• Provisions should be applied to impose additional capital requirements under Pillar 2 to cover risks not taken into account under Pillar 1, and in particular, public and private concentration risk and emerging risks such as interest rate risk in the banking book.

• More coercive measures should be adopted for institutions that fail to comply with solvency ratio requirements on an ongoing basis, and credit institutions with negative equity should be closed.

• Topical missions on credit should be scheduled so that more comprehensive investigations can be conducted on credit granting processes (definition of granting criteria, assessment procedure, quality of scoring tools, and validation process for rating systems).

• The statistical information transmitted in credit information bureau reporting when credit institutions consult solvency reports should be used to summon or potentially to penalize the most persistently uncooperative institutions without waiting for DCPEME investigations to confirm the anomalies.

• The standard (loan to value) approach governing the granting of real property loans should be reviewed with a more conservative approach.

• Regular credit stress tests should be established, and institutions should receive support in implementing such tools.

• The regulatory requirements in the area of credit risk should be supplemented with precise provisions on monitoring and assessing guarantees and the procedures for using assessors.

• Consider the possibility of using the 90-day arrears threshold for the classification of all non-performing exposures.

• Guidelines should be formally established on the management of bad claims, to specify in greater detail than the regulatory texts the expectations and requirements the supervisor applies to the institutions (governance of assets in default, the concept of technical default, consideration of the unlikely to pay downgrading criterion and quantitative examples, identification of structured claims, and asset valuation methodology).

• Institutions not having automated systems for identifying doubtful loans should be ordered to correct this issue as soon as possible.

• A reminder should be issued of the need to transpose, as soon as possible, the Directive on harmonization of the tax system for losses on doubtful and contentious claims recorded by banks in the countries of the Union that have yet to do so.

• A comprehensive review of the quality of the assets of banks having highly deteriorated claims (more than 30 percent) should be programmed with uniform sampling and investigation methodologies by type of portfolio.

• Institutions should be encouraged to strengthen their out-of-court collection mechanisms, and risk management reports should require the remittance of recovery indicators. Studies should be conducted on the recovery of doubtful loans by credit institutions.

• Cross studies should be developed on banks' credit portfolios, and the results of credit stress tests should be taken into greater consideration in banks' ratings.

• Institutions should be required to establish systems for the identification and monitoring large exposures, incorporating formally established procedures and policies, and the use of the appropriate tools.

• Institutions should be required to recapitalize gradually so that the target large exposure limit can be observed.

• Investigations into the process of identifying banks in connection with groups of related customers should be strengthened.

• With a view to the implementation of the 25 percent large exposure limit, institutions should be encouraged to use syndicated loans or additional guarantees and increases in capital.

• Action plans should be provided, if required, using Pillar 2 measures, for any institutions unable to achieve the ratio within the deadline.

• Indicators should be established to monitor institutions' customer diversification.

• Regular bank studies should be conducted on the exposure of institutions in the Union to systemic counterparties and/or those most vulnerable to commodities fluctuations.

• The auditors should be reminded of the obligation to conduct thorough investigations of all information, contracts, and transactions involving related parties, and more specifically to verify whether the agreements signed with them are normal.

• Institutions potentially exposed to country and transfer risks should be mapped, and as required, information should be collected on the mechanisms established to manage these risks.

• The future risk management template should include a section that addresses these risks.

• Market risk should be integrated more effectively into the supervision processes for off-site supervision (a mandatory item in the internal supervision report template, with a description of the types of market activity and products, supervision methodology and procedure, and a warning indicator for growth in the trading book) so that market risks can be detected and surveyed, and institutions whose trading books are developing or that have new market finance instruments can be identified and supervised.

• More comprehensive controls should be introduced, particularly trading book valuation models, for institutions engaged in significant market activity.

• Credit institutions should be subject to quantitative reporting on interest rate risk exposure.

• The information that institutions are expected to report on interest rate risk management and crisis simulations should be specified.

• Supervision methodologies and procedures specifically designed for this risk should be established in off-site and on-site supervision, and this risk should be integrated into the overall assessment of each institution's risk profile.

• The requirements for crisis simulations should be supplemented to require interest rate scenarios to be incorporated.

• Liquidity coverage ratio and net stable funding ratio reporting, along with certain Basel III liquidity monitoring tools should be provided, and more specifically, credit institutions should be subject to quantitative reporting on the remaining maturity gaps between assets and liabilities, without waiting for the minimum LCR/NSFR requirements to enter into force.

• The possibility should be assessed of establishing discounts on government securities to reflect secondary market liquidity levels and member country sovereign risk, while applying the interim measures required to implement this more conservative measure, or at least a uniform discount should be provided for government securities of the countries in the WAMU area.

• The possibility should be studied at the level of the BCEAO of including all of the central bank's reserves in Level 1 high-quality liquid assets under the liquidity coverage ratio, including the reserve requirement.

• The LCR/NSFR implementation schedule should be finalized, and banks should be duly informed.

• The liquidity risk management questionnaire used for ratings should be supplemented and the quantitative indicators used should be reviewed to reflect the new Basel III ratios and monitoring tools.

• Controls applied to liquidity monitoring tools used by the institutions should be strengthened and the on-site supervision methodology should be fleshed out.

• The requirements applicable to crisis simulations should be supplemented by indicating that short and long-term, bank-specific, and generalized liquidity stress scenarios (or any combination of these options) should be used.

The information technology skills of the supervisory authority should be strengthened through the establishment of a team dedicated to on-site supervision of information systems and the use of external consultants.

Cross analyses should be developed for operational risk, to detect common areas of vulnerability.

• The feedback templates for organizations and the work of the compliance and control functions should be finalized as soon as possible.

• The practice of special interviews by the DSP with control functions of the institutions should be generalized.

• Severe corrective measures should be applied to institutions having staffing shortages in their control functions and/or that have not defined the three lines of defense in detail.

• Convergence with international accounting standards should be continued.

• Meetings between the off-site supervision and the auditors should be scheduled without the presence of senior management to discuss the individual situation of a given bank when vulnerabilities are detected.

• More precise guidelines should be established for the format of the auditors' reports so that the content will be more uniform, and templates for the analysis of these reports should be prepared.

• Checks conducted by the on-site supervision in terms of the approval of the auditors should be eliminated when these issues have already been verified by the SGCB legal affairs unit, to avoid duplicated supervision activities. Supervision should be limited to changes in the situation of the auditors in terms of the quality of the work, competence, and independence.

• The SGCB's information levels should be enhanced for portfolios assessed at fair value.

• The mechanisms for implementing the Pillar III requirements in the prudential system should become effective as soon as possible so that the system can become operational.

• Controls should be established for banks' compliance with Pillar III requirements.

• The current requirement to publish information at the website for Pillar 3 should be extended to all financial reporting requirements (financial statements and annual reports).

• Guidelines should be formally established, in accordance with Financial Action Task Force (FATF) Recommendation 34 providing clarification on a number of different gaps or unclear areas in the regulations (remote establishment of relationships, additional oversight measures, definition of national politically-exposed persons, validation of the establishment of relationships with politically exposed persons by members of senior management, incentives to abandon correspondent banking activities in high-risk countries, and the requirement to report suspicious activities to the supervision authority).

• Member countries should be reminded of the requirement to establish, as soon as possible, national committees responsible for preparing lists of penalties and measures to freeze assets.

• The DCPEME methodology on AML-CFT risk factors and the controls required by the specialized nature of certain lines of business (correspondent banking) should be supplemented.

• The inclusion of a program of AML-CFT topical missions in the annual survey program should be confirmed.

• Formalize a memorandum of understanding between BCEAO and the CENTIFs in order to provide a framework for and guarantee the sharing of AML/CFT information and to ensure the implementation of regular exchanges between the SGCB teams and the CENTIFs on AML/CFT risk factors.

• An AML-CFT expertise center should be developed within the SGCB (off-site supervision) and AML-CFT risk mapping should be formally established to highlight all identified weaknesses.

• The policy of applying more stringent penalties to institutions in violation of the AML-CFT regulations should be continued.

Responsibilities, objectives, and powers

An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.⁷ A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorise banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.⁸

Institutional Architecture of the WAMU

There are four players in the institutional architecture for banking regulation and supervision in the WAMU area:

• The WAMU Council of Ministers is responsible for defining the regulatory environment for the activity of the banking system in accordance with Article 17 of the WAMU Treaty. It should be clarified that the WAMU Council of Ministers may “authorize waivers of the agreed provisions that do not affects its principles, that it deems to be justified by the conditions and specific requirements of a WAMU member country.”

• Under Article 10 of its Charter, the BCEAO may conduct “missions, in compliance with monetary equilibrium, in connection with specific projects to support the improvement of the monetary policy environment, the diversification and strengthening of the WAMU financial system, and the technical and professional capacities of the banking and financial sector.”

• The Minister responsible for finance of each WAMU member country, who has the power to make decisions on certain matters incumbent on him or her under the Uniform Act on Banking Regulation (the Banking Law).

• The WAMU Banking Commission (CBU), that is responsible for banking supervision in the WAMU area under the Treaty of the West African Monetary Union of April 6, 2007 (the WAMU Treaty).

Uniformity of Texts Applicable to Member Countries

The texts are applied uniformly. The Council of Ministers has not granted any waivers to member countries of the Union in the area of banking regulation. However, transitional arrangements may be decided in the implementation of regulatory texts to reflect the operational and/or financial significance and impacts of regulatory changes (prudential system or regulation on risk limits).

Areas of competence of the CBU

Where the CBU is concerned, Article 23 of the WAMU Treaty provides that it “is a body of the WAMU responsible in particular for the organization and supervision of credit institutions.” The CBU's supervision prerogatives and conditions are governed by a specific convention signed by the WAMU member countries: the Convention of April 6, 2007, Governing the CBU (the Convention) and its Annex (the Annex to the Convention).

Organization of the CBU

The Annex to the Convention contains the functional provisions, i.e., the composition, organization, and operation of the banking supervision body of the Community. The CBU includes two boards (the Supervision Board and Resolution Board), each of which is comprised of country representatives and members appointed intuitu personae. Article 12 of the Annex to the Convention mentions that “the Central Bank shall provide the secretariat, by making the required staff and resources available, and shall cover the operating costs of the Banking Commission.”

Sharing of Competence Between the CBU and BCEAO

The CBU may use the central bank for off-site and on-site supervision (Article 21 of the Annex to the Convention).

In addition to the resources it provides for the SGCB, that in fact contribute to the implementation of supervision, the BCEAO may also carry out, in accordance with Article 23 of the Annex to the Convention, supervision of systemic credit and banking institutions after having duly informed the CBU.

Regardless of the intervention mechanism it uses, the central bank can also initiate controls incumbent on the CBU, after having duly informed the latter. It must report to the CBU on the results of supervision activities, and any violations of the banking regulations and any other legislation applicable to the supervised institutions, noncompliance with the rules of ethics of the industry, and any other anomalies in the management of the supervised institutions that may be brought to its attention (Section 23).

During October/November 2017, the central bank conducted investigations with 14 WAMU banks to monitor compliance with the provisions on external financial relations.

The results of these supervision activities were brought to the attention of the CBU, that initiated disciplinary proceedings against the banks involved as a result of the significant shortcomings discovered. In addition, the SGCB is responsible for control in respect of regulations on external financing and to conduct missions on nonprudential monetary policy implementation.

In fact, the possibility offered by the Annex to the Convention may lead to overlapping between the areas of competence of the central bank and those of the CBU. In practice, the BCEAO's missions with banks involve central banking responsibilities. However, the respective operating areas of the two authorities in banking supervision have not been formally defined.

The BCEAO is also responsible for processing applications for licenses and various authorizations submitted by credit institutions to the Minister of Finance. Decision 421-12-2015 of the Governor of the Central Bank organizes the examination by the BCEAO of applications for licenses or prior authorizations. In practice, license applications are processed by the SGCB on behalf of the BCEAO.

Role of the Minister of Finance

The Minister of Finance has decision making authority in certain matters under the Banking Law. This involves the licensing of credit institutions or the various authorizations for the credit institutions to engage in certain operations, withdrawal of licenses at the request of the institution involved, when the supervisor has found that the institution has been inactive for at least one year, as well as the suspension of all or some of a credit institution's operations, or all credit institutions in a given country.

However, the decision-making power of the Minister of Finance is shared with the CBU. The legal system applicable to this division of powers derives expressly from the Banking Law (Articles 15, 20, 25, 31, 39, 40, and 41 of the Banking Law) and the Annex to the Convention (Articles 40, 41, 42, and 44).

The Minister makes decisions subject to the opinion of the CBU. For all acts involving a decision of the Minister, the CBU must be consulted, and its opinion must be obtained in all cases provided by the banking regulations under Article 40 of the Annex to the Convention.

Legal Scope of the Opinion

The opinion of the CBU, whether favorable or unfavorable, must be issued to the Minister of Finance, who, under Article 42 of the Annex to the Convention, will have a period of 30 calendar days to adopt an order. When the minister fails to take the appropriate action within this period of time, the CBU will notify the interested party of the content of the opinion, and it will become binding.

The opinion is binding on the Minister. Where the national authorities disagree with this opinion, they may submit the matter, pursuant to Article 44 of the Annex to the Convention, to the WAMU Council of Ministers for arbitration. In practice, arbitration by the Council of Ministers has never been requested. When arbitration is used, decisions must be adopted unanimously, in accordance with the rules provided in Article 15 of the WAMU Treaty.

Appeals Against Decisions of the CBU

Decisions of the CBU against credit institutions and members of their senior management may, according to Article 43 of the Annex to the Convention, be appealed only to the Council of Ministers of the WAMU, which will function as a chamber of appeal. Appeals must be filed within two months from notification.

Appeals may not be filed against decisions to withdraw a license in connection with a disciplinary penalty, after having been announced, within seven days, by the minister responsible for finance of the country in which the decision was made.

Similarly, Article 43 of the Annex provides that appeals may not be filed against decisions to place institutions in provisional administration or liquidation, after the provisional administrator or liquidator has been appointed by the minister responsible for finance of the country in which the decisions are binding.

Neither the appeal period nor the appeal has suspensive effects.

Article 15 of the WAMU Treaty provides that decisions must be made unanimously. In the event of an appeal to the Council of Ministers, penalties can only be upheld by unanimous decisions, reflecting the decision mechanism provided in Article 15 of the WAMU Treaty. Based on this principle, a veto from one country is sufficient to cancel the CBU's decision. This situation also would not appear to be completely satisfactory, as it may delay decision making, particularly in urgent situations.

It is also important to note that the Council of Ministers would no longer seem to be the only remedy in the event of penalties issued by the CBU. Some penalties the CBU has issued to individuals have already been appealed to the Council of Ministers of the Union. Moreover, the penalties had been upheld by the Council of Ministers and justified as the last resort by the complainants before the Court of Justice of the Union. The practice of appealing to the Court of Justice of the Union therefore already appears to be effective.

The functions of the CBU are set out in Article 2 of the Annex to the Convention. The CBU is responsible for ensuring the soundness and security of the WAMU banking system through, inter alia, the oversight of the supervised institutions and the resolution of banking crises. In fact, the CBU comprises two decision making bodies: the Supervision Board and the Resolution Board (Article 3 of the Annex to the Convention).

The CBU's prerogatives also include the protection of depositors and the maintenance of the stability of the regional financial system. In this connection, we should note that the Governor of the BCEAO is the Chair of both the CBU and the WAMU Financial Stability Committee (CSF-WAMU).

The consumer and customer protection component is not one of the prerogatives of the CBU. It is specifically incumbent on the member countries, although not all of them have observatories to monitor the quality of the financial services implemented within the Union.

The CBU is empowered under the Banking Law (Article 56, paragraph 5) and the Annex to the Convention (Article 21, paragraphs 2 and 5 and Article 29.1) to establish “different” prudential standards for supervised institutions to reflect their individual circumstances (size, structure, risk profile, the nature and complexity of their activities, and systemic importance).

To date, the supervisory authority is still applying this functionality on a limited basis to institutions not classified as systemically important banks.

Similarly, in accordance with Article 22 of the Annex to the Convention, the supervisory authority has the right to establish more stringent prudential requirements for systemically important banks. For example, regional systemically important institutions must establish extra capital, primarily in the form of core Tier 1 capital. This extra requirement and the list of systemically important banking institutions will be decided and published by the Banking Commission based on a methodology issued by the BCEAO (paragraphs 101 and 102 of the prudential system).

