## 1wauea2022003 - 2022. The FSAP findings were discussed with the

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### Executive Summary: sector evolution and outlook
- Financial sector structure and size:
  - Total assets at 69 percent of regional GDP at end-2020.
  - Banks account for 74 percent of total assets.
  - Banking groups account for 86 percent of banking assets.
  - Share of sovereign debt reached 35 percent of banks’ total assets at end-2021 (up from 7 percent in 2004).
- Macroeconomic context and recent developments:
  - Growth averaged 6.4 percent during 2012–2019.
  - GDP growth expected to have bounced back to 5.7 percent in 2021.
  - Bank credit grew by nearly 11 percent year-on-year at end-October 2021.
  - Fiscal support measures increased public deficits by 3.5 percent of GDP in 2020; growth in 2020 slowed to 2 percent.
  - BCEAO reduced the policy rate by 50 basis points and fully met banks’ short-term refinancing needs in 2020.
- Risks to the outlook:
  - Imported inflation, potential higher interest rates, a fall in official FX reserves, deterioration in regional security (noted in Mali and Burkina Faso), and resurgence of COVID-19.

### Financial stability risks and stress-test findings
- Credit risk and amplification channels:
  - Credit risk amplified by asset concentration and interconnectedness (interbank market and common exposures).
  - Severe but plausible growth or inflation shocks on their own would entail moderate recapitalization needs; many smaller banks would be affected.
  - Concurrent growth slowdown and inflation spike could further elevate recapitalization needs.
- Liquidity and interest rate risks:
  - Liquidity risks amplified by inadequate regional secondary bond market development and deposit concentration.
  - Share of BCEAO short-term financing increased to 13 percent of total bank assets in 2021 from 2 percent in 2008.
  - Interest rate risk likely increased due to rise of government securities with maturities longer than banks’ funding.
- Structural indicators:
  - Private sector credit increased by an average of 12 percent a year between 2010 and 2019 but accounts for only 25 percent of region-wide GDP.
  - Agricultural lending is limited at 2 percent of private sector loans.
- Stress-test summaries:
  - Adverse scenario: regional real GDP growth cumulatively declines by 15 percentage points relative to baseline over four years (2.3 standard deviations from historical mean in the peak year of stress).
  - Solvency test adverse outcome: banks’ capital adequacy ratios could decline to 5.4 percent; recapitalization needs estimated up to 1.1 percent of regional GDP.
  - Guinea Bissau and Togo: recapitalization needs close to 3 percent of national GDP.
  - Small banks particularly affected: 35 small banks see capital positions fall below minimum requirement in the adverse scenario, joining another 20 banks already undercapitalized.
  - Interest rate (inflation) adverse scenario: inflation uptick to 7 percent in the first year and gradual reduction to BCEAO’s 2-percent target over four years; banks’ return on assets would decline by 2.5 percentage points; capital adequacy ratios would decline to 3.6 percent; recapitalization needs reach 1.5 percent of regional GDP.
  - Liquidity tests: 58 of 91 banks unable to withstand sudden cash outflows in a severe stress; system-wide liquidity gap in the most adverse scenario: 2.1 percent of GDP.

### Key policy recommendations and priorities
- Strengthen supervisory framework and enforcement (short term priorities):
  - Modify the CBU’s governing documents to institute independence of its Supervisory Board from member states and require state representatives to serve in a non-voting capacity or establish selection of commissioners based on professional qualifications. (BCEAO/Council of Ministers) — ST
  - Continue strengthening number and capacity of staff at the Secretariat General of the Banking Commission (SGCB) assigned to supervisory functions. (BCEAO) — ST
  - Impose capital surcharges for concentration risk and interest rate risk (Pillar 2). (CBU) — ST
  - Make more consistent use of monetary sanctions, publish sanctions and censures, and avoid repeated stays of proceedings. (CBU) — ST
  - Publish a guidance note for banks on the preparation of stress tests. (BCEAO/CBU) — ST
  - Strengthen AML/CFT supervision by fully adopting a risk-based approach and enhancing capacity and methodology for onsite supervision. (CBU) — ST
- Macroprudential and liquidity measures:
  - Designate the BCEAO as the "macroprudential authority" and introduce a mechanism for national authorities to raise legitimate concerns. (BCEAO/CSF-UMOA) — ST
  - Introduce the Basel III liquidity ratios and: (i) institute a government securities haircut; (ii) count required reserves toward liquid assets; and (iii) require banks to regularly report residual maturities on assets and liabilities, and interest rates. (BCEAO) — ST
  - Introduce funding plans to manage banks' excessive dependence on BCEAO funding; adopt haircuts and concentration limits for BCEAO eligible assets; introduce a framework for emergency liquidity assistance (ELA). (BCEAO) — ST
  - Impose a higher liquidity coverage ratio (LCR) for banks with riskier profiles (Pillar 2). (CBU) — MT
  - Support development of the regional bond market: introduce a development objective in medium-term borrowing strategies; unify central depositories; reform status of primary dealers. (BCEAO/UT/CREPMF) — MT
- Resolution and crisis management reforms:
  - Liquidate or resolve undercapitalized, nonviable credit institutions on a timely basis. (CBU) — ST
  - Finalize banks’ resolution plans in accordance with best practices. (CBU) — ST
  - Strengthen independence of the Resolution Board from the Supervisory Board and member states; strengthen independence of the FGDR, particularly from active banking industry members. (Council of Ministers/CBU/FGDR) — MT
  - Adopt a program for enhancing systemically important banks’ loss-absorption capacity; speed attainment of FGDR-UMOA's target insurance reserves coverage; enable FGDR-UMOA recourse to member states if resources inadequate. (BCEAO/CBU/CM/FGDR) — MT
- Financial development and inclusion:
  - Improve access to finance for SMEs via: (i) more efficient debt recovery procedures; (ii) increased competition among financial intermediaries; and (iii) further development of the credit reporting system.
  - Review social security institutions’ governing frameworks to encourage stronger participation in capital markets.
  - Refocus public banks’ business models to underserved populations and enhance governance.
  - Promote retail payment digitization to curb transaction costs relative to cash.
- Climate and green finance actions:
  - Adopt a strategy for managing climate risks, including establishing a dedicated governance structure, mobilizing resources, and developing capacity to evaluate climate risks. (BCEAO/CBU) — ST
  - Define prudential expectations for inclusion of climate and environmental risks in financial institutions’ risk management and disclosures; adopt a taxonomy for green assets; encourage region-wide climate commitments; issue green sovereign debt instruments to stimulate green finance. (BCEAO/CBU) — MT

### Implementation sequencing and institutional actions
- Short Term (ST: 1 to 2 years):
  - Supervisory independence reforms, capital surcharges (Pillar 2), Basel III liquidity ratio introduction, AML/CFT supervisory strengthening, ELA framework development, and prompt resolution/liquidation of nonviable institutions.
- Medium Term (MT: 3 to 5 years):
  - Strengthening macroprudential governance, bond market development, higher LCR for riskier banks, FGDR-UMOA resource targets and governance reforms, and climate-related prudential expectations.
- Operational recommendations:
  - Require banks dependent on BCEAO financing to prepare funding plans; BCEAO to adopt procedures for ELA and measures to mitigate balance sheet risks; supervisor to impose monetary sanctions more consistently, publish censure letters, and avoid repeated stays of proceedings.

