## 1wauea2022008 ## Source details **Canonical URL:** [1wauea2022008](https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1wauea2022008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1wauea2022008.pdf.json) --- ### Executive summary — Key findings and recommendations - BCEAO conducted comprehensive reform during the past five years; regulatory and prudential framework aligned with international standards; remaining gaps: liquidity ratio/net stable funding ratio tools for monitoring liquidity, transfers of ownership, acquisitions of holdings, guidelines on nonperforming claims, and AML-CFT. - Transition to Basel III enabled additional capital requirements; 2017 circulars on governance, risk management, internal supervision, and compliance upgraded rules for credit institutions. - Supervision resources increased but insufficient given: - changes in banking sector number and complexity, - substantial risk factors in credit institutions: credit, concentration, information systems, and AML-CFT. - Resource shortages harmed forward-looking risk analysis (stress tests). Recommendations: - increase frequency of cross analyses and expand systemic risk mapping; - continue investments in information technology to optimize and automate Off-site Supervision Directorate tools. - Supervision mechanisms need strengthening despite risk-based approach adoption: - update Off-site Supervision Directorate rating system to reflect various risks and include banking groups; - consolidate reporting to monitor current risks (ICAAP and AML-CFT) and emerging risks (interest rate risk in the banking book); - enhance on-site supervision of groups; increase number and duration of topical missions on risk management, governance, and AML-CFT; - schedule comprehensive review of asset quality for credit risk; - CBU should make greater use of Pillar 2 to address institution-specific risk factors (concentration in sovereign risk and credit exposure to the private sector). - Institutional reforms since 2008 clarified BCEAO and CBU responsibilities, strengthened CBU legal autonomy and implementation powers, introduced bank resolution system, and established a deposit guarantee fund. - Areas for institutional improvement: - strengthen conditions for CBU independence (limit influence of country representatives on Supervision Board; introduce Board independence from countries into Annex to the Convention). - Enforcement should be more vigorous: - corrective measures (particularly reprimands) insufficient given observed prudential and AML-CFT violations; - CBU might issue more fines and publish decisions for deterrence; - credit institutions with negative equity should be closed; - Pillar 3 financial transparency requirements have yet to be observed. ### Assessment methodology, scope, and timeline - Assessment based on September 2012 Basel Core Principles review; essential criteria (EC) used for compliance; additional criteria (AC) as best practices. - Compliance ratings used: Compliant (C), Largely Compliant (LC), Materially Non-Compliant (MNC), Non-Compliant (NC). - Evaluation conducted September 7–28, 2021, focused on CBU banking supervision framework and practice. - Scope: credit institutions (banks and bank‑like financial institutions). No specific investigations of microfinance and electronic money sectors. - Survey participation: total responses 139 institutions — 124 banks; 14 financial institutions; 1 unclassified. - Interviews on July 19, 22, 23 and August 24, 25, 2021. ### Institutional framework and governance - Four institutional players: - WAMU Council of Ministers: defines regulatory environment (Article 17 of WAMU Treaty). - BCEAO: strengthen WAMU financial system, contribute to accounting and prudential regulations, support CBU via resources. - CBU: organization and supervision of credit institutions; powers to issue administrative and disciplinary penalties. - Minister of Finance: decision-making authority on licensing and certain authorizations; must obtain CBU opinion. - CBU governance: - Chaired by Governor of BCEAO. - SGCB comprises six directorates: Crisis Resolution & Legal Affairs; Studies & International Relations; Off-site Supervision (DSP); On-site Supervision of Credit & Electronic Money Institutions (DCPEME); On-site Supervision of Decentralized Financial Systems (SFD); General Resources. - Independence and accountability issues: - Supervision Board: Governor plus 16 members — eight country representatives and eight Council-appointed experts. - Recommendation: strengthen Supervision Board independence (selection criteria, transparency, limit country influence, consider non‑voting participation). ### Market infrastructure and banking system structure (end‑2020 aggregates) - WAEMU financial sector shallow and banking-based; banking sector accounts for more than half of WAEMU GDP. - CSF-WAMU aggregate figures (end of 2020): - Banks: Total Assets 47,718.50 (Billions of CFAF); Percentage of WAEMU GDP 53.87%; Percentage of WAEMU Financial Sector Assets 72.35% - Decentralized Financial Systems: Total Assets 2,561.00; Percentage of WAEMU GDP 2.89%; Percentage of WAEMU Financial Sector Assets 3.88% - Securities Custodians: Total Assets 8,494.90; Percentage of WAEMU GDP 9.59%; Percentage of WAEMU Financial Sector Assets 12.88% - Insurance: Total Assets 1,964.46; Percentage of WAEMU GDP 2.22%; Percentage of WAEMU Financial Sector Assets 2.98% - Pension Funds: Total Assets 5,215.50; Percentage of WAEMU GDP 5.89%; Percentage of WAEMU Financial Sector Assets 7.91% - Total: Total Assets 59,935.82; Percentage of WAEMU GDP 74.46%; Percentage of WAEMU Financial Sector Assets 100% - Number and distribution of supervised institutions (end-2020): - Licensed credit institutions: Total 152 (Banks 131; Bank-like Financial Institutions 21) - Decentralized financial systems: 188 institutions - Electronic money institutions: 12 - Distribution by country (CBU, end-2020 totals): - Benin: Total 15 - Burkina Faso: Total 19 - Côte d'Ivoire: Total 30 - Guinea Bissau: Total 5 - Mali: Total 17 - Niger: Total 18 - Senegal: Total 31 - Togo: Total 17 ### Ownership, groups, and concentration (end‑2020) - Banking groups and market shares: - Licensed credit institutions: 152 - Banks with majority public ownership: 16 - Banking groups active in WAMU: 32 - Financial companies active in WAMU: 17 - Ownership concentration: - 73 percent of banks owned by 32 banking groups. - These 32 groups account for: - 85 percent of banking sector assets, - 83 percent of automated teller machines, - 84 percent of bank accounts. - Systemic institutions (2019 methodology; 2020 list and shares): - Six systemically important banking groups at regional level. - 22 systemically important banks at national level. - Aggregate: Total National Systemic Institutions: 22 — Total Balance Sheet 18,957.7 (Billions of CFAF) — Share in Total WAMU Banking Assets 39.7% - Total Regional Systemic Institutions: 6 — Total Balance Sheet 6,725.7 (Billions of CFAF) — Share in Total WAMU Banking Assets 14% - Country-level systemic balances (end-2020): - Benin: 2 — 1,819.9 — 3.8% - Burkina Faso: 4 — 3,666.3 — 7.7% - Côte d’Ivoire: 3 — 5,645.2 — 11.8% - Guinea Bissau: 1 — 75.8 — 0.2% - Mali: 3 — 2,385.4 — 5% - Niger: 3 — 944.0 — 2% - Senegal: 4 — 3,248.2 — 6.8% - Togo: 2 — 1,172.9 — 2.5% ### Banking sector business models and asset composition (end‑2020) - More than 74 percent of WAEMU banks are traditional full‑service banks; specialized banks (housing, agriculture, long‑term financing) and providers of mobile payment, leasing, factoring have emerged. - Asset composition (end-2020): - loans to customers 60.3 percent; - investment securities 25.9 percent (mostly government securities). - Loan maturity breakdown: - short-term 51.5 percent; - medium-term 39.2 percent; - long-term 4.4 percent. - Liabilities composition: - deposits and borrowing 85.3 percent (demand deposits 46 percent; time deposits 39 percent); - capital and other resources 14.7 percent. ### Concentration and capital metrics (end‑2020 & 2018–2020 changes) - Concentration compliance: - Only 27 institutions complied with 25 percent large exposure limit at end-2020 — 21.4 percent of supervised institutions. - Key prudential indicators (WAMU 2018–2020 and Change 2020/2019): - Effective Capital in Billions of CFAF: 2,565.90 (2018); 2,873.4 (2019); 3,284.0 (2020) — Change 2020/2019: 14.0% - Weighted Assets in Billions of CFAF: 23,662.00 (2018); 24,865.1 (2019); 26,473.5 (2020) — Change 2020/2019: 6.0% - Total Solvency Ratio: 10.8% (2018); 11.6% (2019); 12.4% (2020) — Change 2020/2019: 0.8 - Leverage Ratio: 6.3% (2018); 6.2% (2019); 6.4% (2020) — Change 2020/2019: 0.2 - Liquidity Ratio: NA (2018); 100.5% (2019); 105.8% (2020) — Change 2020/2019: 5.3 - Liquidity requirement compliance (December 31, 2020): - 108 credit institutions met the liquidity requirement, accounting for 85.9 percent of assets and 90.5 percent of weighted risks; average sector liquidity ratio 105.8 percent. - Solvency sector outcome: - Solvency ratio for the banking sector: 12.4 percent at end-2020. - Approximately 20 institutions (largely state‑owned banks) had failed to meet minimum solvency ratio; some banks had negative equity. ### Pandemic response measures and resilience (COVID‑19) - Measures by BCEAO and Union: - increased central bank liquidity supply; - one‑year extension of timetable for implementing transitional prudential measures transposing Basel II and Basel III (Council of Ministers decision June 26, 2020); - mechanism to support enterprises: BCEAO invited credit institutions to grant deferral of loan maturities for three months, subject to one renewal, without interest charges, fees, or late penalties; accounting and prudential treatment relaxed. - Sector performance 2021 H1 (BCEAO note at June 30, 2021): - gross portfolio impairment ratio: 11.4 percent at end-June 2021; - solvency ratio: 12.4 percent at end-May 2021; - stock of deferred maturities: CFAF 769.4 billion at end-December 2020; CFAF 306.5 billion at June 30, 2021 (fully reimbursed credit operations taken into account); - payment pattern recovery: 77.5 percent of outstanding balance at end-June 2021 regained normal payment pattern; 22.5 percent downgraded to overdue claims. ### Preconditions for effective supervision — macroeconomic and institutional themes - Macro performance pre-pandemic: - GDP growth averaged 6 percent per annum during eight years up to 2019; - inflation below 2 percent; - external reserves: 4.3 months of imports in 2019. - Pandemic effects in 2020: - GDP growth 1.5 percent in 2020 (compared with 5.7 percent in 2019); - regional budget deficit 5.8 percent of GDP in 2020 (up from 2.4 percent in 2019); - inflation annual average: -0.7 percent (2019) to 2.1 percent (2020). - Outlook: - growth expected to return quickly to precrisis level in 2021–2022, dependent on external risks and preserving fiscal and external equilibria. - Monetary cooperation reform: - establishment of the ECO suspended; reform expected to enter into force in 2027 for countries meeting convergence criteria including budget deficit < 3 percent of GDP. ### Financial stability institutional arrangements - BCEAO conducts systemic risk assessments via macroprudential policy committee; macroprudential policy objectives not yet defined — to be addressed in strategic action plan. - Financial Stability Committee (CSF‑WAMU) coordinates systemic risk assessment; mandate per Memorandum of Understanding May 20, 2010. - Limitations: - CSF‑WAMU lacks leverage to guarantee implementation of recommendations; - macroprudential analyses and risk assessment results not currently reported publicly. ### Public infrastructures, accounting, audit oversight, and payments - Revised banking chart of accounts (PCBR) adopted to converge with Basel Standards and IFRS; work in progress on full IFRS application including IFRS 9. - Uniform Act on Accounting Law and Financial Reporting (AUDCIF) in force since January 1, 2018 — requires annual financial statements by enterprise size; many SMEs cannot maintain standardized accounting systems. - 2018 circular on audit office operating conditions strengthened control over auditor appointment and activities; CBU approval required for appointment/renewal. - Payments ecosystem modernized; BCEAO operates regional information databases (risk reporting center, payment incident reporting center, balance sheet reporting center) and credit information bureaus (BIC); deployment ongoing. ### Crisis management, recovery, and resolution framework - Banking Commission is resolution authority via Resolution Board (entered into force 2017). - Resolution Board powers broad and legal autonomy present but resolution measures do not include liquidation. - Gaps: - lack of explicit authority to require continuity for critical services from group operational entities (regulated or not); - CBU not explicitly exempt from requirement to provide advance notice to shareholders before exercising powers; lacks power to cancel preemptive rights of shareholders in defaulting institutions. - urgent cases: Resolution Board may adopt provisional resolution measures without procedure ensuring input from both parties; decisions appealable only to Council of Ministers. - Recovery plans: - delays in establishing timetables and in submissions from some institutions have delayed analysis and assessment of plan quality. ### Deposit Guarantee and Resolution Fund (FGDR) - FGDR established 2014: legal status and financial autonomy; two separate funds funded by supervised institutions’ contributions. - FGDR not yet fully independent: board of directors lacks decision‑making power over all prerogatives; board composition mainly industry representatives; insufficient legal protection for board members. - Operational capacity developing (recruitment and staff training); depositor compensation mechanisms not yet adopted due to failure to validate circular. - Repayment deadlines exceed seven-day period common in international practice. - Note: recommendation to significantly increase FGDR financial reserves. ### Market discipline, governance, and Pillar 3 transparency - 2017 governance circular demanding and consistent with best practices; corporate governance primarily regulated by OHADA Uniform Act. - Financial transparency insufficient relative to international standards: - SME credit relies on customer reputation rather than audited accounts; - Pillar 3 requirements introduced in 2016 but not yet operational or supervised; implementing text not published; draft instruction not communicated; some banks publish no financial information on websites. ### AML‑CFT framework and implementation (paras. 70–71) - Legislative and regulatory provisions sometimes vague (remote onboarding, additional vigilance, PEPs) or not applied; risks reduced AML‑CFT effectiveness. - Process of drawing up national asset freeze lists not operational in all jurisdictions; national committees not established in some countries. - Serious shortage of institutional cooperation: BCEAO and CENTIFs have yet to formally establish memorandum of understanding on information sharing. - Significant inadequacies in implementation by institutions; supervisory focus and resources for AML‑CFT need strengthening. ### Summary of Core Principles assessment — selected outcomes (highlights) - CP1 (Responsibilities, objectives, powers) — LC: - regulatory and supervision architecture complex; BCEAO prudential powers cause confusion; draft banking law expected to consolidate system; pillars 2/3 not yet fully used. - CP2 (Independence, accountability, resourcing, legal protection) — MNC: - CBU independence affected by country representation on Supervision Board; staff protection and reporting gaps; insufficient supervision staffing. - CP6 (Transfer of significant ownership) — MNC: - thresholds for approval excessive (blocking minority ~33.3% used in practice); beneficial owner checks absent; no explicit power to cancel unauthorized changes. - CP7 (Major acquisitions) — NC: - legal framework does not define categories/amounts of acquisitions requiring prior approval; ex‑post analysis predominates. - CP8 (Supervisory approach) — MNC: - SNEC rating system consistent but with weaknesses; SNEC not used for groups/EMIs; limited capacity for forward‑looking risk identification and stress testing. - CP11 (Corrective and sanctioning powers) — NC: - preventive action not combined with enforcement commensurate with risks; fines ceilings insufficiently deterrent; provisional administration period undefined. - CP12 (Consolidated supervision) — MNC: - system established 2016 but not guaranteeing group monitoring; 14 groups granted exemptions; on-site supervision limited. - CP16 (Capital adequacy) — LC: - significant progress integrating Basel‑consistent capital requirements; mechanisms (AT1 conversion, countercyclical buffer, Pillar 2) not fully operational. - CP23 (IRRBB) — MNC: - supervisory methodology and information insufficient; interest rate risk rising with increasing long-term government securities share. - CP24 (Liquidity risk) — LC: - progress on LCR/NSFR implementation; current short-term liquidity ratio in use; monitoring tools and consolidated application incomplete. - CP27–CP28 (Financial reporting; Disclosure) — LC / MNC: - chart of accounts revised; IFRS 9 not mandatory; Pillar 3 disclosure not operational or supervised. - CP29 (Abuse of financial services / AML‑CFT) — NC: - vague provisions, incomplete national implementation, weak cooperation, and supervisory shortcomings. ### Recommended action plan — selected priority actions (by principle) - Strengthen CBU independence and governance: - revise Supervision Board appointment/selection; introduce transparency on removal reasons; complete BCEAO divestiture from bank holdings; strengthen legal protection for supervisory staff. - Supervisory resourcing and tools: - increase SGCB staffing (particularly off‑site supervision); budget for external consultants; continue IT investments (implement off-site tool, SCAN‑R extension). - Supervisory methodology and enforcement: - update SNEC rating methodology and conduct regular ex‑post reviews; create group rating tools; set minimum frequencies for on‑site inspections differentiated by risk; increase topical missions on risk management, governance, AML‑CFT, and interest rate risk in banking book. - finalize ICAAP/ILAAP templates and Pillar 2 implementation; use Pillar 2 to address sovereign and concentration risks. - apply stronger enforcement: use full range of penalties, increase fines, publish penalties, avoid consecutive deferrals, and consider closure of institutions with negative equity. - Credit quality and provisioning: - schedule comprehensive asset quality review for banks with very high impaired loan ratios (>30% suggestion in recommendation context); formalize guidelines on doubtful assets classification, collateral valuation, and assessor selection; expedite tax transposition for write‑offs. - Concentration and large exposures: - require systems for identifying related parties and large exposures; implement timetable and support measures to reach 25 percent large exposure limit by target date; encourage syndicated loans, capital increases, and Pillar 2 action plans where needed. - Liquidity and IRRBB: - finalize timetable for LCR/NSFR implementation; require LCR/NSFR reporting and interim monitoring tools; subject institutions to quantitative reporting on IRRBB exposures and require stress testing including interest rate scenarios. - Market discipline and Pillar 3: - finalize implementing text for Pillar 3 disclosure, require publication on websites, and supervise compliance. - AML‑CFT: - formalize BCEAO–CENTIF memorandum of understanding; develop AML‑CFT expertise center in SGCB; formalize FATF Recommendation 34–consistent guidelines on remote onboarding, PEPs, suspicious reporting to supervisor, and correspondent banking; increase topical AML‑CFT missions and stronger sanctions for violations. - Consolidated supervision and cross‑border cooperation: - expand cooperation agreements with home/host supervisors; plan periodic bilateral meetings with CREPMF, CIMA, CIPRES; strengthen supervision boards and colleges for cross‑border groups; establish policy on intermediary financial holding company requirements. *Source: Detailed Assessment (Executive Summary and conclusions, selected sections) of the WAMU Banking Supervision FSAP (PDF content unit 1wauea2022008).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Key Findings and Recommendations - The BCEAO has conducted a comprehensive reform during the past five years. The regulatory and prudential framework were aligned with international standards and the conditions for supervision have been strengthened, although efforts must be continued (liquidity ratio/net stable funding ratio and tools for monitoring liquidity, transfers of ownership, acquisitions of holdings, guidelines on nonperforming claims, and anti-money laundering and combating the financing of terrorism—AML-CFT). - The transition to Basel III has made it possible to incorporate additional capital requirements, while the rules applicable to credit institutions were upgraded with the 2017 publication of four circulars on governance, risk management, internal supervision, and compliance. - More resources have been allocated to supervision, but they appear insufficient given: - the changes occurring in the banking sector (the number of institutions and their complexity), - substantial risk factors within credit institutions (credit, concentration, information systems, and AML-CFT). - Resource shortages have particularly harmed forward-looking risk analysis (stress tests). Recommendations include: - increase frequency of cross analyses and expand systemic risk mapping; - continue investments in information technology to optimize and automate Off-site Supervision Directorate tools. - Supervision mechanisms need strengthening despite adoption of a risk-based approach: - update Off-site Supervision Directorate rating system to reflect various risks and include banking groups; - consolidate the reporting system to monitor current risks (ICAAP and AML-CFT) and emerging risks (interest rate risk in the banking book); - enhance on-site supervision of groups and increase number and duration of topical missions on risk management, governance, and AML-CFT; - schedule a comprehensive review of asset quality for credit risk; - CBU should make greater use of Pillar 2 to address institution-specific risk factors (concentration in sovereign risk and credit exposure to the private sector). - Institutional reforms since the 2008 FSAP clarified BCEAO and CBU responsibilities, strengthened CBU legal autonomy and implementation powers (particularly licensing), introduced a bank resolution system, and established a deposit guarantee fund. - Areas for institutional improvement: - strengthen conditions required for CBU independence (limit influence of country representatives on the Supervision Board and introduce Board independence from the countries into the Annex to the Convention). - Enforcement should be more vigorous: - corrective measures (particularly reprimands) are insufficient given observed violations in prudential and AML-CFT areas; - CBU might issue more fines and publish decisions for deterrence; - credit institutions with negative equity should be closed; - Pillar 3 financial transparency requirements have yet to be observed. ### Introduction, Scope, and Assessment Methodology - The assessment of compliance with the Basel Fundamental Principles for Effective Banking Supervision was carried out within the FSAP of the West African Monetary Union (WAMU). - The evaluation was conducted during September 7-28, 2021, and focused on the banking supervision framework and practice of the WAMU Banking Commission (CBU). - Scope covered credit institutions (banks and bank-like financial institutions). No specific investigations were conducted on the regulatory framework or supervision of the microfinance and electronic money sectors. - Methodology: - Based on the September 2012 review of the Core Principles by the Basel Committee on Banking Supervision. - Used essential criteria (EC) for compliance and additional criteria (AC) as best practices (comments provided but not rated). - Compliance ratings: Compliant (C), Largely Compliant (LC), Materially Non-Compliant (MNC), Non-Compliant (NC), and "not applicable" under certain conditions. - The assessment was qualitative, reviewing self-assessments by the CBU and BCEAO (July 2021), legislative and regulatory framework, CBU policies and practices, and a 2021 FSAP survey of banking institutions. - Survey participation: A total of 139 institutions responded, including 124 banks, 14 financial institutions, and one unclassified institution. - Interviews were also conducted on July 19, 22, and 23 and on August 24 and 25, 2021. - The mission received broad cooperation from SGCB and BCEAO interlocutors; some confidential documents were made available at BCEAO offices in Paris. ### Institutional Framework for Banking Regulation and Supervision - Four institutional players interact in WAMU banking regulation and supervision: - The WAMU Council of Ministers: defines regulatory environment per Article 17 of the WAMU Treaty. - The BCEAO: duties include strengthening the WAMU financial system and technical/professional capacities, contributing to development of accounting and prudential regulations, and supporting banking supervision through resources allocated to the CBU. - The CBU: responsible for organization and supervision of credit institutions; has powers to issue administrative and disciplinary penalties. - The Minister of Finance: has decision-making authority on certain matters under the Banking Law; for ministerial decisions (licensing and certain authorizations) the CBU must be consulted and its opinion obtained. - CBU governance and structure: - Chaired by the Governor of the BCEAO. - Includes an Office of the Secretary General (headed by a Secretary General, assisted by a Deputy Secretary General). - CBU membership: Governor plus 16 members — eight country representatives (one from each WAMU member country) and eight persons appointed by the WAMU Council of Ministers for their expertise (on the Governor’s proposal). - The SGCB comprises six directorates: Crisis Resolution and Legal Affairs Directorate; Studies and International Relations Directorate; Off-site Supervision Directorate (DSP); On-Site Supervision of Credit Institutions and Electronic Money Institutions Directorate (DCPEME); On-Site Supervision of Decentralized Financial Systems Directorate (SFD); General Resources Directorate. ### Market Infrastructure and Banking System Structure - The WAEMU financial sector is shallow and substantially banking-based. The banking sector accounts for more than half of the WAEMU's GDP. - Contribution to the financial sector from other players (microfinance, insurance, pension funds, securities custodians) is modest. - Tabled aggregate figures (CSF-WAMU, end of 2020): - Banks: Total Assets 47,718.50 (In billions of CFAF); Percentage of WAEMU GDP 53.87%; Percentage of WAEMU Financial Sector Assets 72.35% - Decentralized Financial Systems: Total Assets 2,561.00; Percentage of WAEMU GDP 2.89%; Percentage of WAEMU Financial Sector Assets 3.88% - Securities Custodians: Total Assets 8,494.90; Percentage of WAEMU GDP 9.59%; Percentage of WAEMU Financial Sector Assets 12.88% - Insurance: Total Assets 1,964.46; Percentage of WAEMU GDP 2.22%; Percentage of WAEMU Financial Sector Assets 2.98% - Pension Funds: Total Assets 5,215.50; Percentage of WAEMU GDP 5.89%; Percentage of WAEMU Financial Sector Assets 7.91% - Total: Total Assets 59,935.82; Percentage of WAEMU GDP 74.46%; Percentage of WAEMU Financial Sector Assets 100% - At end-2020, the banking system included 152 licensed credit institutions (banks and bank-like financial institutions) under CBU supervision. Decentralized financial systems under Article 44 of the Law on Regulation of Decentralized Financial Systems numbered 188 institutions and are supervised by CBU and BCEAO. There were 12 electronic money institutions under CBU supervision. - Distribution of credit institutions by country (CBU, end of 2020): - Benin: Banks 14; Bank-like Financial Institutions 1; Total 15 - Burkina Faso: Banks 15; Bank-like Financial Institutions 4; Total 19 - Côte d'Ivoire: Banks 28; Bank-like Financial Institutions 2; Total 30 - Guinea Bissau: Banks 5; Bank-like Financial Institutions —; Total 5 - Mali: Banks 14; Bank-like Financial Institutions 3; Total 17 - Niger: Banks 14; Bank-like Financial Institutions 4; Total 18 - Senegal: Banks 27; Bank-like Financial Institutions 4; Total 31 - Togo: Banks 14; Bank-like Financial Institutions 3; Total 17 - Total: Banks 131; Bank-like Financial Institutions 21; Total 152 - WAEMU banking landscape (2020, CBU Report, 2020): - Licensed Credit Institutions: 152 - Of which, Banks with Majority Public Ownership: 16 - Banking Groups Active in the WAMU: 32 - Financial Companies Active in the WAMU: 17 - Ownership and market concentration: - Majority of the sector is controlled by international and regional private banking groups (regional, North Africa, EU). - At end-2020, 73 percent of the banks operating in the region were owned by 32 banking groups. - These 32 banking groups account for a total of 85 percent of banking sector assets, 83 percent of automated teller machines, and 84 percent of bank accounts. - Some groups are subject to consolidated supervision within the WAMU at the level of their financial companies. - There are 16 banks in which the majority of capital is publicly owned in the region. *Source: Detailed Assessment (Executive Summary and introductory sections) of the WAMU Banking Supervision FSAP, as presented in the provided content.