Strengthening of the Regulatory and Prudential Framework

The WAMU area has been subject to major regulatory changes and reforms during the past five years, enabling it to move to a higher prudential level. The new regulatory texts are largely in line with international best practices.

First, at the prudential level, the WAMU has transposed the Basel II and Basel III provisions, resulting in the establishment of a new prudential system for credit institutions and financial companies. This new system entered into force on January 1, 2018.

It is also worth mentioning the three circulars formally established in 2017 on governance, internal supervision, and risk management, that have significantly enhanced the requirements and obligations applicable to credit institutions and financial companies in connection with their operations.

Last, the Annex to the Convention governing the CBU was revised in 2017, which involved the introduction of a banking crisis resolution mechanism. A circular on the mechanisms and conditions for the implementation of the resolution system was also published at the end of 2020.

In accounting matters, the new revised chart of accounts entered into force on January 1, 2018.

In the area of supervision, the WAMU also adopted a new consolidated supervision system for parent credit institutions and financial companies in the WAMU on June 24, 2016.

Process of Developing and Validating the Regulations

"The updating of the regulations may be delayed from time to time in light of the adoption of international standards, at the risk of affecting the supervision conditions of the WAMU and weakening the financial and banking system. The lengthy delays that have been observed from time to time in updating the regulations primarily involve the texts of laws, which must be adopted by each of the national parliaments of the eight WAMU member countries.

The structured, iterative method involves numerous directorates within the BCEAO. It is dictated by the division of roles and responsibilities between the units of the central bank responsible for regulation (the Financial Stability Directorate—DSF) and those responsible for supervision (primarily the SGCB). In a dynamic of complementarity, the aim is to combine all available skills and expertise to produce robust regulations.” Publication of the texts, in accordance with the operations of the Union, will then require arbitration and validation at country level and subsequently at the community level.

The guidance note will be forwarded for comments to the relevant directorates at headquarters, the national directorates, and to the SGCB. The version of the guidance note, amended to reflect the comments received, will be subject to validation by the bank authorities.

After the proposed guidelines have been adopted, the services involved will prepare a preliminary draft text, which will be validated within the directorate responsible for drafting the regulations. The draft validated by the Directorate will then be forwarded for comments to the relevant directorates at headquarters, the national directorates, and the SGCB.

The amended version of the draft text will be the subject of consultations with the relevant players and/or the national authorities and will then be submitted to the bank authorities for validation.

The draft text will then be finalized to reflect the comments made by the bank authorities, where appropriate. Depending on the type of text, the validated text will be:

• Forwarded to the Governor for signing.

• Submitted to the Monetary Policy Committee or to the Council of Ministers for adoption, depending on the area of competence.

• Communicated to the countries to be incorporated into their domestic legal systems.

Should a draft text not be adopted by the competent authority (the Monetary Policy Committee or Council of Ministers of the Union), it will be revised to reflect the comments and guidelines provided.

Public Consultations Prior to the New Prudential Standards and Supervision Guidelines

The consultation process for texts occurs upstream and downstream. The DSF will question credit institutions and the financial sector in connection with the regulatory authority's concerns involving any amendments or changes to the current text that may be required. It will then use consultations to obtain a formal statement of the opinions of the supervised institutions. The BCEAO may also combine these activities with impact studies.

When the text has been validated, the BCEAO will give the institutions feedback on the choices adopted, inform them of any points not reflected in the final version of the text and the supervisor's expectations on the implementation of the regulatory provisions. It was found in the mission's discussions with a panel of institutions that this participative approach is appreciated in the industry.

The supervisor has the power to:

(a) have full access to banks' and banking groups' Boards, management, staff and records in order to review compliance with internal rules and limits as well as external laws and regulations;

(b) review the overall activities of a banking group, both domestic and cross-border; and

(c) supervise the foreign activities of banks incorporated in its jurisdiction.

(a) the regulations allow the Banking Commission to freely contact senior management and the decision-making body of the supervised institutions and to access all documents required for their supervision. Accordingly:

• Article 24 of the Annex to the Convention provides that the CBU may conduct a simple hearing of members of senior management of the supervised institutions or any persons who may provide useful assistance.

• According to Article 25, supervised institutions are required to provide the CBU, on request, within the specified time frame and forms, any documents, information, clarifications, and justifications required for the exercise of its duties.

• Article 15 of Circular 01-2017/CB/C on governance of credit institutions specifies that the minutes of the meetings of the decision-making bodies must be submitted to the CBU. In addition, the supervisory authority may also participate as an observer in meetings of the decision-making body when it deems it necessary. The Banking Commission has already exercised this power.

The CBU also has extensive supervision powers. Article 21 of the Annex to the Convention provides that the CBU may carry out or assign off-site and on-site supervision activities, on an individual or consolidated basis, in the supervised institutions, to ensure that the relevant provisions are being observed. In connection with inspection missions, inspectors from the DCPEME have extensive investigative powers and access to any documents and records they may wish to examine.

Last, responsible members of senior management are subject to an approval process. In fact, the CBU ensures that persons considered for director or senior management positions meet the mandatory criteria of expertise (academic training and professional experience), moral standing, and nationality. “The Banking Commission has the power to require the institution concerned to change the composition of the decision-making body of a supervised institution if it finds that some of its members are not fulfilling their responsibilities. However, it will not take direct action to make such a change, which is instead incumbent on internal management of each supervised institution.”

(b) The CBU is clearly empowered to conduct on-site and off-site supervision activities, on a consolidated basis, in the supervised institutions, in order to ensure that the relevant provisions are being observed. In this connection, the Chapter II of the Annex to the Convention defines the specific framework for consolidated supervision. The concept of consolidated supervision is explained in further detail in Decision 014/24/06/2016/CM/UMOA of June 24, 2016, on consolidated supervision.

(c) The CBU may, pursuant to Decision 014/24/06/2016/CM/UMOA of June 24, 2016, in reference above (Article 9), monitor the activities abroad of banks registered in its jurisdiction and limit the scope of the activities that a supervised institution may undertake and the jurisdictions in which it conducts them.

Further, as part of its role as the home supervision authority, the CBU has signed cooperation conventions with peer supervisors and organizes supervision boards for regional banking groups having significant facilities abroad. However, the conventions currently signed by the WAMU do not cover all jurisdictions in which the groups operating in the Union are also established.

When, in a supervisor's judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardise the bank or the banking system, the supervisor has the power to:

(a) take (and/or require a bank to take) timely corrective action;

(b) impose a range of sanctions;

(c) revoke the bank's licence; and

(d) cooperate and collaborate with relevant authorities to achieve an orderly resolution of the bank, including triggering resolution where appropriate.

The Banking Commission's powers to apply penalties are explicitly provided in Section 3 of the Annex to the Convention (Articles 29, 30, 31, 32, and 33). The Banking Commission is authorized to issue administrative measures (warnings or orders) and disciplinary penalties and/or fines, depending on the severity of the violations committed.

(a) The Banking Commission will intervene through administrative measures as defined in Article 29 of the Annex to the Convention. Accordingly, when the CB finds that a supervised institution has failed to comply with the rules of ethics of the industry, has compromised its financial equilibrium, has engaged in irregular management practices, or no longer meets the conditions required for the license or authorization to operate, as applicable, it may issue the following to the supervised institution after duly informing the minister responsible for finance of the country involved:

• A warning.

• An order to take or implement the required remedial measures or any appropriate precautionary measures within a specified time frame.

There are various forms of remedial measures: capital requirements exceeding the regulatory targets, liquidity requirements appropriate for the institution's situation, strengthening of governance arrangements, management of risks, the internal control system, establishment of additional provisions, etc.

Precautionary measures include the transfer of any activity that would compromise the financial soundness of a supervised institution, of all or part of the shareholders' rights, the limiting or prohibition of discretionary distributions, including dividends to shareholders, the partial or total allocation of profits for the fiscal year period to capital, or implementation of a preventive recovery plan.

(b) and (c) In the event of a violation of the banking regulations, under Article 31 of the Annex to the Convention, the Banking Commission may impose penalties on financial companies and institutions.

The range of penalties is quite broad and includes disciplinary penalties and fines.

The CBU of the WAMU may impose the following disciplinary penalties under Article 31.1 of the Annex to the Convention:

• Warnings.

• Reprimands.

• Suspension or prohibition of all or some of the institution's operations.

• Any other limits in the practice of the profession.

• Suspension or ex officio resignation of the responsible members of senior management.

• Prohibition of persons responsible from senior management, administration, or management of an institution under its supervision or one of its agencies. Depending on the seriousness of the offense committed, this prohibition may be permanent or limited in time, and may be imposed even after the above persons have left office.

• Withdrawal of the license. This act is subject to notification of the Council of the Ministers.

Comments on Fines

In addition to disciplinary penalties, the CBU may issue fines, the amount of which is established in an instruction issued in 2018 by the BCEAO. The BECAO has established the following maximum amounts:

• CFAF 500 million for parent credit institutions and financial companies.

• CFAF 300 million for banks.

• CFAF 90 million for bank-like financial institutions.

• 25 percent of the minimum amount of the required capital stock, i.e., CFAF 75 million, for electronic money institutions.

Several comments can be made in this connection:

• The establishment of monetary ceilings actually limits the supervisory authority's power to issue penalties.

• The established amounts would not appear to have substantial deterrent effects, particularly in light of the size of certain groups operating in the Union.

• “Fines imposed by the CBU were applied within the limits of the amounts and ceilings provided in the current texts. The CBU has issued the maximum fines to some institutions.

(d) The CBU is also the resolution authority of the WAMU. Through its Resolution Board, it has the power to subject systemically important institutions, as well as any of their subsidiaries that may be involved, to the WAMU resolution system (paragraph 17). Under the WAMU resolution system, the Resolution Board “may decide to place any supervised institution deemed to be unsustainable and not to have any outlook for rehabilitation in resolution.”

Subsidiaries or supervised institutions established outside of the WAMU may also be subject to resolution measures, if applicable, in the framework of the implementation of cooperation agreements executed by the CBU with the competent authorities.

The CBU is explicitly authorized to engage in consolidated supervision of banking groups. This power is exercised pursuant to Article 37 of the Annex to the Convention Governing the CBU and Article 9 of Decision 014/24/06/2016/CM/UMOA on the consolidated supervision of parent company credit institutions and financial companies in the WAMU.

The examination of the implementation of consolidated supervision is addressed in BCP 12.

The responsibilities and objectives are generally stated clearly in the legislative and regulatory texts, although there is scope for clarification in some areas. In addition to the BECAO's contribution to the SGCB's resources, the supervision and control powers granted to the BCEAO (that are insufficiently used and substantially involve capital control issues) are likely to be a source of confusion and an obstacle to the understanding of the supervision system.

Furthermore, the mechanisms provided in the Annex to the Convention to appeal decisions of the CBU, whether this involves disciplinary penalties or opinions, confirm the Council of Ministers as the ultimate decision-making body in the area of supervision. In practice, it would seem that appeals are now also being filed with the Court of Justice of the Union, and accordingly, a review of the regulatory system might be required (see BCP 2).

The decision-making mechanisms of the Council of Ministers defined in Article 15 of the WAMU Treaty are based on the rule of unanimity. This gives member countries veto rights and may result in decisions being affected by political and national considerations.

Otherwise, the reform efforts of the regulatory authority during the past five years have led to a substantial consolidation of the regulatory base and the establishment of conditions for enhanced supervision. The draft banking law, which is in the process of finalization, should result in beneficial improvements to the regulatory system. The process of preparing and publishing regulatory texts, characterized by iterations in connection with the multilateral decision-making process, can occur late in the adoption of international standards. The BCEAO justifies this situation with its participatory approach and its willingness to involve the banking sector fully in impact studies and activities. In addition, the transposition of the prudential standards and regulations issued by the BCEAO into local laws can lack diligence and delay the enactment of new texts. In addition, some of the new texts are quite stringent. While this method might be expected to prevent the Union from updating its texts too quickly, it can also lead to potentially destabilizing regulatory shocks for institutions, with drastic qualitative changes that might be difficult for some institutions that do not always have the expertise or information technology resources they need. To address these issues, the BCEAO invokes the principle of proportionality that it intends to apply.

In terms of supervision, the CBU is clearly authorized to issue standards that are differentiated by institution, although this approach has not been used to date. The establishment of prudential rules that target and more effectively correlate with the risk profiles of the institutions might strengthen the efficacy and efficiency of the supervision system.

Where corrective measures and penalties are concerned, the CBU has an arsenal that is very rich but not fully utilized (see BCP 11) that might be restricted by the ceiling on fines issued by the BCEAO. In addition, the amounts authorized for fines are insufficiently deterrent, particularly for the large banking groups in the Union.

Last, at the international level, the conventions currently signed by the WAMU do not cover all jurisdictions in which the groups operating in the Union are also established.

Recommendations:

• Intervention mechanisms for the BCEAO in the area of supervision should be clarified in the context of the new banking law. More specifically, the regulatory provisions giving the BCEAO the power to initiate on-site supervision activities in the discharge of its duties should be specified.

• Respectively for penalties and opinions, supervised parties and member countries should appeal only to Court of Justice of the Union, which jurisdiction on the matter was established.

• Differentiated prudential standards should be applied, particularly under Pillar 2, to consolidate the supervision approach for credit institutions.

• The regulations of the Union should be aligned more quickly with international standards.

• The ceiling on the amounts established for fines should be reviewed to make them more deterrent.

The Treaty of the West African Monetary Union, ratified in 2007 by the eight WAMU member countries, defines:

• The Central Bank of West African States (BCEAO) as an institution of the WAMU having the exclusive authority to issue currency (Articles 25 and 26). The BCEAO is governed by the Charter appended to the Treaty, of which it is an integral part. This Charter provides that the central bank has legal status and financial autonomy (Article 2). It may not request or receive directives or instructions from Community institutions or bodies, governments of the WAMU member countries, or any other organization or person (Article 4).

• The Banking Commission (CBU) as a body of the WAMU is responsible for, inter alia, overseeing the organization and supervision of credit institutions. The CBU is governed by a specific convention signed by the WAMU member countries (Article 23). This Convention, including its Annex, is a treaty ratified by the eight signatory member countries of the WAMU. Accordingly, under the internal legal systems of these countries, when they have been duly ratified or approved, the authority of the treaties or agreements is above the law, upon their publication.

Since January 1, 2018, the CBU has had two decision-making bodies: the Supervision Board and the Resolution Board. It has a secretariat.

Resolution and Supervision Boards

The Annex to the Convention defines the composition of the Supervision and Resolution Boards (Articles 4.2 and 5.2).

The Supervision Board comprises:

• Its Chair, the Governor of the Central Bank of West African States (BCEAO).

• Eight members, each of whom represents a member country of the WAMU, i.e., the Public Treasury Director or the head of the directorate responsible for the supervision of credit institutions.

• Eight members appointed by the WAMU Council of Ministers for their expertise, on the proposal of the Governor of the BCEAO. The process of the selection of profiles by the BCEAO may reflect suggestions from the Office of the Secretary General of the Banking Commission (SGCB) or the National Directorates of the BCEAO. There is no procedure defining the selection criteria and ensuring that potential candidates participate in competitive processes. The Board now includes the following profiles: three economists, two legal experts, one financial auditor, one financial inspector, and one corporate director. However, the supervisory authority was unable to provide the CVs of the members of the Banking Commission requested by the mission.

As a result of the review of the cooperation agreements with France (Agreements of December 21, 2019), since June 2019, the Supervision Board has no longer included the representative from the country providing the currency convertibility guarantee. Similarly, the French member appointed by the Council of Ministers is no longer present on the Supervision Board. As these two members have not been replaced, the Supervision Board has been reduced from 18 to 16 members.

The Resolution Board includes:

• Its Chair, the Governor of the BCEAO.

• The representative on the Supervision Board from the government that chairs the Council of Ministers.

• The Director of the Deposit Guarantee and Resolution Fund in the WAMU.

• One member appointed by the Council of Ministers of the WAMU for his or her expertise, on the proposal of the Governor of BCEAO.

Decisions must be adopted by the majority of the votes cast. The Chair will have the casting vote in the event of a tie (Article 13).

Members of the CBU may not occupy any position or accept any appointment, remunerated or unremunerated, in a supervised institution or professional association representing supervised institutions, or provide services to such organizations (Article 9 and Code of Ethics for CBU Members adopted on September 17, 2018). Persons who are disqualified from senior management, administration, or management of a supervised institution, commercial or industrial enterprise, cooperative, or artisanal enterprise cannot be members of the CBU (Article 9).