### Progress since 2008 FSAP and key achievements
- Achievements:
  - Increase in banks' minimum capital requirement.
  - Reform of the BCEAO and the CBU—strengthening regulatory independence and enforcement capacity.
  - Transition toward the Basel II/III regulatory framework.
  - Introduction of risk-based supervision.
  - Introduction of a new AML/CFT regulatory framework via the adoption of the Uniform Law in 2015 and its implementing regulations in 2017.

### Financial sector risks and vulnerabilities (selected)
- Credit risk:
  - NPLs declined to 11.2 percent of total loans in November 2021 from 20 percent at end-2006.
  - NPLs in some member countries as high as 20 percent of loans.
  - Provisions at end-2020 stood at 65 percent of NPLs.
- Concentration and single-counterparty exposures:
  - Banks’ single largest exposure exceeds the limit of 55 percent of regulatory capital for over a third of reporting banks.
  - The 25 percent large exposure limit under the Basel standard is exceeded for two thirds of the banks.
  - Sovereign concentration risk more pronounced in Benin and Togo.
  - Banks’ securities portfolios biased toward own-country and Côte d’Ivoire debt securities.
- Contagion and interconnectedness:
  - High contagion risks due to mostly unsecured direct interbank exposures and common exposures to private and sovereign borrowers, including cross-border investments in other member states’ debt securities (e.g., Côte d’Ivoire).
- Capital adequacy:
  - System-wide capital adequacy ratio reached 12.4 percent at end-June 2021, up from 10.5 percent at end-2018.
  - Full provisioning of NPLs would mostly absorb existing Tier 1 capital buffers.
  - 18 banks (10.2 percent of banks’ assets) not complying with solvency norms at end-June 2021.
- Liquidity and risk management:
  - Five largest depositors on average account for 25 percent of deposits.
  - Illiquidity of secondary markets for government securities hampers mitigation of liquidity shocks and repo market development.
  - Only 35 percent of banks systematically require approval by their risk management department before making a loan.
  - Only 50 of 152 banks report conducting regular solvency and liquidity stress tests.
- Climate risk:
  - WAEMU countries, particularly in the Sahel, highly exposed to climate change impacts.
  - Less than a third of banks consider themselves capable of identifying assets directly exposed to climate risks.

### Banking system stress tests — detailed outcomes
- Solvency and concentration reverse stress tests:
  - Recapitalization needs due to losses on the largest and up to the ten largest exposures are at 1 to 3 percent of regional GDP.
  - Country-level needs range from 1.5 percent of national GDP for Côte d’Ivoire to 7 percent for Togo.
- Contagion tests:
  - Failure of WAEMU’s largest banking group would lead to the failure of 23 other banks.
  - Recapitalization needs from failure of all interbank positions: 0.3 percent of regional GDP.
  - Country-level needs generally less than 0.2 percent of national GDP, except Burkina Faso (close to 1 percent) and Togo (to a lesser extent).
  - Recapitalization needs rise to about 0.8 percent of regional GDP in case of concomitant defaults of banks’ 10 largest common private exposures or defaults on debt payments due in 2021 and 2022 by the largest common sovereign exposure.
- Interest rate / inflation stress:
  - Adverse inflation-at-risk scenario: inflation uptick to 7 percent in the first year; banks’ return on assets decline by 2.5 percentage points; capital adequacy ratios decline to 3.6 percent; recapitalization needs reach 1.5 percent of regional GDP.
- Liquidity stress:
  - Most banks have an LCR below 100 percent; most banks’ LCR falls in the 25 to 50 percent range.
  - Large banks’ LCR clustered in the 50-125 percent range; small banks up to the 75 percent range.
  - Most adverse scenario: HQLA deficit at 2.1 percent of GDP; inadequate HQLA for 58 banks, mostly in the largest WAEMU jurisdictions.

### Contagion and recapitalization metrics (selected)
- Interbank contagion WAEMU-wide outcomes:
  - Capital losses: 0.7 percent of regional GDP.
  - Recapitalization needs: 0.3 percent of regional GDP.
- Selected national interbank results (capital losses / recapitalization needs):
  - Benin: 1.2 / 0.9
  - Burkina Faso: 0.3 / 0.17
  - Côte d’Ivoire: 0.2 / 0.12
  - Mali: 0.1 / 0.08
  - Niger: 0.1 / 0.04
  - Senegal: 0.6 / 0.09
  - Togo: 1.1 / 0.5
- Contagion from large common private exposures (cumulative):
  - 10 largest common exposures: Capital losses 1.62 / Recapitalization needs 0.85
  - 20 largest common exposures: Capital losses 2.21 / Recapitalization needs 1.22
  - 30 largest common exposures: Capital losses 2.66 / Recapitalization needs 1.57
  - 40 largest common exposures: Capital losses 2.99 / Recapitalization needs 1.88
  - 50 largest common exposures: Capital losses 3.25 / Recapitalization needs 2.07
- Contagion due to sovereign exposures (issuing country defaults on payments due in 2021 and 2022) — country results (capital losses / recapitalization needs):
  - Benin: 0.2 / 0.06
  - Burkina Faso: 0.4 / 0.1
  - Côte d’Ivoire: 1.7 / 0.8
  - Guinea-Bissau: 0.1 / 0.04
  - Mali: 0.4 / 0.15
  - Niger: 0.4 / 0.13
  - Senegal: 0.2 / 0.05
  - Togo: 0.2 / 0.06
- Interest rate risk adverse scenario WAEMU-wide capital needs: 1 .2 percentage points of GDP even at the 90-percent risk level.

### Liquidity stress test assumptions and run-off / haircut parameters
- Run-off rates by deposit size (Moderate / Severe):
  - Deposits ≤ 1 000 000 FCFA: 5% / 10%
  - Deposits >1 000 000 FCFA et ≤10 000 000 FCFA: 5% / 10%
  - Deposits >10 000 000 FCFA et ≤100 000 000 FCFA: 10% / 20%
  - Deposits >100 000 000 FCFA et ≤1 000 000 000 FCFA: 10% / 20%
  - Deposits >1 000 000 000 FCFA et ≤10 000 000 000 FCFA: 20% / 40%
  - Deposits >10 000 000 000 FCFA: 20% / 40%
- Run-off rates by depositor type (Moderate / Severe):
  - Households: 5% / 10%
  - SMEs: 10% / 20%
  - Large companies: 20% / 40%
  - Financial institutions: 20% / 40%
  - Central and local public administrations: 20% / 40%
  - Non-residents: 20% / 40%
- Interbank borrowing run-off:
  - Unsecured borrowing: 50% (Moderate) / 100% (Severe)
  - Secured borrowing: 0% / 0%
- Assumed HQLA depreciation haircuts (Moderate / Severe):
  - Cash: 0% / 0%
  - Reserves at BCEAO: 0% / 0%
  - Sovereign debt securities (Benin, Burkina Faso, Côte-d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo): 10% / 30%

### Stress-testing framework, methodology, and key modeling assumptions
- Coverage and data:
  - Institutions included: 99 banks (almost all banks, with some exceptions due to missing data for very small banks).
  - Market share: More than 95 percent of banking sector assets in the region.
  - Data and baseline date: 2000–2020 (macro data), 2010–2020 (banking data); reference date: Q4 2020.
  - Bank-by-bank historical data over about ten years for balance sheets, P&L, equity, credit breakdowns, securities holdings, credit risk, concentration risk, interest rate risk, foreign exchange risk, liquidity risk.
- Modeling and propagation:
  - Growth-at-risk model projects distribution of real GDP growth as a function of current macrofinancial conditions.
  - Nonlinear density estimators and a density projection model robust to measurement errors and small samples used for propagation.
  - Banks divided into four groups; conditional distribution of doubtful debts estimated by group to predict PD rises under each scenario and risk level.
  - Static balance sheet credit portfolio stress test with estimated PDs and default losses; loss recovery assumptions ad hoc due to limited historical data.
- Horizon and scenarios:
  - Stress testing horizon: Four years, 2021–24.
  - Two scenarios: baseline (V-shaped recovery) and adverse (U-shaped recovery) aligned with IMF World Economic Outlook and WAEMU Article IV; adverse scenarios structured from Article IV RAM shocks, historical crisis paths, and assumed risk levels.
- Behavioral assumptions:
  - Banks’ balance sheet compositions and sizes assumed static over stress period.
  - Dividend distributions permitted only for banks meeting regulatory capital requirements and with positive profits.