* ### 15. In 2019, the BCEAO published the methodology for identifying systemically important ### 15. In 2019, the BCEAO published the methodology for identifying systemically important banking institutions in the WAMU ### Systemic institutions: 2020 list and aggregate shares - Regional and national counts: - Six systemically important banking groups at the regional level. - 22 systemically important banks at the national level. - Table 4 aggregates (Total National Systemic Institutions / Total Regional Systemic Institutions): - Total National Systemic Institutions: 22 — Total Balance Sheet: 18,957.7 (Billions of CFAF) — Share in Total WAMU Banking Assets: 39.7% - Total Regional Systemic Institutions: 6 — Total Balance Sheet: 6,725.7 (Billions of CFAF) — Share in Total WAMU Banking Assets: 14% - Country-level systemic institution counts and balances: - Benin: 2 — 1,819.9 (Billions of CFAF) — 3.8% - Burkina Faso: 4 — 3,666.3 (Billions of CFAF) — 7.7% - Côte d’Ivoire: 3 — 5,645.2 (Billions of CFAF) — 11.8% - Guinea Bissau: 1 — 75.8 (Billions of CFAF) — 0.2% - Mali: 3 — 2,385.4 (Billions of CFAF) — 5% - Niger: 3 — 944.0 (Billions of CFAF) — 2% - Senegal: 4 — 3,248.2 (Billions of CFAF) — 6.8% - Togo: 2 — 1,172.9 (Billions of CFAF) — 2.5% - Source: CBU, end of 2020. ### Banking sector structure, business areas, and concentration - Business models and evolution: - More than 74 percent of WAEMU banks are traditional full-service banks. - Emergence over the past 10 years of specialized banks (housing, agriculture, investment/long-term financing) and financial institutions offering mobile payment, leasing, and factoring services. - Asset and liability composition at end-2020: - Assets: loans to customers 60.3 percent; investment securities 25.9 percent (most are government securities). - Loan maturity breakdown: 51.5 percent short-term; 39.2 percent medium-term; 4.4 percent long-term. - Liabilities: 85.3 percent deposits and borrowing (including 46 percent demand deposits and 39 percent time deposits); 14.7 percent capital and other resources. - Concentration and capital: - Only 27 institutions complied with the concentration limit of 25 percent at end-2020, equivalent to 21.4 percent of supervised institutions. - Solvency ratio for the banking sector: 12.4 percent at end-2020 (Table 5); levels are heterogeneous and some banks have negative capital levels. - Nonperforming loan (NPL) trend: declined from 13 percent in 2017 to 11.4 percent at end-June 2021, but remain high. ### Key prudential indicators (WAEMU) - From Table 5 (WAMU 2018–2020 and Change 2020/2019): - Effective Capital in Billions of CFAF: 2,565.90 (2018); 2,873.4 (2019); 3,284.0 (2020) — Change 2020/2019: 14.0% - Weighted Assets in Billions of CFAF: 23,662.00 (2018); 24,865.1 (2019); 26,473.5 (2020) — Change 2020/2019: 6.0% - Total Solvency Ratio: 10.8% (2018); 11.6% (2019); 12.4% (2020) — Change 2020/2019: 0.8 - Leverage Ratio: 6.3% (2018); 6.2% (2019); 6.4% (2020) — Change 2020/2019: 0.2 - Liquidity Ratio: NA (2018); 100.5% (2019); 105.8% (2020) — Change 2020/2019: 5.3 - Liquidity requirement compliance at December 31, 2020: - 108 credit institutions met the liquidity requirement, accounting for 85.9 percent of the assets and 90.5 percent of the weighted risks, with an average sector liquidity ratio of 105.8 percent. ### Pandemic response measures and subsequent resilience - BCEAO and Union measures to limit pandemic impacts: - Increased central bank liquidity supply to support financial intermediation. - One-year extension of the timetable for implementing transitional prudential measures transposing Basel II and Basel III rules (Council of Ministers decision of June 26, 2020, on a proposal from the BCEAO). - Mechanism to support enterprises struggling to repay loans: BCEAO invited credit institutions to grant deferral of loan maturities for a period of three months, subject to one renewal, without interest charges, fees, or late penalties; accounting and prudential treatment of these claims was relaxed. - Sector performance in 2021 H1: - Gross portfolio impairment ratio: 11.4 percent at end-June 2021. - Solvency ratio: remained at 12.4 percent at end-May 2021. - Structural cash deficit narrowed as resources increased more than applications. - Stock of deferred maturities: CFAF 769.4 billion at end-December 2020; CFAF 306.5 billion at June 30, 2021 (fully reimbursed credit operations taken into account). - Payment pattern recovery: 77.5 percent of the outstanding balance at end-June 2021 regained normal payment pattern; 22.5 percent downgraded to overdue claims. - Source for H1 2021 figures: BCEAO note on the situation of the WAMU banking system at June 30, 2021. ### Preconditions for effective banking supervision — Key findings by theme A. Sound, Sustainable, Macroeconomic Policies - Pre-pandemic performance: - GDP growth averaged 6 percent per annum during the past eight years up to 2019. - Inflation remained below 2 percent. - External reserves: 4.3 months of imports in 2019. - Pandemic effects in 2020: - GDP growth: 1.5 percent in 2020, compared with 5.7 percent in 2019. - Regional budget deficit: 5.8 percent of GDP in 2020, up from 2.4 percent in 2019. - Inflation: annual average increased from -0.7 percent in 2019 to 2.1 percent in 2020. - Monetary and fiscal policies were eased considerably in 2020; banks became increasingly dependent on BCEAO refinancing. - Outlook: - Growth expected to return quickly to precrisis level in 2021–2022, driven by private consumption and investment rebound; recovery depends on decrease in worldwide risks and policies preserving fiscal and external equilibria. - Monetary cooperation reform: - Establishment of the ECO suspended due to pandemic and coordination needs; reform expected to enter into force in 2027 for countries meeting convergence criteria, including a budget deficit of less than 3 percent of GDP. B. A Well-Established Framework for the Formulation of Financial Stability Policies - Institutional arrangements: - BCEAO conducts systemic risk assessments via its macroprudential policy committee but macroprudential policy objectives are not yet defined; BCEAO plans to address this in its strategic action plan. - Financial Stability Committee (CSF-WAMU) coordinates systemic risk assessment across WAMU, chaired by the Governor of BCEAO; mandate per Memorandum of Understanding of May 20, 2010. - CSF-WAMU responsibilities: (i) assess risks to financial system stability including macroprudential indicators; (ii) make recommendations to strengthen resilience of Union's financial sector; each member authority is responsible for implementation. - Limitations: - CSF-WAMU lacks leverage to guarantee implementation of its recommendations. - Macroprudential analyses and risk assessment results are not currently reported to the public; BCEAO’s annual report contains only a brief paragraph on CSF-WAMU work and main vulnerabilities. C. Well-Developed Public Infrastructures - Accounting and reporting: - Revised banking chart of accounts (PCBR) adopted to converge with Basel Standards and IFRS; work in progress on full application of IFRS including IFRS 9 (expected substantial provisioning impact and data challenges for small institutions). - Uniform Act on Accounting Law and Financial Reporting (AUDCIF) in force since January 1, 2018 — requires production of annual financial statements by enterprise size; many small and medium enterprises cannot maintain standardized accounting systems. - Audit oversight: - 2018 circular on Audit Office operating conditions with credit institutions and financial companies strengthened control over auditor appointment and activities; CBU approval required for appointment/renewal and CBU may reject or remove auditors lacking expertise or independence. - Payments and information systems: - Structured, modernized payments ecosystem with regional interbank systems and an automated interbank payments group; projects underway to strengthen interoperability of electronic payment mechanisms. - BCEAO operates regional information databases (risk reporting center, payment incident reporting center, balance sheet reporting center) and credit information bureaus (BIC); deployment not yet fully satisfactory and improvement projects ongoing. - Legal environment: - OHADA framework (10 Uniform Acts) acknowledged, but national court procedures are lengthy, complex, and uncertain; execution of collateral difficult; weaknesses include shortage of judicial human resources and insufficient specialization of magistrates. - Business environment weaknesses persist (insufficient investor protection, lack of transparent regulations, red tape); most WAMU countries ranked near 150th in World Bank Doing Business survey except Togo and, to a lesser extent, Côte d’Ivoire. D. Clear Framework for Crisis Management, Recovery, and Resolution - Institutional framework: - Banking Commission is the resolution authority through the Resolution Board, chaired by the Governor of the BCEAO; framework entered into force in 2017. - Three members of the Resolution Board also sit on the Supervision Board, raising independence concerns. - Powers and gaps: - Resolution Board has broad powers and full legal autonomy but resolution measures do not include liquidation. - Gaps identified: lack of explicit authority to require continuity for critical services and essential functions from group operational entities (regulated or not); need improved scope vis-à-vis shareholders of defaulting institutions. - CBU is not explicitly exempt from requirement to provide advance notice to shareholders or to obtain their approval before exercising powers; CBU lacks power to cancel preemptive rights of shareholders in defaulting institutions. - In urgent cases, Resolution Board may adopt provisional resolution measures without a procedure with input from both parties; chair must inform the Council of Ministers of the Union; decisions of the Resolution Board can only be appealed to the Council of Ministers. - Recovery plans: - Delays in establishing schedules for submission of recovery plans and in submissions from some institutions have delayed analysis and assessment of plan quality. E. Appropriate Level of Systemic Protection (Public Safety Net) - Deposit Guarantee and Resolution Fund (FGDR): - FGDR established in 2014 aims to protect small depositors in event of cessation of payments by a Member Credit Institution or Decentralized Financial System; has legal status and financial autonomy and consists of two separate funds funded by supervised institutions’ contributions. - FGDR is not yet fully independent: board of directors does not have decision-making power over all prerogatives; board composition mainly includes industry representatives; insufficient legal protection for board members may affect integrity. - Operational capacity is being developed with recruitment and staff training. - Mechanisms for depositor compensation not yet adopted due to failure to validate the circular provided for that purpose. - Repayment deadlines established for depositors exceed the seven-day period common in international practices. *Source: CBU and BCEAO data and notes as reported in the chapter (end-2020 and mid-2021 figures).* ### 42. Moreover, a significant increase in the FGDR’s financial reserves would seem to be ### 1wauea2022008 - 42. Moreover, a significant increase in the FGDR’s financial reserves would seem to be ### F. Effective Market Discipline - Regulatory governance requirements have been strengthened. - Corporate governance in the WAEMU area is regulated primarily by the Uniform Act Relating to the Law of Commercial Companies and Economic Interest Groups. - OHADA legislator upgrades: - upgraded shareholders’ rights, - separated the functions of the administration and General Manager, - increased the responsibilities of corporate management. - In banking, governance obligations imposed by the circular published in 2017 by the BCEAO constitute a particularly demanding framework that is consistent with best practices. - Financial transparency is insufficient according to international standards: - SME credit practices rely more on knowing the customer (reputation of the enterprise, executives, and shareholders) than on analysis of audited accounts, due to absence of available financial data approved by the auditors. - Pillar 3 requirements have been introduced into banking regulations but: - they have yet to be controlled by the supervisory authority, - they are not fully observed by banks. ### SUMMARY OF THE ASSESSMENT OF THE CORE PRINCIPLES #### A. Powers and Responsibilities (Core Principles 1 to 7) - Institutional framework: - WAMU banking supervision and regulation involves four institutional players: the CBU, BCEAO, WAEMU Council of Ministers, and the Minister of Finance from each member country, with functions defined in the Banking Law of 2010. - Powers vested with the CBU have been strengthened since the last FSAP, particularly in licensing, and are now binding on the Minister of Finance. - Regulatory progress and implementation needs: - BCEAO has conducted major reform over the past five years consolidating the prudential base and setting conditions for enhanced supervision. - Implementation might be facilitated by issuance of guidelines specifying the supervisor’s expectations. - Clarity and appeals: - Objectives, prerogatives, and supervision conditions of the CBU are detailed in the Specific Convention of April 6, 2007, and its Annex. - Appeals for supervised parties (penalties) or member countries (opinions) should be limited to the sole Court of Justice of the Union. - Clarifications needed on BCEAO powers in prudential supervision and control (insufficiently used) to avoid confusion. - Reporting and governance transparency: - CBU should improve reporting on execution of tasks via publication of objectives in its annual report and establishment of performance indicators. - Differentiated prudential standards: - CBU authorized to issue differentiated prudential standards but to date has used them only for systemically important banks. - Recommendation: establish prudential rules targeted and correlated with institutions’ risk profiles. - Fines and independence: - Ceilings on fines remain insufficiently deterrent. - CBU independence should be strengthened by: - limiting influence of countries on the Supervision Board through participation without voting rights for country-appointed members, - introducing principle of Supervision Board independence into the Annex to the Convention, - creating clearly established selection criteria and a transparent recruitment procedure for members appointed by the Council of Ministers on a proposal from the Governor, - requiring public disclosure of reasons for dismissal of members of decision making bodies of the CBU. - BCEAO should be prohibited from acquiring holdings in credit institutions and decentralized financial systems (while its divestiture process is being finalized). - Resources and capacity: - Resources provided by the BCEAO to the CBU and its secretariat remain insufficient despite recent recruitment. - SGCB has experienced and more extensive teams but needs strengthening to address more complex (systemic and cross-border) groups and new risks. - Continued investments in information technology needed to optimize and automate DSP tools. - Cooperation: - Cooperation with domestic and foreign regulatory authorities should be consolidated. - Regulatory texts define cooperation in memorandums of understanding, but CBU has not formally established protocols with all foreign authorities; content could be supplemented to promote cooperation in resolution. - Absence of periodic bilateral meetings limits information sharing with other regulators (CREPMF, CIMA, and CIPRES) and discussion of supervision of individual cases. - Legal/regulatory coverage and licensing: - Legal and regulatory framework governs banking satisfactorily, but responsibilities for detecting misuse of the word “bank” are not determined in banking law — in practice, ministers responsible for finance are incumbent to ensure no unlicensed entities operate. - Increase in minimum capital to CFAF 10 billion doubled capital requirements for licensing and secured the issue of licenses. - BCEAO conservative in review of license applications and establishment of branch facilities. - Approval of acquisitions and changes in ownership: - CBU’s powers to approve major acquisitions of credit institutions are nonexistent; powers involving changes in shareholders must be strengthened. - Acquisitions requiring prior CBU approval must be defined. - Current limit applied for approval of significant ownership transfers (set at the blocking minority) appears much higher than international best practices. - Need to collect information to track and approve significant changes in control involving beneficial owners. #### B. Functions of the Supervision Authorities (Core Principles 8 to 13) - Risk-based approach and methodology gaps: - Supervision system structured according to a risk-based approach but requires consolidation. - DSP bases analyses on a rating tool for credit institutions; methodology must be updated. - Some risk criteria (market risk and overall interest rate risk) not included; weightings for certain factors (concentration risk) are inadequate. - Frequency of cross analyses, systemic risk mapping, and SGCG's stress testing expertise limited in capturing/managing risk trends and accumulation. - Resolution and recovery planning: - Plans for resolution of institutions not formally established due to delays in distribution of regulatory schedule for submission of preventive recovery plans. - Off-site surveillance weaknesses: - Absence of tools for processing and analysis of financial statements and management indicators (summary data, alerts, comparative data). - Supervision methodologies updated but not fully completed. - Recommendation: hold special meetings between Off-site Supervision and senior managers or persons responsible for control functions in systemic institutions to expand information sources. - On-site supervision frequency and depth: - Frequency of on-site missions commensurate with allocated resources, but increase in topical missions and a differentiated minimum frequency for inspections (systemic, vulnerable, lower-risk) recommended. - Increasing duration of on-site supervision activities recommended for more comprehensive activities. - Accounting and reporting: - Revised banking chart of accounts has aligned accounting standards closer to international standards; new standards require more detailed qualitative information accompanying accounts. - Prudential statements are not always submitted with appropriate frequencies. - Enforcement and penalties: - Preventive action via administrative orders not accompanied by enforcement activities commensurate with stakes and risks. - CBU has broad range of penalties but has been tolerant with institutions committing sustained violations (minimum capital, solvency), often resorting to reprimands or deferrals (sometimes consecutive), potentially allowing situations to worsen and harming credibility. - Suggestion: Resolution Board could be assigned monitoring tasks for vulnerable credit institutions. - Supervision of groups: - System for supervising groups established in 2016 has yet to guarantee special monitoring for group activities and risks. - CBU defined quantitative and qualitative prudential standards for governance, internal supervision, and risk management for groups; supervision partly ensured through supervision boards for cross-border groups. - On-site supervision of groups limited; off-site supervision lacks a suitable rating tool for groups. - Some groups slow to meet regulatory requirements on a consolidated basis. - Rules governing exemptions (involving 14 groups) are insufficient relative to consolidated supervision principle. #### C. Prudential Requirements and Regulations (Core Principles 14 to 29) - 2017 circulars and gradual implementation: - Publication in 2017 of four circulars on governance, risk management, internal supervision, and compliance aligned with international best practices significantly enhanced regulatory requirements. - Some provisions could be further enhanced (remuneration, information system security). - Implementation is gradual with increasing disparities observed between small and large banks. - Supervision focus and cyber risk: - On-site supervision investigations might be expanded for certain risk topics (topical surveys). - Need greater consideration of governing bodies’ involvement in risk steering. - Cyber security risks repeatedly noted; supervisory authority should issue severe precautionary recommendations for highly exposed institutions. - Reporting templates and ICAAP: - Absence of a submission template leads to non-uniform reporting on internal supervision, risk management, and compliance. - Institutions should be supported in establishing internal capital adequacy assessment process (ICAAP) with a model report as soon as possible. - Basel compliance and outstanding mechanisms: - Significant progress integrating regulatory capital requirements fully compliant with Basel standards. - Some mechanisms not fully defined/operational: conversion/depreciation of additional Tier 1 capital, countercyclical buffers, and Pillar 2 (ICAAP and stress tests). - Prudential rules for Islamic finance activities yet to be defined. - Recommendation: introduce a solvency requirement in Pillar 2 (or Pillar 1) to account for sovereign risk of WAMU area countries and concentration risk. - Liquidity and sovereign exposure: - Study recommended to adapt Basel standards to differentiated risks in signatures or liquidity of government securities. - Solvency ratio of the banking sector was 12.4 percent in 2020, which exceeds the current minimum requirement of 10.125 percent. - This level can be expected to increase during the next few years with finalization of transitional arrangements for entry into force of the new requirements delayed by the health crisis. - Approximately 20 institutions, largely state-owned banks, have failed to meet