Article 2 of the Code of Ethics for CBU Members provides that they must act with full independence. However, the WAMU Treaty and Annex to the Convention do not mention that the Banking Commission cannot receive directives or instructions from governments of WAMU member countries or from any other body, as mentioned for the case of the BCEAO.

There is a substantial presence of country representatives on the Supervision Board. In fact, eight out of 17 voting members on the Board are senior public officials from member countries. They come from ministries in each country: the Public Treasury Director, or the head of the directorate responsible for the supervision of credit institutions, which also limits the diversity of the profiles on the Board. Accordingly, there is a substantial risk of political interference in decision making.

For the appointment of the remaining eight members by the Council of Ministers on the proposal of the Governor, the latter is responsible for identifying the appropriate profiles and for making appointment proposals to be submitted to the Council of Ministers. In practice, a list of potential candidates in the areas of banking, law, or finance, or in any other areas considered to be compatible with the positions is drawn up. This list includes information on the candidates: last name, first name, current job title, degrees, professional experience, and incompatibilities. We note that this procedure does not include clearly established selection criteria or any competitive process, potentially detracting from the independence of the Supervision Board.

In this connection, we note that the CBU does not use the full range of penalties at its disposal, even though certain public banks are in vulnerable positions and have committed persistent violations of the prudential regulations (See Principle 11).

The review of the composition of the Supervision Board is not included in the reforms provided in the framework of the Banking Law and the Annex to the Convention. There is a draft revision of the composition of the Resolution Board designed to increase the number of members representing the countries. Further, there are no plans to establish a separate Penalties Board from the Supervision Board, as the CBU has yet to receive challenges against its decisions from the supervised institutions.

SGCB

The SGCB is covered by the central bank. Accordingly, the Secretary General and all staff of the SGCB are officers of the BCEAO. In this connection, Article 4 of the BCEAO Charter provides that such persons cannot receive directives or instructions from Community institutions or bodies, governments of WAMU member countries, or any other organization or person.

The SGCB is organized with the following units that report to the Secretary General and his or her deputy:

• Operations Supervision: Under the authority of the Secretary General, this unit is responsible for daily checks to ensure that the operations of the SGCB are regular.

• Crisis Resolution and Legal Affairs Directorate: This Directorate is primarily responsible for monitoring the banking crisis resolution process, preparing decisions of the CBU, and providing legal assistance to all SGCB services. It is divided into two units: the Crisis Resolution and Trade Practice Supervision Unit, and the Legal Affairs Unit.

• The Studies and International Relations Directorate: This Directorate primarily addresses issues relating to regulations and prudential standards applicable to the supervised parties, management of relations with external partners, the conduct of studies relating to the stability of the banking system of the Union, and the assessment of applications for licenses, declarations of intent, and prior authorizations. It also coordinates the preparation of the sessions of the CBU with the other directorates involved. It is comprised of two units: the Regulatory Monitoring, Methods, and International Relations Unit; and the Studies, Statistics, and Licensing Unit.

• The Off-site Supervision Directorate (DSP): This unit is responsible for individual off-site supervision of supervised institutions. It also monitors implementation of administrative measures and penalties applied by the supervisory authority in connection with the directorates involved. The DSP comprises three units: the Subregional Banks and Financial Institutions Surveillance Unit, the Cross-Border Surveillance Unit, and the Specialized Institutions Surveillance Unit.

• The On-Site Supervision of Credit and Electronic Money Institutions Directorate (DCPEME): This Directorate implements the on-site supervision program for credit institutions, financial companies, and electronic money institutions. The on-site monitoring teams are each under the authority of a mission head.

• The On-Site Supervision of Decentralized Financial Systems Directorate (SFD): This Directorate is responsible for implementation of the SFD inspection program. Its on-site supervision teams are also each under the authority of a mission head.

• The General Resources Directorate: This Directorate is responsible for management of support activities. It includes the Administrative Affairs Unit, the Human Resources Unit, the Accounting and Budget Unit, and the Information Technology Unit.

The Banking Commission has an autonomous operating budget, provided entirely by the central bank, without any contributions from the governments or from the institutions subject to its supervision.

A process for the BCEAO to divest from the capital of certain banks is being finalized. The BCEAO still holds stakes of less than 10 percent in a bank that is on the list of institutions subject to special supervision.

Under Article 69 of the Annex to the Convention, the CBU must prepare a report at least once a year on its performance, to be submitted to the central bank and to the bodies of the WAMU. The bodies of the WAMU are the Conference of Heads of State and Government, the Council of Ministers, and the Regional Public Savings and Financial Markets Board (See Principle 2, Criterion 3).

The Governor of BCEAO, the Statutory Chair of the CBU, is appointed by the Conference of Heads of State and Government for a term of six years, subject to renewal. First appointed in 2011, the current Governor's term has been renewed twice. He spent most of his career with the BCEAO and in public administration in Côte d'Ivoire. The Deputy Governors are appointed by the WAMU Council of Ministers for a term of 5 years, subject to renewal. Their terms are irrevocable, except in the case of serious misconduct or disability (Article 56 of Charter of the BCEAO). The texts do not require the reasons for their removal from office to be publicly disclosed.

Representatives from the member countries on the CBU are appointed by notification to the Chair of the CBU from the competent national authority, and in this case, the minister responsible for finance. This representative must, on a mandatory basis, be the Public Treasury Director or manager of the directorate responsible for oversight of credit institutions. Any changes in leadership in the foregoing Directorates are subject to the announcement of the termination of the former representative and the appointment of the new representative from the government involved within the CBU.

The members of the CBU appointed by the WAMU Council of Ministers serve terms of three years, subject to two renewals (Article 8 of the Annex to the Convention). Except in cases of resignation or death, a member may be removed from office before the expiry of his or her term or by decision of the WAMU Council of Ministers (Article 8). The regulatory texts do not specify the cases in which the Council of Ministers may remove these members from office and do not impose any requirement to publicly disclose the reasons for their removal from office.

The secretariat of the CBU is headed by a Secretary General, assisted by one or two Deputy Secretaries General, appointed by the Governor from the staff of the central bank.

The objectives pursued by the CBU are stated in the Annex to the Convention (Articles 2 and 4), that lists the tasks of the supervisory authority. In addition to these general objectives, the CBU does not set annual or multiannual priorities for prudential supervision activities. The SGCB indicated that the BCEAO's strategic plan does include some aspects of supervision. This multiannual strategic plan is not published in the annual report. Further, the plan published at the BCEAO's website is not current (covering the period 2016-2018).

Under Article 69 of the Annex to the Convention, the CBU must prepare a report, at least once a year, on the performance of its mission, to be submitted to the central bank and to the bodies of the WAMU. In practice, the annual report of the CBU is submitted to the members of the Conference of Heads of State and Government, the Council of Ministers, the Monetary Policy Committee of the BCEAO, the Board of Directors of BCEAO, and the Regional Public Savings and Financial Markets Board. It is also published at the central bank's website and is accessible to the public, as the CBU does not yet have its own website.

After each session, the CBU must inform the ministers responsible for finance of the decisions made involving the supervised institutions located in their jurisdiction. It also must prepare a report on its activities after each of its four annual meetings for the Council of Ministers of the Union.

The Annex to the Convention and the Internal Rules of Procedure of the CBU contain provisions for decision making in emergency situations or those requiring a prompt reaction from the supervision and resolution authority.

The CBU is authorized to delegate some of these powers to its Chair (Article 64 of the Annex to the Convention): those relating to authorizations to become established, creation of differentiated prudential standards, administrative measures, placement in provisional administration, liquidation, and approval of the auditors. The powers required, in particular, to adopt early intervention measures were also effectively delegated to the Chair of the CBU (under a 2011 decision of the Banking Commission): creation of a branch or subsidiary, warnings, orders, placement under special surveillance, simple hearings, or in the framework of a disciplinary procedure, placement in provisional administration or liquidation, approval of the auditors, opinions, and notifications of decisions and opinions (in the absence of an act of the minister within the established time limit). In practice, these powers are delegated in cases of emergency, with a view to maintaining the collegial operation of the Banking Commission's decisions. The decision states that these powers were delegated to ensure that operations continue, particularly in the event of an emergency. This delegation of powers was only used once during the last two sessions of the CBU. These are most often cases of waivers of the nationality requirement, as the banking law requires member country nationality to serve in senior management, administration, or management of a credit institution; and cases in which the CBU asks the Chair to finalize a decision between two sessions, when information is pending.

The Chair of the CBU is also authorized to subdelegate certain powers to the Secretary General of the CBU (Article 64). In practice, the Secretary General of the CBU has received, by sub delegation (decision of 2011), the powers to summon the heads of supervised institutions to a simple hearing, or to a meeting of the CBU in the context of a disciplinary proceeding, and to approve the appointments and renewals of the assignments of the auditors.

In addition, the Internal Rules of Procedure of the CBU adopted on September 17, 2018, allow the CBU to:

• Hold meetings by video conference or through other telecommunication media in which the participants can be identified and the confidentiality of the deliberations can be ensured (Article 4). This particular mechanism enabled the CBU to continue to hold its quarterly sessions during the health crisis in connection with the COVID-19 pandemic. In fact, the CBU has held its meetings via video conferencing since March 2020.

• In the event of an emergency as confirmed by the Chair, except in the case of penalties, to decide via home consultation (Article 5).

The CBU will meet at the initiative of its Chair or at the request of one third of its members, at least twice a year for the Supervision Board and at least once a year for the Resolution Board. In practice, the Supervision Board meets an average of four times per year and the Resolution Board meets once per year. It is incumbent on all directorates of the Office of the Secretary General of the Banking Commission to prepare for the meetings of the CBU, each in its respective area of competence.

In the management of conflicts of interest, in addition to restrictions against holding positions, whether remunerated or unremunerated, in a supervised institution or professional association representing the supervised institutions (Article 9 of the Annex to the Convention), Members of the CBU are subject to specific provisions deriving from Articles 11 and 12 of the Code of Ethics for CBU Members adopted on September 17, 2018. Under these provisions, they must:

• Act with full independence in the discharge of their duties, within the limit of the powers vested with them under the current texts. They must not receive or request instructions from third parties (Article 2 of the Code of Ethics for CBU Members).

• Avoid being placed in a situation potentially leading to conflicts of interest. A conflict of interest is defined as a situation in which their personal interests or those of their relatives are incompatible with those of the CBU and could accordingly influence the impartiality expected of them in the performance of their duties.

• If they are placed in a conflict-of-interest situation during a deliberation, they must file a formal declaration to that effect and recuse themselves from the deliberation.

• Submit a list to the Chair of the CBU upon taking office of external, public or private interests, functions, and appointments that they hold or are expected to hold during their term.

• Update the foregoing information when required.

Members of the CBU are subject to rules designed to prevent conflicts of interest (see Criterion 4). They are also subject to professional secrecy under Article 10 of the Annex to the Convention and Article 7 of the Code of Ethics applicable to them. The confidentiality requirement will continue to apply to CBU Members, even after they have left office.

Staff of the SGCB made available by the BCEAO are subject to the Staff Regulations of the BCEAO, to which a Code of Ethics and Conduct (CED) is appended.

Article 12 of the BCEAO Code of Ethics and Conduct includes provisions on the prevention of the risk of conflicts of interest and insider trading. Accordingly:

• BCEAO staff members must avoid any situation that might give rise to a conflict of interest or insider trading.

• Any staff member who is in a situation of actual or potential conflict of interest in relation to his or her position or the tasks that he or she is required to perform must inform his or her superior, if applicable, who will take the appropriate measures to protect the interests of the BCEAO.

• All BCEAO staff members must observe a two-year waiting period from their termination from the BCEAO before engaging in any capacity in labor contracts, corporate appointments, service contracts, or any other arrangement, or any activity in or on behalf of credit institutions, decentralized financial systems, electronic money institutions, any other organization supervised by the central bank, or any company in a business relationship with the BCEAO,

BCEAO staff members are also subject, under Article 13 of the Staff Regulations and Article 10 of the Annex to the Convention, to professional secrecy and to the obligations of discretion and confidentiality.

In addition, the staff of the SGCB are subject to specialized and complementary rules of ethics issued by Decision 008-01-2020 of January 22, 2020, of the Governor of the BCEAO. These rules explicitly prohibit these persons from acquiring securities issued by institutions subject to the supervision of the CBU and from accepting gifts from those establishments. The foregoing persons are therefore subject to the following reporting requirements:

• Interests in the above-mentioned institutions potentially leading to conflicts of interest.

• Securities held before the above-mentioned decision of the Governor entered into force.

Before participating in any inspection mission, each team member must sign a statement indicating that there are no conflicts of interest. Should any conflicts of interest exist, the person involved will be replaced.

Any staff members of the BCEAO who fail to comply with the Staff Regulations, the Code of Ethics and Conduct, and any specific and complementary rules of ethics will be subject to first- and second-degree disciplinary penalties as provided in Articles 114 to 118 of the Staff Regulations of the BCEAO. The degree of the penalties depends on the severity or repetition of the violation. Accordingly, first degree penalties include written warnings, written reprimands placed on file, and a maximum unpaid suspension without any remuneration of five business days. Second degree penalties involve a suspension of six to 10 business days without remuneration, suspension without all or part of the remuneration for six months to one year, demotion, and dismissal, with or without prior notice, and with or without indemnities.

The SGCB indicated that no staff members have received penalties under the code of ethics during recent years. During the past five years, the BCEAO conducted one mission on ethics (a cross audit of all sites) in 2019. No penalties have been issued to staff of the SGCB for noncompliance with the rules of ethics in recent years.

The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes:

(a) a budget that provides for staff in sufficient numbers and with skills commensurate with the risk profile and systemic importance of the banks and banking groups supervised;

(b) salary scales that allow it to attract and retain qualified staff;

(c) the ability to commission external experts with the necessary professional skills and independence, and subject to necessary confidentiality restrictions to conduct supervisory tasks;

(d) a budget and programme for the regular training of staff;

(e) a technology budget sufficient to equip its staff with the tools needed to supervise the banking industry and assess individual banks and banking groups; and

(f) a travel budget that allows appropriate on-site work, effective cross-border cooperation and participation in domestic and international meetings of significant relevance (eg supervisory colleges).

(a) Under Article 12 of the Annex to the Convention, the BCEAO provides the secretariat and covers the operating costs of the CBU. Accordingly, the SGCB has a budget funded from the accounts of the BCEAO. This budget reflects all expenditure related to its operations and investments. It is prepared on the basis of the requirements expressed by the Office of the Secretary General and takes into account the requirements to conduct the missions of the CBU.

The operating budget includes the following sections:

• Staff expenditure, including a “Training activities” heading covering the costs of enrolling in various courses, examinations, and seminars provided by specialized institutions. In addition, as officers of the BCEAO, staff members of the WAMU SGCB are included in the central bank's continuing education program.

• Transportation and travel. This item reflects, in particular, transportation costs sustained in connection with missions, travel, and training activities.

• Other travel expenses, including hotel and mission expenses, as well as those in connection with travel for training.

• Miscellaneous management outlays, including business expenses and hospitality costs.

Under the capital budget, a chapter on “Service equipment and office furniture” includes service equipment and information technology equipment.

Staff requirements are expressed in terms of number and profile when the budget is prepared, and recruitment is carried out by the competent directorates of BCEAO headquarters. Vacancies within the SGCB are filled internally (with existing BCEAO staff members having the required profile) or with external applications, through the selection of candidates from available databases, after selection interviews with the participation of SGCB staff.

In 2020, the SGCB had 131 staff members. In addition to the Secretary General and the Deputy Secretary General, it has six directors, 10 mission heads with the rank of director, 78 professional staff, and 35 administrative and technical staff members.

Changes in SGCB Staffing and the Number of Supervised Institutions

Regarding the human resources available to the SGCB, it was found that, during the past five years, the work force has grown, although this increase was outstripped by growth in the number of institutions supervised by the SGCB, particularly as a result of the increase in the number of decentralized financial systems. In addition, there are more complex institutions, involving more transnational groups and financial companies supervised on a consolidated basis, as well as systemic institutions.

There would seem to be a shortage of staff assigned to supervision tasks, particularly in the DSP.

During the last Basel Committee Core Principles Assessment, the previous mission had identified a ratio of 2.9 between the number of institutions (112) under the supervision of the CBU and the number of staff assigned to supervision directorates (39) at end-June 2007.¹³ At the end of 2020, the ratio was 5, corresponding to 384 institutions and 74 persons assigned to the On-Site Supervision Directorate, the Surveillance Directorate, the Studies and International Relations Directorate, and the Resolution and Legal Affairs Directorate.