### Regulatory reforms, supervision, and resources
- BCEAO regulatory reforms:
  - 2017 publication of four circulars on governance, risk management, internal control, and compliance aligned with international best practices.
  - Substantial progress on aligning regulatory capital with Basel standards.
  - Regulatory framework on liquidity risk management standards published in 2017 appears complete and consistent with the Basel Core Principles.
- Offsite supervision and risk assessment:
  - Need to enhance offsite supervision capacity: more frequent cross-cutting analyses; further development of systemic risk map.
  - Strengthen stress testing expertise at SGCB; amend methodology for rating credit institutions to account for market and interest rate risks and give higher weight to concentration risk.
  - Regular assessment of rating system robustness required.
- Resources, IT, and onsite supervision:
  - SGCB teams experienced but need further capacity reinforcement for rising complexity and cross-border groups.
  - Continued IT investments needed to optimize and automate offsite supervision toolkits.
  - Preventive supervision should be accompanied by vigorous deterrent actions: increase frequency and intensity of onsite supervision; publish censures and sanctions; use monetary sanctions more frequently; avoid repeated stays of proceedings.
- AML/CFT supervision:
  - Reforms: new supervisory risk assessment model, AML/CFT bank questionnaire, updated onsite inspection checklists.
  - Persistent weaknesses: offsite AML/CFT supervision underdeveloped and not fully risk based; limited AML/CFT inputs in risk assessment model; onsite methodology needs improvement for PEPs; CBU cooperation with partners inadequate.
  - Recommended steps: expand offsite supervision role; require banks to submit basic clientele statistics annually; strengthen onsite inspection methodology; improve domestic and international cooperation; consider internal pool of AML/CFT expertise.
- Systemic liquidity and market development:
  - Deepen secondary market for government securities: include secondary market development objective in medium-term debt strategies; develop institutional investor base; unify central depository; review primary dealers’ roles; strengthen UT and CREPMF cooperation.
  - Address excessive dependence on BCEAO refinancing: require funding plans for banks exceeding dependence threshold; plans to reduce BCEAO financing to a predetermined threshold.
  - BCEAO collateral framework: set further haircuts based on risk type, base haircuts on sovereign ratings with larger haircut for unrated debt, introduce concentration limits.
  - Introduce ELA framework: provide emergency liquidity to solvent, viable banks after exhausting eligible collateral, with expanded collateral pool, risk-control measures, conditionality, and financing terms that discourage use except as last resort.
- Crisis management and bank resolution:
  - Bank resolution framework established in 2015 but not fully implemented; liquidation should be included in toolkit.
  - Undercapitalized, nonviable credit institutions should be promptly liquidated or resolved.
  - Resolution Board priorities: finalize banks’ resolution plans; complete CBU approval of initial resolution plans for systemic institutions and financial corporations without delay.
  - Strengthen decision-making independence: independence of CBU Resolution College relative to Supervisory College and national authorities; independence of FGDR vis-à-vis active banking industry members.
  - Funding for resolution: FGDR reserves insufficient; develop strategy to accelerate FGDR’s attainment of a reasonable target for coverage of eligible deposits with available reserves; establish recourse mechanism to tap member states’ resources for resolution funding or reimbursement in liquidation.
- Financial sector development and payments:
  - Improve SME funding: more efficient debt enforcement, extend credit bureau information, foster competition.
  - Ensure competition-enhancing measures maintain level playing field across private and public banks with regulatory impact analyses.
  - Social security institutions (~5 percent of regional GDP) could act as institutional investors to develop capital market.
  - Payments and fintech: further digitalize retail payments; national treasuries plan electronic money issuance; revamp legal framework for new payment methods and operators.
- Green strategy:
  - Adopt green strategy with dedicated governance and resources; develop capacity to evaluate climate risks; medium-term prudential expectations for climate risk inclusion, uniform taxonomy for green assets, commitments to WAEMU’s and Paris Accord’s climate goals, encourage green sovereign debt issuance.

### Key macrofinancial indicators and supervisory developments (selected)
- Banks’ assets account for 51.3 percent of GDP.
- Public banks and social security institutions manage close to 5 percent of regional GDP.
- Aggregate capital adequacy ratio reached 12.4 percent in 2020.
- Solvency stress test severe scenario: cumulative GDP growth shock of 15 p.p. relative to baseline; under the severe scenario, capital ratios decline by 6 percentage points.
- Post-shock, 35 (small) banks’ capitalizations fall below the minimum requirement, joining 20 already undercapitalized banks.
- Resolution Board approved resolution plans for five systemically important banks on December 13, 2021.
- The CBU’s Supervisory Board started publishing disciplinary and financial sanctions since December 2021.

### Authorities’ views (selected)
- Authorities appreciated FSAP discussions and noted progress on regulatory framework, supervision processes, and financial digitalization.
- Actions and observations:
  - Further thought on member states’ representation at the CBU.
  - Reinforcement of supervisory resources; initiatives include dedicated IT budget and capacity development with Regional Banking Training and Studies Center and the IMF.
  - Publishing disciplinary and financial sanctions since December 2021 to enhance deterrent impact.
  - CBU’s Resolution Board prepared and approved resolution plans for five systemically important banks (December 13, 2021).
  - FGDR contribution rate and 10-year horizon for reaching target reserves set based on banks’ ability to service contributions and in line with international practices.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022003.pdf*

### 2022. The FSAP findings were discussed with the

### 1wauea2022003 - 2022. The FSAP findings were discussed with the

### Executive Summary: sector evolution and outlook
- The WAEMU’s financial sector has:  
  - increased in size significantly; total assets at 69 percent of regional GDP at end-2020.  
  - been dominated by banking: banks account for 74 percent of total assets.  
  - become concentrated in regional banking groups: banking groups now account for 86 percent of banking assets.  
  - seen a rise in sovereign exposures: the share of sovereign debt reached 35 percent of banks’ total assets at end-2021 (up from 7 percent in 2004).  
- Macroeconomic context and recent developments:  
  - Growth averaged 6.4 percent during 2012–2019.  
  - The economy rebounded with GDP growth expected to have bounced back to 5.7 percent in 2021.  
  - Bank credit rebounded, growing by nearly 11 percent year-on-year at end-October 2021.  
  - Fiscal support measures increased public deficits by 3.5 percent of GDP in 2020; growth in 2020 slowed to 2 percent.  
  - The BCEAO reduced the policy rate by 50 basis points and fully met banks’ short-term refinancing needs in 2020.  
- Risks to the outlook highlighted: imported inflation, potential higher interest rates, a fall in official FX reserves, deterioration in regional security (noted in Mali and Burkina Faso), and resurgence of COVID-19.