the minimum solvency ratio, and some have negative equity. - Recommendation: credit institutions with negative equity should be closed. - Doubtful assets and provisioning: - Weaknesses remain in regulatory framework covering doubtful assets despite improvements from prudential system and 2016 instruction. - Criteria for classifying doubtful loans are compliant with accepted rules, but rules on contagion are disproportionately conservative. - Writing off bad loans after the sixth year is not effective or applied by most institutions because member countries have not transposed the directive adopted by the BCEAO (delayed) on the relevant tax system. - Supervisor specified provisions on frequency and conditions for revaluation of mortgage collateral at the beginning of 2021, but precise rules for valuation of collateral and selection/renewal of assessors remain absent. - Optional provisioning for doubtful loans during the first two years and absence of collective provisioning likely delay and undermine depreciation effort. - Many institutions do not strictly apply instruction on accounting of overdue claims; reviews highlight numerous reclassifications and significant provisioning requirements. - Recommendation: schedule a comprehensive review of quality of banks’ assets with very substantial levels of impaired loans, using uniform sampling and investigation mechanisms by type of portfolio. - Credit risk control approach is fairly effectively managed by DSP and DCPEME with consistent methodologies based on questionnaires and rigorous investigations. - Concentration risk and large exposure limit: - Market narrowness and preference for large enterprises with reliable financial statements led to structural concentration of liabilities. - Gradual reduction of large exposure limit with a target of 25 percent at the horizon 2023 (postponed one year due to health crisis) represents major regulatory progress and a real challenge for institutions. - Issue: lack of maturity of substantial share of institutions regarding concentration risk. - Need for enhanced support measures, increase in Tier 1 capital, or development of syndicated loans to encourage compliance. - Liquidity risk management standards and monitoring: - Regulatory framework for liquidity risk management standards published in 2017 appears complete and consistent with Basel Core Principles, although Basel ratios (liquidity coverage ratio and net stable funding ratio) are not yet in force. - Institutions currently subject to a short-term liquidity ratio and transformation ratio not applied on a consolidated basis and calculated differently from Basel, with minimum requirements of less than 100 percent. - Implementation of Basel III liquidity standards is in progress. - Recommendation: finalize timetable for implementation and implement monitoring tools to strengthen liquidity reporting available to SGCB. - SGCB’s supervision methodologies for liquidity and interest rate risks in the banking book need further development. - Absence of quantitative reporting and precise requirements on information to be provided by institutions on interest rate risk framework in the banking book does not guarantee sufficient SGCB information. - Interest rate risk is rising alongside increasing share of long-term government debt securities on banks’ balance sheets. - Operational and market risks: - Framework for operational and market risks improved substantially with introduction of quantitative requirements in solvency ratio and more advanced qualitative rules. - SGCB expert resources limited in information systems and require strengthening. - Need to incorporate market risks more effectively into SGCB supervision processes, even if institutions are exposed to low levels of market risk. - Accounting standards and auditors: - Chart of accounts revised in 2016 to converge with ordinary law applicable to enterprises and IFRS. - Work in progress on application of all IFRS standards, including IFRS 9, to banking sector. - Regulatory framework for appointment and work of auditors substantially strengthened with circular published in 2018, vesting auditors with supervision responsibilities beyond account accuracy to review internal supervision, prudential regulation, and the 50 largest risks. *WEST AFRICAN ECONOMIC MONETARY UNION — INTERNATIONAL MONETARY FUND* ### 70. Despite the introduction of Pillar 3 requirements in 2016, the system is not yet fully ### 1wauea2022008 - 70. Despite the introduction of Pillar 3 requirements in 2016, the system is not yet fully ### Pillar 3 disclosure and supervision (paras. 70) - Despite the introduction of Pillar 3 requirements in 2016, the system is not yet fully operational and is not supervised by the SGCB. - The implementing text for Pillar 3, specifying, in particular, the required information and the formats in which they must be included, has not yet been published. - There is a draft instruction, but it has not been communicated to the banks and its implementation date has not been established. - In practice, the requirements under Pillar 3 of the Basel Standard have not been effectively observed, including by major banking groups. - Some banks are not publishing any information on their financial situation at their websites. ### AML-CFT framework and implementation (para. 71) - Some legislative and regulatory provisions appear relatively vague (remote onboarding, additional vigilance measures, and politically exposed persons), or are not applied, risking reduced effectiveness of AML-CFT measures. - The process of drawing up national asset freeze lists is not operational in all jurisdictions as the national committees authorized for that purpose have not been established. - There is a serious shortage of institutional cooperation. - The BCEAO and the National Financial Information Processing Units (CENTIF) have yet to formally establish a memorandum of understanding on information sharing. - There are serious inadequacies in the implementation of the regulatory requirements by institutions. ### Summary of the results of the detailed assessment — institutional and supervisory framework (selected Principles and comments) - CP1. Responsibilities, objectives, and powers — LC - The regulatory and supervision architecture of the WAMU, that involves four institutional players, would seem to be fairly complex. - The powers granted to the BCEAO in the area of prudential supervision and control are still a source of confusion. - The draft banking law, announced to be in the process of finalization, will enable the current system to be properly consolidated. - The CBU is not yet using Pillar two measures, even though this is permitted by the regulations. - Authorized fine amounts would appear to be an insufficient deterrent, particularly for large banking groups in the Union. - CP2. Independence, accountability, resourcing and legal protection for supervisors — MNC - The CBU’s independence is still adversely affected by the substantial presence of the countries and the revocation mechanisms that have not been defined in the texts and have not been made public. - The CBU does not engage in satisfactory reporting on the execution of its missions in the absence of published objectives and performance indicators. - The staff assigned to supervision functions are still insufficient. - The law does not provide staff of the SGCB and CBU with sufficient protection against possible prosecution. - CP3. Cooperation and collaboration — LC - The framework for cooperation and collaboration with local or foreign authorities is clearly defined in the regulatory texts and bilateral agreements. - Exchanges on individual cases with the market and insurance authorities are still too limited. - Memorandums of understanding have not yet been signed with all of the foreign authorities concerned. - CP4. Permissible activities — C - The legal and regulatory framework adequately cover banking activities, except for the responsibilities for detecting and monitoring the misuse of the word “bank.” - CP5. Licensing criteria — LC - The issue of licenses is not explicitly contingent on qualitative preconditions (such as in the area of governance). - The absence of agreements with certain jurisdictions reduces opportunities to consult with supervisors on license applications from applicants outside of the Union. - CP6. Transfer of significant ownership — MNC - Significant changes of ownership require approval from the CBU; however, the threshold for authorization would seem excessive compared to international standards. - No information is collected, or checks conducted, on beneficial owners. - Texts do not give the CBU power to cancel changes in control made without its authorization when required or on the basis of false information. - Banks are not required to disclose to the supervisory authority substantial information that may negatively impact the acceptability of a shareholder. - CP7. Major acquisitions — NC - The current legal framework does not define categories or amounts of acquisition and investment operations that require prior approval or reporting to the CBU. - Since 2016, the CBU can limit activities of groups exposed to excessive risks, although this power has yet to be used. - The CBU does not conduct prior analyses to ensure banks have the required financial and organizational resources for acquisitions. - CP8. Supervisory approach — MNC - The rating system for credit institutions (SNEC) uses a consistent methodology but has weaknesses and has never been subject to an ex-post review. - The SNEC cannot be used to rate banking groups or electronic money institutions (EMI). - The CBU does not have capacity for forward-looking risk identification or developed expertise in stress testing. - The studies unit has limited staffing; CSF-WAMU risk mapping work is incomplete. - Delays in release of preventive recovery plans have impacted establishment of resolution plans; not all systemically important banking institutions have submitted recovery plans. - Regulatory adjustments will be required to make the resolution architecture more robust. - CP9. Supervisory techniques and tools — LC - The CBU uses an appropriate combination of on-site and off-site supervision; a minimum frequency should be introduced for on-site inspections. - Off-site supervision procedures must be updated to reflect latest regulatory reforms. - Horizontal peer assessments are not used. - The CBU does not make sufficient use of crisis simulations. - Banks are not required to inform the supervisory authority of substantial changes in activity or overall situation. - Internal audit work is effectively assessed by the SGCB, but the DSP does not hold regular meetings with supervision functions for systemic and vulnerable institutions. - Information technology tools for off-site supervision are insufficient (there are no management indicators; data are collected manually). - CP10. Supervisory reporting — LC - Submission of nonliquidity prudential statements on a semiannual basis would seem to be insufficient. - Penalties are not systematically applied for recurring errors in the submission of prudential statements. - CP11. Corrective and sanctioning powers of supervisors — NC - Preventive action by the CBU is not combined with enforcement activity commensurate with stakes and risks. - The CBU has been very tolerant with institutions committing sustained violations of prudential regulations. - Placement of fragile institutions under special surveillance can extend indefinitely. - Penalties are insufficiently deterrent; the CBU has not used its ability to publish penalties to date. - There is currently no legal period of time for the provisional administration system. - For resolution processes, the CBU has only signed memorandums of understanding with supervisors without ensuring all institutional players potentially involved have been identified and mapped. - CP12. Consolidated supervision — MNC - The supervision system for groups, established in 2016, does not yet guarantee special monitoring for their activities and risks. - Quantitative and qualitative prudential standards for governance, internal control, and risk management applicable to groups have been defined. - On-site supervision of these entities is limited; off-site supervision lacks a rating tool adapted to this population. - Some groups are slow to meet consolidated supervision requirements. - There are insufficient rules to govern exemptions (involving 14 groups). - CP13. Home-host relationships — LC - Memorandums of understanding have been signed with 10 supervisory authorities for cooperation and exchange of confidential information. - The CBU has established supervision boards for cross-border groups and participates in boards organized by home-country supervisory authorities when asked. - There is no exchange of information or cooperation on crisis management and preparation of resolution plans. - CP14. Corporate governance — LC - Governance requirements imposed by Circular 0162017/CB/C constitute a particularly demanding framework consistent with best practices. - Recommendations for the compensation system would clearly stand to be improved. - Increasing disparities between large and small-scale banking institutions in application of the provisions are observed. - No recent missions on governance issues in several publicly owned banks in great difficulty. - CP15. Risk management process — MNC - Circular 04/2017/CB imposes stringent risk control requirements, but does not provide sufficient detail on security requirements for information systems or new products. - Creation of specific variants for each institution is still quite incomplete. - Absence or inadequacy of risk measurement and surveillance methodologies; most institutions lack effective or adapted tools. - The CBU has not undertaken specific missions on risk management by supervised parties. - The CBU does not have expert resources to develop stress tests to regularly assess banking sector resilience. - CP16. Capital adequacy — LC - Significant progress has been made in integrating a regulatory framework for capital requirements compliant with the Basel standards. - Some mechanisms remain undefined and not fully operational: conversion/depreciation of additional Tier 1 capital, countercyclical buffer, and Pillar 2 (ICAAP and stress tests). - The solvency ratio of the banking sector was 12.4 percent in 2020—a level that exceeds the current minimum requirement of 10.125 percent. - This level can be expected to increase in the next few years with finalization of the transitional arrangements for the entry into force of the new requirements that had been delayed as a result of the health crisis. - Approximately 20 institutions, largely publicly owned banks, have failed to meet the minimum solvency ratio, and some even have negative equity. - CP17. Credit risk — LC - The CBU has not conducted topical missions on credit risk to expand on certain risk factors (credit granting and rating systems). - The CBU does not conduct stress tests on the credit component. - Information sharing systems developed by the BCEAO (credit information bureau or balance sheet reporting center) are not yet being implemented in fully satisfactory conditions by credit institutions. - CP18. Problem assets, provisions and reserves — MNC - Despite improvements from the prudential framework and Instruction 026-2016, weaknesses remain. - Rules on contagion are disproportionately conservative. - Write-off of bad claims after the sixth year is still not effective or applied by most institutions. - Optional provisioning for all overdue claims during the first two years and absence of collective provisioning are likely to delay and reduce depreciation effort. - Many institutions do not always strictly apply the instruction on accounting of overdue claims. - Circular letter on asset valuation did not correct absence of rules on valuation of guarantees and selection/renewal of assessors. - No studies have been conducted by the SGCB or BCEAO on recovery rates for doubtful claims. - Reporting system consolidated, but scope for improvement in information quality remains. - CP19. Concentration risk and large exposure limits — MNC - At December 31, 2020, only 27 institutions in the Union, equivalent to just over 20 percent of the total, met the target large exposure limit of 25 percent. - The transitional ratio of 55 percent was only met by 68 percent of the institutions. - A substantial number of institutions still do not have major risk monitoring systems. - On-site supervision activities are insufficiently focused on the quality of banks’ information systems and ability to cover related customers effectively. - CP20. Transactions with related parties — LC - Frequent anomalies are observed in on-site supervision regarding compliance with obligations on related parties (absence of procedures and failure to declare exposures to related parties exceeding 5 percent). - CP21. Country and transfer risks — MNC - The SGCB considers country and transfer risk exposure to be low, although it has not conducted a detailed assessment. - Monitoring of country and transfer risks is not covered by the SGCB’s methodological tools and is not used as a basis for checks in on-site and off-site supervision. - CP22. Market risks — LC - Substantial progress has been made in the establishment of rules for the management of market risk. *Source: 1wauea2022008 - 70. Despite the introduction of Pillar 3 requirements in 2016, the system is not yet fully operational and is not supervised by the SGCB (PDF content unit).* ### introduction of capital requirements in connection with ### introduction of capital requirements in connection with ### Risk assessments (selected principles CP23–CP29) - CP23. Interest rate risk in the banking book — MNC - The risk management circular establishes requirements for institutions in connection with interest rate risk in the banking book. - The SGCB does not have a sufficient level of information or a supervision methodology in this area. - This risk, that the SGCB had considered to be limited, is on the rise, with an increasing share of long-term government debt securities on the banks’ books. - CP24. Liquidity risk — LC - Current liquidity and conversion ratios do not allow sufficient monitoring of liquidity risk. - The CBU has made substantial progress in the implementation of the liquidity coverage ratio, the net stable funding ratio, and Basel III monitoring tools, although there are delays in defining the implementation schedule. - The regulatory framework in connection with liquidity risk management standards is compliant with international standards and is regularly verified by the SGCB, but there are deficiencies in some areas. - CP25. Operational risk — C - Framework improved substantially with introduction of quantitative requirements for the solvency ratio and more advanced qualitative rules. - Risk is subject to comprehensive controls by the SGCB, which issues recommendations to correct deficiencies in continuity plans and loss collection. - CP26. Internal control and audit — LC - Quality of reports submitted by institutions on internal supervision and risk management is highly variable, indicating lack of maturity in small institutions. - Absence of a template on reports from the supervisor reduces uniformity. - The DSP does not organize working meetings with banks’ internal control and compliance staff. - CP27. Financial reporting and external audit — LC - Chart of accounts revised in 2016; convergence with IFRS still needs to be finalized. - IFRS 9 is not mandatory for credit institutions. - Use of fair value and SGCB supervision in this connection is limited. - Regulatory framework for appointment and work of auditors substantially strengthened by circular issued in 2018, vesting auditors with supervision responsibilities beyond accuracy of accounts. - CP28. Disclosure and transparency — MNC - Adoption of the prudential system in 2016 introduced Pillar 3 requirements on a consolidated or individual basis, but reporting mechanisms are not specified. - Pillar 3 Basel requirements are far from being met in practice; some banks do not publish financial information or have websites. - SGCB has yet to effectively control quality of financial reporting. - CP29. Abuse of financial services — NC - Several provisions of the Uniform Law are vague or not applied, weakening AML-CFT activities. - National asset freeze list processes not operational in all jurisdictions; national committees not established in some countries. - Freezing provisions incomplete and lack operational guidance for supervised institutions. - Definition of national politically exposed persons does not reflect relatives and affiliates. - BCEAO and CENTIFs have yet to formally establish a memorandum of understanding on information sharing. - Reviews reveal numerous, significant weaknesses in AML-CFT processes across institutions. ### Recommended action plan (selected actions by principle) - CP1. Responsibilities, objectives and powers - Clarify BCEAO intervention procedures in supervision, specify that BCEAO should initiate on-site supervision as required. - Limit appeals in connection with penalties or opinions to Court of Justice of the Union. - Apply differentiated prudential regulations, particularly under Pillar 2. - Align Union regulations more quickly with international standards. - Review ceiling established for fines to make them more deterrent. - CP2. Independence, accountability, resourcing and legal protection for supervisors - Strengthen Supervision Board independence via appointment processes and Annex to the Convention Governing the CBU. - Complete divestiture from last bank shareholding and prohibit BCEAO from acquiring stakes in credit institutions and decentralized financial systems. - Require public disclosure of reasons for removal from office of decision-making body members. - Establish transparent, competitive procedure for appointment of CBU members appointed by the Council of Ministers. - Increase Supervision Board session frequency and improve supervisory authority performance reporting. - Increase SGCB supervision staffing, particularly for off-site supervision, and budget for external consultants. - Limit the two-year cooling-off rule for staff movement to institutions recently supervised; strengthen legal protection for CBU and SGCB staff. - CP3. Cooperation and collaboration - Continue establishing cooperation agreements with home and host country supervisors; plan periodic bilateral meetings with CREPMF, CIMA, and CIPRES. - CP4–CP7 (Permissible activities, Licensing criteria, Transfer of significant ownership, Major acquisitions) - Establish surveillance of misuse of “bank” label. - Apply conservative analysis of financial soundness in licensing, include qualitative license conditions, require beneficial owner data on application, systematic meetings with sponsors and future managers, strengthen consultations with foreign supervisors. - Introduce reduced threshold of 10 percent for supervisory approval of shareholder changes. - Define beneficial owner concept in banking law and require submission of significant information affecting major shareholders’ acceptability. - Empower CBU to cancel or modify unauthorized shareholder changes. - Specify categories and authorization mechanisms for major acquisitions and investments. - CP8–CP11 (Supervisory approach; Supervisory techniques and tools; Supervisory reporting; Corrective and sanctioning powers) - Update SNEC rating methodology and conduct ex-post reviews at least semiannually; establish specific rating tools for groups. - Assess banks’ capacity for recovery and orderly resolution; formalize recovery plan programs with timetables. - Increase frequency of cross-analyses and systemic risk mapping. - Continue development of stress testing expertise (DERI, DSF) and introduce a development outline. - Extend quality control approach to off-site supervision and better leverage internal/external audit work for systemic institutions. - Strengthen frequency of meetings between SGCB, senior management, and boards; set minimum frequencies for vulnerable/systemic institutions. - Streamline multiple review process to allocate more time to on-site investigations. - Establish minimum frequencies for on-site supervision, distinguish by risk category, and increase missions to monitor recommendation implementation. - Require banks to report substantial changes in advance; improve off-site supervision IT systems, comparable bank analyses, updated templates, and finalize CBU stress test system with better database and macroeconomic model. - Set quarterly periodicity for prudential statement submission, prepare trading book valuation surveys, and ensure penalties for reporting delays are applied. - Ensure effective penalties policy, apply full range of penalties with more frequent fines, publish fines against institutions, avoid consecutive deferrals, use extraordinary sessions, formalize voting use, transfer eligible files to Resolution Board, consider maximum period for provisional administrators, and continue cooperation agreement procedures for cross-border resolution. - CP12–CP14 (Consolidated supervision; Home-host relationships; Corporate governance) - Strengthen group supervision via group rating in SNEC, increase meeting frequency with groups’ management/boards, strengthen on-site supervision of financial companies and major foreign subsidiaries. - Apply coercive measures for groups not meeting consolidated requirements. - Consider financial companies in future banking law. - Establish internal policy/methodology for exceptions to intermediary financial holding company requirement and monitor non-consolidated groups regularly. - Ensure information sharing/cooperation agreements include explicit coordination commitments for crisis resolution and preparation of resolution plans for systemically important cross-border groups. - Supplement governance