Distribution of Staff by Directorate in 2020

There was no change in off-site supervision staff as against 2007. This staff of 17 now includes four persons responsible for supervision of decentralized financial systems, that the CBU did not supervise in 2007. For this directorate, the ratio of supervised institutions (384) to staff (17) is 22 institutions per staff member. The two subregional bank supervisors with whom we met during the mission monitor 21 and 22 institutions, including groups, respectively. In monitoring this portfolio, the surveillance officers also have significant manual data collection tasks, in the absence of a suitable information technology tool (see Principle 9) and are not assisted by any support staff in processing and verifying the data in connection with the institutions.

The total work force of 131 SGCB staff members includes a substantial share of support staff (43.4 percent of the total workforce) who do not perform supervision duties. This proportion of staff assigned to support positions, that are covered by the BCEAO, would also seem to be high. This is explained by the physical remoteness of the SGCB and the BCEAO, meaning that general resources functions must be replicated. In addition, the General Resources Directorate has few management officers, unlike other SGCB directorates.

There are no vacancies for SGCB directors. By contrast, one unit head position in the Subregional Banking Services Unit is covered by an officer, as the previous head became the deputy director. We also found that the Annex to the Convention provides two Deputy Secretaries General, although only one position is currently filled. The organizational chart in the general report shows a vacant position of Advisor to the Secretary General.

(b) When the Staff Regulations entered into force on January 1, 2016, the BCEAO adopted an integrated human resources management system, including, inter alia, a career path classification system and a new remuneration scale linked to that classification. The SGCB did not provide precise information on wage differentials between the BCEAO and the private sector but indicated that it was not experiencing recruitment difficulties or departures for the private sector. During the past five years, there were eight resignations in the SGCB, one of which was to take a job in the banking sector. The Rules of Ethics impose a strict requirement for staff to wait two years before they can work in a supervised institution (see Criterion 5).

(c) Article 21 of the Annex to the Convention indicates that the CBU will execute or arrange the execution by the BECAO of on-site and off-site supervision activities. This provision allows the CBU to use persons other than the staff of its Office of the Secretary General to conduct these inspections. In practice, the SGBC does not use external auditors or consultants to conduct its supervision activities. There is no budget for that purpose. By contrast, it may use BCEAO officers, particularly those specialized in information systems.

(d) An annual training program was developed across the BCEAO that includes specialized activities devoted to staff of the SGCB. Special programs are also designed, at the level of the SGCB, for newly recruited officers, as well as for specific supervision requirements, particularly in connection with AFRITAC West¹⁴ and other foreign supervisors. Training expenditure is included in the budget provided in paragraph (a). In 2020, 18 training activities benefiting 182 staff members were organized. These activities would seem to be adequate for the areas covered by the SGCB (AML-CFT, Islamic finance, governance and compliance, etc.), and they address emerging risks (banking supervision in the framework of climate change, digital transformation, financial technology, etc.). Expertise hubs were created in April 2021 in the On-Site Supervision Directorate, for governance, accounting, and credit, and are being established for market and digital finance risks.

(e) There is an investment component of the budget available to the SGCB that includes technological equipment. In this connection, information technology equipment requirements are processed centrally by the Information Systems Directorate of the BCEAO, that is responsible for ensuring that the SGCB has the information technology equipment required for its operation, as well as its periodic renewal:

• All staff members involved in supervision are equipped with a portable computer.

• The SGCB's supervision tools were improved after Basel II/III entered into force, primarily through efforts including the revision of the rating system for credit institutions (SNEC), the development of risk mapping for the banking system, and the revision of off-site and on-site supervision guides. Against this backdrop, the supervisory authority started production in 2019 on a new Credit Institution Monitoring Application (ASEC WAMU) dedicated to the management of administrative affairs for supervised institutions (information on shareholders, members of senior management, auditors, administrative measures and penalties, and directors). Two further dedicated computer solutions for the management of inspection missions and off-site supervision were also acquired. However, only the first, known as the “solution for oversight of supervised parties, rating, and follow-up of recommendations (SCAN-R), on-site supervision,” is operational. The second, relating to off-site supervision, has yet to be implemented. The information technology tools available for on-site supervision would currently seem to be insufficient: no tools for the analysis of financial statements, management indicators summarizing the key prudential data, or automated collection of information for rating requirements (see Principle 9). The SGCB indicated that the new tool should be implemented by the end of the year. An information technology manager was appointed to head the General Resources Directorate to support this development of information technology tools.

(f) Travel and miscellaneous subsistence costs for inspection missions are provided in the operating budget of the SGCB. This budget also includes business expenditure, cooperation expenditure, and outlays for cross-border surveillance. In this connection, there are also expenditure items relating to the organization of meetings, including:

• Supervision Boards (Ecobank Group and ORAGROUP) organized by the CBU and participation in supervision boards established by foreign authorities.

• The annual meeting with the SGCB of the WAMU and AFRITAC Central.

• The annual meeting with the Directors General of credit institutions and financial companies and their auditors.

The SGCB indicated that there are no budget constraints in connection with the participation in these meetings at the regional and international levels. The SGCB has participated in almost all of the supervision boards of groups having subsidiaries in the WAMU, when invited.

The SGCB identifies its staffing requirements, including on-site supervision, at least when preparing its annual budget. In this framework, it takes account of changes in the banking landscape and supervision practices in order to determine the appropriate staffing and profiles. The following, inter alia, should be considered in this connection:

• The configuration of the banking sector and the number of institutions it comprises.

• Risk-based supervision techniques are now being used.

• The available supervision tools.

To date, the SGCB has identified the following requirements: two legal experts; two information technology auditors; two auditors specializing in Base II/III implementation; three auditors specialized in accounting and financial analysis; one inspector specializing in Basel II/III implementation;, three inspectors specializing in the International Financial Reporting Standards (IFRS), operational risk management, and liquidity and market; one inspector specializing in accounting and financial analysis; and four surveillance officers.

The supervision program is prepared with a procedure that is based primarily on the identification of high-risk establishments and the assessment of the requirements and resources needed to carry out the annual inspection program.

The following key tasks are carried out in the identification of high-risk credit institutions:

• A survey is conducted of the risks to which each credit institution is exposed through the use of periodic reports submitted by credit institutions, auditors' reports, and the latest inspection reports from the Banking Commission.

• These risks are rated based on the risk mapping generated by the Credit Institution Rating System (SNEC). A rating scale comprising four levels (from 1 to 4) is used to reflect whether the risk identified is acceptable (1), medium (2), high (3), or very high (4). Of the 123 credit institutions rated in June 2020, 31 were rated 1, 42 were rated 2, 31 were rated 3, and 19 were rated 4. Based on the list of credit institutions determined at the end of the foregoing process, an assessment is conducted of the human resources and material requirements needed for the implementation of the annual inspection program. The human resources assessment is a function of the identified working time and is measured in person days. It takes into account the size of the credit institution, its risk profile, and the type of inspection involved.

Within the DSP, the SGCB indicates that the institutions are divided among the different supervisors. The largest or most vulnerable institutions are assigned to the most experienced supervisors. A supervisor maintains a case for an average of four years.

Members of the CBU

Article 11 of the Annex to the Convention Governing the CBU provides, inter alia, that members of the CBU cannot be subject to civil or criminal prosecution for acts carried out in the discharge of their duties. The foregoing text takes precedence over the law. The Convention, including its Annex, is a treaty ratified by the eight signatory member countries of the WAMU. Accordingly, by virtue of the internal legal systems of these countries, when they have been duly ratified or approved, upon their publication, the authority of the treaties or agreements is above the authority of the law.

The above-mentioned text confers on the members of the CBU the privileges and immunities provided in the Protocol on the Privileges and Immunities of the Central Bank annexed to the WAMU Treaty, of which it is an integral part. These privileges and immunities are granted to diplomatic officers, including immunity from criminal, civil, and administrative proceedings. Such immunities may be removed, for country representatives, by the government of that country; for members appointed by the WAMU Council of Ministers, by the WAMU Council of Ministers; and, for the Chair, by the Conference of Heads of State and Government.

Staff of the SGCB

With regard to the Secretary General and senior non-Ivoirian officials ranking at least equivalent to category D of the United Nations classification, legal protection derives from the Agreement of October 10, 1990, between the Government of the Republic of Côte d'Ivoire and the BCEAO on the establishment of the CBU in Abidjan and its privileges and immunities. These staff members receive the same privileges and immunities as staff of the CBU. However, the list of these persons could not be submitted to the Mission.

Staff members of the SGCB receive immunity from any legal action and arrest for acts carried out in the discharge of their duties or in the execution of their mission with the central bank (Article 16 of the Protocol). This immunity may be canceled by the Governor.

Staff of the SGCB receive less legal protection for acts committed in the discharge of their duties than staff of the CBU. This protection is being reinforced in connection with the reform of the Banking Law and the Annex to the Convention.

The regulatory texts do not specify the coverage of legal fees incurred by staff for their defense for acts or omissions committed in good faith in the discharge of their duties.

The SGCB indicated that no CBU members or persons from the SGCB have been prosecuted for acts carried out in the discharge of their duties since the CBU was established.

CBU

Under Article 8 of the Memorandum, the BCEAO has immunity from legal proceedings and enforcement in all areas. There are no specific provisions in the regulatory texts to ensure that the CBU has legal protection with relation to decisions and acts made and carried out in the discharge of its duties.

The presence of representatives from the countries on the supervision board is substantial, with 8 out of 17 members (including the Chair, the Governor of the BCEAO). These eight members are public treasury directors or managers from the directorate responsible for oversight of credit institutions, representing each country. This composition brings to light the problem of the risk of political influence in the decision making of the CBU. In addition, deficiencies observed in the process of appointment and removal from office of CBU members (see below) do not create favorable conditions for the institution's independence. Moreover, the WAMU Treaty or the Annex and the Convention do not specify, as is done for BCEAO, that the Banking Commission cannot receive instructions from the countries. In practice, we find that the CBU has the use of a fairly limited range of penalties (primarily reprimands and warnings), while a number of institutions, particularly public banks, are in situations of persistent vulnerability (see Principle 11).

To strengthen the CBU's independence from the banking sector, a process of selling off the BCEAO's holdings in banks was conducted, although the BCEAO is still a shareholder in one bank that is also subject to special surveillance.

While the conditions for the appointment and removal from office of members of the CBU are defined in the regulatory texts, there is no obligation to publicly disclose the reasons for their revocation, as had been found during the previous mission in 2008. For members of the CBU appointed by the Council of Ministers, the situations in which they can be removed from office are insufficiently specified. Furthermore, the selection of members appointed by the Council of Ministers on the proposal of the Governor does not rely on a procedure that defines the selection criteria or ensures that potential candidates are subject to competitive procedures. The CBU reports on its performance with its annual report, which is published. This approach would seem to be insufficient. In fact, the CBU does not publish the assigned objectives of supervision and performance indicators to measure the achievement of past objectives.

The Annex to the Convention and the Internal Rules of Procedure of the CBU contain provisions for decision making in situations of emergency or requiring a prompt reaction from the supervision and resolution authorities. While the Chair of the CBU has been delegated broad powers, their use is limited in practice. They were granted by the CBU to be used primarily in cases of emergency. In addition, the quarterly frequency of supervision board meetings would seem to be insufficient in light of the number, the increasing complexity, and the vulnerability of the institutions in the area.

Members of the CBU are subject to a Code of Ethics adopted in 2018 that contains obligations regarding professional secrecy and rules designed to reduce the risk of conflicts of interest. The same is true for staff of SGCB, who are subject to the rules of ethics applicable to the BCEAO and to the specialized rules on holding securities of credit institutions. The rule requiring staff to observe a two-year waiting period to work in any financial institution would appear to be too broad. It should be limited to the institutions supervised by the person in question. A more effectively adjusted rule would be more favorable for the development of a critical approach within the organization.

The BCEAO provides the CBU's secretariat and covers its operating expenditure. The SGCB has a sufficient budget for travel (covering on-site missions and participation in cross-border cooperation activities), as well as for staff training, which is also provided by the BCEAO.

With regard to information technology requirements, improvements have been made to the on-site supervision tools, although the information technology supervision tools are insufficient for off-site supervision (see Principle 9). Improvements in this connection have been included in the SGCB's future information technology activities.

In terms of human resources available to the SGCB, we find that the staffing has increased, although not commensurately with the number of institutions supervised by the SGCB, that now include decentralized financial systems and groups involving more complex supervision (transnational, foreign, and systemic groups). Off-site supervision staffing is identical to its 2007 levels. As observed during the previous mission, it would seem that insufficient staff are assigned to supervision activities. The SGCB reports significant requirements, including specialized profiles, which have not been covered to date. In addition, the possibility of using external experts to conduct CBU missions is provided in the Convention, but this is not applied in practice, and there are no budget allocations for that purpose.

The Annex to the Convention, which takes precedence over the law, provides that members of the CBU cannot be prosecuted for acts carried out in the discharge of their duties. This type of provision does not exist for staff of the SGCB and the CBU, who receive lower levels of legal protection.

Recommendations:

• The level of independence of the Supervision Board vis-à-vis the countries should be strengthened (i) by including in the Supervision Board only members appointed by the Council of Ministers on the proposal of the Governor or by introducing participation without voting rights for members appointed by the countries; and (ii) by introducing into the Annex to the Convention Governing the Banking Commission the principle that the Supervision Board should be independent from the countries.

• The process of divestiture from the last bank in which the BCEAO is a shareholder should be completed and the BCEAO should be prohibited from acquiring stakes in credit institutions and decentralized financial systems.

• The requirement should be introduced into the legal texts to publicly disclose the reasons for the removal from office of the members of the decision-making bodies of the CBU and BCEAO, and the cases in which the members of the CBU appointed by the Council of Ministers can be removed from office should be specified in the law.

• A transparent, competitive procedure should be established for the appointment and selection of the members of the CBU appointed by the Council of Ministers with specific requirements in terms of training, experience, and specialization in connection with an organized selection process (interview with a panel of experts).

• The frequency of the sessions of the Supervision Board should be increased by introducing sessions focusing on a specific risk between general sessions.

• The mechanism for the supervisory authority to report on its performance should be improved:

  • The annual report should include the priorities for supervision activities in the coming year; performance indicators should be developed, and information on performance against these indicators should be regularly measured and publicly disclosed.

• Staffing of the SGCB assigned to supervision functions should be increased, particularly in the area of off-site supervision, and a budget should be provided for the use of external consultants for short-term assignments. This budget might be financed with endowments from the supervised institutions.

• The rule requiring staff to observe a waiting period of two years in order to work in a financial institution should be limited to institutions recently supervised by the staff member in question.

• The legal protection of the CBU and staff members of the SGCB responsible for supervision functions should be enhanced, and the draft banking law should provide that they cannot be prosecuted for acts carried out in the discharge of their duties, along with coverage of the relevant court costs.

Cooperation and Collaboration

Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.¹⁵

Cooperation with the minister responsible for finance, the judiciary authorities, the central bank, and the Deposit Guarantee and Resolution Fund.

The Annex to the Convention¹⁶ Governing the CBU contains provisions relating to collaboration between the CBU and other national or community authorities in support of the security and soundness of banks: the minister responsible for finance, the judiciary authorities, the central bank, and the WAMU Deposit Guarantee and Resolution Fund (FGDR-WAMU).

• The CBU may use the central bank for on-site and off-site supervision activities (Article 21). The central bank may also initiate the supervision incumbent on the CBU after having duly informed the latter. It will report the results of supervision activities and violations of the banking regulations and other legislation applicable to the supervised institutions, violations of the rules of ethics for the industry, and any other anomalies in the management of the supervised institutions that may come to its attention (Article 23). During October/November 2017, the central bank conducted investigations of 14 banks in the WAMU to monitor compliance with the provisions on external financial relations. The results of these supervision activities were brought to the attention of the CBU, which, in light of the significant shortcomings, initiated disciplinary proceedings against the banks involved. The SGCB is also required to supervise the regulation of external financing and to conduct missions on nonprudential monetary policy implementation.

• The CBU reports the findings of on-site supervision activities, inter alia, to the minister responsible for finance of the member country and to the BCEAO (Article 27).

• When the CBU observes a criminal offense in connection with its supervision activities, it must inform the competent judiciary authorities, the minister responsible for finance of the country involved, and the BCEAO (Article 28).