### Financial stability risks and stress-test findings
- Credit risk and amplification channels:  
  - Credit risk is amplified by asset concentration and interconnectedness (interbank market and common exposures).  
  - Stress tests based on growth-at-risk and inflation-at-risk models show that a severe but plausible deterioration of economic growth or a rise in inflation, on their own, would entail moderate recapitalization needs given the relatively small size of banks’ assets as percent of regional GDP and the soundness of large banks; many smaller banks would be affected.  
  - A concurrent economic growth slowdown and an inflation spike could further elevate recapitalization needs.  
- Liquidity and interest rate risks:  
  - Liquidity risks are amplified by the inadequate development of the regional secondary bond market and deposit concentration.  
  - Several banks are persistently dependent on BCEAO refinancing; the share of BCEAO short-term financing increased to 13 percent of total bank assets in 2021 from 2 percent in 2008.  
  - Interest rate risk has likely increased due to the rise of government securities (whose maturities tend to be longer than banks’ funding).  
- Structural financial deepening indicators:  
  - Private sector credit increased by an average of 12 percent a year between 2010 and 2019 but accounts for only 25 percent of region-wide GDP.  
  - Agricultural lending is limited at 2 percent of private sector loans despite agricultural importance in some members.

### Key policy recommendations and priorities
- Strengthen supervisory framework and enforcement (short term priorities):  
  - Modify the CBU’s governing documents to institute independence of its Supervisory Board from member states and require state representatives to serve in a non-voting capacity or establish selection of commissioners based on professional qualifications. (BCEAO/Council of Ministers) — ST  
  - Continue strengthening number and capacity of staff at the Secretariat General of the Banking Commission (SGCB) assigned to supervisory functions. (BCEAO) — ST  
  - Impose capital surcharges for concentration risk and interest rate risk (Pillar 2). (CBU) — ST  
  - Make more consistent use of monetary sanctions, publish sanctions and censures, and avoid repeated stays of proceedings. (CBU) — ST  
  - Publish a guidance note for banks on the preparation of stress tests. (BCEAO/CBU) — ST  
  - Strengthen AML/CFT supervision by fully adopting a risk-based approach and enhancing capacity and methodology for onsite supervision. (CBU) — ST  
- Macroprudential and liquidity measures:  
  - Designate the BCEAO as the "macroprudential authority" and introduce a mechanism for national authorities to raise legitimate concerns. (BCEAO/CSF-UMOA) — ST  
  - Introduce the Basel III liquidity ratios and: (i) institute a government securities haircut; (ii) count required reserves toward liquid assets; and (iii) require banks to regularly report residual maturities on assets and liabilities, and interest rates. (BCEAO) — ST  
  - Introduce funding plans to manage banks' excessive dependence on BCEAO funding; adopt haircuts and concentration limits for BCEAO eligible assets adapted to underlying risks; and introduce a framework for emergency liquidity assistance (ELA). (BCEAO) — ST  
  - Impose a higher liquidity coverage ratio (LCR) for banks with riskier profiles (Pillar 2). (CBU) — MT  
  - Support development of the regional bond market: introduce a development objective in medium-term borrowing strategies; unify central depositories; reform status of primary dealers. (BCEAO/UT/CREPMF) — MT  
- Resolution and crisis management reforms:  
  - Liquidate or resolve undercapitalized, nonviable credit institutions on a timely basis. (CBU) — ST  
  - Finalize banks’ resolution plans in accordance with best practices. (CBU) — ST  
  - Strengthen independence of the Resolution Board from the Supervisory Board and member states; strengthen independence of the FGDR, particularly from active banking industry members. (Council of Ministers/CBU/FGDR) — MT  
  - Adopt a program for enhancing systemically important banks’ loss-absorption capacity; speed attainment of FGDR-UMOA's target insurance reserves coverage; enable FGDR-UMOA recourse to member states if resources inadequate. (BCEAO/CBU/CM/FGDR) — MT  
- Financial development and inclusion measures:  
  - Improve access to finance for SMEs via: (i) more efficient debt recovery procedures; (ii) increased competition among financial intermediaries; and (iii) further development of the credit reporting system.  
  - Review social security institutions’ governing frameworks to encourage stronger participation in capital markets.  
  - Refocus public banks’ business models to underserved populations and enhance governance.  
  - Promote retail payment digitization to curb transaction costs relative to cash.  
- Climate and green finance actions (short and medium term):  
  - Adopt a strategy for managing climate risks, including establishing a dedicated governance structure, mobilizing resources, and developing capacity to evaluate climate risks. (BCEAO/CBU) — ST  
  - Define prudential expectations for inclusion of climate and environmental risks in financial institutions’ risk management and disclosures; adopt a taxonomy for green assets; encourage region-wide climate commitments; issue green sovereign debt instruments to stimulate green finance. (BCEAO/CBU) — MT

### Implementation sequencing and institutional actions
- Short Term (ST: 1 to 2 years) priorities highlighted include supervisory independence reforms, capital surcharges (Pillar 2), Basel III liquidity ratio introduction, AML/CFT supervisory strengthening, ELA framework development, and prompt resolution/liquidation of nonviable institutions.  
- Medium Term (MT: 3 to 5 years) actions include strengthening macroprudential governance, bond market development, higher LCR for riskier banks, FGDR-UMOA resource targets and governance reforms, and climate-related prudential expectations.  
- Additional operational recommendations: require banks dependent on BCEAO financing to prepare funding plans; BCEAO to adopt procedures for ELA and measures to mitigate balance sheet risks; supervisor to impose monetary sanctions more consistently, publish censure letters, and avoid repeated stays of proceedings.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022003.pdf*

### 13. The authorities have implemented most recommendations of the 2008 FSAP (Table 4).

### 13. The authorities have implemented most recommendations of the 2008 FSAP (Table 4).

### Key achievements
- Increase in banks' minimum capital requirement.
- Reform of the BCEAO and the CBU—an important step toward strengthening regulatory independence and enforcement capacity.
- Transition toward the Basel II/III regulatory framework.
- Introduction of risk-based supervision.
- Introduction of a new AML/CFT regulatory framework via the adoption of the Uniform Law in 2015 and its implementing regulations in 2017.

### Financial Sector Risks and Vulnerabilities
- Credit risk is the most important risk faced by the system.
- Nonperforming loans (NPLs):
  - Declined to 11.2 percent of total loans in November 2021 from 20 percent at end-2006.
  - NPLs in some member countries as high as 20 percent of loans.
  - Provisions at end-2020 stood at 65 percent of NPLs.
- Concentration and single-counterparty exposures:
  - Banks’ single largest exposure exceeds the limit of 55 percent of regulatory capital (the current WAEMU standard) for over a third of reporting banks.
  - The 25 percent large exposure limit under the Basel standard is exceeded for two thirds of the banks.
- Sovereign concentration risk more pronounced in Benin and Togo.
- Banks’ securities portfolios biased toward own-country and Côte d’Ivoire debt securities.
- Contagion risks are high due to:
  - Mostly unsecured direct interbank exposures.
  - Considerable common exposures to private and sovereign borrowers, including cross-border investments in other member states’ debt securities (e.g., Côte d’Ivoire).
- Interest rate risk:
  - Rise in sovereign exposures and greater reliance on BCEAO short-term funding have raised asset-liability mismatches and risk to interest rate margins if rates rise.
- Capital adequacy:
  - System-wide capital adequacy ratio reached 12.4 percent at end-June 2021, up from 10.5 percent at end-2018.
  - Full provisioning of NPLs would mostly absorb existing Tier 1 capital buffers.
  - 18 banks (10.2 percent of banks’ assets) not complying with solvency norms at end-June 2021.
- Liquidity risks:
  - Banks’ funding largely based on customer deposits; five largest depositors on average account for 25 percent of deposits.
  - Illiquidity of secondary markets for government securities hampers mitigation of liquidity shocks and development of the repo market.
- Risk management quality is heterogeneous:
  - Only 35 percent of banks systematically require approval by their risk management department before making a loan.
  - Only 50 of 152 banks report conducting regular solvency and liquidity stress tests.
- Climate risk:
  - WAEMU countries, particularly in the Sahel, highly exposed to climate change impacts.
  - Less than a third of banks consider themselves capable of identifying assets directly exposed to climate risks.
- Data notes:
  - Findings on internal risk management based on a survey conducted by the FSAP.