provisions on remuneration; program audit cycles on governance of public banks; finalize governance reporting template; encourage deeper investigations by DCPME inspectors and longer missions; supplement credit institution rating with business model and strategic planning questionnaire. - CP15–CP19 (Risk management process; Capital adequacy; Credit risk; Problem assets; Concentration risk) - Expand investigations into development, use, and governance of stress tests (credit, liquidity, market). - Increase on-site supervision of risk management and decision-making bodies’ involvement; apply stricter penalties for noncompliance. - Require external audits for institutions lacking internal IT security expertise; strengthen regulations on information system security, including regular intrusion tests by external auditors. - Establish system for formal, regularly updated recovery plans. - Complete Basel II/Basel III regulatory texts: finalize mechanisms (threshold for triggering conversion/depreciation of additional Tier 1 capital indirect holdings), finalize countercyclical buffer provisions, update banking law to include new capital categories and reflect Pillar 2 and 3 requirements. - Exclude regulated provisions that do not meet Basel III eligibility criteria from capital definition. - Introduce prudential provisions for Islamic finance and assign SGCB specialized human resources. - Finalize implementing texts for ICAAP and stress tests; establish methodologies for comprehensive SGCB supervision. - Enhance off-site supervision capacities for new ratios with established methodologies. - Consider introduction of more granular Basel III standard approach (December 2017) for certain unrated counterparties. - Apply Pillar 2 additional capital requirements for risks not covered under Pillar 1, including public and private concentration risk and emerging risks such as interest rate risk in the banking book. - Adopt more coercive measures for institutions failing solvency ratio requirements; close credit institutions with negative equity. - Schedule topical credit missions to investigate credit granting processes (criteria, assessment, scoring, validation). - Use credit bureau statistical information to summon or penalize persistently uncooperative institutions. - Review loan-to-value standard for real property loans with a more conservative approach; establish regular credit stress tests and support institutions in implementation. - Supplement credit risk regulations with precise monitoring of guarantees and assessor procedures. - Consider using the 90-day arrears threshold for classification of all non-performing exposures. - Establish formal guidelines on management of bad claims, including governance, technical default, unlikely to pay downgrading, structured claim identification, and asset valuation methodology. - Require automated systems for identifying doubtful loans or order corrections. - Transpose Directive on harmonization of tax system for losses on doubtful and contentious claims as soon as possible where not yet done. - Program comprehensive review of asset quality for banks with more than 30 percent deteriorated claims using uniform sampling and investigation methodologies. - Encourage stronger out-of-court collection mechanisms and require recovery indicators in risk management reports; conduct studies on recovery of doubtful loans and cross-studies on credit portfolios; integrate stress test results into bank ratings. - Require institutions to establish systems for identifying and monitoring large exposures with formal procedures and tools. - Encourage gradual recapitalization to meet target large exposure limit; strengthen identification of related customer groups. - For implementation of the 25 percent large exposure limit, encourage syndicated loans, additional guarantees, and capital increases; provide action plans under Pillar 2 where needed; establish customer diversification indicators; conduct regular studies on exposure to systemic counterparties and commodity-vulnerable counterparties. - CP20–CP25 (Related parties; Country/transfer risk; Market risk; Interest rate risk; Liquidity risk; Operational risk; Internal control and audit) - Remind auditors of obligation to thoroughly investigate related-party information, contracts, and transactions and verify normalcy of agreements. - Map institutions potentially exposed to country and transfer risks and include these risks in future risk management templates. - Integrate market risk more effectively into off-site supervision via mandatory internal supervision report items, supervision methodology, and warning indicators for trading book growth; strengthen controls on trading book valuation models for significant market activity. - Subject credit institutions to quantitative reporting on interest rate risk exposure; specify information required on interest rate risk management and crisis simulations; establish supervision methodologies and procedures for this risk in off-site and on-site supervision; integrate the risk into overall institution risk profiles; supplement crisis simulation requirements to include interest rate scenarios. - Provide LCR and NSFR reporting and certain Basel III liquidity monitoring tools; subject credit institutions to quantitative reporting on remaining maturity gaps between assets and liabilities prior to minimum LCR/NSFR entry into force. - Assess discounts on government securities to reflect secondary market liquidity and sovereign risk or provide a uniform discount for WAMU government securities; study including all central bank reserves in Level 1 high-quality liquid assets under LCR, including the reserve requirement. - Finalize LCR/NSFR implementation schedule and inform banks; supplement liquidity risk management questionnaire and review quantitative indicators to reflect Basel III ratios and monitoring tools. - Strengthen controls and on-site supervision methodology for liquidity monitoring tools and supplement crisis simulation requirements to include short/long-term, bank-specific, and generalized liquidity stress scenarios. - Strengthen SGCB IT skills via an on-site information systems supervision team and external consultants; develop cross-analyses for operational risk to detect common vulnerabilities. - Finalize feedback templates for compliance and control functions; generalize special interviews by DSP with control functions; apply severe corrective measures for institutions with staffing shortages in control functions or unclear three lines of defense. - CP27–CP29 (Financial reporting; Disclosure/transparency; Abuse of financial services) - Continue convergence with international accounting standards. - Schedule meetings between off-site supervision and auditors without senior management when vulnerabilities are detected. - Establish more precise auditors’ report format guidelines and prepare templates for analysis; avoid duplication of approval checks already verified by SGCB legal affairs unit. - Enhance SGCB’s information on portfolios assessed at fair value. - Make Pillar 3 implementation mechanisms operational as soon as possible and establish controls for compliance; extend requirement to publish Pillar 3 information on websites to all financial reporting (financial statements and annual reports). - Formally establish FATF Recommendation 34–consistent guidelines to clarify remote relationship establishment, oversight measures, national politically-exposed person definitions, validation by senior management, correspondent banking incentives, and suspicious activity reporting to the supervision authority. - Remind member countries to establish national committees for penalty and asset-freeze lists. - Supplement DCPEME AML-CFT risk factor methodology and controls for specialized lines (correspondent banking); include AML-CFT topical missions in annual survey program. - Formalize memorandum of understanding between BCEAO and CENTIFs to guarantee AML/CFT information sharing and regular exchanges between SGCB teams and CENTIFs. - Develop an AML-CFT expertise center within SGCB (off-site supervision) and establish AML-CFT risk mapping; continue policy of more stringent penalties for AML-CFT violations. _International Monetary Fund — WEST AFRICAN ECONOMIC MONETARY UNION (selected sections)_ ### 72. The authorities of the West African Monetary Union are grateful to the staff of the ### 1wauea2022008 - 72. The authorities of the West African Monetary Union are grateful to the staff of the ### Acknowledgements and context - The authorities of the West African Monetary Union expressed gratitude to the staff of the International Monetary Fund and World Bank for the quality of discussions in the update of the Union’s Financial Sector Assessment Program (FSAP). - The update was conducted in a context characterized by the ongoing COVID-19 pandemic, requiring work to be conducted by video conference. (Paragraph 72) ### Progress since the 2008 FSAP - The mission observed substantial progress since the 2008 FSAP in the regulatory and supervision framework of the WAMU banking sector, noting: - implementation of stringent regulatory texts aligned with the best international standards, including a largely successful transition to Basel III; - an effectively managed supervision approach and a robust methodological foundation; - experienced but numerically insufficient staff; - a good level of efficiency with strong ambitions for digitization. (Paragraph 73) ### Independence of the WAMU Banking Commission (CBU) from member countries - The analysis should reflect specific features of a monetary union, notably the presence of country representatives on the CBU Supervision Board deriving from the WAMU institutional architecture and division of responsibilities between countries and regional institutions. This representation: - is a foundation of regional integration and does not undermine the independence of the Banking Commission; it reinforces the collegial aspect of decision making; member countries have not challenged this composition and support implementation of the Banking Commission’s decisions. (Paragraphs 75–76) - The proposal to make country representatives non-voting members would undermine the institutional framework of supervision by removing substance from the role of countries that delegated monetary management and banking supervision to Community institutions and bodies. Studies could be conducted to adjust representation more effectively. (Paragraph 76) ### Resources of the WAMU Banking Commission (CBU) - Strengthening resources of the Office of the Secretary General of the Banking Commission is important to improve supervision quality. The mission’s analysis should reflect actions already undertaken by the central bank, including: - specific budgets established for development of information technology tools for supervision; - substantial progress in increasing the quality and number of inspectors; - ongoing capacity building through diversification of training by the West African Center for Banking Studies and Training (COFEB); - collaboration with external partners including counterpart central banks and the IMF Technical Assistance Center for West Africa (AFRITAC West). (Paragraph 77) ### Policy on applying penalties - The Banking Commission must ensure appropriate penalties are applied to supervised institutions when required. Measures were supplemented by giving the Banking Commission the option to require publication of penalties. At its December 2021 session, the Supervision Board decided on publication of disciplinary penalties and fines applied to supervised institutions and members of their senior management; this deterrent measure will be continued. (Paragraph 78) ### Anti-money laundering and combating the financing of terrorism (AML-CFT) - The Union’s commitment to combating money laundering and the financing of terrorism is steadfast. A review of the body of AML-CFT laws is in progress to enhance compliance with recent international standards. (Paragraph 79) ### Authorities’ assessment and reform intent - The WAMU authorities are pleased with ambitious structural reforms achieved in recent years that have made the banking sector more resilient. They intend to pursue these dynamics to strengthen stability and promote sound, inclusive financing, and to continue collaboration with the IMF and World Bank. (Paragraph 80) ### Detailed assessment — Principle 1: Responsibilities, objectives, and powers - Principle summary: An effective system of banking supervision has clear responsibilities and objectives for each authority involved; a suitable legal framework provides necessary legal powers for authorizing banks, conducting ongoing supervision, addressing compliance, and undertaking timely corrective actions. (Principle 1 preamble) ### Institutional architecture of the WAMU (EC1) - Four players in WAMU banking regulation and supervision: - The WAMU Council of Ministers: responsible for defining the regulatory environment for the banking system per Article 17 of the WAMU Treaty; it 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." (EC1 description) - The BCEAO: under Article 10 of its Charter 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." (EC1 description) - The Minister responsible for finance of each WAMU member country: has power to make decisions on certain matters under the Uniform Act on Banking Regulation (the Banking Law). (EC1 description) - The WAMU Banking Commission (CBU): responsible for banking supervision in the WAMU area under the WAMU Treaty of April 6, 2007. (EC1 description) ### Uniformity of texts and areas of competence (EC1) - Texts are applied uniformly; the Council of Ministers has not granted any waivers to member countries in banking regulation. Transitional arrangements may be decided in implementation of regulatory texts to reflect operational/financial significance and impacts of regulatory changes. (EC1 description) - Article 23 of the WAMU Treaty: the CBU "is a body of the WAMU responsible in particular for the organization and supervision of credit institutions." The CBU’s prerogatives are governed by the Convention of April 6, 2007, Governing the CBU and its Annex. (EC1 description) ### Organization of the CBU and sharing competence with BCEAO (EC1) - The Annex to the Convention contains functional provisions for composition, organization, and operation. The CBU includes two boards (the Supervision Board and Resolution Board), each comprised of country representatives and members appointed intuitu personae. Article 12 of the Annex: "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." (EC1 description) - The CBU may use the central bank for off-site and on-site supervision (Article 21 of the Annex). The BCEAO may carry out supervision of systemic credit and banking institutions after duly informing the CBU (Article 23 of the Annex). The central bank can also initiate controls incumbent on the CBU, after duly informing the CBU, and must report results. (EC1 description) - Example: During October/November 2017, the central bank conducted investigations with 14 WAMU banks to monitor compliance with provisions on external financial relations; results were brought to the CBU, which initiated disciplinary proceedings. (EC1 description) - The Annex’s provisions may lead to overlapping competence between the BCEAO and CBU; in practice BCEAO missions involve central banking responsibilities, and respective operating areas have not been formally defined. (EC1 description) ### Licensing, role of the Minister of Finance, and legal limits (EC1) - The BCEAO is responsible for processing license and authorization applications submitted by credit institutions to the Minister of Finance; Decision 421-12-2015 of the Governor organizes BCEAO examination of applications; in practice, license applications are processed by the SGCB on behalf of the BCEAO. (EC1 description) - The Minister of Finance has decision-making authority on certain matters under the Banking Law: licensing of credit institutions, authorizations, withdrawal of licenses at the institution’s request when inactive for at least one year, suspension of operations. Decision-making power is shared with the CBU and derives from Articles 15, 20, 25, 31, 39, 40, and 41 of the Banking Law and Articles 40, 41, 42, and 44 of the Annex to the Convention. (EC1 description) - For all acts involving a Minister decision, the CBU must be consulted and its opinion obtained in all cases provided by the banking regulations under Article 40 of the Annex. (EC1 description) - Legal scope of the CBU opinion: under Article 42 of the Annex, the Minister of Finance has a period of 30 calendar days to adopt an order after receiving the opinion; when the minister fails to act within this period, 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 national authorities disagree, they may submit the matter to the WAMU Council of Ministers for arbitration pursuant to Article 44. Arbitration by the Council of Ministers has never been requested in practice; arbitration decisions must be adopted unanimously per Article 15 of the WAMU Treaty. (EC1 description) ### Appeals against CBU decisions (EC1) - Appeals process: - Decisions of the CBU against credit institutions and members of senior management may be appealed only to the Council of Ministers of the WAMU, functioning as a chamber of appeal. Appeals must be filed within two months from notification. (Article 43) - Appeals may not be filed against decisions to withdraw a license in connection with a disciplinary penalty, after announcement within seven days by the minister responsible for finance of the country in which the decision was made. (Article 43) - 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. (Article 43) - Neither the appeal period nor the appeal has suspensive effects. (EC1 description) - Practical implication: Article 15 of the WAMU Treaty requires unanimous decisions; in an appeal to the Council of Ministers, a veto from one country is sufficient to cancel the CBU’s decision, which may delay decision making, particularly in urgent situations. (EC1 description) - Additional practice: Some penalties issued by the CBU to individuals have been appealed to the Council of Ministers and subsequently to the Court of Justice of the Union; this practice of appealing to the Court of Justice of the Union already appears to be effective. (EC1 description) ### EC2 — Primary objective of supervision - The CBU’s functions per Article 2 of the Annex: ensure soundness and security of the WAMU banking system through oversight of supervised institutions and resolution of banking crises. The CBU comprises two decision-making bodies: the Supervision Board and the Resolution Board (Article 3). The CBU’s prerogatives also include protection of depositors and maintenance of regional financial system stability. The Governor of the BCEAO chairs both the CBU and the WAMU Financial Stability Committee (CSF-WAMU). Consumer and customer protection is incumbent on member countries; not all have observatories to monitor quality of financial services. (EC2) ### EC3 — Prudential standards and powers - Legal empowerment: 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 individual circumstances (size, structure, risk profile, nature and complexity of activities, systemic importance). To date, the supervisory authority applies this functionality on a limited basis to institutions not classified as systemically important. (EC3) - Article 22 of the Annex: the supervisory authority may establish more stringent prudential requirements for systemically important banks; regional systemically important institutions must establish extra capital, primarily in the form of core Tier 1 capital. The extra requirement and list of systemically important 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). (EC3) *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022008.pdf* ### Conclusions, ### 1wauea2022008 - Conclusions ### 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. - Prudential transposition: - 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. - Three circulars formally established in 2017 on governance, internal supervision, and risk management have significantly enhanced requirements and obligations for credit institutions and financial companies. - The Annex to the Convention governing the CBU was revised in 2017 to introduce a banking crisis resolution mechanism. A circular on the mechanisms and conditions for the implementation of the resolution system was published at the end of 2020. - Accounting and supervision: - The new revised chart of accounts entered into force on January 1, 2018. - A new consolidated supervision system for parent credit institutions and financial companies in the WAMU was adopted on June 24, 2016. ### Process of Developing and Validating the Regulations - Regulatory updating can be delayed by the multilateral adoption process, especially for texts of laws that must be adopted by each national parliament of the eight WAMU member countries. - The structured, iterative drafting method involves numerous BCEAO directorates, reflecting a division of roles between the Financial Stability Directorate (DSF) and supervision units (primarily the SGCB). - Validation and publication steps: - Guidance notes are forwarded for comments to relevant directorates at headquarters, national directorates, and the SGCB; amended versions are validated by bank authorities. - After adoption of guidelines, services prepare a preliminary draft text validated within the drafting directorate, circulated for comments, consulted with relevant players and national authorities, and submitted to bank authorities for validation. - Finalization steps depend on text type and include: - Forwarding to the Governor for signing. - Submission to the Monetary Policy Committee or to the Council of Ministers for adoption, depending on competence. - Communication to the countries for incorporation into domestic legal systems. - If a draft is not adopted by the competent authority, it will be revised to reflect comments and guidelines. ### Public Consultations Prior to New Prudential Standards and Supervision Guidelines - The consultation process occurs both upstream and downstream. - The DSF consults credit institutions and the financial sector on proposed amendments and uses consultations to obtain formal statements of supervised institutions’ opinions; the BCEAO may combine these activities with impact studies. - When a text is validated, the BCEAO provides feedback to institutions on choices adopted and supervisor expectations regarding implementation. - Industry reaction: - The mission’s discussions found the participative consultation approach is appreciated by the industry. ### EC5 — Supervisory Access and Consolidated Supervision Powers - The supervisor has the power to: - (a) have full access to banks’ and banking groups’ Boards, management, staff and records to review compliance with internal rules and 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. - Description and conclusions for EC5: - (a) Access to senior management and documents: - Article 24 of the Annex to the Convention: the CBU may conduct a simple hearing of members of senior management or any persons who may provide useful assistance. - Article 25: supervised institutions must provide the CBU, on request, within the specified time frame and forms, any documents, information, clarifications, and justifications required. - Article 15 of Circular 01-2017/CB/C on governance: minutes of meetings of decision-making bodies must be submitted to the CBU; the supervisory authority may participate as an observer in decision-making body meetings when deemed necessary. The Banking Commission has exercised this power. - Inspectors from the DCPEME have extensive investigative powers and access to documents and records in inspection missions. - Responsible members of senior management are subject to an approval process; the CBU ensures candidates meet criteria of expertise, moral standing, and nationality. - The Banking Commission can require an institution to change the composition of its decision-making body if members are not fulfilling responsibilities, but will not take direct action to make such changes. - (b) Consolidated supervision: - The CBU is empowered to conduct on-site and off-site supervision activities, on an individual or consolidated basis. Chapter II of the Annex defines the framework for consolidated supervision. - Decision 014/24/06/2016/CM/UMOA of June 24, 2016, explains consolidated supervision in further detail. - (c) Supervision of foreign activities: - Pursuant to Decision 014/24/06/2016/CM/UMOA (Article 9), the CBU may monitor activities abroad of banks registered in its jurisdiction and limit the scope of activities and jurisdictions where a supervised institution may operate. - The CBU, as home supervisor, has signed cooperation conventions with peer supervisors and organizes supervision boards for regional banking groups with significant facilities abroad. Conventions currently signed do not cover all jurisdictions in which groups operating in the Union are established. ### EC6 — Powers for Corrective Action, Sanctions, License Revocation, and Resolution - EC6 powers include: - (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. - Description and conclusions for EC6: - Penalties and administrative measures: - Section 3 of the Annex to the Convention (Articles 29, 30, 31, 32, and 33) authorizes the Banking Commission to issue administrative measures (warnings or orders) and disciplinary penalties and/or fines. - (a) Administrative measures under Article 29: when a supervised institution fails to comply with ethics rules, compromises financial equilibrium, engages in irregular management, or no longer meets licensing conditions, the CB may issue: - A warning. - An order to take or implement remedial or precautionary measures within a specified time frame. - Forms of