• The CBU (Resolution Board) may request the intervention of the WAMU Deposit Guarantee and Resolution Fund to finance resolution activities after all private financing solutions have been exhausted (Article 58). On May 20, 2020, the CBU executed a Memorandum of Understanding with WAMU Deposit Guarantee and Resolution Fund making it possible, inter alia, to organize the sharing of data and information useful in discharging their duties, as well as assistance in supervising the regulatory obligations of members of the Fund. Pursuant to this agreement, the FGDR-WAMU asked the SGCB on March 1, 2021, for an opinion on the effects of a member's failure to pay its deposit guarantee contributions. The text also provides that the Banking Commission may also ask for opinion of the FGDR-WAMU when a recovery plan provides for its contribution in connection with a resolution procedure.

• The administrative and judiciary authorities will provide assistance in the execution of the CBU's tasks (Article 66). Since 2016, training has been organized for judiciary staff on banking regulations.

The possibility offered by the Annex to the Convention leads to an overlapping of authority between the central bank and the CBU. In practice, the missions carried out by BCEAO with banks involve the missions of the central bank. However, the respective operating areas of the two authorities in the area of banking supervision have not been formally defined (see Principle 1).

Cooperation with Other Financial Sector Regulators

Mechanisms for consultation and cooperation are established between the CBU and the other financial sector regulators of the WAMU (the Inter-African Insurance Market Conference—CIMA, the Inter-African Social Welfare Conference—CIPRES, and the Regional Public Savings and Financial Markets Board —CREPMF), within the framework of the WAMU Financial Stability Committee (CSF-WAMU) established by the Protocol of March 20, 2010.¹⁷ The CSF holds semiannual meetings. The experts meet before the members (the presidents of the institutions).

The mechanisms for cooperation with the CREPMF, CIMA, and CIPRES are governed by the Charter of December 4, 2014, signed by the above-mentioned authorities. This Charter defines the practical mechanisms for consultation, cooperation, and coordination between the various supervision authorities that are members of the CSF-WAMU.

Specifically with regard to the CREPMF, the presence of listed banking groups (Ecobank and BOA) makes cooperation between these two authorities a necessity. In addition, the scope of the banking groups includes subsidiaries specializing in investment services (management and intermediation companies) that are supervised by the CREPMF. On June 27, 2002, the CBU signed a bilateral cooperation agreement with that authority, well before the Charter was established. Under this text, information concerning, inter alia, disciplinary penalties applied to persons in senior management or administrative positions in institutions in the banking and financial sector is exchanged between the SGCB and the Office of the Secretary General of the CREPMF. These two organizations hold meetings to exchange information on their experiences, although there are no periodic bilateral meetings to discuss the situation of groups whose areas include management and intermediation companies outside of the scope of the CSF-WAMU, that includes all of the authorities, and is intended to address macroprudential issues.

In the area of insurance, there are groups including banking and insurance subsidiaries. While the CBU and CIMA exchange information as required, there are no periodic bilateral meetings outside of the CSF-WAMU.

In the area of pension, there are pension funds that are shareholders in banks. While information is exchanged between the CBU and the CIPRES, there are no periodic meetings to discuss the individual cases of linkages between pension funds and the banking sector.

The Annex to the Convention governing the CBU contains provisions for the CBU to cooperate with foreign authorities responsible for the supervision of banking groups and institutions. For example, sections 59, 60, 61, and 62 of the Annex allow the CBU to:

• Enter, with full authority, cooperation agreements in the areas of supervision and resolution, with any competent authority.

• Provide information about a supervised institution under another supervision or resolution authority, subject to reciprocity and confidentiality.

• Establish, along with other supervision authorities, a supervision board for each financial holding company and parent credit institution engaging in significant international activity.

• Participate, as the host supervisory authority, in the supervision board of foreign groups, when asked by the home supervisory authority.

• Establish, as required, a crisis management committee for institutions subject to the resolution system.

• Participate, as the host resolution authority, in the crisis management committee for foreign groups, when asked by the home resolution authority.

Cooperation Agreements

To date, the CBU has executed 10 cooperation agreements or memorandums of understanding with foreign supervision and resolution authorities (Morocco, France, Nigeria, CEMAC, Guinea, Liberia, Ghana, Sierra Leone, Gambia, and Congo). Cooperation agreements have not been signed:

• With all countries in which cross-border groups such as Ecobank or Oragroup have subsidiaries (Kenya, Tanzania, and Mauritania). However, supervision boards comprising all supervisors, reflecting the choice of the expanded format, provide a framework for cooperation and information sharing.

• Or with all of the home authorities of subsidiaries of foreign groups established in the WAMU (Europe, United Kingdom, South Africa, Comoros, Switzerland, Lebanon, and Tunisia). The BCEAO has taken steps with regard to the European Central Bank, although they are still in progress.

The above conventions, that the mission was able to consult, provide for relevant information to be submitted in connection with off-site supervision, in the event of any significant developments, or if the supervisor has any particular concerns. They also organize mechanisms for the planning of joint inspection missions and periodic meetings:

• Information sharing between the CBU, and its counterparts takes place, inter alia, during the decision-making process on the granting of licenses to engage in banking activities, the appointment of directors or senior managers, and the acquisition of holdings in institutions subject to their respective supervision. In this connection, the CBU requires a notice of non-objection from its counterparts, when examining applications for licenses, waivers of the nationality requirement, or prior authorization to amend the shareholding structure of a credit institution.

• Joint inspection missions are carried out on cross-border institutions based on specialized mechanisms agreed on the merit of each individual case. These missions are scheduled during the preparation of the annual inspection program of each of the authorities involved. Joint missions with other supervisors are scheduled each year: four in 2017, two in 2018, and 8 in 2019 with Bank Al-Maghrib, the Central African Banking Commission, the French Prudential Supervision and Resolution Authority, and the Central Bank of Nigeria (see Criterion 4, Principle 12).

• Periodic meetings provided in cooperation agreements establish a framework for discussions on general developments in the banking sector environment and the situation of banking institutions operating in reciprocal jurisdictions. In this connection, since 2013, the SGCB of the WAMU and Central Africa have held an annual consultation meeting, inter alia, to exchange information on regulatory progress in their respective areas and on the problems encountered in the supervision of banking groups. The eighth meeting was held on November 3, 2020, by video conference.

Supervision Board

Specifically, where the supervision boards are concerned, the CBU, as the home supervisory authority for Ecobank and Oragroup, has established a supervision board for each of these two financial companies. The supervision boards of Ecobank and Oragroup have each held one annual meeting since 2015. These boards are universal. All foreign supervisors are invited. This may involve approximately 20 authorities for a group such as Ecobank, although not all of them will participate. Relations between the supervisors who are members of each of these boards are governed by a declaration of mutual cooperation, which contains provisions involving:

• Sharing of information on the situation of the institutions in the group.

• Mechanisms for conducting joint supervision of group institutions.

• Confidentiality of the information shared.

• Cooperation in the area of crisis prevention and management within the institutions in the group.

The CBU also participates, as a host supervisory authority, in the supervision boards established by the following peer supervision authorities:

• Bank Al-Maghrib, for the Attijariwafa bank, Banque Centrale Populaire du Maroc, Atlantic Business International, and BMCE/Bank of Africa groups.

• The Central African Banking Commission (COBAC) for the BGFIbank and Afriland First Bank groups.

• The Central Bank of Nigeria, for the United Bank of Africa (UBA) and FNBANK groups.

• South African Reserve Bank, for Standard Bank Group.

• The Prudential Regulation Authority, for Standard Chartered Bank.

In some cases, the CBU is not asked to attend supervision boards of foreign groups when the size of the subsidiaries within the WAMU is insignificant within the group. While this does not apply to systemic institutions at the level of the WAMU, it may be the case for systemic institutions at the national level, such as Société Générale Côte d'Ivoire or Société Générale Sénégal (see Principle 12, Criterion 1 on monitoring this type of group).

Supervision Groups

Last, the CBU is a member of several bank supervision groups, i.e., the Banking Supervision Committee of West and Central Africa, although this organization has not been active for several years; the African Banking Supervision Community; and the Francophone Banking Supervision Group. It also participates as an observer on the Supervision Board of the West African Monetary Area.

Article 60 of the Annex to the Convention governing the CBU provides that the CBU may disclose information on the situation of an institution subject to a supervision or resolution authority, subject to reciprocity and confidentiality.

The cooperation agreements or arrangements signed by the CBU contain precise stipulations relating to the confidentiality of the information that is shared. Accordingly, it was found from a sample agreement with the foreign authorities examined by the mission that, unless otherwise indicated, all documents and information shared are confidential and may only be used for the purposes provided in the request. It must not be disclosed to third parties without the prior approval of the authority that provided the information. In the case of requests for information, the obligation to preserve the confidentiality of the information or documents to be shared must also be borne in mind.

Article 10 of the Annex to the Convention, which is a treaty signed by the eight member countries of the WAMU, provides that members of the CBU and persons involved in its operation are subject to professional secrecy that will not be binding on judiciary authorities acting in the context of criminal proceedings. The regulatory framework does not contain more precise rules to protect the confidentiality of nonpublic information received from other authorities, whether domestic or foreign. However, the authorities undertook the following in the Charter of December 4, 2014, on cooperation between the supervision authorities of WAMU members:

• To preserve the confidentiality of the information received; to take all necessary measures to prevent and to avoid disclosure to third parties.

• In the event of a request submitted by a judiciary authority, the authority that received the request must request the consent of the authority that provided the information.

In addition, cooperation agreements or memorandums of understanding contain specific provisions on the confidentiality of information exchanged between the CBU and other supervision or resolution authorities. Accordingly, it was found from a sample of agreements with foreign authorities that, unless otherwise specified, any documents or information exchanged are confidential and may only be used for the purposes provided in the request. It must not be disclosed to third parties without the prior approval of the authority that provided the information. Where such information is to be used in an administrative, disciplinary, civil, or criminal proceeding, the authority involved must be informed, in the request or at the latest before the proceeding is initiated.

The Annex to the Convention governing the CBU contains provisions for the sharing of information and cooperation with any competent authorities in the areas of supervision and resolution. It addresses the confidentiality of information submitted to the supervision authorities. In the charter on cooperation between the supervision authorities of members of the WAMU (insurance, market, and pension funds), established in 2014, these authorities undertake to preserve the confidentiality of the information received.

The Annex defines certain forms of cooperation with the Ministry of Finance, the judiciary authority, the central bank (see Principle 1), and the guarantee fund. In the latter case, a memorandum of understanding has also been established.

Sharing between the regulatory authorities of the financial system (CBU, CIMA, CREPMF, and CIPRES) occurs, in particular, in the framework of the CSF-WAMU, encompassing all of the authorities. There are, however, no periodic bilateral meetings to address individual cases of banks or banking groups having linkages with insurance companies, management and intermediation companies, or pension funds.

Agreements or protocols have been executed with more than 10 foreign authorities. However, they have yet to be established with all home authorities of foreign groups established in the WAMU area and with all host authorities of subsidiaries of cross-border groups from the WAMU. Of course, these documents contain provisions to protect the confidentiality of the information submitted and received. Cross-border cooperation is reflected in practice with frequent requests for opinions, joint missions, and periodic meetings with foreign authorities of major foreign groups in the WAMU area. Regular exchanges also occur in the framework of supervision boards.

Recommendations:

• The establishment of cooperation agreements with supervision authorities of the home countries of foreign groups located in the WAMU and the host countries of cross-border groups from the WAMU should be continued; and

• Periodic bilateral meetings should be planned with each of the three supervision authorities (CREPMF, CIMA, and CIPRES) to address individual cases of banks having linkages with insurance companies, management and intermediation companies, or pension funds.

Permissible Activities

The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled.

The term “bank” is clearly defined in the regulations. Article 2 of the Framework Law on Banking Regulation defines credit institutions as “legal entities that engage in banking operations during the course of their routine professional operations.” Credit institutions are licensed as banks or bank-like financial institutions.

Banking operations include receiving funds from the public, credit operations, and making means of payment available to customers.

Permissible operations for banks are defined in Articles 3, 4, 5, 6, 7, 8, and 9 of the Banking Law. Prohibited activities are established in Articles 43 to 45 for banks and Articles 48 and 49 for financial institutions.

In addition, BCEAO Instruction 011-12/2010/RB of December 13, 2010 on the classification, operations, and legal form of bank-like financial institutions defines the categories of financial institutions, the operations they are authorized to carry out, the conditions for their operation, and those they are prohibited from carrying out.

Payment Institutions

Instruction 011-12/2010 classifies financial payment institutions governed by the Banking Law as category 5 bank-like financial institutions.

However, payment financial institutions are distinguished from the category of payment institutions licensed only to provide payment services. The new draft Banking Law will address this new category of players.

Electronic Money Institutions (EME)

The supervision of electronic money institutions by the CBU was endorsed in the context of the review of the Annex to the Convention. However, these institutions are currently governed by a specialized instruction (Instruction 08-015-2015) rather than by the Banking Law. They should be integrated into the scope of the future Banking Law.

Insurance Activities

Financial companies may have subsidiaries in the insurance sector. While these subsidiaries may be included in the accounting area, depending on how the group is structured in terms of the capital, they will be excluded from the prudential area.

The Banking Regulation Law governs the use of the term “bank” and its derivatives in a company name, trade name, advertising, or in any way in business activity.

Article 13 prohibits any persons not previously licensed and included on the list of banks or bank-like financial institutions from engaging in banking operations and from “claiming the status of a bank, banker, or banking institution of a financial nature, or creating the appearance of this status, in particular through the use of terms such as bank, banker, banking, or financial institution in its company name, commercial name, advertising or, in any way, in its activity.”

“The Banking Commission shall ensure, in the discharge of its duties, the strict observance of the use of the word “bank” by unlicensed entities. For example, when the capital structure of the subsidiaries of the Banque Atlantique Group was changed as a result of the sale of AFG holdings to ABI, the CBU's favorable opinion required it to change the name of ABI (Atlantic Bank International), under the provisions of the Banking Law on the use of the term “bank (banque).” This is how the name Atlantic Business International (ABI) was adopted by senior management of this financial company.” In practice, it is incumbent on the minister responsible for finance to ensure in his or her country that there are no entities engaging illegally in banking activities without a license. Of course, should any legal distortions be detected, the CBU will duly inform the national authorities. The future banking law should explicitly entrust this role, in the title devoted to the various institutional responsibilities, to the national authorities and ministers of finance.

Article 5 of the Banking Regulation Law defines the concept of funds received from the public. Articles 2, 3, and 13 of the Banking Regulation Law reserve this activity for licensed banks.

Article 49 stipulates that bank-like financial institutions may only receive deposits of funds from the public in connection with their activities. They may, however, be authorized by decree subject to the opinion of the BCEAO. The BCEAO has investigated a few cases, and two financial institutions were able to obtain this waiver.

The conditions for access to the updated list of approved banks and subsidiaries of foreign banks are specified in Article 16 of the Banking Regulation Law.

This text indicates that licenses are confirmed with their inclusion on the list of banks or on the list of financial institutions.

When the license is issued, the institution will be included on the list of licensed credit institutions and will be registered. The lists are updated on an annual basis. The BCEAO expects that subsequently adopted legal instruments have been designed to verify and order the publication of the lists. These lists are prepared by the government and submitted for comments to the National Directorates of the BCEAO. When they have been reviewed and approved, they will be forwarded to the National Directorates for publication in the official journal of the countries in which the National Directorates are located. The National Directorates must publish the list of all WAMU institutions, and not only the lists in their country of establishment.

The list of banks and bank-like financial institutions is posted at the BCEAO's website. The latest update is from December 31, 2020.

The legal and regulatory framework adequately cover banking activities, except for the responsibilities for detecting and monitoring abuse of the word “bank.” Accordingly, it was not found that this surveillance is carried out on an organized basis.

Recommendations:

• Structured surveillance should be established for the “abuse” of the word “bank.”

Licensing Criteria

The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)¹⁹ of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition (including capital base). Where the proposed owner or parent organisation is a foreign bank, the prior consent of its home supervisor is obtained.

Title II, Articles 13-24 of the Framework Law on Banking Regulations establishes the responsibilities in the area of granting and revoking licenses.

Granting of Licenses

Licensing decisions involve the minister responsible for finance, the BCEAO, and the CBU. Under Article 15, license applications must be addressed to the minister responsible for finance and filed with the BCEAO, and the review procedure is incumbent on the BCEAO. Article 16 provides that licenses will be issued by decree of the minister, subject to the opinion of the CBU.