### Banking System Stress Tests
- Scenario construction:
  - Adverse and baseline scenarios estimated via a “growth-at-risk” model, assuming a U-shaped post-COVID-19 recovery under the adverse scenario and a V-shaped recovery under the baseline scenario.
  - The adverse scenario entails: accelerated fiscal adjustment; regionwide resurgence of the COVID-19 pandemic; deterioration in the region’s security situation; external shock due to surging commodity prices; climate shock capturing temperature variation, frequency of catastrophic events, and agricultural production.
  - Regional real GDP growth cumulatively declines by 15 percentage points relative to the baseline over four years (2.3 standard deviations from historical mean in the peak year of stress).
- Solvency test results:
  - In the adverse scenario, banks’ capital adequacy ratios could decline to 5.4 percent.
  - Recapitalization needs estimated up to 1.1 percent of regional GDP.
  - Guinea Bissau and Togo: recapitalization needs close to 3 percent of national GDP.
  - Small banks particularly affected: 35 small banks see capital positions fall below minimum requirement in the adverse scenario, joining another 20 banks already undercapitalized.
- Concentration risk reverse stress test:
  - Recapitalization needs due to losses on the largest and up to the ten largest exposures are at 1 to 3 percent of regional GDP.
  - Country-level needs range from 1.5 percent of national GDP for Côte d’Ivoire to 7 percent for Togo.
- Contagion tests:
  - Failure of WAEMU’s largest banking group would lead to the failure of 23 other banks.
  - Recapitalization needs from failure of all interbank positions: 0.3 percent of regional GDP.
  - Country-level needs generally less than 0.2 percent of national GDP, except Burkina Faso (close to 1 percent) and Togo (to a lesser extent).
  - Recapitalization needs rise to about 0.8 percent of regional GDP in case of concomitant defaults of banks’ 10 largest common private exposures or defaults on debt payments due in 2021 and 2022 by the largest common sovereign exposure.
- Interest rate (inflation) stress test:
  - Adverse scenario: inflation uptick to 7 percent in the first year and a gradual reduction to the BCEAO’s 2-percent target over four years.
  - Banks’ return on assets would decline by 2.5 percentage points.
  - Capital adequacy ratios would decline to 3.6 percent.
  - Recapitalization needs reach 1.5 percent of regional GDP.
- Liquidity tests:
  - Stress tests of liquidity coverage ratios (LCR) show most banks (58 of 91) are unable to withstand sudden cash outflows in a severe stress.
  - System-wide liquidity gap in the most adverse scenario: 2.1 percent of GDP.
  - Liquidity capacity heterogeneous, with small banks and banks in certain member countries most affected.

### Policies to Reduce Vulnerabilities
- Additional capital requirement to discourage excessive concentration of sovereign exposures:
  - Calibrate nonlinearly with requirement increasing gradually beyond a minimum concentration threshold based on a bank’s exposure to a specific sovereign relative to its risk-weighted assets.
  - Additional requirement should be based on Basel Pillar 2 or, alternatively, on Pillar 1 with an accompanying macroprudential rule.
  - Difference between approaches: institution in charge (CBU for Pillar 2; BCEAO for Pillar 1) and extent of public disclosure (Pillar 1 entails publication of regulations).
- Supplementary capital requirement could be extended to:
  - Large exposures to private borrowers:
    - Advantage of Pillar 2: accounts for specific concentration factors, correlation of risks between borrowers, and sectoral exposures.
    - Important complement to the Basel large exposure limit—which the authorities are strongly encouraged to implement as planned by 2023.
  - Interest rate risk:
    - Pillar 2 requirement commensurate with maturities and interest rate mismatches in banks’ balance sheets, necessitating regular measurement.
- Liquidity risk internalization and LCR introduction:
  - An LCR requirement expected to be introduced soon and gradually increased to 100 percent by 2028.
  - Guidance on implementation:
    - Haircuts on high-quality liquid assets (HQLA) should reflect assets’ market liquidity as revealed by liquidity indicators; if regulator opts not to apply different haircuts across sovereign issuers, a uniform haircut should be introduced at a minimum.
    - Required reserves could be counted toward HQLA without applying a discount since they are available to absorb temporary liquidity needs.
    - Over time, LCR requirements should be differentiated based on banks’ relative liquidity risk profiles under the Basel Pillar 2 approach.
- Data and supervisory requirements for Basel liquidity ratios:
  - Supervisor should develop capacity to monitor distribution of monthly changes in banks’ funding sources.
  - Introduction of the long-term liquidity ratio should entail regular reporting requirements on residual maturities of banks’ assets and liabilities.

### Financial Sector Supervisory Framework
- Institutional architecture and legal reforms since 2008 FSAP:
  - Clarified mandates of the BCEAO and the CBU; strengthened CBU’s legal autonomy and enforcement powers.
  - BCEAO explicitly charged with ensuring financial stability in addition to preserving price stability.
  - Law on the banking regulatory framework established an overarching framework and introduced risk-based supervision with gradual Basel II/III implementation since 2016.
  - Introduced: macroprudential policy framework, bank resolution regime, and a deposit guarantee fund whose mandate was extended to bank resolution funding.
- CBU independence recommendations:
  - Principle of independence (prohibiting CBU members from receiving instructions from external entities, including member states) should be explicitly enunciated in the CBU’s governing documents (specifically the Annex to the CBU’s governing Convention).
  - CBU’s governing documents should stipulate that commissioners serving because of their status or position in a WAEMU member state’s administration (eight of the 16 members) should do so in a non-voting capacity.
  - Alternative: amend CBU composition to increase representation of CM-nominated commissioners based on professional qualifications.
  - Maintain appeals over CBU decisions only before the WAEMU’s Court of Justice rather than the CM to address institutional independence concerns.
- Macroprudential policy framework and governance:
  - Financial Stability Committee of the WAEMU (CSF-UMOA), created in 2010, includes all regional financial sector regulators and is charged with assessing systemic risks, recommending macroprudential measures, and ensuring coordination.
  - Macroprudential instruments introduced in 2010 include capital surcharges: countercyclical buffer, conservation buffer, systemic buffer; and measures to contain credit growth on loans secured by real estate (ceilings on loan-to-value and debt-service coverage ratios).
    - The systemic buffer is applied solely to regional systemically important institutions.
    - The countercyclical buffer has never been activated.
  - Framework for monitoring systemic risks is well defined but needs to close data gaps and better monitor sectoral vulnerabilities (nonfinancial corporate and household sectors).
  - Recommendations to enhance macroprudential policymaking:
    - Designate the BCEAO as the macroprudential authority responsible inter alia for activating the countercyclical buffer.
    - Grant the CSF-UMOA powers to require macroprudential decision-making entities to “comply or explain” with time limits for implementation or explanation of non-implementation.
    - Strengthen BCEAO capacity to analyze and monitor sectoral vulnerabilities and cover data collection gaps.
    - CSF-UMOA should communicate regularly to the public its systemic risk analyses and policy decisions.