remedial measures: capital requirements exceeding regulatory targets, liquidity requirements appropriate for the institution’s situation, strengthening governance, risk management, internal control system, establishment of additional provisions, etc. - Precautionary measures: transfer of activities that compromise financial soundness, transfer of shareholder rights, limiting or prohibiting discretionary distributions including dividends, partial or total allocation of profits to capital, or implementation of a preventive recovery plan. - (b) and (c) Disciplinary penalties under Article 31: - The range of penalties includes disciplinary penalties and fines. - Disciplinary penalties the CBU may impose under Article 31.1 include: - 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 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 (may be permanent or limited in time and may be imposed after persons have left office). - Withdrawal of the license (subject to notification of the Council of the Ministers). - Comments on fines: - The CBU may issue fines; amounts established in an instruction issued in 2018 by the BCEAO set 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. - Observations: - The establishment of monetary ceilings limits the supervisory authority’s power to issue penalties. - The established amounts would not appear to have substantial deterrent effects, particularly given 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) Resolution powers: - The CBU is the resolution authority of the WAMU. Through its Resolution Board, it can subject systemically important institutions and any involved subsidiaries to the WAMU resolution system. - 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 the WAMU may be subject to resolution measures, if applicable, within the framework of cooperation agreements executed by the CBU with competent authorities. ### EC7 — Review of Parent and Affiliated Companies’ Activities (Consolidated Supervision) - The CBU is explicitly authorized to engage in consolidated supervision of banking groups pursuant to: - Article 37 of the Annex to the Convention Governing the CBU. - Article 9 of Decision 014/24/06/2016/CM/UMOA on consolidated supervision of parent company credit institutions and financial companies in the WAMU. - The examination of implementation of consolidated supervision is addressed in BCP 12. ### Assessment of Principle 1 — Largely Compliant - Findings and comments: - Responsibilities and objectives are generally stated clearly in legislative and regulatory texts, though some areas need clarification. - The BCEAO’s contribution to the SGCB’s resources and BCEAO supervision and control powers (insufficiently used and substantially involving capital control issues) may cause confusion and impede understanding of the supervision system. - Mechanisms in the Annex to the Convention to appeal CBU decisions confirm the Council of Ministers as ultimate decision-making body in supervision. In practice, appeals are also being filed with the Court of Justice of the Union, suggesting a review of the regulatory system may be required (see BCP 2). - The Council of Ministers’ decision-making mechanisms (Article 15 of the WAMU Treaty) are based on unanimity, which gives member countries veto rights and may result in decisions influenced by political and national considerations. - Reform efforts over the past five years have substantially consolidated the regulatory base and established conditions for enhanced supervision. A draft banking law in process of finalization should yield beneficial improvements. - The iterative multilateral process for preparing and publishing regulatory texts can delay adoption of international standards; BCEAO justifies this by its participatory approach and use of impact studies. - Transposition of BCEAO prudential standards into local laws can lack diligence and delay enactment; some new texts are quite stringent and may lead to destabilizing regulatory shocks for institutions lacking expertise or IT resources. The BCEAO invokes the principle of proportionality it intends to apply. - The CBU is authorized to issue standards differentiated by institution, although this approach has not been used to date; differentiated prudential rules correlated with institutions’ risk profiles could strengthen supervision efficacy and efficiency. - The CBU’s range of corrective measures and penalties is extensive but not fully utilized and may be constrained by the BCEAO ceiling on fines. Authorized fine amounts are insufficiently deterrent for large banking groups. - International cooperation conventions do not cover all jurisdictions where Union-operating groups are established. - Recommendations: - Intervention mechanisms for the BCEAO in supervision should be clarified in the context of the new banking law. Specifically, regulatory provisions giving the BCEAO the power to initiate on-site supervision activities in discharge of its duties should be specified. - For penalties and opinions, supervised parties and member countries should appeal only to the Court of Justice of the Union, whose 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. ### Principle 2 — Independence, Accountability, Resourcing and Legal Protection for Supervisors - Summary statement: - "The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor." - EC1 (beginning): - "The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision." - (Further description and conclusions for EC1 are not included in the supplied content.) *Source: 1wauea2022008 - Conclusions* ### Conclusions, ### Conclusions ### EC1 — Legal framework and institutional roles - 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, which 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 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; once 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 — composition and governance - Annex to the Convention defines composition (Articles 4.2 and 5.2). - Supervision Board composition: - Chair: the Governor of the BCEAO. - Eight members, each representing a member country of the WAMU (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 selection process lacks a procedure defining selection criteria and ensuring competitive processes. - Current profiles on the Board: three economists, two legal experts, one financial auditor, one financial inspector, and one corporate director. - 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 no longer includes the representative from the country providing the currency convertibility guarantee and the French member appointed by the Council of Ministers; these two members have not been replaced, reducing the Supervision Board from 18 to 16 members. - Resolution Board composition: - 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 expertise, on the proposal of the Governor of BCEAO. - Decisions adopted by majority of votes cast; Chair has the casting vote in the event of a tie (Article 13). - Incompatibility and independence rules: - 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 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. 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 is specified for the BCEAO. - Risk of political interference: - Eight out of 17 voting members on the Supervision Board are senior public officials from member countries (Public Treasury Director, or head of the directorate responsible for supervision), which limits profile diversity and creates a substantial risk of political interference in decision making. - The appointment process for the eight Council-appointed members (on proposal of the Governor) involves a list of potential candidates including last name, first name, current job title, degrees, professional experience, and incompatibilities, but lacks clearly established selection criteria or competitive process, potentially detracting from Board independence. - Enforcement and institutional design: - 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 prudential regulations (See Principle 11). - The review of Supervision Board composition 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. - 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 supervised institutions. ### SGCB — organization, budget, and BCEAO links - The SGCB is covered by the central bank; the Secretary General and all staff of the SGCB are officers of the BCEAO. 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. - SGCB organizational units reporting to the Secretary General and deputy: - Operations Supervision: responsible for daily checks to ensure operations of the SGCB are regular. - Crisis Resolution and Legal Affairs Directorate: monitors banking crisis resolution process, prepares CBU decisions, and provides legal assistance. Divided into Crisis Resolution and Trade Practice Supervision Unit, and Legal Affairs Unit. - Studies and International Relations Directorate: addresses regulations and prudential standards, manages relations with external partners, conducts studies on banking system stability, assesses license applications, declarations of intent, and prior authorizations. Comprised of Regulatory Monitoring, Methods, and International Relations Unit; and Studies, Statistics, and Licensing Unit. - Off-site Supervision Directorate (DSP): responsible for individual off-site supervision; monitors implementation of administrative measures and penalties. Comprises Subregional Banks and Financial Institutions Surveillance Unit, Cross-Border Surveillance Unit, and Specialized Institutions Surveillance Unit. - On-Site Supervision of Credit and Electronic Money Institutions Directorate (DCPEME): implements on-site supervision program for credit institutions, financial companies, and electronic money institutions; on-site teams under mission heads. - On-Site Supervision of Decentralized Financial Systems Directorate (SFD): responsible for SFD inspection program; on-site teams under mission heads. - General Resources Directorate: manages support activities; includes Administrative Affairs Unit, Human Resources Unit, Accounting and Budget Unit, and Information Technology Unit. - Budget and ownership: - The Banking Commission has an autonomous operating budget, provided entirely by the central bank, without contributions from 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. - Reporting: - 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 (Conference of Heads of State and Government, Council of Ministers, Regional Public Savings and Financial Markets Board). ### EC2 — Appointment and removal transparency for supervisory heads and governing members - Governor of BCEAO (Statutory Chair of the CBU): - Appointed by the Conference of Heads of State and Government for a term of six years, subject to renewal. - Current Governor first appointed in 2011; term has been renewed twice. - Deputy Governors 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). - Texts do not require reasons for removal from office to be publicly disclosed. - Representatives from member countries on the CBU: - Appointed by notification to the Chair of the CBU from the competent national authority (minister responsible for finance). - Representative must, on a mandatory basis, be the Public Treasury Director or manager of the directorate responsible for oversight of credit institutions. - Leadership changes require announcement of termination of former representative and appointment of new representative. - Members 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 expiry by decision of the WAMU Council of Ministers (Article 8). - Regulatory texts do not specify the cases in which the Council may remove these members and do not impose any requirement to publicly disclose reasons for removal. - Secretariat leadership: - Secretariate headed by a Secretary General, assisted by one or two Deputy Secretaries General, appointed by the Governor from the staff of the central bank. ### EC3 — Objectives, accountability, and transparency - Objectives of the CBU are stated in the Annex to the Convention (Articles 2 and 4), listing tasks of the supervisory authority. - The CBU does not set annual or multiannual priorities for prudential supervision activities. - The SGCB indicated the BCEAO’s strategic plan does include some aspects of supervision. The multiannual strategic plan is not published in the annual report. The plan published at the BCEAO’s website covers the period 2016-2018 and is not current. - Under Article 69, the CBU must prepare an annual report on its mission performance; in practice the annual report is submitted to 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. - The annual report is published on the central bank's website and is accessible to the public; the CBU does not yet have its own website. - After each session, the CBU must inform the ministers responsible for finance of decisions involving supervised institutions in their jurisdiction and must prepare a report on its activities after each of its four annual meetings for the Council of Ministers of the Union. ### EC4 — Internal governance, emergency decision-making, and conflicts of interest - Emergency and delegation provisions: - Annex to the Convention and Internal Rules of Procedure contain provisions for decision making in emergencies. - CBU authorized to delegate some powers to its Chair (Article 64): authorizations to become established, creation of differentiated prudential standards, administrative measures, placement in provisional administration, liquidation, and approval of the auditors. - Powers required to adopt early intervention measures were delegated to the Chair under a 2011 decision: creation of a branch or subsidiary, warnings, orders, placement under special surveillance, simple hearings, placement in provisional administration or liquidation, approval of auditors, opinions, and notifications (in absence of a minister act within established time limit). - Delegation used in practice in cases of emergency to maintain collegial operation; delegation used once during the last two sessions of the CBU, most often for waivers of the nationality requirement or to finalize decisions between sessions when information is pending. - Chair authorized to subdelegate certain powers to the Secretary General of the CBU (Article 64). Secretary General has powers by sub delegation (decision of 2011) to summon heads of supervised institutions to hearings and to approve appointments and renewals of auditors. - Internal Rules of Procedure (adopted September 17, 2018) permit: - Meetings by video conference or other telecommunication media with participant identification and confidentiality (Article 4). CBU has held meetings via video conferencing since March 2020. - In the event of an emergency confirmed by the Chair, except in the case of penalties, to decide via home consultation (Article 5). - Meeting frequency in practice: - Supervision Board meets an average of four times per year; Resolution Board meets once per year. - CBU will meet at initiative of Chair or at request of one third of members, at least twice a year for the Supervision Board and at least once a year for the Resolution Board. - All directorates of the Office of the Secretary General prepare for CBU meetings in their respective competence areas. - Conflicts of interest framework: - In addition to Article 9 restrictions (no positions in supervised institutions), Members of the CBU are subject to Articles 11 and 12 of the Code of Ethics (adopted September 17, 2018). - Requirements include: - Act with full independence and not receive or request instructions from third parties (Article 2 of the Code). - Avoid situations potentially leading to conflicts of interest; conflicts defined as incompatibility between personal/relatives’ interests and those of the CBU that could influence impartiality. - If placed in a conflict-of-interest situation during deliberation, file a formal declaration and recuse themselves. - Submit upon taking office a list to the Chair of external, public or private interests, functions, and appointments they hold or expect to hold during their term, and update when required. ### EC5 — Professionalism, integrity, and conflict-of-interest rules - The text begins addressing EC5: "The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed." (text continues beyond provided excerpt) *Conclusions (source PDF: 1wauea2022008 - Conclusions).* ### Conclusions, ### Conclusions ### EC5 — Conflicts of Interest, Professional Secrecy, and Ethics Rules - Members of the CBU are subject to rules designed to prevent conflicts of interest (see Criterion 4) and to professional secrecy under Article 10 of the Annex to the Convention and Article 7 of the Code of Ethics. The confidentiality requirement continues to apply to CBU Members 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 — prevention of conflicts of interest and insider trading: - BCEAO staff members must avoid any situation that might give rise to a conflict of interest or insider trading. - Any staff member in an actual or potential conflict of interest must inform his or her superior, who will take 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 obligations of discretion and confidentiality. - SGCB staff 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 SGCB staff from acquiring securities issued by institutions subject to the supervision of the CBU and from accepting gifts from those establishments. - Require reporting of: - Interests in the above-mentioned institutions potentially leading to conflicts of interest. - Securities held before the foregoing decision entered into force. - Require each inspection team member to sign a statement indicating no conflicts of interest before participating in any inspection mission; if conflicts exist, the person will be replaced. - Disciplinary penalties for noncompliance with Staff Regulations, the Code of Ethics and Conduct, and complementary ethics rules are provided in Articles 114 to 118 of the Staff Regulations of the BCEAO: - First degree penalties: written warnings, written reprimands placed on file, and a maximum unpaid suspension without any remuneration of five business days. - Second degree penalties: 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. - SGCB indicated: - No staff members have received penalties under the code of ethics during recent years. - In 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. ### EC6 — Resources, Budgeting, Staffing, Technology, Training, and Travel - EC6 criteria summarized: supervisor financed so as not to undermine autonomy/independence; budget for sufficient staff and skills; salary scales to attract/retain staff; ability to commission external experts; budget/program for regular training; technology budget for supervisory tools; travel budget for on-site work and cross-border cooperation. - (a) Budget and financing: - Under Article 12 of the Annex to the Convention, the BCEAO provides the secretariat and covers operating costs of the CBU. The SGCB has a budget funded from the accounts of the BCEAO reflecting all expenditure related to operations and investments, prepared based on requirements expressed by the Office of the Secretary General and missions of the CBU. - Operating budget includes: - Staff expenditure, including "Training activities" covering costs of courses, examinations, seminars; SGCB staff included in BCEAO continuing education program. - Transportation and travel for missions, travel, and training activities. - Other travel expenses, including hotel and mission expenses and travel for training. - Miscellaneous management outlays, including business expenses and hospitality costs. - Capital budget includes "Service equipment and office furniture" chapter covering service equipment and information technology equipment. - (a) Staff numbers and structure: - In 2020, the SGCB had 131 staff members. - Composition: Secretary General, Deputy Secretary General, six directors, 10 mission heads with rank of director, 78 professional staff, and 35 administrative and technical staff members. - Changes 2015–2020 (Source: SGCB and CBU Report): - Staff: 2015 = 120; 2020 = 131; Increase = 9.2% - Number of institutions supervised: 2015 = 285; 2020 = 384; Increase = 34.7% - Of which, number of credit institutions: 2015 = 137; 2020 = 152; Increase = 10.9% - Of which, number of groups: 2015 = 28; 2020 = 32; Increase = 14.3% - Of which, financial companies: 2015 = 11; 2020 = 17; Increase = 54% - Of which, decentralized financial systems: 2015 = 119; 2020 = 188; Increase = 58% - Of which, electronic money institutions: 2015 = 3; 2020 = 12; Increase = 300% - Assessment: - Workforce grew over past five years, but growth in supervised institutions outstripped staff growth, notably due to increase in decentralized financial systems and more complex institutions (transnational groups, financial companies, systemic institutions). - Shortage of staff assigned to supervision tasks, particularly in the DSP. - Historical reference: previous mission (end-June 2007) identified ratio of 2.9 between number of institutions (112) and staff assigned to supervision directorates (39). - At end-2020, 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. - (b) Remuneration and retention: - When Staff Regulations entered into force on January 1, 2016, BCEAO adopted integrated human resources management, including career path classification and new remuneration scale linked to that classification. - SGCB indicated no recruitment difficulties or departures for private sector; during past five years there were eight resignations in the SGCB, one to take a job in the banking sector. - Rules of Ethics impose two-year waiting requirement before staff can work in a supervised institution (see Criterion 5). - (c) Use of external experts: - Article 21 of the Annex to the Convention allows the CBU to execute or arrange execution by the BCEAO of on-site and off-site supervision activities, permitting use of persons other than SGCB staff to conduct inspections. - In practice, SGCB does not use external auditors or consultants to conduct supervision activities; there is no budget for that purpose. - SGCB may use BCEAO officers (e.g., information systems specialists). - (d) Training: - Annual BCEAO training program includes specialized activities for SGCB staff; SGCB also has special programs for newly recruited officers and specific supervision requirements, including AFRITAC West and other foreign supervisors. - Training expenditure included in the SGCB budget. - In 2020, 18 training activities benefiting 182 staff members were organized. - Training areas include AML-CFT, Islamic finance, governance and compliance, and emerging risks (banking supervision in the framework of climate change, digital transformation, financial technology). - Expertise hubs created in April 2021 in the On-Site Supervision Directorate for governance, accounting, and credit; hubs being established for market and digital finance risks. - (e) Technology and information systems: - Investment component of SGCB budget includes technological equipment; IT equipment requirements are processed centrally by Information Systems Directorate of the BCEAO responsible for SGCB equipment and periodic renewal. - All staff members involved in supervision are equipped with a portable computer. - Supervision tools improved after Basel II/III implementation via revision of rating system for credit institutions (SNEC), development of risk mapping, and revision of off-site and on-site supervision guides. - New developments: - 2019: production started on Credit Institution Monitoring Application (ASEC WAMU) for administrative management (shareholders, senior management, auditors, administrative measures and penalties, directors). - Two further dedicated computer solutions acquired for management of inspection missions and off-site supervision. Only the first, “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. - Current shortcomings: - Information technology tools for on-site supervision are insufficient: no tools for analysis of financial statements, management indicators summarizing key prudential data, or automated collection of information for rating requirements (see Principle 9). - SGCB indicated 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 development of IT tools. - (f) Travel and cross-border cooperation: - Travel and miscellaneous subsistence costs for inspection missions are provided in SGCB operating budget; budget also includes business expenditure, cooperation expenditure, and outlays for cross-border surveillance. - Expenditure items relating to organization of meetings include: - Supervision Boards (Ecobank Group and ORAGROUP) organized by the CBU and participation in supervision boards established by foreign authorities. - Annual meeting with the SGCB of the WAMU and AFRITAC Central. - Annual meeting with the Directors General of credit institutions and financial companies and their auditors. - SGCB indicated no budget constraints for participation in regional and international meetings of relevance. - SGCB has participated in almost all supervision boards of groups with subsidiaries in the WAMU when invited. ### EC6 — Staff Distribution, Workload, and Support - Staff distribution and workload observations: - No change in off-site supervision staff relative to 2007; staff of 17 now includes four persons responsible for supervision of decentralized financial systems (which the CBU did not supervise in 2007). - For the off-site supervision directorate, ratio of supervised institutions (384) to staff (17) = 22 institutions per staff member. - Two subregional bank supervisors met monitor 21 and 22 institutions respectively. - Surveillance officers have significant manual data collection tasks in absence of suitable information technology tools (see Principle 9) and lack support staff for processing and verifying data. - Total SGCB workforce of 131 includes substantial support staff share = 43.4 percent of total workforce, who do not