The minister responsible for finance is not involved in the process of reviewing license applications addressed to him or her. As indicated in BCP1, the opinion is binding on the minister. If the latter disagrees with this opinion, he or she will refer the matter to the WAMU Council of Ministers for arbitration (Article 44 of the Annex to the Convention). No appeals have been filed to date.

The minister's action is therefore limited to formally establishing the decision of the supervisory authority in an administrative instrument. When the regulatory instrument required by the opinion of the CBU is has not been adopted within the established deadline, the CBU will inform the interested parties of the content of the opinion, and it will become binding (Article 42 of the Annex to the Convention).

Responsibilities in the Review of License Applications

Although Banking Law assigns responsibility for the review of applications to the BCEAO, in practice, the review procedure is carried out by staff of the CBU on behalf of the BCEAO. Decision 421-12-2015 on the review by the BCEAO of applications for prior authorization precisely defines the responsibilities of the various players in verifying the compliance of the documents and reviewing the applications.

Single Licensing and Applications to Become Established

The regulation provides for a single, simplified licensing scheme within the Union for applications to become established. Article 18 of the Banking Law provides that credit institutions that have obtained a license in a country of the Union and that intend to open branches and/or subsidiaries in one or more other countries must state their intentions on the declaration form. Article 18 would seem to be inconsistent, in light of the parallel structure of the forms, as it expressly attributes responsibility for reviews to the CBU. The mission was informed that this anomaly should be corrected in the future banking law. Decisions on becoming established are incumbent on the CBU only when the ministers have already decided on the issue of the licenses.

The Process of Reviewing Applications for Licenses and to Become Established

The SGCB Licensing Unit, placed within the Studies and International Relations Directorate (DERI), that is comprised of five full-time equivalents (FTE), reviews applications for licenses and to become established as part of a highly sequenced process. The BCEAO national directorates only examine applications for completeness. They inform the SGCB and the directorate responsible for banking activities when an application has been filed. They have five days from the filing date to check the contents. Should an application be incomplete, it will be rejected. By contrast, complete applications will be forwarded to the SGCB for processing, to the directorate responsible for banking activities, and, if applicable, to the national directorate of the BCEAO of the host country of the branch or subsidiary, for information.

The SGCB will have a maximum of 25 business days to examine the application for compliance (10 days), its review (15 days), and to submit the provisional conclusions of the Governor of the BCEAO. The Governor may ask applicants to submit any additional documents, and, if required, he or she may request comments from other units of the BCEAO. He or she must also ask for the opinion of the supervisors on operations involving cross-border credit institutions (non-objection opinion). The review takes into account any prudential issues, factors involving the business model, governance, supervision, and anti-money laundering and combating the financing of terrorism issues. Forecast prudential and financial statements also receive special attention.

Licensing Limits or Conditions

The CBU may impose limits or obligations on institutions that have received a license on the basis of the Framework Law or the Annex to the Convention. Accordingly, the CBU may establish a minimum amount of capital stock above the level established by the Council of Ministers, and different standards depending on the individual situation of each credit institution (Article 21 of the Annex to the Convention and Articles 34 and 56 of the Banking Law). However, the regulatory texts do not explicitly provide the possibility, before the license is granted, of imposing qualitative conditions on the applicant (such as in the area of governance), even when it has been properly executed. To respond to this point, it was indicated that the future draft banking law should specifically define all of the conditions required to grant licenses (prudential factors, type of capital, legal form, organization of governance, etc.).

Revocation of Licenses

An institution's license can be revoked through two processes:

• By order of the minister responsible for finance, subject to the opinion of the CBU, at the request of the institution, or when it is found that the institution has not been active for at least one year (Article 20 of the Framework Law and Article 19 of the Annex to the Convention).

• By the CBU, in the framework of a disciplinary procedure, in accordance with Articles 66 of the Banking Law and Article 31 of the Annex to the Convention.

The conditions for the revocation of the license, introduced by the institutional reform of April 1, 2010, have constituted the main regulatory development in the area of licensing since the last Financial Sector Assessment Program. The decision of the CBU is in fact fully binding upon notification to the parties involved. The minister will have seven days to inform the interested party of the decision. The decision will be applied after this period has ended.

Licensing Decisions Made by the CBU

The review of licensing decisions made by the BCEAO shows that the BCEAO is rather conservative in the review of applications for licenses and the establishment of branches. The share of favorable opinions and authorizations to become established accounts for only 60 percent of the decisions. Negative opinions and refusals of permission to become established are based on prudential reasons (the applicant's financial unsoundness, violation of prudential standards by institutions in the applicant's group, governance issues in the institution, or insufficient moral standing of the applicant's senior management).

Decisions Made by the CBU on Prior Authorizations Between 2017 and 2021

The license of only one institution has been revoked during the past three years. This would appear to be a low level, in light of the very unstable situation of some institutions (see BCP 11).

The licensing criteria are provided in detail in several articles of the Banking Law and in two instructions. Accordingly, BCEAO Instructions 017-04/2011/RB and 018-04/2011/RB of April 21, 2011, provide the list of the documents and information included in the license application for credit institutions, as well as the application to declare the intention to become established in connection with the procedure for the authorization to become established (single license). The required documentation would seem to be complete.

Article 15 of the Banking Law provides that the “central bank, which is responsible for reviewing licensing applications, ensures that the legal form of the company is suitable for banking activities or those of a bank-like financial institution. It also reviews the company's program of activities, the technical and financial resources that it plans to implement, and its plan for the development of a network of branches, agencies, or windows at the national level. In addition, it assesses the applicant company's ability to achieve its development objectives in conditions compatible with the proper operation of the banking system and sufficient customer protection."

Article 18 specifies the conditions for refusal to grant licenses. The CBU must inform the minister responsible for finance of the home country and host country of the credit institution in advance.

Failure to meet the licensing criteria and the provision of inappropriate or inadequate information in connection with the procedure are punishable by the refusal to approve the license.

Should any false declarations be discovered after the license has been issued, the withdrawal of the license may be ordered after a disciplinary procedure has been initiated, even if this case is not explicitly mentioned in the regulations.

In the context of issuing its opinion on license applications based on the review of the application carried out by the BCEAO, the CBU will analyze the structure of the group to which it belongs and the location of the group's main decision-making centers. Based on this analysis, it may require the group's architecture to be simplified, an intermediary financial holding company to be established, and that entity's inclusion on the list of the financial companies that it supervises. In this connection, not all groups will be subject to consolidated supervision (see BCP 12).

It may also be required to issue an unfavorable opinion on applications for which the corporate shareholders operating in the banking sector are located in areas that do not have a credible supervisory authority.

The structure and quality of the shareholding will be examined during the review of the license application, including for shareholders owning at least 5 percent individually and/or jointly, as provided in Annex 1, item 2.1 of Instruction 018-04/2011/RB.

The procedures include collection and verification of identification documents and supporting documentation on the institution's wealth position, the source of funding of the shareholders (individuals and/or legal entities) used to subscribe the capital of the future institution, and the legitimacy of these funds under the current AML-CFT legislation in the member countries of the Union. By contrast, the procedures provided in the regulations do not explicitly include checks on the beneficial owners.

In terms of the capacity of the shareholders to provide additional financial support, if required, this capacity is verified through the examination of the certified financial statements from the past three fiscal years (Annex 1 of Instruction 017-04/2011/RB of April 21, 2011). These checks relate to the capacity of the shareholders to finance their holdings and their ability to support the bank's development.

Regulatory Framework

In an opinion of November 2, 2007, the BCEAO increased the minimum capital of banks to CFAF 10 billion, and of bank-like financial institutions to CFAF 3 billion and established the conditions for implementation.

Accordingly, the minimum capital stock for banks was increased initially to CFAF 5 billion on January 1, 2008, while the new thresholds were applied in the review of new license applications filed from the date on which the measure entered into force. Active banks were required to meet these new requirements by December 31, 2010.

The implementation date of the second phase, in which the minimum level under the capital regulations was increased to CFAF 10 billion, entered into force on July 1, 2017.

Decision 03 of March 30, 2015, confirmed these regulatory thresholds. Article 3 of the Decision provided that credit institutions whose capital stock failed to meet the thresholds under Article 1 were required, by December 31, 2015, to submit an action plan designed to meet the new rules. Moreover, Article 4 provided that institutions would have an exceptional, interim period of 24 months to comply with the requirements.

The threshold of CFAF 10 billion would seem to be relatively high. This decision was made based on an impact paper and a comparison of different limits established in comparable or neighboring areas.

In addition, Article 34, paragraph 3 of the Banking Law provides that the CBU may establish a minimum level of capital stock exceeding the level established by the Council of Ministers.

This provision has been applied to several institutions.

Status of Institutions in the Union in Terms of the Regulations on Representation of Minimum Capital

At September 30, 2021, two institutions were found to be in violation of the minimum capital rule (including two public banks) since 2017 (see BCP 11). In addition, at end-December 2020, 17.5 percent of the institutions in the Union were non-compliant with the rule on representation of minimum capital with Tier 1 capital.

Subscription of Capital

Article 4 of Instruction 17604/2011/RB requires that, prior to the filing of license applications for credit institutions, at least 25 percent of the capital stock must be subscribed and paid into an account on the books of a bank located in the member country of the Union in which the company was established. The remaining capital stock must be paid in within three months after the CBU has made its decision on the license.

The assessment of moral standing and expertise is based on the regulatory plan in Circular 01-2017/CB/C. This assessment applies to all executive management, members of the decision-making body, and shareholders.

The BCEAO will review the CVs of the members of the executive and decision-making bodies.

Article 12 provides that the members of the decision-making body must individually or collectively have the appropriate expertise, particularly in the areas of credit operations, financial analysis, information technology, strategic planning, governance, risk management, internal supervision, capital markets, and compensation policies.

The members of the decision-making body in general must also have a good knowledge of the economy and the markets in which the institution operates and must be familiar with the current legal texts governing the institution's activities in the Union.

In terms of integrity, it must check to ensure that the members of senior management and the directors have no criminal record based on a criminal record excerpt, which is not be older than three months, to be appended to the license application.

For non-WAEMU nationals who have practiced in the banking industry in other countries, the CBU will seek the advice of the supervisors of those areas in order to finalize its assessment.

The CBU issued an unfavorable opinion based on various reasons, including lack of moral standing of members of senior management and the main shareholder.

The regulation specifies that applicants must provide information on their strategy and business model. In particular, a market study is required when a license application is filed, reflecting plans to become established at the national and regional levels, target customers, business lines, and instruments and services to be offered.

Applicants are also required to remit the following, in accordance with Instruction 017/04/2011/RB and its annex:

• Manuals of administrative, accounting, and financial procedures covering, in particular, all of the bank's operations and the related operations under consideration.

• Manuals on credit and deposit procedures.

• Internal supervision manuals providing the definition of and rules for assessing the prudential system and mechanism for controlling all risks, including the internal AML-CFT system, for example.

The governance, risk management, and internal supervision components are considered in the review of the application. Accordingly, in 2019, one unfavorable opinion was issued as a result of reputational risks in connection with the applicant, and two authorizations to become established were refused as a result of governance problems in the parent company and deficiencies in the information system.

The licensing service will conduct a careful review of the institutions to detect any excessively optimistic forecast statements. In particular, it will examine the applicant's business model and strategy and will use its analysis of the least favorable scenarios.

As part of the license application, BCEAO Instruction 17-04-2011/RB requires the balance sheets and five-year projected income statements with low, medium, and high assumptions. Vulnerability tests are also required to assess factors such as the impact of changes in certain business indicators.

However, page 18 of the license examination guide recommends the use of the baseline assumption in the review of applications rather than the most conservative scenario. Moreover, the average assumption was used as a reference scenario in the application the mission consulted. However, three refusals of authorizations to become established were based instead on the principle of an excessively unstable financial situation.

Article 17, paragraph 4 of the Annex to the Convention provides that, when the license application originates with a foreign entity subject to a supervisory authority in its home country, the CBU will be required to request a non-objection notice from that authority. This requirement will be taken into account in the review of applications.

The CBU will also check whether the foreign bank's home country authority applies consolidated supervision at the world level. In some cases, it will assess the advisability of formally establishing cooperation with that supervisor.

The process of consultation with supervisors from the home country undertaken by the CBU may possibly be limited by the absence of agreements signed on information sharing with the supervisors involved by the institutions or groups of the Union (see BCP 13).

The progress made by recently established entities is monitored within the framework of off-site supervision, as well as through missions carried out by the DCPEME within the framework of missions “to verify the startup conditions.”

Accordingly, 20 of such missions were conducted during the past five years, 14 in 2019, and six since the beginning of 2021. The missions discovered departures from the announced business plan and deficiencies in information systems, particularly in the AML-CFT component.

At the institutional level, the changes made since the last FSAP in the regulatory framework covering licensing procedures have confirmed the CBU's decision making power in this connection. Useful additions should be made in the framework of the future banking law. Accordingly, this text should give the BCEAO authority to review applications to become established, in keeping with the parallel structure of the forms. Similarly, there are plans to explicitly accompany the issue of licenses with qualitative conditions (such as in the area of governance) and providing additional possibilities to raise the existing prudential standards. In terms of the rules relating to the knowledge of shareholders and the origin of funds mobilized to meet the capital requirements, the procedures must be extended to the beneficial owners.

In addition, the increase in the minimum capital to CFAF 10 billion CFA has helped to double the capital requirements for licensing and has made the issue of licenses more secure. However, three institutions are still in a situation of long-term violation (see BCP 11) with no confirmed prospect of restoring equilibrium in the near future.

The procedure for the review of applications to become established would seem to be rigorous, with particular care to monitor financial forecasts and prudential ratio projections. The increased presence of foreign banking groups within the Union, however, requires enhanced collaboration with the supervisors in the host countries.

Last, frequent on-site missions on the start-up conditions of newly licensed or established institutions allow to monitor them.

Recommendations:

• The financial soundness of the applications and projections under the prudential rules should be analyzed, taking into account the most conservative assumptions for the applicants, and any discounts that may be required should be applied. The review guide should be amended accordingly.

• The regulatory texts should include the possibility of accompanying the issue of licenses with qualitative steering conditions, and licenses should be revoked if any false information is submitted.

• The instructions on procedures for preparing license applications should be amended to require the collection of data on the beneficial owners when license applications are filed and examined.

• Meetings should be systematically organized with the sponsors and future senior managers, attended by the supervisory authority and BCEAO staff responsible for prudential supervision.

• For license applications from applicants outside of the Union, opportunities for the consultation of supervisors in the host country should be strengthened with the continued signing of cooperation agreements.

Transfer of Significant Ownership

The supervisor¹⁶ has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties.

(Reference documents:¹⁷ Parallel-owned banking structures, January 2003; and Shell banks and booking offices, January 2003.)

The terms “significant holdings” and “controlling interest” are defined in the regulations introduced in June 2016: the prudential system applicable to credit institutions and financial companies and the decision on the consolidated supervision of parent credit institutions and financial companies. According to these texts:

• Significant holdings are all of the institution's exposures in the banking or trading book included in the capital of another institution, insurance enterprise, or other financial institution, when the institution directly or indirectly holds more than 10 percent of the common stock in such entities (Paragraph 14, Prudential System).

• “Controlling interest” is defined in paragraph 5 of the prudential system, in Article 1 of the decision on consolidated supervision and in Banking Chart Accounts (BCA) Instruction 033-11-2016 on consolidated financial statements. These texts define the concepts of joint control, exclusive control, and significant influence.

These definitions are not used in the authorization process by the supervisory authority for changes in control. They are used in other prudential regulations, such as in the definition of capital and consolidated supervision.

The provisions relating to the approval of changes in shareholders are provided in the Banking Law. This involves the approval of changes in control to a blocking minority, which is defined under Article 39, paragraph 2 of the Banking Law as the number of votes that can block a change in the charter of the bank or financial institution. The Banking Law does not establish any numerical threshold. In practice, the SGCB indicates that the threshold of 33.3 percent, corresponding to the blocking minority in a public limited company, is applied.

This reference to the blocking minority would seem to be high in comparison with best practices, which use a lower threshold corresponding to the concept of significant holdings for the approval of changes in control. Moreover, even if there is annual reporting on shareholding (see Criterion 4), there is no obligation to inform the supervisory authority of any changes in the shareholding structure should this threshold not be reached.