*Source: 1wauea2022003 - 13. The authorities have implemented most recommendations of the 2008 FSAP (Table 4).*

### 38. The BCEAO has undertaken an ambitious regulatory reform. The 2017 publication of four

### 38. The BCEAO has undertaken an ambitious regulatory reform.

### Regulatory reforms and progress
- 2017 publication of four circulars on governance, risk management, internal control, and compliance aligned the regulatory environment more closely with international best practices and imposed stricter regulatory requirements on credit institutions.
- Substantial progress made on aligning regulatory capital requirements with Basel standards.
- Regulatory framework on liquidity risk management standards, published in 2017, appears complete and consistent with the Basel Core Principles.
- The regulatory effort has consolidated the prudential base and established conditions for strengthened supervision.

### Offsite supervision and risk assessment
- Offsite supervision capacity should be enhanced:
  - Conduct cross-cutting analyses more frequently.
  - Further develop the systemic risk map.
- Strengthen stress testing expertise of the Secretariat General of the CBU (SGCB) to ensure adequate risk oversight.
- Amend the methodology for rating credit institutions to:
  - (i) account for market and interest rate risks; and
  - (ii) weigh risk factors by their relative importance, with a higher weight for concentration risk.
- Regular assessment of the robustness and performance of the rating system is required.

### Resources, IT, and onsite supervision
- SGCB teams are experienced and qualified but need further capacity reinforcement to respond to rising complexity and stronger presence of cross-border groups.
- Continued IT investments are needed to optimize and automate offsite supervision toolkits.
- Preventive supervision should be accompanied by vigorous deterrent actions:
  - Increase frequency and intensity of onsite supervision, particularly inspections of banks’ governance and risk management.
  - CBU has various sanctions but has not been sufficiently strict toward entities violating prudential regulations over extended periods, notably on enforcing minimum capital requirements.
  - CBU’s reliance on unpublished written censures and repeated stays of proceedings should be reduced.
  - Publish censures and sanctions to enhance effectiveness; use monetary sanctions more frequently; avoid repeated stays of proceedings where possible.

### AML/CFT supervision
- Reforms following the 2015 Uniform Law and 2017 implementing regulations included:
  - New overall supervisory risk assessment model with risk ratings for each bank.
  - Administration of an AML/CFT-specific bank questionnaire.
  - Issuance of updated onsite inspection checklists.
- Persistent weaknesses:
  - Offsite AML-CFT supervision is underdeveloped and not fully risk based.
  - AML/CFT-related inputs to the risk assessment model are unduly limited.
  - Onsite inspection methodology needs improvements to distinguish lower- and higher-risk domestic politically exposed persons (PEPs).
  - CBU does not cooperate effectively with key partners in and outside the region.
- Recommended steps to implement a risk-based AML/CFT supervisory program and enhance capacity:
  - (i) expand the role of offsite supervision and move to a risk-based model;
  - (ii) require banks to submit, at least annually, basic clientele statistics as additional ML/TF risk indicators, including numbers of foreign customers, high-risk domestic PEPs, and residents of higher-risk regions or countries;
  - (iii) strengthen onsite inspection methodology regarding PEPs, suspicious transaction reporting, and targeted financial sanctions;
  - (iv) improve domestic and international cooperation by eliminating obstacles to information exchange between the CBU and national financial intelligence units, and better use existing powers and tools for information exchange with foreign counterparts;
  - (v) consider establishing an internal pool of AML/CFT expertise to further develop supervisory capacity.
- Note: The risk ratings include global ratings and ratings specific to Money Laundering and Terrorism Financing (ML/TF).

### Systemic liquidity and market development
- Deepen the secondary market for government securities to reduce banks’ liquidity risk by:
  - (i) adding secondary market development as an objective in member states’ medium-term debt strategies;
  - (ii) developing an institutional investor base to foster greater and more stable securities demand;
  - (iii) addressing market segmentation associated with the syndication process (in particular, unify the central depository);
  - (iv) reviewing rights and obligations of primary dealers, notably their role as market makers;
  - (v) strengthening cooperation between the UT and the CREPMF to promote higher transparency and supervision standards.
- Address excessive dependence on BCEAO refinancing:
  - Require banks exceeding a predefined threshold of dependence on BCEAO refinancing to prepare funding plans reviewed and monitored by the BCEAO and the CBU.
  - Under plans, banks expected to reduce BCEAO financing to a predetermined threshold by controlling balance sheet growth and actively raising customer funds.
- BCEAO collateral framework recommendations:
  - Set further haircuts on eligible assets based on risk type to preserve access to refinancing while ensuring risk equivalence.
  - Haircuts should reflect credit and liquidity risk and cover government securities and private claims.
  - Government securities’ haircuts for credit risk should be based on sovereign ratings, with a larger haircut for unrated debt.
  - Introduce concentration limits to ensure diversity of accepted collateral.
- Introduce an ELA framework as a financial stability measure:
  - Provide emergency liquidity to solvent, viable banks facing temporary liquidity pressures after exhausting collateral eligible for monetary policy operations and other funding sources.
  - Provide ELA based on an expanded collateral pool, offsetting BCEAO risks with risk-control measures and conditionality including a repayment plan by the beneficiary bank.
  - Financing terms should discourage use of ELA except as last resort, without jeopardizing the user’s solvency.
  - BCEAO responsible for ELA, cooperating with the supervisor to assess counterparties’ solvency and impose conditionality.

### Crisis management and bank resolution
- A bank resolution framework was established in 2015 but not implemented; several nonviable institutions remain unaddressed.
- Framework should be extended to include liquidation in the resolution toolkit and appropriate safeguards for creditors.
- Undercapitalized, nonviable credit institutions should be promptly liquidated or resolved.
- Resolution Board priorities:
  - Finalize banks’ resolution plans. Publication of regulatory texts in 2020 allowed banks to begin preparing preventive resolution plans.
  - CBU approval of initial resolution plans for systemic institutions and financial corporations is ongoing; authorities need to complete reviews without delay and ensure reasonable funding arrangements to ensure credibility.
  - Mobilize adequate CBU resources to prepare resolution plans and engage foreign resolution authorities.
- Strengthen decision-making independence of financial safety net stakeholders:
  - (i) independence of the CBU Resolution College relative to the Supervisory College and national authorities;
  - (ii) independence of the FGDR vis-à-vis active members of the banking industry.
  - Review of appeals against decisions of the Resolution College should be reserved for WAEMU’s Court of Justice, which has legal competency to determine their legality.
- Funding for bank resolution:
  - Systemic institutions’ loss-absorption capacity appears inadequate.
  - FGDR’s reserves are insufficient to contribute to resolution funding without compromising deposit guarantee mandate.
  - Develop an ambitious strategy to accelerate FGDR’s ability to attain a reasonable target for coverage of eligible deposits with available reserves.
  - Establish a recourse mechanism to enable the FGDR to tap member states’ resources for resolution funding or reimbursement of insured depositors in case of liquidation.