perform supervision duties. This high proportion explained by physical remoteness of SGCB and BCEAO requiring replication of general resources functions. General Resources Directorate has few management officers relative to other directorates. - Vacancies and organizational posts: - No vacancies for SGCB directors. - One unit head position in Subregional Banking Services Unit covered by an officer as previous head became deputy director. - Annex to the Convention provides two Deputy Secretaries General, although only one position is currently filled. - Organizational chart shows a vacant position of Advisor to the Secretary General. ### EC7 — Resource Planning, Skills Assessment, and Staffing Requirements - SGCB practice: - Identifies staffing requirements, including on-site supervision, at least when preparing annual budget. - Considers banking sector configuration, number of institutions, risk-based supervision techniques, and available supervision tools. - Identified staffing requirements to date (listed individually as provided): - 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 - four surveillance officers ### EC8 — Risk-Based Supervisory Program and Resource Allocation - Supervision program preparation: - Procedure primarily based on identification of high-risk establishments and assessment of requirements and resources needed for annual inspection program. - Key tasks in identifying high-risk credit institutions: - Survey risks to which each credit institution is exposed using periodic reports submitted by credit institutions, auditors' reports, and latest inspection reports from the Banking Commission. - Risks are rated based on risk mapping generated by the Credit Institution Rating System (SNEC). Rating scale comprises four levels (1 to 4) reflecting acceptable (1), medium (2), high (3), or very high (4) risk. - Of the 123 credit institutions rated in June 2020: - 31 were rated 1 - 42 were rated 2 - 31 were rated 3 - 19 were rated 4 - Based on list of credit institutions from above process, assess human resources and material requirements for annual inspection program. Human resources assessment measured in person days, accounting for size of credit institution, risk profile, and type of inspection. - Within the DSP, institutions are divided among supervisors; largest or most vulnerable institutions assigned to most experienced supervisors. - A supervisor maintains a case for an average of four years. *Conclusions section from 1wauea2022008 - Conclusions* ### Conclusions, ### Conclusions ### Legal immunities and privileges - Article 11 of the Annex to the Convention Governing the CBU: members of the CBU cannot be subject to civil or criminal prosecution for acts carried out in the discharge of their duties; the text takes precedence over the law. - The Convention, including its Annex, is a treaty ratified by the eight signatory member countries of the WAMU; upon publication, treaties or agreements have authority above the law in member countries' internal legal systems. - Privileges and immunities conferred on CBU members are those provided in the Protocol on the Privileges and Immunities of the Central Bank annexed to the WAMU Treaty, including immunity from criminal, civil, and administrative proceedings. - Immunities may be removed as follows: - For country representatives: by the government of that country. - For members appointed by the WAMU Council of Ministers: by the WAMU Council of Ministers. - For the Chair: by the Conference of Heads of State and Government. - Staff of the SGCB: - Secretary General and senior non-Ivoirian officials ranking at least equivalent to category D (UN classification) derive legal protection from the Agreement of October 10, 1990, between the Government of the Republic of Côte d’Ivoire and the BCEAO; they receive the same privileges and immunities as staff of the CBU. - 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. - Regulatory texts do not specify 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 legal protection: - 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. ### Assessment of Principle 2 - Overall assessment: Materially Non-compliant. - Key findings: - Supervision board composition: 8 out of 17 members (including the Chair, the Governor of the BCEAO) are representatives from the countries; these eight are public treasury directors or managers responsible for oversight of credit institutions, representing each country. - Risk of political influence due to substantial presence of country representatives. - Deficiencies in appointment and removal processes for CBU members undermine independence. - WAMU Treaty/Annex/Convention do not specify that the Banking Commission cannot receive instructions from the countries (unlike BCEAO). - In practice, CBU has a fairly limited range of penalties (primarily reprimands and warnings); several institutions, particularly public banks, are in situations of persistent vulnerability. - BCEAO divestiture process reduced its holdings in banks but remains shareholder in one bank subject to special surveillance. - No obligation to publicly disclose reasons for revocation of CBU members; for members appointed by the Council of Ministers, removal cases are insufficiently specified. - Selection of members appointed by the Council of Ministers on the Governor’s proposal lacks defined selection criteria and competitive procedures. - CBU publishes an annual report, but does not publish assigned supervisory objectives or performance indicators to measure achievement of past objectives. - Decision-making provisions exist for emergencies, and Chair has broad delegated powers, but their use is limited in practice; delegation primarily for emergency use. - Quarterly frequency of supervision board meetings is considered insufficient. - Code of Ethics adopted in 2018 applies to CBU members and SGCB staff, including obligations on professional secrecy and rules to reduce conflicts of interest. - Staff waiting rule: requirement of a two-year waiting period to work in any financial institution is considered too broad and should be limited to institutions supervised by the person in question. - BCEAO provides the CBU secretariat and covers operating expenditure; SGCB has sufficient budget for travel and staff training provided by BCEAO. - Information technology: improvements in on-site supervision tools; IT tools insufficient for off-site supervision (see Principle 9); improvements included in SGCB’s future IT activities. - Human resources: staffing increased but not commensurate with number and complexity of supervised institutions; off-site supervision staffing unchanged since 2007; insufficient staff for supervision activities and unmet needs for specialized profiles. - External experts: Convention allows using external experts for CBU missions but not applied in practice; no budget allocations for that purpose. - Legal protection disparity: Annex to the Convention provides immunity for CBU members but not for SGCB and CBU staff; draft banking law should address protection for supervisory staff and coverage of court costs. ### Recommendations - Strengthen Supervision Board independence: - Include only members appointed by the Council of Ministers on the proposal of the Governor or introduce participation without voting rights for members appointed by the countries. - Introduce into the Annex to the Convention Governing the Banking Commission the principle that the Supervision Board should be independent from the countries. - Complete BCEAO divestiture from the last bank in which it is a shareholder and prohibit BCEAO from acquiring stakes in credit institutions and decentralized financial systems. - Introduce legal obligation to publicly disclose reasons for removal from office of members of decision-making bodies of the CBU and BCEAO; specify cases for removal of CBU members appointed by the Council of Ministers. - Establish a transparent, competitive appointment and selection procedure for CBU members appointed by the Council of Ministers with specific requirements in training, experience, and specialization, and an organized selection process (interview with a panel of experts). - Increase frequency of Supervision Board sessions by introducing sessions focusing on a specific risk between general sessions. - Improve supervisory authority performance reporting: - Annual report should include priorities for supervision activities in the coming year. - Develop performance indicators and regularly measure and publicly disclose performance against these indicators. - Increase SGCB staffing assigned to supervision functions, particularly off-site supervision, and provide a budget for external consultants for short-term assignments; this budget might be financed with endowments from supervised institutions. - Limit the two-year waiting period rule to institutions recently supervised by the staff member in question. - Enhance legal protection of the CBU and SGCB staff responsible for supervision functions; draft banking law should provide that they cannot be prosecuted for acts carried out in the discharge of their duties, along with coverage of relevant court costs. ### Principle 3 — Cooperation and Collaboration (overview) - Principle summary: Laws, regulations, or arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors while protecting confidential information. - EC1: Arrangements, formal or informal, in place for cooperation and information sharing with domestic authorities responsible for safety and soundness of banks and financial system stability. ### Cooperation with domestic authorities (EC1 details) - Annex to the Convention Governing the CBU contains collaboration provisions with: the minister responsible for finance, the judiciary authorities, the central bank, and the WAMU Deposit Guarantee and Resolution Fund (FGDR-WAMU). - Specific arrangements: - CBU may use the central bank for on-site and off-site supervision activities (Article 21). - Central bank may initiate supervision incumbent on the CBU after informing the CBU and must report results, violations, and anomalies to the CBU (Article 23). - October/November 2017: central bank conducted investigations of 14 banks in the WAMU to monitor compliance with external financial relations; results were reported to the CBU leading to disciplinary proceedings. - SGCB required to supervise regulation of external financing and to conduct missions on nonprudential monetary policy implementation. - CBU reports findings of on-site supervision to the minister responsible for finance of the member country and to the BCEAO (Article 27). - When CBU observes a criminal offense, it must inform the competent judiciary authorities, the minister responsible for finance, and the BCEAO (Article 28). - CBU (Resolution Board) may request intervention of the FGDR-WAMU to finance resolution activities after private financing exhausted (Article 58). - May 20, 2020: CBU executed a Memorandum of Understanding with FGDR-WAMU to organize data and information sharing and assistance in supervising regulatory obligations. - March 1, 2021: FGDR-WAMU asked the SGCB for an opinion on effects of a member's failure to pay deposit guarantee contributions. - Administrative and judiciary authorities will provide assistance in execution of CBU tasks (Article 66); since 2016, training has been organized for judiciary staff on banking regulations. - Practical issues: - Overlapping authority between central bank and CBU due to Annex provisions; respective operating areas in banking supervision not formally defined. ### Cooperation with other financial sector regulators (EC1 continued) - WAMU Financial Stability Committee (CSF-WAMU) established by Protocol of March 20, 2010; CSF holds semiannual meetings with experts meeting before the presidents. - Cooperation charter: Charter of December 4, 2014 defines practical mechanisms for consultation, cooperation, and coordination between CBU, CREPMF, CIMA, and CIPRES. - CREPMF cooperation: - Presence of listed banking groups (Ecobank and BOA) makes cooperation necessary. - June 27, 2002: CBU signed a bilateral cooperation agreement with CREPMF exchanging information on disciplinary penalties and holding periodic meetings to exchange experiences; no periodic bilateral meetings to discuss group situations outside CSF-WAMU. - Insurance and pension cooperation: - CBU and CIMA exchange information as required; no periodic bilateral meetings outside CSF-WAMU. - CBU and CIPRES exchange information on pension funds that are shareholders in banks; no periodic meetings to discuss individual cases of linkages. *Source: 1wauea2022008 - Conclusions (1wauea2022008 - Conclusions).* ### Conclusions, ### Conclusions ### Cooperation Agreements (Annex to the Convention governing the CBU) - 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. - 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). 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. - Mechanisms and practices documented: - Information sharing during decision-making on licensing, appointment of directors or senior managers, and acquisition of holdings; the CBU requires a notice of non-objection from counterparts when examining applications for licenses, waivers of the nationality requirement, or prior authorization to amend shareholding structure. - Joint inspection missions scheduled during the annual inspection program; joint missions with other supervisors: 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. - Periodic meetings per cooperation agreements to discuss banking sector developments; SGCB of the WAMU and Central Africa has held annual consultation meetings since 2013, with the eighth meeting held on November 3, 2020, by video conference. ### Supervision Board - The CBU, as 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 will participate. - Relations among supervisors in these boards are governed by a declaration of mutual cooperation that includes provisions for: - 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 crisis prevention and management within the institutions in the group. - The CBU participates, as host supervisory authority, in supervision boards established by peer authorities for: - Bank Al-Maghrib (Attijariwafa bank, Banque Centrale Populaire du Maroc, Atlantic Business International, and BMCE/Bank of Africa groups). - The Central African Banking Commission (COBAC) for BGFIbank and Afriland First Bank groups. - The Central Bank of Nigeria for UBA and FNBANK groups. - South African Reserve Bank for Standard Bank Group. - Prudential Regulation Authority for Standard Chartered Bank. - In some cases the CBU is not asked to attend when the size of WAMU subsidiaries is insignificant within the group; this may apply to systemic institutions at the national level (e.g., Société Générale Côte d’Ivoire or Société Générale Sénégal). ### Supervision Groups - The CBU is a member of: - the Banking Supervision Committee of West and Central Africa (inactive for several years), - the African Banking Supervision Community, - the Francophone Banking Supervision Group. - The CBU participates as an observer on the Supervision Board of the West African Monetary Area. ### Confidentiality and Information Sharing (EC3 and EC4) - Article 60 of the Annex 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. - Cooperation agreements and arrangements signed by the CBU contain stipulations relating to confidentiality: - Sample agreements reviewed indicate that, unless otherwise specified, all documents and information shared are confidential and may only be used for the purposes provided in the request and must not be disclosed to third parties without prior approval of the providing authority. - Where information is to be used in administrative, disciplinary, civil, or criminal proceedings, the authority involved must be informed in the request or at the latest before the proceeding is initiated. - Article 10 of the Annex provides that members of the CBU and persons involved in its operation are subject to professional secrecy, not binding on judiciary authorities acting in criminal proceedings. - The Charter of December 4, 2014, on cooperation between supervision authorities of WAMU members requires authorities: - To preserve the confidentiality of information received and take all necessary measures to prevent 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. - Where legally compelled to disclose confidential information received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances; where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist or protect confidentiality. ### Resolution Support (EC5) - The CBU is both the supervisory authority and the resolution authority of the WAMU. - Through its Resolution Board, the CBU must ensure that crisis prevention and resolution measures are prepared and implemented. ### Assessment of Principle 3: Largely Compliant - The Annex contains provisions for sharing information and cooperation in supervision and resolution and addresses confidentiality. - The 2014 charter commits supervisory authorities to preserve confidentiality. - The Annex defines cooperation forms with the Ministry of Finance, judiciary, the central bank, and the guarantee fund (memorandum of understanding for the guarantee fund). - Sharing among regulatory authorities (CBU, CIMA, CREPMF, and CIPRES) occurs within the CSF-WAMU. - Gaps: - No periodic bilateral meetings to address individual cases of banks or banking groups with linkages to insurance companies, management and intermediation companies, or pension funds. - Agreements executed with more than 10 foreign authorities but not yet with all home authorities of foreign groups in the WAMU area nor with all host authorities of subsidiaries of cross-border WAMU groups. - Recommendations: - Continue 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. - Plan periodic bilateral meetings 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. ### Principle 4 — Permissible Activities (Assessment: Compliant) - EC1: Definition of "bank" - The term "bank" is clearly defined in 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. - EC2: Permissible activities defined - 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. - BCEAO Instruction 011-12/2010/RB of December 13, 2010 defines categories of financial institutions, authorized operations, and prohibited operations. - Payment financial institutions are classified as category 5 bank-like financial institutions (Instruction 011-12/2010). Payment financial institutions are distinguished from payment institutions licensed only to provide payment services; the new draft Banking Law will address this new category. - Electronic Money Institutions (EME) are governed by Instruction 08-015-2015; supervision by the CBU was endorsed in the review of the Annex; EMEs should be integrated into the scope of the future Banking Law. - Financial companies may have subsidiaries in the insurance sector; such subsidiaries may be included in the accounting area but excluded from the prudential area depending on group capital structure. - EC3: Use of the word “bank” - The Banking Regulation Law governs the use of "bank" and its derivatives in names, trade names, advertising, or any business activity. - Article 13 prohibits unlicensed persons from engaging in banking operations or "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 ensures strict observance of the use of the word “bank” by unlicensed entities. Example: after a capital structure change in the Banque Atlantique Group, the CBU’s favorable opinion required the change of ABI’s name to Atlantic Business International. - In practice, the minister responsible for finance in each country must ensure no entities engage illegally in banking activities without a license. The future banking law should explicitly entrust this role to national authorities and ministers of finance. - EC4: Taking deposits reserved for licensed banks - Article 5 defines funds received from the public. Articles 2, 3, and 13 reserve this activity for licensed banks. - Article 49: bank-like financial institutions may only receive deposits of funds from the public in connection with their activities; they may be authorized by decree subject to the opinion of the BCEAO. The BCEAO investigated a few cases; two financial institutions obtained this waiver. - EC5: Publication of list of licensed banks - Article 16 specifies access to the updated list of approved banks and subsidiaries of foreign banks. - Licenses are confirmed by inclusion on the list of banks or list of financial institutions. Lists are updated annually. - Lists are prepared by the government, submitted to National Directorates of the BCEAO for comments, reviewed and approved, and forwarded for publication in the official journal of countries where National Directorates are located. - National Directorates must publish the list of all WAMU institutions, not only those 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. - Comments and gap: - Legal and regulatory framework adequately covers banking activities, except responsibilities for detecting and monitoring abuse of the word “bank” — surveillance is not carried out on an organized basis. - Recommendation: - Structured surveillance should be established for the “abuse” of the word “bank.” ### Principle 5 — Licensing Criteria (introductory note) - The licensing authority has power to set criteria and reject applications that do not meet criteria. At a minimum, licensing assesses ownership structure and governance (including fitness and propriety of Board members and senior management), strategic and operating plan, internal controls, risk management, and projected financial condition (including capital base). Where owner or parent is a foreign bank, prior consent of its home supervisor is obtained. - EC1 (beginning): The law identifies the authority responsible for granting and withdrawing a banking licence; if licensing authority and supervisor differ, the supervisor has the right to have its views considered and to provide material information; supervisor may impose prudential conditions or limitations on newly licensed bank. *Source: Conclusions, 1wauea2022008 - Conclusions* ### conclusions, ### conclusions ### Licensing framework and responsibilities - Title II, Articles 13-24 of the Framework Law on Banking Regulations establishes the responsibilities in the area of granting and revoking 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. The opinion is binding on the minister; if the minister disagrees, 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. - When the regulatory instrument required by the opinion of the CBU 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). - 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. ### Single licensing and "become established" applications - The regulation provides for a single, simplified licensing scheme within the Union for applications to become established. - Article 18: 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 appears inconsistent with the parallel structure of the forms, as it expressly attributes responsibility for reviews to the CBU; this anomaly is to 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. ### Review process, timing, and staffing - The SGCB Licensing Unit, placed within the Studies and International Relations Directorate (DERI), comprised of five full-time equivalents (FTE), reviews applications for licenses and to become established as part of a highly sequenced process. - BCEAO national directorates examine applications for completeness and have five days from the filing date to check the contents. Incomplete applications will be rejected; complete applications are 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 has 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 additional documents, request comments from other units of the BCEAO, and must ask for the opinion of the supervisors on operations involving cross-border credit institutions (non-objection opinion). - The review takes into account prudential issues, business model factors, governance, supervision, AML-CFT issues, and forecast prudential and financial statements. ### Licensing limits, conditions, and qualitative requirements - 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, including establishing 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). - 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). 