Under Article 39 of the Banking Law, any acquisition or transfer of holdings that would have the effect of changing the holdings of one person, directly or through an intermediary person, or of the same group of persons acting jointly, first, above the blocking minority, and second, above the majority of voting rights in the credit institution, or of reducing these holdings below these limits, is subject to the prior approval of the minister responsible for finance, subject to the opinion of the CBU. The Banking Law does not define these limits numerically. In practice, the SGCB indicates that the threshold of 33.3 percent corresponds to the blocking minority in a public limited company and a 50 percent threshold is established for majority voting rights.

Similarly, as provided in Article 40 of the Banking Law, any transfer by a credit institution of more than 20 percent of its assets, placement under management, or the cessation of all activities is subject to the same authorizations.

The minister is bound by the favorable or unfavorable opinion of the CBU. The minister must notify the credit institution of the decision within 30 days. After that period, if the minister from the country in question has not issued an order, the CBU's decision will become binding.

The concept of persons acting jointly is mentioned in the Banking Law and the SGCB indicates that relations between shareholders must be considered in order to detect this type of situation (by analyzing the capital linkages between legal entities and the family relations between individuals). However, off-site supervision, that involves the analysis of the annual statement on the shareholding structure (see Criterion 4), is not subject to a formally established methodology to assess this concept, defining the rules applicable to individuals as well as legal entities, and specifying the cross checking of information to be carried out to detect possible linkages between persons who might be acting jointly to circumvent the reporting thresholds.

The Banking Law also refers to intermediary persons and defines this concept. However, the definition in Article 39 lacks clarity.¹⁸ We also observe that the concept of beneficial owner has been introduced into the texts relating to AML-CFT (see Principle 29) but has yet to be included in the Banking Law.

Prior authorizations for changes in shareholders will be granted under Article 41 of the Banking law, as in the case of licensing.

The licensing service within the DERI is responsible for applications for the approval of changes in control. It conducts checks on the origin of the funds, the financial situation, objectives pursued, moral standing, and expertise of the new shareholders.

The BCEAO may be provided with any additional documents or information it deems useful. Central Bank Instruction 19-12-2011 of December 27, 2011, lists the documents and information constituting the application for prior authorization. Information is requested on the situation of the institution, the proposed operation (minutes from the decision-making bodies that authorized the operation, objectives pursued by the assignor and the assignee, CVs of the proposed new directors, criminal record excerpt, and strategy of the institution). The following information is required:

• For shareholders who are individuals: identification document, CV, criminal record excerpt, notarized declaration on the wealth position (assets and liabilities), and source of funds.

• For legal entities: company name, amount of capital and list of key shareholders, financial position, notarized declaration of the legitimate origin of funds, etc.

However, the requirements in the regulatory text do not explicitly include the verification of beneficial owners.

In 2017 and 2018, nine requests for prior authorization to change the shareholding structure were submitted and received favorable opinions. In 2019, three out of 16 requests were rejected. In 2020, unfavorable opinions were issued to credit institutions located in Benin, Côte d'Ivoire, and Togo. These rejections were justified by the insufficient assurance of the financial capacity of the shareholders.

The regulatory texts do not explicitly mention that the CBU has the power to modify or to cancel a change of control made on the basis of false information provided to the supervisory authority. However, the supervisory authority has the possibility to take legal action to request the cancellation of a change in control made in violation of legal and regulatory provisions, which covers cases of false declarations.

Under Article 33 of the Banking Regulation Law, shares issued by credit institutions having their headquarters within the WAMU must be registered.

In addition, in the context of license applications, the supervisory authority requires a list of all shareholders, indicating the level of each party's holdings, nationality, and address.

Last, at the end of each fiscal year, the CBU will obtain a declaration that specifies the shareholding structure. This statement, which is used by the DSP, provides the distribution of the capital and voting rights. It provides the identity, nationality, address, and the number of securities held by each shareholder. While it can be used to monitor changes in shareholding, the reporting does not contain any information that can be used to check the identity of the beneficial owners of the shares in the event of indirect holdings through the intermediary of figureheads, custodians, etc.

The regulatory texts do not explicitly mention that the CBU has the power to modify or to cancel a change in control made without its authorization (when required). However, it has the option to take legal action to request the cancellation of a change in control made in violation of the legal and regulatory provisions.

The SGCB indicated that the cases in which these changes are not reported to the supervisory authorities are rare. However, it did mention an old case in which a transaction involving a change in shareholders was canceled because it had not been validated by the CBU. In another case, the CBU issued a penalty against a credit institution that subsequently applied for an authorization to regularize the situation.

Article 19 of Circular 05-2017/CB/C of September 27, 2017, on management of compliance with the current rules requires supervised institutions to inform the CBU immediately of any deficiencies identified by the compliance function that have a significant impact on the reputation and/or financial soundness of the institution. Furthermore, when the auditors discover during the course of their work illegal acts or those that could compromise the business continuity of a supervised institution, they must inform the Banking Commission immediately in writing.

However, there is no text that specifically mentions cases of information that may have an impact on the acceptability of a significant shareholder. In practice, the SGCB has never received this type of information.

Proposals to transfer controlling interest to existing banks must be approved by the CBU. In practice, the latter rejects these proposals when it does not deem that the financial situation of the new shareholders is sufficiently robust. The application also contains information that can be used to verify the moral standing and expertise of the new shareholders. However, the requirements in the regulatory texts do not explicitly include the collection of information or verification of the beneficial owners.

Furthermore, this power does not apply to significant holdings representing more than 10 percent of the shares in a given bank. The reference to the blocking minority leads to a higher approval threshold than international best practices in this area, and there is no obligation to inform the supervisory authority immediately of any changes in the shareholding structure if the threshold has not been reached.

Moreover, if the regulatory system indicates that changes in control requiring authorization must be determined to reflect intermediary or jointly acting persons, these concepts should be defined more clearly in the law or specified in the internal methodologies to make them more practicable.

Monitoring systems exist for changes in shareholders through annual declarations from banks. In addition, compliance obligations require banks to report factors potentially impacting their reputation, although there is no explicit obligation in the texts to declare any significant information that may have a negative impact on the acceptability of a major shareholder or person holding controlling interest.

The regulatory texts do not explicitly give the CBU power to amend or cancel changes in control made without its authorization, when required, or based on false information provided to the supervisory authority. However, it has the option to take legal action to request the cancellation of a change in control carried out in violation of the legal and regulatory provisions.

Recommendations:

• A lower threshold of 10 percent should be introduced for approval by the supervisory authority for a change in shareholders.

• An internal procedure should be established so that jointly acting persons can be identified more effectively by defining the rules applicable to individuals and to legal entities.

• The concept of beneficial owner should be introduced and defined in the banking law and information should be collected to monitor and approve significant changes in control involving beneficial owners.

• An explicit requirement should be included for banks to submit to the supervisory authority any significant information potentially having a negative impact on the acceptability of a major shareholder or shareholder having controlling interest.

• A provision should be introduced into the regulatory texts that the CBU has the power to cancel or amend changes in shareholders made without its authorization, when required, or based on false information provided to the supervisory authority.

Major Acquisitions

The supervisor has the power to approve or reject (or recommend to the responsible authority the approval or rejection of), and impose prudential conditions on, major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and to determine that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision.

Laws or regulations clearly define:

(a) what types and amounts (absolute and/or in relation to a bank's capital) of acquisitions and investments need prior supervisory approval; and

(b) cases for which notification after the acquisition or investment is sufficient. Such cases are primarily activities closely related to banking and where the investment is small relative to the bank's capital.

Article 56 of the Banking Law states that the WAMU Council of Ministers is authorized to take any measures concerning the conditions under which credit institutions may acquire stakes. However, there are no texts that provide further definitions of these conditions. For example, it is not specified that an authorization is required, and the types of stakes that require prior authorization or ex-post notification are not indicated.

Despite the absence of authorizations/notifications of the acquisitions of stakes, there are rules imposing the deduction from capital of different types of holdings exceeding the thresholds provided by the regulations:

• For the acquisition of stakes in financial institutions, the regulations do not set a limit, but those not subject to consolidation are deducted from capital according to the Basel III deductibles.

• For investments in nonbanking sectors, the Banking Law (Article 43) and the Prudential System (paragraph 483) prohibit credit institutions and financial companies from engaging in commercial, industrial, agricultural, or service activities, on their own behalf or on behalf of others, except when such operations are required for or ancillary to the practice of their banking activity or the recovery of their claims. In this connection, credit institutions cannot:

  • Directly or indirectly hold, in the same business entity, stakes in excess of 25 percent of the capital in the enterprises or of 15 percent of their Tier 1 capital. In addition, the total amount of investments in commercial entities cannot exceed 60 percent of the institution's effective capital.

  • Hold an overall amount of non-working capital assets exceeding 15 percent of their Tier 1 capital (except when required for staff housing).

  Amounts in excess of these limits will be deducted from core Tier 1 capital.

• Total tangible or intangible assets (excluding expenses and intangible fixed assets) and investments (excluding investments in credit institutions) cannot exceed 100 percent of effective capital (Tier 1 and Tier 2 capital net of investments in credit institutions). Amounts in excess of these limits will be fully deducted from Tier 1 capital.

On-site supervision may be required to analyze certain acquisitions, and off-site supervision will ensure that the limits imposed by the regulations in terms of holdings are observed, although these analyses are conducted on an ex-post basis.

Decision 014/24/06/2016/CM/UMOA on consolidated supervision, adopted by the WAMU Council of Ministers, now gives the supervisory authority the possibility of restricting the activity of parent credit institutions and financial companies. Article 9 of the Decision provides that the CBU is authorized to:

• Limit the scope of activities that a supervised entity may undertake and the jurisdictions in which it conducts them, when it considers that:

  • The security and soundness of the supervised institution are jeopardized by these activities, which expose the supervised institution to excessive risks or are not properly managed.

  • The control exercised by other supervision authorities is unsatisfactory, in light of the risks involved.

  • It is prevented from exercising effective consolidated supervision.

• Not to authorize capital or organizational structures that prevent the authorities from obtaining consolidated financial data, or that in any other way impede the effective supervision of a group.

While this regulatory framework has been in force since 2016, it has not been used to date.

Where startups are concerned, the review of the license application includes an examination of the financial situation of the proposed shareholders and the five-year financial projections, specifying the acquisitions of capital assets or holdings, and the planned investments. The regulations subsequently do not provide for prior authorization of large acquisitions.

For the acquisition of holdings analyzed on an ex-post basis, the SGCB indicated that their impact on the prudential and financial situation of the institution acquiring the holdings is taken into account.

The limits prescribed by the prudential system for industrial, commercial, agricultural, or service activities will also be applicable to banking groups on a consolidated basis. Banking groups are required to observe the limits on an individual and consolidated basis. Amounts exceeding these limits will be deducted in full from Tier 1 core capital in accordance with paragraph 38 (i) of the prudential system. Should the standards established in the prudential system not be observed, the CBU may issue an order to the institution to take any corrective measures required to comply within a specified deadline. During this period, the institution will be prohibited from making discretionary distributions.

However, in the absence of a prior authorization, there will be no analysis prior to the bank's acquisition of its capacity to manage the risks involved in nonbanking activities. The SGCB indicated that holdings in commercial entities are in practice fairly limited in light of the regulatory restrictions. They generally correspond to support activities (information technology and real property). The SGCB relies on the information available from the financial statements and a Prudential Statement Declaration Form (FODEP) that takes stock of various investments.

The current legal framework does not define the categories and amounts of acquisition and investment operations that require prior approval from the CBU. It also does not cover cases in which ex-post notification of acquisitions or investments is sufficient. In addition, the legislation does not provide criteria for assessing each proposal. This regulatory vacuum should be filled in the draft banking law.

The regulatory framework has been strengthened by giving the CBU the capacity since 2016 to limit activities of groups when they involve exposure to excessive risks or if there are obstacles to consolidated supervision. This power, however, has yet to be used.

There is a system of limits and/or capital deductions for investments and nonoperational fixed assets. Ex-post monitoring of acquisitions is carried out by the SGCB. However, the CBU does not conduct any prior analyses to ensure that the bank has the required financial and organizational resources to address the acquisitions.

Recommendations:

• In connection with the review of the Banking Law, the categories and amounts of acquisitions and investments requiring prior authorization from the CBU and those for which it is sufficient to report their execution on an ex-post basis should be introduced; and

• An implementing text should specify the mechanisms for authorizing large acquisitions and investments, including the criteria to be used to assess proposals.

Supervisory Approach

An effective system of banking supervision requires the supervisor to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; identify, assess and address risks emanating from banks and the banking system as a whole; have a framework in place for early intervention; and have plans in place, in partnership with other relevant authorities, to take action to resolve banks in an orderly manner if they become non-viable.

The supervisor uses a methodology for determining and assessing on an ongoing basis the nature, impact and scope of the risks:

(a) which banks or banking groups are exposed to, including risks posed by entities in the wider group; and

(b) which banks or banking groups present to the safety and soundness of the banking system.

The methodology addresses, among other things, the business focus, group structure, risk profile, internal control environment and the resolvability of banks, and permits relevant comparisons between banks. The frequency and intensity of supervision of banks and banking groups reflect the outcome of this analysis.

Supervision of credit institutions is organized around a control structure led by two divisions: the DSP for off-site supervision and the DCPEME²¹ for on-site inspections.

The DSP's methodological approach to microprudential risk assessment is based on:

• - Daily use of financial and prudential reporting statements and the analysis of available documentation (annual risk management reports, semiannual internal supervision reports, reports submitted by the auditors, etc.);

• - A risk-based approach focusing on the rating exercise for credit institutions.

Analytical activities are designed to identify risk factors as well as potential or confirmed violations of the prudential standards. They include a process involving the verification of accounting, prudential, and qualitative information submitted by the institutions as well as a regular dialog in various forms (written correspondence and hearings) with the institutions.

The DSP uses the Credit Institution Rating System derived from the capital adequacy, asset quality, management, earnings, and sensitivity (CAMELS) approach, which was overhauled in 2016, with the assistance of AFRITAC West, to take factors such as the implementation of the Basel II/Basel III rules and regulatory developments in governance, internal supervision, and risk management into account.

The CBU distinguishes systemic institutions from other banks. The CBU uses a methodology based on the approach proposed by the Basel Committee. The WAMU banking sector has six regional-scale systemically important banks and 22 national systemically-important banks. The DSP has a body of methodological notes that have been updated to reflect the regulatory developments, and technical notices drafted within the framework of a performance plan involving multidisciplinary teams.

Although the DSP does not formally have expertise centers, the development of expertise is encouraged. The DCPEME, however, has specialized inspectors.

The SNEC uses quantitative and qualitative data from accounting and prudential reporting as well as periodic reports to establish ratings for the various risks and to identify the risk profile of each credit institution or financial company. Quantitative data are always entered manually at this stage, in the absence of an automated system.

Although the implementation of a computerized solution designed to automate processing and incorporating management indicators with integrated indicators was initially planned for mid-2021, its implementation was postponed as a result of the health crisis.

Methodological Approach of the SNEC

The SNEC is based on a conventional methodological approach. It aims to rate 11 individual risk factors and to combine the ratings into a composite rating with an expert mechanism that uses a mix of quantitative and qualitative approaches.

The 11 risk factors are: credit, concentration, market, operational risk, liquidity and interest rate risk in the banking book, capital adequacy, business model, governance, internal supervision, and AML-CFT. Risk factors are addressed individually through qualitative questionnaires and the inherent risk assessment. The responses to the questionnaires make it possible to rate the risk management system with three-level scale (“satisfactory,” “requires improvement,” or “deficient”). We should bear in mind that the questions are not weighted to reflect their degree of importance, which could bias the assessment of certain criteria. By contrast, individual risk factors are weighted to reflect their relative importance with relation to the banking system of the Union. In this connection, the weighting (5.6 percent) for concentration risk would seem to be low. Two risk factors, although low at the scale of the Union, are not rated (market risk and overall interest rate risk). The SGCB plans to review the SNEC methodology, including the calibration of weightings, when it has collected all of the required data.

A rating scale of one to four was adopted to assign an overall rating, from acceptable (1) to very high (4) (see Note 4). The overall rating is used to prioritize supervision activities. The rating attributed to institutions is considered in preparing the survey program.

Calibration tests to evaluate the predictive performance of the tool were carried out during the overhaul of the methodology. However, since it has been in use, the rating system has not been back tested to assess its performance on an ex-post basis, owing to the shortage of available resources. The procedure, however, provided for an ex-post review of the system on an annual basis.