### Financial sector development
- Develop a multipronged strategy to improve access to finance while mindful of financial stability:
  - Address lack of SME funding via: (i) more efficient debt enforcement procedures; (ii) extending credit bureau information; (iii) fostering competition in the financial sector.
  - Ensure competition-enhancing measures establish a level playing field across private and public banks, with formal analyses of regulatory impact on competition and financial stability implications.
  - Social security institutions, which manage close to 5 percent of regional GDP, could play a more active role in developing the capital market as institutional investors.
- Payments and fintech:
  - WAEMU has a solid regional payment system; further digitalization of retail payments would reduce transaction costs and improve welfare.
  - National treasuries plan to issue electronic money to better serve populations with limited digital access and accelerate availability of public sector funds.
  - Revamp legal framework to support new payment methods and operators, including fintech firms, and to protect customers and safeguard financial integrity.
- Public banks governance:
  - Strengthen governance to refocus business models toward funding underbanked segments (e.g., SMEs).
  - Address compliance and capital adequacy issues persistently experienced by some public banks.
- Green strategy for the financial system:
  - Adopt a green strategy with dedicated governance and resources.
  - Develop capacity to evaluate climate risks’ impact on the financial system and establish outreach among supervisors and financial institutions.
  - In the medium term, supervisors should define prudential expectations for inclusion of climate risk in risk management and disclosure frameworks, develop a uniform taxonomy for green assets, seek commitments from financial institutions to WAEMU’s and the Paris Accord’s climate goals, and encourage issuance of green sovereign debt to stimulate the green finance market.

### Key macrofinancial indicators and stress testing findings (selected)
- Banks’ assets account for 51.3 percent of GDP.
- Public banks and social security institutions manage close to 5 percent of regional GDP.
- Aggregate capital adequacy ratio reached 12.4 percent in 2020.
- Solvency stress test severe scenario: cumulative GDP growth shock of 15 p.p. relative to baseline.
- Under the severe scenario, capital ratios decline by 6 percentage points.
- Post-shock, 35 (small) banks’ capitalizations fall below the minimum requirement, joining 20 already undercapitalized banks.
- Resolution Board approved resolution plans for five systemically important banks on December 13, 2021.
- The CBU’s Supervisory Board started publishing disciplinary and financial sanctions since December 2021.

### Authorities’ views (selected)
- Authorities appreciated FSAP discussions and noted progress on the regulatory framework, supervision processes, and financial digitalization.
- Observations and actions noted by authorities:
  - Further thought on member states’ representation at the CBU.
  - Reinforcement of supervisory resources is important; initiatives include a dedicated IT budget and capacity development with the Regional Banking Training and Studies Center and the IMF.
  - Publishing disciplinary and financial sanctions since December 2021 to enhance deterrent impact.
  - CBU’s Resolution Board prepared and approved resolution plans for five systemically important banks (December 13, 2021).
  - FGDR contribution rate and 10-year horizon for reaching target reserves set based on banks’ ability to service contributions and in line with international practices.

*Source: IMF staff summary of WAEMU FSAP chapter.*

### 0.7 percent of regional GDP.

### 1wauea2022003 - 0.7 percent of regional GDP.

### Interbank contagion and recapitalization needs
- Banks in Burkina Faso and Togo are most exposed to interbank contagion.
- WAEMU-wide outcomes from contagion due to direct interbank exposures:
  - Capital losses: 0.7 percent of regional GDP.
  - Recapitalization needs: 0.3 percent of regional GDP.
- Selected national results (capital losses / recapitalization needs):
  - Benin: 1.2 / 0.9
  - Burkina Faso: 0.3 / 0.17
  - Côte d’Ivoire: 0.2 / 0.12
  - Mali: 0.1 / 0.08
  - Niger: 0.1 / 0.04
  - Senegal: 0.6 / 0.09
  - Togo: 1.1 / 0.5

### Contagion from large common private exposures
- Cumulative large exposures and resulting impacts:
  - 10 largest common exposures: Capital losses 1.62 / Recapitalization needs 0.85
  - 20 largest common exposures: Capital losses 2.21 / Recapitalization needs 1.22
  - 30 largest common exposures: Capital losses 2.66 / Recapitalization needs 1.57
  - 40 largest common exposures: Capital losses 2.99 / Recapitalization needs 1.88
  - 50 largest common exposures: Capital losses 3.25 / Recapitalization needs 2.07

### Contagion due to sovereign exposures
- Scenario: Issuing country defaults on payments due in 2021 and 2022.
- Country results (capital losses / recapitalization needs):
  - Benin: 0.2 / 0.06
  - Burkina Faso: 0.4 / 0.1
  - Côte d’Ivoire: 1.7 / 0.8
  - Guinea-Bissau: 0.1 / 0.04
  - Mali: 0.4 / 0.15
  - Niger: 0.4 / 0.13
  - Senegal: 0.2 / 0.05
  - Togo: 0.2 / 0.06

### Interest rate risk and inflation-at-risk scenario
- Adverse “inflation-at-risk” scenario: shock pushes inflation up to 7 percent.
- Method: densities of macrofinancial variables obtained via satellite density models.
- Bank clustering: based on profitability, capital ratios, nonperforming loans, and balance sheet size; profitability modeled via quantile regressions by cluster and risk level.
- Stress test outcomes:
  - Assets profitability could deteriorate by 2.5 percentage points under the adverse scenario.
  - WAEMU-wide capital needs in the adverse scenario are limited: 1 .2 percentage points of GDP even at the 90-percent risk level.

### Liquidity risk stress tests and LCR outcomes
- Large share of banks across the region have an LCR below 100 percent; most banks’ LCR falls in the 25 to 50 percent range.
- Large banks’ LCR distribution tends to be clustered in the 50-125 percent range; small banks up to the 75 percent range.
- Most adverse scenario:
  - HQLA deficit would be at 2.1 percent of GDP, with country dispersion.
  - Inadequate HQLA for 58 banks, mostly in the largest WAEMU jurisdictions.

### Liquidity stress test run-off and haircut assumptions
- Run-off rates by deposit size (Moderate / Severe):
  - Deposits ≤ 1 000 000 FCFA: 5% / 10%
  - Deposits >1 000 000 FCFA et ≤10 000 000 FCFA: 5% / 10%
  - Deposits >10 000 000 FCFA et ≤100 000 000 FCFA: 10% / 20%
  - Deposits >100 000 000 FCFA et ≤1 000 000 000 FCFA: 10% / 20%
  - Deposits >1 000 000 000 FCFA et ≤10 000 000 000 FCFA: 20% / 40%
  - Deposits >10 000 000 000 FCFA: 20% / 40%
- Run-off rates by depositor type (Moderate / Severe):
  - Households: 5% / 10%
  - SMEs: 10% / 20%
  - Large companies: 20% / 40%
  - Financial institutions: 20% / 40%
  - Central and local public administrations: 20% / 40%
  - Non-residents: 20% / 40%
- Interbank borrowing run-off:
  - Unsecured borrowing: 50% (Moderate) / 100% (Severe)
  - Secured borrowing: 0% / 0%
- Assumed HQLA depreciation haircuts (Moderate / Severe):
  - Cash: 0% / 0%
  - Reserves at BCEAO: 0% / 0%
  - Sovereign debt securities (Benin, Burkina Faso, Côte-d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo): 10% / 30%