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 decision of the CBU is 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. - The license of only one institution has been revoked during the past three years. ### Licensing decisions and statistics (2017–2021) - 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 are based on prudential reasons: applicant's financial unsoundness, violation of prudential standards by institutions in the applicant's group, governance issues, or insufficient moral standing of senior management. - Decisions Made by the CBU on Prior Authorizations Between 2017 and 2021: - Favorable opinion (licensing): 6 (2017), 6 (2018), 3 (2019), 2 (2020), 17 (2021 total across years) - Unfavorable opinion (licensing): 2 (2019) and 2 (2020) — presented in table as 2 and 2 - Deferral of decision: 1 (2017) - Authorization to become established (branch): 1 (2017), 2 (2018), 1 (2019), 1 (2020), total 5 - Refusal of the authorization to become established (branch): 5 (2017), 4 (2019), 3 (2020), total 12 - Source: WAMU. - Note: The table as provided lists the years 2017–2021 with the counts above. ### Licensing criteria, documentation, and compliance with supervision - Licensing criteria are provided in detail in several articles of the Banking Law and in BCEAO Instructions 017-04/2011/RB and 018-04/2011/RB of April 21, 2011, which list documents and information included in the license application and the application to declare the intention to become established (single license). The required documentation would seem to be complete. - Article 15: the central bank, responsible for reviewing licensing applications, ensures that the legal form is suitable for banking activities, reviews the program of activities, technical and financial resources, and branch development plan, and assesses the applicant’s ability to achieve development objectives 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 criteria or provision of inappropriate/inadequate information can result in refusal to approve the license. - If false declarations are discovered after issuance, withdrawal of the license may be ordered after a disciplinary procedure has been initiated, even if not explicitly mentioned in the regulations. ### Ownership, beneficial owners, and shareholder capacity (EC5) - The structure and quality of the shareholding are examined during the review, including shareholders owning at least 5 percent individually and/or jointly, as provided in Annex 1, item 2.1 of Instruction 018-04/2011/RB. - Procedures include collection and verification of identification documents and supporting documentation on shareholders’ wealth position, source of funding used to subscribe capital, and legitimacy of funds under AML-CFT legislation in the Union. Procedures do not explicitly include checks on beneficial owners. - Capacity of shareholders to provide additional financial support is verified through examination of certified financial statements from the past three fiscal years (Annex 1 of Instruction 017-04/2011/RB of April 21, 2011). ### Minimum initial capital (EC6) and capital representation - Regulatory framework: - BCEAO opinion of November 2, 2007 increased minimum capital of banks to CFAF 10 billion, and of bank-like financial institutions to CFAF 3 billion, and established implementation conditions. - 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 the measure entered into force. Active banks were required to meet these new requirements by December 31, 2010. - Implementation date of the second phase, increasing the minimum level under the capital regulations to CFAF 10 billion, entered into force on July 1, 2017. - Decision 03 of March 30, 2015 confirmed these regulatory thresholds. Article 3 required credit institutions failing to meet thresholds to submit an action plan by December 31, 2015. Article 4 provided an exceptional, interim period of 24 months to comply. - The threshold of CFAF 10 billion would seem to be relatively high; the decision was made based on an impact paper and comparisons with comparable or neighboring areas. - Article 34, paragraph 3 of the Banking Law allows the CBU to 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 as of September 30, 2021: two institutions were found to be in violation of the minimum capital rule (including two public banks) since 2017. - 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 filing license applications, 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 establishment. The remaining capital stock must be paid in within three months after the CBU has made its decision on the license. ### Fit and proper (EC7) and assessment of management/directors - Assessment of moral standing and expertise is based on the regulatory plan in Circular 01-2017/CB/C. This applies to all executive management, members of the decision-making body, and shareholders. - The BCEAO reviews CVs of members of executive and decision-making bodies. - Article 12: members of the decision-making body must individually or collectively have appropriate expertise in credit operations, financial analysis, information technology, strategic planning, governance, risk management, internal supervision, capital markets, and compensation policies; they must also know the economy and markets in which the institution operates and be familiar with current legal texts governing activities in the Union. - Integrity: members of senior management and directors must provide a criminal record excerpt not older than three months appended to the license application. - For non-WAEMU nationals with prior banking practice in other countries, the CBU will seek advice of supervisors of those areas to finalize its assessment. - The CBU has issued unfavorable opinions based on lack of moral standing of members of senior management and the main shareholder. ### Governance, strategic and operational plans (EC8) - The licensing authority reviews proposed strategic and operating plans, including determination that an appropriate system of corporate governance, risk management and internal controls, including those related to detection and prevention of criminal activities and oversight of outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of proposed activities of the bank. - As indicated (see EC1), all regulatory requirements before license grant (minimum capital requirement, prudential projections, moral standing and experience requirements for senior management and directors, strict governance rules, risk control and management system reflecting Circulars 03 and 04/2017/CB/C) will be mentioned in the future banking law. *Source: 1wauea2022008 - conclusions* ### Conclusions, ### Conclusions ### Licensing (Principle 5) — findings and description - Applicants must provide information on their strategy and business model, including a market study reflecting plans to become established at the national and regional levels, target customers, business lines, and instruments and services to be offered. - Applicants are required to remit, 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. - Governance, risk management, and internal supervision components are considered in the review of the application; in 2019 one unfavorable opinion was issued due to reputational risks connected with the applicant, and two authorizations to become established were refused due to governance problems in the parent company and deficiencies in the information system. - The licensing authority reviews pro forma financial statements and projections of the proposed bank, including an assessment of the adequacy of financial strength to support the proposed strategic plan and financial information on the principal shareholders. - BCEAO Instruction 17-04-2011/RB requires balance sheets and five-year projected income statements with low, medium, and high assumptions; vulnerability tests are also required. - Page 18 of the license examination guide recommends use of the baseline assumption in the review of applications rather than the most conservative scenario; the average assumption was used as a reference scenario in one application consulted. - Three refusals of authorizations to become established were based on the principle of an excessively unstable financial situation. - For foreign banks establishing a branch or subsidiary, Article 17, paragraph 4 of the Annex to the Convention requires requesting a non-objection notice from the home supervisor; the host supervisor checks whether the foreign bank’s home country authority applies consolidated supervision at the world level and may assess establishing formal cooperation. - Consultation with home-country supervisors may be limited by the absence of signed information-sharing agreements (see BCP 13). - Progress of new entrants is monitored via off-site supervision and missions by the DCPEME to “verify the startup conditions.” Twenty such missions were conducted during the past five years, 14 in 2019, and six since the beginning of 2021; missions discovered departures from announced business plans and deficiencies in information systems, particularly in the AML-CFT component. - Assessment of Principle 5: Largely Compliant. ### Licensing (Principle 5) — comments and key points - Changes since the last FSAP confirm the CBU's decision-making power on licensing; future banking law should give the BCEAO authority to review applications to become established, consistent with the parallel structure of the forms. - Plans exist to explicitly accompany the issue of licenses with qualitative conditions (such as governance) and to provide additional possibilities to raise prudential standards. - Procedures relating to knowledge of shareholders and origin of funds should be extended to beneficial owners. - The increase in minimum capital to CFAF 10 billion CFA doubled capital requirements for licensing and enhanced license security. - Three institutions remain in a situation of long-term violation (see BCP 11) with no confirmed prospect of restoring equilibrium in the near future. - The review procedure appears rigorous, with care to monitor financial forecasts and prudential ratio projections. - The increased presence of foreign banking groups requires enhanced collaboration with supervisors in host countries. - Frequent on-site missions to verify startup conditions help monitor newly licensed institutions. ### Licensing (Principle 5) — recommendations - The financial soundness of applications and projections under 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. - 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. - Instructions on procedures for preparing license applications should be amended to require collection of data on beneficial owners when license applications are filed and examined. - Meetings should be systematically organized with 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 consultation of supervisors in the host country should be strengthened with the continued signing of cooperation agreements. ### Transfer of Significant Ownership (Principle 6) — findings and description - The supervisor has the power to review, reject and impose prudential conditions on proposals to transfer significant ownership or controlling interests in existing banks. - Definitions introduced in June 2016: - Significant holdings: 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”: 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 joint control, exclusive control, and significant influence. - These definitions are not used in the authorization process for changes in control; the Banking Law provides for approval of changes in control to a blocking minority but does not establish a numerical threshold; in practice SGCB applies a threshold of 33.3 percent corresponding to the blocking minority in a public limited company. - The reference to the blocking minority is high compared with best practices, which use a lower threshold corresponding to the concept of significant holdings for approval of changes in control. - There is no obligation to inform the supervisory authority of changes in shareholding structure if the threshold is not reached. - Article 39 of the Banking Law: acquisitions/transfers changing holdings above the blocking minority and above the majority of voting rights are subject to prior approval of the minister responsible for finance, subject to the opinion of the CBU; in practice 33.3 percent is used for blocking minority and 50 percent for majority voting rights. - Article 40: any transfer by a credit institution of more than 20 percent of its assets, placement under management, or cessation of all activities is subject to the same authorizations. - The minister must notify the credit institution of decision within 30 days; thereafter the CBU's decision becomes binding. - The Banking Law mentions persons acting jointly and intermediary persons but definitions and methodology to detect joint action are not clearly established; the concept of beneficial owner appears in AML-CFT texts but not yet in the Banking Law. - Central Bank Instruction 19-12-2011 of December 27, 2011 lists documents for prior authorization; required information includes: - 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. - Regulatory texts do not explicitly include verification of beneficial owners. - In 2017 and 2018, nine requests for prior authorization 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, justified by insufficient assurance of the financial capacity of the shareholders. - The regulatory texts do not explicitly mention the CBU’s power to modify or cancel a change of control made on the basis of false information, though the supervisory authority can take legal action to request cancellation. ### Transfer of Significant Ownership (Principle 6) — assessment and comments - Assessment of Principle 6: Materially Non-compliant. - Comments: - Proposals to transfer controlling interest must be approved by the CBU; in practice the CBU rejects proposals when financial capacity of new shareholders is insufficient. - Requirements do not explicitly include collection or verification of beneficial owners. - The approval threshold applying the blocking minority leads to a higher threshold than international best practices; no obligation to immediately inform the supervisory authority of changes if threshold not reached. - Concepts of intermediary or jointly acting persons should be defined more clearly in law or internal methodologies. - Monitoring systems exist via annual declarations, and compliance obligations require banks to report reputational factors, but there is no explicit obligation to declare significant information that may negatively affect acceptability of a major shareholder. - The CBU does not have an explicitly stated power in regulatory texts to amend or cancel changes in control made without authorization, though it may seek legal remedies. ### Transfer of Significant Ownership (Principle 6) — recommendations - Introduce a lower threshold of 10 percent for supervisory approval for a change in shareholders. - Establish an internal procedure to identify jointly acting persons more effectively by defining rules applicable to individuals and legal entities. - Introduce and define the concept of beneficial owner in the banking law and collect information to monitor and approve significant changes in control involving beneficial owners. - Include an explicit requirement 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. - Introduce a provision in 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 (Principle 7) — opening description - Principle 7 states the supervisor has the power to approve or reject, 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. - Essential Criteria EC1 begins with laws or regulations clearly defining types and amounts (absolute and/or relative to a bank’s capital) of acquisitions and investments needing prior supervisory approval, and cases where notification after the acquisition is sufficient. *Source: 1wauea2022008 - Conclusions* ### Conclusions, ### Conclusions ### Acquisitions and investments: legal framework and limits - Article 56 of the Banking Law authorizes the WAMU Council of Ministers to take measures concerning the conditions under which credit institutions may acquire stakes; however, there are no texts that further define these conditions (for example, whether authorization is required, and which types of stakes require prior authorization or ex-post notification). - Despite the absence of authorization/notification requirements, rules impose deductions from capital for different types of holdings exceeding regulatory thresholds: - 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: 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 except when required for or ancillary to banking activity or recovery of claims. - 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. - 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 will be fully deducted from Tier 1 capital. - On-site supervision may be required to analyze certain acquisitions; off-site supervision ensures limits are observed, but these analyses are conducted on an ex-post basis. ### Criteria, supervisory discretion, and practice - The regulatory texts do not provide criteria to assess proposed acquisitions (EC2). - Supervisory objectives used in practice include ensuring new acquisitions and investments do not expose the bank to undue risks or hinder effective supervision; supervisor may prohibit major acquisitions/investments in countries with laws hindering information flows necessary for consolidated supervision (EC3). - Decision 014/24/06/2016/CM/UMOA on consolidated supervision (adopted by WAMU Council of Ministers) authorizes the CBU to: - Limit the scope of activities and jurisdictions for a supervised entity when these activities jeopardize security and soundness, expose the institution to excessive risks or are not properly managed, when control by other supervisors is unsatisfactory, or when effective consolidated supervision is prevented. - Not authorize capital or organizational structures that prevent obtaining consolidated financial data or otherwise impede effective supervision. - This framework has been in force since 2016 but has not been used to date. - Where startups are concerned, license review includes examination of shareholders’ financial situation and five-year financial projections specifying planned acquisitions and investments. However, regulations do not provide for prior authorization of large acquisitions; major acquisitions are analyzed on an ex-post basis. - SGCB indicated that impact on prudential and financial situation is taken into account for acquisitions analyzed ex-post. - In practice, holdings in commercial entities are fairly limited and generally correspond to support activities (information technology and real property). SGCB relies on financial statements and the Prudential Statement Declaration Form (FODEP). ### Supervisor’s ability to address non-banking activity risks - Limits prescribed by the prudential system for industrial, commercial, agricultural, or service activities apply on a consolidated basis; banking groups must observe limits individually and consolidated. Amounts exceeding limits are deducted in full from Tier 1 core capital per paragraph 38 (i) of the prudential system. - If standards are not observed, the CBU may order corrective measures within a specified deadline; during this period the institution is prohibited from discretionary distributions. - Absence of prior authorization means no ex-ante analysis of a bank’s capacity to manage risks from nonbanking activities. - SGCB does not conduct analyses of large operations by other institutions in the banking group (Additional Criterion AC1). ### Assessment of Principle 7 (acquisitions, investments) - Assessment: Non-compliant. - Comments: - Current legal framework does not define categories and amounts of acquisitions/investments requiring prior approval from the CBU, nor cases where ex-post notification suffices. - Legislation does not provide criteria for assessing each proposal; this gap should be filled in the draft banking law. - Regulatory framework strengthened by granting CBU capacity since 2016 to limit group activities where there is exposure to excessive risks or obstacles to consolidated supervision; power not yet used. - System of limits and/or capital deductions exists for investments and non-operational fixed assets; ex-post monitoring is carried out by SGCB. CBU does not conduct prior analyses to ensure banks have required financial and organizational resources to address acquisitions. - Recommendations: - In the review of the Banking Law, introduce the categories and amounts of acquisitions and investments requiring prior authorization from the CBU and those for which ex-post reporting suffices. - An implementing text should specify mechanisms for authorizing large acquisitions and investments, including criteria to assess proposals. ### Supervisory approach (Principle 8) — methodology and implementation - Supervisory organization: - Supervision organized around DSP (off-site supervision) and DCPEME (on-site inspections). - DSP’s microprudential risk assessment uses daily financial and prudential reporting, analysis of documentation (annual risk management reports, semiannual internal supervision reports, auditors’ reports), and a risk-based approach focusing on ratings. - DSP uses the Credit Institution Rating System derived from CAMELS, overhauled in 2016 to include Basel II/Basel III and developments in governance, internal supervision, and risk management. - Systemic institution identification: - CBU distinguishes systemic institutions using a methodology based on the Basel Committee approach. - WAMU banking sector: six regional-scale systemically important banks and 22 national systemically-important banks. - Methodological notes and expertise: - DSP has methodological notes updated for regulatory developments and technical notices within a performance plan; DCPEME has specialized inspectors. - SNEC methodological approach and implementation (EC2): - SNEC uses quantitative and qualitative data from accounting and prudential reporting and periodic reports to establish risk ratings; quantitative data are currently entered manually (no automated system). - Planned computerized solution implementation was postponed (initially planned for mid-2021) due to the health crisis. - The SNEC rates 11 individual risk factors: 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 via qualitative questionnaires with inherent risk assessment and a three-level scale for the risk management system ("satisfactory," "requires improvement," or "deficient"). Questions are not weighted, which could bias assessments. - Individual risk factors are weighted to reflect relative importance for the Union; the weighting (5.6 percent) for concentration risk is noted as seemingly low. - Two risk factors (market risk and overall interest rate risk) are not rated at the Union scale despite being low at that scale. - SGCB plans to review SNEC methodology and calibration of weightings when required data are collected. - Rating scale one to four adopted (1 = acceptable to 4 = very high). The overall rating prioritizes supervisory activities. - Calibration tests were carried out during overhaul, but the rating system has not been back tested ex-post due to resource shortages; procedure provides for annual ex-post review. - Rating tool is largely manual using Excel; each risk criterion on a dedicated sheet; overall rating generated automatically. - Ratings must be issued on an individual and consolidated basis and use a risk-based approach; frequency of reviews reflects risk profile and rating. - Ratings can be updated following on-site and off-site findings; on-site inspection program is based primarily on rating results; no formal audit cycle exists (see Principle 9). - Implementation and validation: - In 2020, ratings of more than 85 percent of the institutions were reviewed by DSP analysts. - Semiannual review frequency for vulnerable and systemically important institutions has been observed per DSP. - Approximately 20 institutions were given a rating of 4 (“very high risk”). - Validation follows an “expert” approach with at least dual review; sensitive institution ratings subject to organized validation involving Deputy Director and DSP; some ratings may be collegial or escalated to Secretary General. ### Compliance monitoring, resources, and engagement (EC3 and EC4) - Compliance: - CBU Circular 05-2017/CB/C of September 27, 2017, establishes rules governing management of compliance by supervised institutions; compliance verified via off-site and on-site supervision. - Monitoring carried out through examination of accounting and prudential statements on individual and consolidated basis. - Resource constraints and consolidated monitoring: - DSP analysts review financial and regulatory statements, but staff shortages may lead to large portfolios per analyst, possibly preventing thorough review of all risk factors. - Consolidated monitoring remains insufficient. - Off-site supervision staffing: 19 full-time equivalents—ETPs, including senior management, plus four ETPs currently being assigned to the services. - Number of institutions to be supervised: 152 (has increased substantially during past 10 years). - Frequency of discussions with institutions: - SGCB meets with an average of just over 20 institutions per year; by end-July 2021 it had met with more than 30 institutions. - Regional systemically important institutions are generally seen every year, but SGCB has not met with a list of regional systemically important institutions during the past five years. - SGCB organizes few meetings with 14 institutions under special surveillance; most of these institutions met only once since 2017; meetings not held with three institutions during the period. - Meetings of the Supervisory Authority with Institutions (annual counts) - Meetings with the institutions (hearings and working sessions): 2017: 21; 2018: 19; 2019: 21; 2020: 19; 2021: 33. - Meetings with supervision boards: 2017: 2; 2018: 1; 2019: (blank); 2020: (blank); 2021: (blank). - Meetings with provisional administrator: 2017: 4; 2018: 3; 2019: 1; 2020: 2; 2021: (blank). - Total: 2017: 27; 2018: 23; 2019: 22; 2020: 21; 2021: 33. - Source: WAMU. - Supervisor takes macroeconomic environment and cross-sectoral developments into account in risk assessments and through contact with other regulators (EC4). *Source: Conclusions (1wauea2022008 - Conclusions).