The review of the rating tables shows that they provide comprehensive coverage for the risks addressed by the supervised institutions. To date, the rating tool has been largely manual, using Excel spreadsheets. Each risk criterion is evaluated on a dedicated sheet. However, the overall rating is generated automatically.

Implementation of Ratings

Ratings must be issued, according to the methodology, on an individual and consolidated basis and should use a risk-based approach. The frequency of the reviews reflects the risk profile and the rating of the institution.

The ratings can be updated with the results of on-site supervision activities and the findings from off-site supervision. Similarly, the development of the on-site inspection program is based as a priority on the results of the credit institution rating system. However, there is no audit cycle per se (see Principle 9).

In 2020, the ratings of more than 85 percent of the institutions were reviewed by DSP analysts. The semiannual frequency of reviews of ratings for vulnerable and systemically important institutions has been observed, according to the DSP. Approximately 20 institutions were given a rating of 4 (“very high risk”).

Validation Process

Ratings are validated based on an “expert” approach, that at least follows the rule of dual review. In practice, the ratings, particularly those awarded to sensitive institutions (systemically important and vulnerable institutions) are subject to a highly organized validation system involving the Deputy Director and the DSP. Some ratings may be based on a collegial decision or may be escalated to the Secretary General. A rating may differ from the rating deriving from the analysis, although these cases are limited, according to the DSP. The ratings assigned are justified.

CBU Circular 05-2017/CB/C of September 27, 2017, establishes the rules governing management of compliance by the supervised institutions with the current rules. Compliance with these provisions will be verified in the context of off-site and on-site supervision.

Monitoring of compliance with the prudential rules should be carried out on an ongoing basis, through the examination of the accounting and prudential statements the supervised institutions are required to submit, on an individual and consolidated basis. DSP analysts ensure that the financial and regulatory statements and documentation received are carefully reviewed and analyzed. As a result of the staff shortage, analysts may have a fairly large portfolio of institutions, including a combination of systemic and small-scale institutions. This situation may prevent a thorough review of all of the risk factors the institutions present. In addition, consolidated monitoring of institutions is still insufficient.

Further, the tasks of rating institutions are also designed to monitor changes in the risks to which the institutions are subject and to anticipate possible deterioration. DSP analysts are responsible for monitoring the situation of their respective institutions on a daily basis. In this connection, we should bear in mind that off-site supervision staffing (19 full-time equivalents—ETPs, including senior management, plus four ETPs currently being assigned to the services) would now seem to be insufficient, despite the recruitment efforts undertaken during the past two years, in light of the number of institutions to be supervised (152), that has increased substantially during the past 10 years).

Frequency of Discussions with Representatives from the Institutions

The frequency of discussions between the CBU and/or the SGCB (hearings, working sessions, meetings with supervision boards and representatives from the institutions (senior managers and industry representatives), not including procedures with input from both parties under Article 32 of the Annex to the Convention, would seem to be insufficient, despite the efforts made in 2021 (see also BCP 26). These discussions are intended primarily to gain a better understanding of the risk factors to which the institutions are exposed and the relevant control measures, and to monitor progress in connection with the recommendations from on-site missions. They may also be requested by institutions that require clarifications on regulatory matters.

The SGCB meets with an average of just over 20 institutions per year. In 2021, however, it had met with more than 30 institutions by the end of July. Regional systemically important institutions are generally seen every year. We note, however, that the SGCB has not met with a list of regional systemically important institutions during the past five years.

Meetings of the Supervisory Authority with Institutions

The SGCB organizes only a few meetings with the 14 institutions under special surveillance. With the exception of one institution, with which three meetings have been held during the past five years, the majority of the institutions have been met with only once since 2017. Meetings were not held with three institutions during the period. Members of senior management of these institutions are, however, summoned by the CBU in the framework of disciplinary proceedings.

Description and Conclusions, EC4

The CBU has a studies unit consisting of five full-time equivalents, including a Unit Chief, three Statistician Engineers, and one Financial Analyst. This service primarily conducts studies on the structure of the banking system (monitoring of certain banking groups and studies on the restructuring of public banks) and the exposure of institutions to key risks.

In addition, the service participates, along with the other supervision authorities in the financial sector, in the work of the CSF-WAMU established under a Memorandum of Understanding of May 20, 2010. The Internal Rules of Procedure of the CSF-WAMU establish meetings between the authorities “as often as required, and at least twice per year” as well as a framework for sharing information, cooperation, and joint missions. It has not, however, developed capabilities for macroprudential supervision and the development of crisis simulations. Accordingly, the SGCB relies primarily on the expertise of the DSF of the BCEAO.

The DSF in fact conducts stress tests on solvency and liquidity on an annual basis, that also take into account concentration risks, which constitute one of the key risks in the WAMU area. The results of these stress tests, which are submitted to the DSP, are intended to be reflected in the analysis of the vulnerabilities of the institutions. We should note that the DSP does not always diligently use the results of these stress tests or reflect them in the ratings of the institutions. Accordingly, the DSP did not use the results of the latest stress tests conducted by the DSF, affecting the solvency of two institutions, to take any actions against them. Similarly, from a more general standpoint, the DSP might make more effective use of the work of the DSF.

While exchanges do exist with the supervision authorities of nonbank financial institutions, they do not always occur on a regular basis.

Work is in progress in the WAMU Financial Stability Committee (CSF-WAMU), including the risk mapping of the financial system, which should be completed by the end of 2021 in the best-case scenario. These activities will contribute to the analysis of risk factors for financial instability. The Banking Commission is represented in the CSF-WAMU by its Chair.

The CSF-WAMU's duties include the following:

• To assess risks likely to undermine the stability of the financial system as a whole, through the analysis of macroprudential indicators, inter alia.

• To examine malfunctions in the system that may ultimately result in costs and affect its resilience to internal and external shocks; to define the actions required to correct the identified vulnerabilities and to coordinate and monitor them.

The banking crisis resolution system was not formally established until 2020 with the entry into force of Circular 03/2020/CB on the Conditions and Mechanisms for the Application of the Banking Resolution System in the WAMU. In addition, from the operational standpoint, the resolution mechanism is still being established. In fact, there have been delays in the publication of the schedule for the institutions to submit their plans. Circular 01/2020/CB established the following dates for the first announcement of the recovery plans:

• January 15, 2021, for systemically important institutions, parent credit institutions, and financial companies.

• January 15, 2022, for banks, except for systemically important institutions and parent institutions.

• July 15, 2023, for bank-like financial institutions and electronic money institutions.

Two systemically important institutions have yet to submit their recovery plans to the SGCB. The DSP indicated that the review of the first recovery plans revealed an appropriate level of quality. The recovery plans were formally established using the template provided by the supervisory authority and were validated by the competent authorities. In addition, the DSP observed that the choices in the identification of critical functions, preparation of emergency plans, and prioritization of remedial measures were relevant.

The analysis of the documents submitted by the institutions has yet to be completed, while interactions with the submitting institutions on the overall completeness and quality of their recovery plans are still limited.

Through the Supervision Board, the CBU has a framework to be applied to supervised institutions in difficulty. In this connection, in addition to the corrective measures listed in Article 29.1 of the Annex to the Convention, it may take a number of precautionary measures listed in Article 29.2 of the Annex. It also has other instruments described in Article 29.3, including special surveillance.

Furthermore, in addition to disciplinary penalties and fines, the CBU has the power to place any institution in difficulty in provisional administration (Article 34).

More specifically, the CBU has formally established and gradually implemented a resolution mechanism during recent years. Article 52 of the Annex provides that, at the request of the Supervision Board, the Resolution Board may decide to place in resolution any institution that is deemed not to be viable and not to have any prospect of restoring its viability. The Supervision Board relies on the analysis of the preventive recovery plan that all supervised institutions are required to have.

The legal conditions for the independence and intervention of the Resolution Board would seem to be observed. In urgent cases, the Resolution Board is authorized to take any resolution measures it deems appropriate, without any procedure involving input from both parties (Article 56 of the Annex to the Convention). Moreover, the cancellation of a decision of the Resolution Board after an appeal cannot affect the validity of the actions of the Board, unless fraud is involved.

The resolution measures available to the Resolution Board are listed in Article 53 of the Annex to the Convention. However, these measures do not include the possibility of liquidation. Liquidation can only be ordered by the CBU and is contingent on the prior withdrawal of the banking institution's license as the result of a disciplinary procedure, with potential risks of lengthy delays.

To date, the CBU has not used the resolution mechanism for banks in difficulty and has preferred other options (see Principle 11).

Article 13 of the Banking Law provides that institutions cannot engage in banking activities without having been previously licensed and placed on the list of banks or bank-like financial institutions. When organizations illegally engaging in banking activity are identified, the CBU will inform the competent authorities. This might have occurred a number of times, according to the CBU.

When banks restructure their activities outside of the supervision area, the CBU has the capacity to analyze the operation, to ensure that the licensing conditions are still met, and to apply penalties for any shortcomings that may be observed, including the withdrawal of the license. The SGCB has not detected any of such cases.

The WAMU supervisory authority's supervision framework is organized on the basis of an appropriate reporting system, with a risk-based approach. The rating system for credit institutions (SNEC) uses a consistent methodology, despite some weaknesses that have been identified (failure to reflect certain risk factors and weighting of risk factors). However, since its implementation, it has never been subject to an ex-post review to assess its performance level in terms of predictability. The risk-based approach, which is defined in detail through the SNEC, could be reflected to a greater extent in establishing the on-site supervision program (see also Principle 11).

It should also be noted that the SNEC cannot be used to rate banking groups or electronic money institutions. The situation of electronic money institutions is assessed using an expert opinion with an approach that has not been formally established. Corrective actions to date have been announced without any established schedule.

The Pillar 2 methodology, which is being gradually implemented, and the computerized application of off-site supervision activities, will strengthen the WAMU supervisor's tools for the forward-looking analysis of the individual situation of institutions.

The SGCB has yet to develop expertise in the area of stress testing, despite its quantitative resources. However, the staff of the Studies Unit still have limited capacity to cope with the range of assigned tasks (processing of license applications, banking studies, and macroprudential surveillance). Work in progress in the CSF-WAMU, including risk mapping for the financial system, will be used in the analysis of risk factors in connection with financial instability.

The delays observed in the release of preventive recovery plans have impacted the efforts to formally establish recovery plans. Not all systemically important banking institutions have submitted their recovery plans. Adjustments will be required at the regulatory level to strengthen the resolution architecture. More specifically, resolution measures do not include liquidation, which can only be activated following a disciplinary proceeding.

Recommendations:

• The methodology of the rating system for credit institutions should be updated and an ex-post review should be conducted on at least a semiannual basis.

• The rating process should be consolidated with the establishment of special rating tools for groups.

• Assess the capacity of banks to implement robust and credible strategies for orderly resolution. Formalize, after analysis and evaluation of the solvency of the institutions, a program for the development of recovery plans organizing the conditions and modalities of their financial stabilization, along with a timetable for implementation.

• The frequency of cross analyses and systemic risk mapping should be increased to gain a better understanding of the trends and accumulation of risks in the sector, so that they can be more effectively managed.

• Continue development of expertise (DERI, DSF) in the conduct of stress tests so as to better support the banks on the methodological level in introducing such tools (introducing a development outline).

Supervisory Techniques and Tools

The supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and deploys supervisory resources on a proportionate basis, taking into account the risk profile and systemic importance of banks.

Article 21 of the Annex to the Convention indicates that the CBU will conduct or assign the task of conducting, in particular by the BCEAO, on-site and off-site supervision activities with supervised institutions, on an individual or consolidated basis, to ensure that the relevant provisions are being observed. It will define the frequency and scope of the supervision and assessment of a supervised institution in light of its size, structure, risk profile, the nature and complexity of its activities, and its systemic importance.

In practice, the SGCB has separate directorates responsible for on-site and off-site supervision.

Off-site Supervision

The monitoring of the 370 supervised institutions by the DSP is divided into three units:

• The Sub-Regional Banks and Financial Institutions Directorate monitors financial institutions whose shareholders are individuals or legal entities resident in the WAMU. It has four staff members.

• The Cross-Border Surveillance Unit monitors intermediary financial holding companies and subsidiaries held by foreign groups. It has six staff members.

• The Specialized Institutions Unit monitors electronic money institutions, decentralized financial systems, and mutual and cooperative banks. It has four staff members.

In addition to these 14 staff members, the unit has one director and two deputies, i.e., a total of 17 staff members.

The institutions are distributed among different surveillance managers, and the largest institutions are assigned to the most experienced surveillance officers.

There are no regular staff interactions between on-site and off-site supervision, although off-site supervision controllers can be involved in on-site supervision from time to time.

Off-site supervision includes individual monitoring activities of supervised institutions:

• Document management.

• Monitoring and analysis of accounting and financial statements.

• Monitoring and analysis of internal supervision, risk management, and compliance reports, as well as minutes of board of directors' meetings.

• Annual rating of institutions, or semiannual rating of nationally systemic and vulnerable institutions. Cases in which the vulnerabilities require the presence of senior management will be escalated to the level of the Secretary General (SG). Similarly, the rating of national systemic institutions will be escalated to the SG, and the remaining cases will be validated by the directorate. Ratings have yet to be established for electronic money groups and institutions.

• Definition of supervision activities to be carried out for inspections, through the terms of reference

• Follow-up of action plans for the implementation of recommendations.

The data collected on the institutions also enable the International Relations and Studies Directorate to conduct general or specific studies on overall trends in the banking system, microfinance activities, and the issue of electronic money in the WAMU.

On-site Supervision

On-site supervision (not including decentralized financial systems) has a staff of 20 persons: one director, one deputy, and one assistant, six mission heads, three senior inspectors (equivalent to a deputy director), three principal inspectors (equivalent to a unit chief) and five inspectors.

The unit decided in 2021 to establish expertise centers in the following areas: AML-CFT/Governance, Accounting/Finance, Information System/Digital, Credit Portfolio, Market Risk, and Liquidity. The objective is for each center to have two persons. These centers were created to address mission requirements.

Four types of inspections are conducted:

• General inspections, the number of which is on the decline. In 2019, for example, three general missions were conducted.

• Special inspections based on several topics indicated by the off-site supervision function. During these inspections, several aspects are monitored in a given bank (such as credit risk, risk control, AML-CFT, and governance). In 2019, for example, 33 specific inspections were conducted.

• Topical missions in several banks. Two topical missions were conducted in 2019 in the area of AML-CFT.

• Inspection missions on implementation of recommendations. For example, two of this type of mission were conducted in 2019.

During the past five years, 230 missions have been conducted. In the survey conducted in the framework of the FSAP, 45 percent of the banks surveyed indicated that the last two CBU on-site inspections dated back less than three years, and 26 percent reported no inspections during the past three years. They indicated for specific missions that the supervision activities primarily involved the AML-CFT system, banking and transfer conditions, compliance with capital requirements, and risk management systems.

Missions are conducted as follows:

• The mission is announced one month before it will begin and is preceded by a preaudit phase.

• Topical missions generally last one week; special missions last two weeks; and those for systemically important institutions last three weeks.

• Before leaving the institution, a feedback sheet is prepared and submitted with the list of provisional findings. The institution will have one week to respond.

• The mission head will have a period of one week to submit the report after the on-site mission ends. The preliminary draft report is pre-validated with the Director and, for the last two years, by a peer mission head.

• The report is reviewed by a review committee comprised of all directors and deputies, the Secretary General, and the Deputy Secretary General.

• The follow-up letter to the Chair of the Board of Directors, the Minister of Finance, and the Chair of the CBU is drafted by the on-site-supervision authorities and signed by the Secretary General of the CBU. There is a six-week period between the filing of the report and the preparation of the follow-up letters.

A relatively lengthy six-week process is allocated for the finalization, review of the report, and drafting of the follow-up letter, in comparison with the time allotted for on-site investigations (one to three weeks).

On-site supervision is based on an annual program approved by the Chair of the CBU. It is carried out as part of an approach based on the risks identified in off-site supervision, making it possible to prepare a list of the supervised institutions considered to be the most vulnerable. Off-site supervision uses the risk mapping prepared based on the rating of all supervised institutions. It also reflects newly licensed institutions. In preparing this program, some directorates of the BCEAO are consulted (the Financial Stability Directorate and Financial Inclusion and Payments Systems Directorate). By contrast, the supervisory authority does not take the bank audit program into account. Moreover, the length of the time between inspections is not the essential criterion, owing to the substantial increase in the number of institutions to be supervised. There are no rules that require a minimum frequency for inspections that differentiates between vulnerable, systemic, and lower-risk institutions.