### Stress testing framework, methodology, and key modeling assumptions
- Institutional and dataset coverage:
  - Institutions included: 99 banks (almost all banks, with some exceptions due to missing data for very small banks).
  - Market share: More than 95 percent of banking sector assets in the region.
  - Data and baseline date: 2000–2020 (macro data), 2010–2020 (banking data); reference date: Q4 2020.
  - Bank-by-bank data include historical series over about ten years for balance sheets, P&L statements, equity, credit breakdowns, securities holdings, credit risk, concentration risk, interest rate risk, foreign exchange risk, liquidity risk.
- Risk propagation and modeling:
  - A macroeconomic growth-at-risk model projects the future distribution of real GDP growth as a function of current macrofinancial conditions.
  - Propagation of risks captured by nonlinear density estimators; a density projection model was developed for low-income countries, robust to measurement errors and small samples.
  - Banks divided into four groups via statistical learning methods; conditional distribution of doubtful debts estimated separately by group to predict rises in PDs under each scenario and risk level.
  - Loss recovery assumptions are ad hoc due to lack of historical data.
  - Credit portfolio stress test uses a static balance sheet method with estimation of PDs, calculation of default losses, equity absorption.
  - The same methodology used to estimate an inflation-at-risk model and its impact on banks’ capital.
- Satellite models and horizon:
  - Satellite models infer dynamics of macroeconomic variables (interest rate, inflation, etc.) based on estimated growth-at-risk (or inflation-at-risk) and stress paths over a three-year horizon.
  - Stress testing horizon: Four years, 2021–24.
- Scenarios, tail shocks, and sensitivity:
  - Two scenarios: a baseline scenario and an adverse scenario.
  - Scenarios entail a recovery-at-risk framework modeling slow U-shaped recovery and rapid V-shaped recovery.
  - Baseline aligned with the IMF’s latest World Economic Outlook and consistent with the WAEMU’s Article IV.
  - Adverse scenarios structured dynamically from: (i) macroeconomic shocks of the Article IV report’s Risk Assessment Matrix (RAM); (ii) historical crisis paths in the WAEMU; and (iii) level of assumed risk (e.g., value at risk of 5 percent).
  - Sensitivity analysis for concentration risk via ad hoc tests of defaults of largest borrowers and withdrawals of largest depositors.
- Behavioral and modeling assumptions:
  - Banks’ balance sheet compositions and sizes assumed static over the stress period.
  - Dividend distributions permitted only for banks that meet regulatory capital requirements and have positive profits.
  - Loss recovery assumptions and some calibration elements are ad hoc due to limited historical data.

*Sources: BCEAO and IMF staff calculations; IMF staff.*

### 5. Regulatory and

### 5. Regulatory and market-based standards and parameters

### Calibration of risk parameters
- Risk parameters are estimated via density models using structural relationships and estimated distributions conditional on the macrofinancial conditions at the reference date.
- The approach permits time series modeling of relationships while accounting for the already exceptionally strong shock of COVID-19.
- Risk paths are calibrated—in distribution percentiles—on the WAEMU’s crises of 1982, 1994, and 2011, enabling different (U-shaped and V-shaped) recoveries to be captured.

### Regulatory, accounting, and market-based standards
- Use of regulatory ratios and minimum capital requirements imposed by the BCEAO as IMF stress test standard.

### Reporting format for results (capital stress)
- Output presentation includes:
  - A decline in banking sector capital during the stress period, under different scenarios.
  - Number of banks and share of banking sector assets of banks whose capital falls below the regulatory minimum.
  - Recapitalization needs in percent of GDP.

---

### Banking sector: liquidity risks

### Institutional perimeter
- Institutions included:
  - 99 banks or almost all banks with some exceptions due to missing data for very small banks with insignificant activity.
- Market share:
  - More than 95 percent of banking sector assets in the region.
- Data and baseline date:
  - Reference date: Q4 2020.
  - Bank-by-bank data provided by the authorities include historical series over about ten years for:
    - The balance sheet.
    - The five largest deposits, the distribution of deposits by amounts, and a breakdown of deposits by type of depositor (non-financial enterprises and households).

### Risk propagation channels
- Methodology:
  - Sensitivity test entailing withdrawals by the largest depositors, taking into account the nature of the largest depositors (households and corporates) and the estimated stability of deposits.
  - Sensitivity test based on the classification of liquid assets, particularly government securities.

### Risks and buffers
- Risks:
  - High deposit concentration.
  - Illiquidity of secondary markets.
  - Dependence on central bank financing.
- Buffers:
  - Excess reserves.

### Tail shocks
- Size of the shock:
  - Withdrawals differentiated by deposit sizes.
  - Withdrawals differentiated by type of depositors.

### Regulatory and market-based standards and parameters (liquidity)
- Regulatory standards:
  - Not applicable.

### Reporting format for results (liquidity)
- Output presentation includes:
  - Number of banks breaching the LCR.
  - Liquidity gap as a percentage of GDP.

---

### Appendix II. Risk Assessment Matrix — selected risks

- RAM 1: A lethal and highly contagious local outbreak of COVID-19 leads to subpar/volatile growth.
  - Relative Probability/Horizon: High
  - Expected Impact if Realized: High
  - Timeframe: Short to medium term
  - Key channels and impacts:
    - Low vaccination rates raise the probability of reimposing containment measures, leading to weaker economic growth, worsened fiscal situation, and elevated debt sustainability concerns.
    - New costly containment measures, including large-scale lockdowns, lead to a contraction in private sector demand that cannot be redressed by the public sector due to limited fiscal space.
    - Slowdown in economic growth leads to a deterioration in banks’ asset quality; impact exacerbated by weaknesses in the WAEMU’s health system.

- RAM 2: A systematic deterioration of the security situation in the region.
  - Relative Probability/Horizon: Medium
  - Expected Impact if Realized: High
  - Timeframe: Short to medium term
  - Key channels and impacts:
    - Intensification of security incidents and spillovers can slow economic activity and impair public finances and policy implementation.
    - Impaired domestic demand in one or two countries with spillovers to others leads to deterioration in banks’ asset quality.

- RAM 3: De-anchoring of inflation expectations in the U.S. and/or advanced European countries leading to a rise in interest rates and risk premia.
  - Relative Probability/Horizon: Medium
  - Expected Impact if Realized: High
  - Timeframe: Short to medium term
  - Key channels and impacts:
    - Unanchoring of U.S. inflation expectations could prompt early U.S. monetary policy tightening.
    - Tighter global financial conditions and higher risk premia for frontier markets would negatively affect capital inflows and official foreign reserves in the WAEMU.
    - Loss of global market access, decline in foreign reserves, interest rate spike, accelerated fiscal correction, higher interest rates and crowding out of private sector demand lead to credit contraction and deterioration in banks’ asset quality; interest rate increase squeezes banks’ margins.

- RAM 4: Rising and volatile food and energy prices.
  - Relative Probability/Horizon: High
  - Expected Impact if Realized: Medium
  - Timeframe: Short to medium term
  - Key channels and impacts:
    - Raw material prices rise more than expected due to pent-up post-pandemic demand and supply disruptions; uncertainty leads to volatility, particularly in oil prices, with fiscal implications given the WAEMU’s status as a net oil importer.
    - Accelerated fiscal correction could dampen public sector demand and spill over to private sector demand; contribution of external demand to GDP growth declines or turns negative.
    - Rise in inflation and drop in foreign reserves lead to higher interest rates and lower private sector demand; slowdown in growth leads to deterioration in banks’ asset quality and squeezes banks’ profitability.

- RAM 5: A rise in the frequency and intensity of natural disasters related to climate change.
  - Relative Probability/Horizon: Medium
  - Expected Impact if Realized: High
  - Timeframe: Short to medium term
  - Key channels and impacts:
    - Negative effects on agricultural production and exports, increased need for subsidies, and reduced population standard of living.
    - Reduced yields on food crops dampen growth due to lower net exports; asset quality of banks with agricultural exposures is impaired directly as yields drop.
    - Government exposure guarantees pass the losses to the public sector; use of subsidies diverts resources from more productive uses and reduces the growth impact of public expenditure.
    - The small size of exposures dampens the impact.

*Source: 1wauea2022003 - 5. Regulatory and market-based standards and parameters*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022003.pdf_