* ### Conclusions, ### Conclusions ### EC4 — Studies unit, CSF‑WAMU, and stress testing - The CBU has a studies unit consisting of five full-time equivalents: a Unit Chief, three Statistician Engineers, and one Financial Analyst. - The studies unit 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. - The service participates, along with 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" and a framework for sharing information, cooperation, and joint missions. - The CSF‑WAMU has not 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 conducts stress tests on solvency and liquidity on an annual basis that also take into account concentration risks. Results are submitted to the DSP to be reflected in analysis of institutions’ vulnerabilities. - The DSP does not always use results of these stress tests or reflect them in institution ratings; the DSP did not use the results of the latest DSF stress tests affecting the solvency of two institutions to take actions against them. - Exchanges with supervision authorities of nonbank financial institutions exist but do not always occur on a regular basis. ### EC5 — Systemwide risk identification and CSF‑WAMU work - Work in progress in the CSF‑WAMU includes risk mapping of the financial system, which should be completed by the end of 2021 in the best-case scenario. - The Banking Commission is represented in the CSF‑WAMU by its Chair. - CSF‑WAMU duties include: - To assess risks likely to undermine the stability of the financial system as a whole, through analysis of macroprudential indicators, inter alia. - To examine malfunctions in the system that may result in costs and affect resilience to shocks; to define actions required to correct identified vulnerabilities and to coordinate and monitor them. ### EC6 — Resolvability assessment and recovery plans - 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. - Operationally, the resolution mechanism is still being established; there have been delays in publication of the schedule for institutions to submit their plans. - Circular 01/2020/CB established first announcement dates for 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; plans were formally established using the template provided and validated by competent authorities. - Analysis of submitted documents has yet to be completed; interactions with submitting institutions on completeness and quality of recovery plans are still limited. ### EC7 — Framework for handling banks in stress and resolution powers - Through the Supervision Board, the CBU has a framework for supervised institutions in difficulty, including corrective and precautionary measures (Articles 29.1 and 29.2 of the Annex to the Convention) and other instruments (Article 29.3) including special surveillance. - The CBU can place any institution in difficulty in provisional administration (Article 34). - A resolution mechanism has been formally established and gradually implemented. Article 52 of the Annex provides that, at the request of the Supervision Board, the Resolution Board may place in resolution any institution deemed not viable with no prospect of restoring viability. - The Supervision Board relies on preventive recovery plans required of all supervised institutions. - In urgent cases, the Resolution Board is authorized to take resolution measures it deems appropriate without any procedure involving input from both parties (Article 56). Cancellation of a Resolution Board decision after appeal cannot affect validity of the Board's actions unless fraud is involved. - Resolution measures listed in Article 53 do not include liquidation. Liquidation can only be ordered by the CBU and is contingent on prior withdrawal of the banking institution's license as a 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. ### EC8 — Bank‑like activities outside perimeter and licensing enforcement - Article 13 of the Banking Law prohibits engaging in banking activities without prior licensing and placement on the list of banks or bank-like financial institutions. When organizations illegally engaging in banking activity are identified, the CBU will inform competent authorities; the CBU indicated this might have occurred a number of times. - When banks restructure activities outside the supervision area, the CBU can analyze the operation, ensure licensing conditions are met, and apply penalties including withdrawal of the license. The SGCB has not detected such cases. ### Assessment of Principle 8 — Materially Non‑compliant and key weaknesses - The WAMU supervisory authority’s framework is organized on an appropriate reporting system with a risk-based approach. - The rating system for credit institutions (SNEC) uses a consistent methodology, despite weaknesses (failure to reflect certain risk factors and weighting of risk factors). - The SNEC has never been subject to an ex-post review to assess its performance in terms of predictability since implementation. - The risk-based approach defined through the SNEC could be better reflected in establishing the on-site supervision program. - The SNEC cannot be used to rate banking groups or electronic money institutions. Electronic money institutions are assessed using an expert opinion approach that has not been formally established. - Corrective actions have been announced without any established schedule. - Pillar 2 methodology implementation and computerized application of off-site supervision activities will strengthen forward-looking analysis. - The SGCB has yet to develop expertise in stress testing despite quantitative resources; Studies Unit staff have limited capacity given tasks (license processing, banking studies, macroprudential surveillance). - Delays in release of preventive recovery plans have impacted efforts to formally establish recovery plans; not all systemically important institutions have submitted their recovery plans. - Resolution architecture requires regulatory adjustments; resolution measures do not include liquidation, which can only be activated following a disciplinary proceeding. ### Recommendations (Principle 8) - Update the methodology of the rating system for credit institutions and conduct an ex-post review on at least a semiannual basis. - Consolidate the rating process with 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 solvency, a program for development of recovery plans organizing conditions and modalities of financial stabilization, along with a timetable for implementation. - Increase the frequency of cross analyses and systemic risk mapping to better understand trends and accumulation of risks in the sector. - Continue development of expertise (DERI, DSF) in conducting stress tests to better support banks methodologically (introducing a development outline). ### Principle 9 — Supervisory Techniques and Tools (EC1 & on/off‑site organization) - EC1: The supervisor employs an appropriate mix of on-site and off-site supervision and regularly assesses quality and integration of these functions. - Article 21 of the Annex to the Convention authorizes the CBU to conduct or assign on-site and off-site supervision, define frequency and scope in light of size, structure, risk profile, complexity, and systemic importance. - In practice, the SGCB has separate directorates responsible for on-site and off-site supervision. On‑site and off‑site resourcing and activities: - DSP monitors 370 supervised institutions. - Off-site supervision is divided into three units: - Sub-Regional Banks and Financial Institutions Directorate: 4 staff members. - Cross‑Border Surveillance Unit: 6 staff members. - Specialized Institutions Unit: 4 staff members. - Off-site function totals 14 staff members plus 1 director and 2 deputies = 17 staff members. - Institutions are distributed among surveillance managers; largest institutions assigned to most experienced officers. - No regular staff interactions between on-site and off-site supervision, though off-site controllers can be involved in on-site from time to time. - Off-site supervision activities include: - Document management. - Monitoring and analysis of accounting and financial statements. - Monitoring and analysis of internal supervision, risk management, and compliance reports, and minutes of board meetings. - Annual rating of institutions, or semiannual rating of nationally systemic and vulnerable institutions; vulnerabilities requiring senior management presence are escalated to the Secretary General (SG); rating of national systemic institutions escalated to SG; remaining cases validated by the directorate. Ratings have yet to be established for electronic money groups and institutions. - Definition of supervision activities through terms of reference for inspections. - Follow-up of action plans for implementation of recommendations. - Data collected enable the International Relations and Studies Directorate to conduct general or specific studies on trends in the banking system, microfinance, and electronic money. On-site supervision specifics: - On-site supervision staff: 20 persons (one director, one deputy, one assistant, six mission heads, three senior inspectors, three principal inspectors, five inspectors). - In 2021 the unit established expertise centers in AML‑CFT/Governance, Accounting/Finance, Information System/Digital, Credit Portfolio, Market Risk, and Liquidity, targeting two persons per center. - Four types of inspections: - General inspections (number declining): e.g., 3 general missions in 2019. - Special inspections based on off-site indications: e.g., 33 specific inspections in 2019. - Topical missions in several banks: e.g., 2 topical missions in 2019 (AML‑CFT). - Inspection missions on implementation of recommendations: e.g., 2 such missions in 2019. - During the past five years, 230 missions have been conducted. - Survey results: 45 percent of banks indicated last two CBU on-site inspections dated less than three years; 26 percent reported no inspections during the past three years. - Supervision mission process: - Mission announced one month before start, preceded by a preaudit phase. - Typical durations: topical missions 1 week; special missions 2 weeks; systemically important institutions missions 3 weeks. - Before leaving institution, a feedback sheet with provisional findings is submitted; institution has one week to respond. - Mission head has one week to submit report after on-site ends; preliminary draft pre-validated with Director and, for last two years, by a peer mission head. - Report reviewed by a review committee comprised of all directors and deputies, SG, and Deputy SG. - Follow-up letter to Chair of Board, Minister of Finance, and Chair of CBU drafted by on-site authorities and signed by SG of the CBU. - Six-week period between filing of report and preparation of follow-up letters. - On-site supervision is based on annual program approved by Chair of CBU and is part of an approach based on risks identified in off-site supervision; risk mapping prepared based on rating of supervised institutions is used. - Some BCEAO directorates are consulted in preparing the program (Financial Stability Directorate and Financial Inclusion and Payments Systems Directorate); the supervisor does not take the bank audit program into account. - There are no rules requiring minimum inspection frequency differentiating between vulnerable, systemic, and lower‑risk institutions. - The inspection program may be adapted during the year to reflect specific concerns or risks identified by off-site supervision or emergent situations (e.g., 2021 pandemic adaptations). - SGCB reorganizes to reflect changes in activities and risks (e.g., on-site supervision divided into two directorates to monitor credit institutions and decentralized financial systems). - Directorates responsible for on-site supervision conduct an annual assessment of efficacy via review workshops and a quality assurance improvement program; a similar approach has not been implemented for off-site supervision, though off-site participates in on-site review workshops. *Source: 1wauea2022008 - Conclusions* ### conclusions, ### conclusions ### EC2 — On-site and off-site supervision framework - On-site supervision activities are planned by defining a schedule of surveys approved by the Chair of the CBU, based on risks identified by off-site supervision to prepare a list of supervised institutions considered to be the most vulnerable. - In preparing the program, some directorates of the BCEAO will be consulted (the Financial Stability Directorate and Financial Inclusion and Payments Systems Directorate). - Off-site supervision rating procedures provide more frequent supervision of systemic and vulnerable institutions. - On-site and off-site activities are carried out based on guides and procedures that define objectives, scope, and expected results. - On-site supervision procedures must be updated to reflect regulatory developments related to implementation of Basel II/III (see Principle 16) and supplemented for analysis of liquidity and interest rate risks in the banking and market books. - There is scope for further development in the analysis of liquidity and interest rate risks in the banking book. - Clear coordination and sharing of activities exists between on-site and off-site functions for: definition of the survey program, terms of reference for missions, review of reports, and follow-up of recommendations. - Off-site supervision is responsible for follow-up of inspection mission recommendations; these findings are included in off-site analyses, particularly rating activities. - A procedure to formally coordinate on-site with off-site supervision is in the process of being implemented. ### EC3 — Information sources, submission frequency, and validation - Primary supervisory information source: reports submitted by supervised parties. - Legal and regulatory bases: annual financial statements required by Article 50 of the Banking Law; statements during the fiscal year as prescribed by the BCEAO; submission to the BCEAO and the CBU (Article 51). Article 53 of the Banking Law and Article 25 of the Annex require supervised parties to provide documents and information on request. Banking secrecy is not binding on the CBU or the BCEAO. - Submission frequencies observed: - monthly, quarterly, semiannual, and annual on accounting and prudential statements, on an individual, sub-consolidated, and consolidated basis. - Prudential statements: prepared on a semiannual basis, with the exception of the liquidity ratio and the liquidity coverage ratio (which are prepared on a monthly basis). - Internal supervision reports: semiannual. - Compliance reports: semiannual. - Risk management reports: annual. - AML-CFT system reports: semiannual. - Note: The semiannual prudential frequency is relaxed and aligned with accounting submissions; frequency should be reduced to a quarterly basis under the new banking law. - Additional submissions: minutes from board of directors’ meetings and auditors’ reports. Auditors produce: - a specific report each year on compliance with prudential regulations; and - a report on the assessment of the 50 largest risks. - Data collection systems: - Register of Accounting Statements of Financial institutions (FISEC). - Prudential Statement Declaration Form (FODEP). - Qualitative data submitted in hardcopy form. - Observed deficiencies in reporting: - Internal supervision reporting templates were not updated after the last regulatory reform; the table used by off-site supervision to analyze these reports has not been updated. - Reporting to supervision authorities on interest rate and liquidity risk is incomplete (see Principles 23 and 24). - The instruction defining the Pillar 3 template and information to be published has yet to be adopted; published information appears insufficient on credit risk (see Principle 28). - Use of external information: CBU may order institutions to provide information when press reports refer to operations/situations lacking official information; rating agency data may be used if validated by the BCEAO Financial Stability Directorate. - Prudential information verification and integrity involves four interventions: - Legal checks of accounting and internal supervision statements by auditors; verification of quality of financial and prudential statements. - Automated consistency checks integrated into reporting platforms; the FODEP reporting system includes 10,000 control rules. - Off-site supervision activities by the DSP verifying plausibility via cross checks, consistency controls, and compliance with regulatory texts. - Targeted controls by the DCPEME in the context of general or specific surveys. ### EC4 — Analytical tools and stress testing inputs - Supervisor uses a variety of tools to review and assess safety and soundness, including: - analysis of financial statements and accounts; - business model analysis; - horizontal peer reviews; - review of outcomes of stress tests undertaken by the bank; - analysis of corporate governance, including risk management and internal control systems. - Findings are communicated to banks and used to require mitigating actions; analyses determine required follow-up work. - Current practice: - On-site and off-site activities enable analysis of financial statements, operational model, profitability, corporate governance, risk management, and internal control systems per CBU circulars. - Prudential system, risk management circular, and systemic banks circular include crisis simulation requirements, but provisions are limited and need clarification and supplementation by a circular. A draft circular has been finalized and should be adopted in the near future. - In practice, only a minority of institutions meet crisis simulation requirements (see Principle 15). - Supervisory findings are transmitted to institutions via correspondence and reports with time-bound corrective actions monitored by periodic reports. ### EC5 — Systemic risk identification and stress-testing framework - BCEAO carries out crisis simulations: annual stress tests on solvency and liquidity covering all banks in operation; findings reported to the DSP. - Observed issue: DSP did not use results of the latest stress tests conducted by the DSF, affecting solvency of two institutions, to take any actions against them. - Stress-testing methodology: - Sensitivity tests developed by Martin Čihák (2007) to quantify impacts on solvency (capital and solvency ratio) and liquidity (capacity to cover immediate commitments). - Steps: identify risks (credit risk, concentration risk, liquidity risk); establish shock scenarios and assumptions (loan losses, default of large borrowers, run-on deposits). - Test assumptions and scenarios used: - Credit risk sensitivity: simulate increase in gross impairment rate via increased bad claims outstanding and downgrading of sound and restructured claims to doubtful or disputed status. - Concentration risk vulnerability: simulate default of each bank's largest borrower, then its two largest borrowers; also simulate default of main borrower and then two largest borrowers on the regional interbank market. - Liquidity risk: simulate a run-on bank deposits for five consecutive days, resulting in the daily withdrawal of 5 percent of demand deposits and 3 percent of time deposits during the first three days, then of 10 percent and 5 percent, respectively, during the last two days. The liquidity analysis may also simulate interruption of banks' access to wholesale financing. - Sovereign risk: assume a 50 percent loss on the public securities portfolio of the banks’ host country, directly affecting their capital. - Interbank contagion/interconnection: assess series of bank defaults caused by insolvency of one bank. - Sociopolitical and security crisis scenario: combination of shocks to credit portfolios of banks in the Union. - Projects and capacity: - Project to enable the CBU to conduct independent tests; a solvency model expected to be rolled out this year and subsequently extended to contagion and liquidity. - SGCB indicated it has statistical engineers (three in the DERI) capable of conducting stress tests and establishing scenarios. ### EC6 — Reliance on internal audit - SGCB assesses internal audit work within the SNEC rating system (using 17 checkpoints) and during on-site missions. - DCPEME’s supervision methodology covers internal audit matters; checkpoints verify existence of control procedures, assessment of operational process robustness, and efficacy of the first and second lines of supervision. - Analysis includes human and technical resources allocated to internal audit; DCPEME ensures internal audit can act freely. - CBU reliance: Article 25 of the Internal Supervision Circular states the CBU relies on internal audit and auditors, paying particular attention to their comments and recommendations on efficacy of internal supervision systems and ensuring governance bodies address concerns (Article 25). - Internal audit findings are used to produce a semiannual internal supervision report submitted to the CBU; notification letters are sent to banks when shortcomings are identified. - Observed limitations: - No periodic meetings between off-site supervision and internal audit functions, even for systemic groups; meetings occur only for individual cases when vulnerability issues arise. - Off-site supervision does not collect audit reports and audit programs prepared by banks, though periodic bank reports often contain information on audit programs and results. ### EC7 — Engagement with boards and senior management - SGCB maintains contact with heads of supervised institutions on financial position, strategy, corporate governance, and capital adequacy, typically at the request of institutions or the Office of the Secretary General when vulnerabilities are detected; meetings are held in the presence of the Secretary General. - Legal powers: under Article 53 of the Banking Law, institutions must provide requested documents/information; Article 24 of the Annex allows summoning senior managers/directors to hearings (Article 24 not used in practice; hearings used primarily for disciplinary proceedings per Article 32). - Frequency and scope of meetings observed: - Frequency of meetings with institutions (board members, senior management, industry managers) appears insufficient despite efforts in 2021. - SGCB meets with an average of just over 20 institutions per year, except in 2021 when it had met with more than 30 institutions by end-July 2021. - Regional systemically important institutions are generally seen each year, but SGCB has not met with a list of regional systemically important institutions during the past five years. - SGCB organizes a few meetings with the 14 institutions under special surveillance; with the exception of one institution (three meetings during the past five years), the majority of these institutions have been met only once since 2017. Meetings were not held with three institutions during the period. - CBU summons senior management in the framework of disciplinary proceedings. - SGCB organizes an annual meeting with all General Managers of credit institutions and with their auditors. - CBU may participate as an observer in decision-making body meetings when deemed necessary; this was done in practice for one institution during the past two years. ### EC8 — Communication of supervisory findings - Off-site supervision reports findings to supervised institutions via correspondence (notification letters on periodic reports, use of board minutes, follow-up letters on CBU decisions, correspondence on identified problems) or meetings with senior management. - Rating results are used to prioritize meetings; no formal procedure exists for transmitting ratings to supervised parties, though ratings can be discussed with senior management. - On completion of on-site supervision, per Article 27 of the Annex, supervisory conclusions are issued to credit institutions via follow-up letters and supervision reports. - Banks indicated in the FSAP survey that they interact regularly with the bank supervisor, at least on a semiannual basis, primarily through regulatory reporting and monitoring of recommendations and administrative instructions from the CBU. ### EC9 — Follow-up and escalation (introductory content present) - The supervisor undertakes appropriate and timely follow-up to check that banks have addressed supervisory concerns or implemented requirements communicated to them, including early escalation to appropriate supervisory authority levels and to the bank’s Board if action points are not addressed in an adequate or timely manner. *Source: conclusions (1wauea2022008 - conclusions)* ### Conclusions, ### Conclusions ### EC9 — On-site and Off-site Supervision Implementation - Implementation of recommendations is monitored through off-site supervision. - Monitoring tools and methods: - Excel spreadsheet. - Requests for information by the off-site supervision function. - Possible new on-site supervision missions to verify implementation of recommendations of an order from the CBU or recommendations from the Supervision Board. - Observations: - Given the number and sensitivity or severity of comments and recommendations in on-site supervision reports, the frequency of discussions with representatives and key staff, and the frequency of on-site supervision missions, appear to be insufficient. - In case of violations, major risks, or failure to implement recommendations properly, the Secretary General may propose to the CBU the application of administrative measures or penalties (Articles 29, 30, and 31 of the Annex to the Convention). ### EC10 — Notification Requirements by Banks and Control Functions - Regulatory provisions requiring prompt notification: - 2017 Circular on Internal Supervision: Head of Internal Audit must report any significant deficiencies in internal supervision immediately to governance bodies and to the CBU (Article 14). - 2017 Circular on Compliance Management: supervised institutions must inform the CBU immediately of any deficiencies identified by the compliance function that have a significant impact on reputation and/or financial soundness (Article 19). - Circular on the operating conditions of the auditors: auditors must report to the CBU immediately when they become aware of any illicit facts or those that may jeopardize business continuity (Article 19). - Practical findings: - Supervisory authority rarely indicates receipt of such alerts from control functions. - The SGCB is attempting to improve implementation by raising awareness of the need for independent control functions. - Legal scope under Banking Law: - Article 39 requires banks to request prior authorization for changes in legal form, company name, trade name, transfer of headquarters, mergers, splits, dissolutions, and shareholding structure modifications resulting in crossing a threshold (blocking minority or majority of voting rights). - Banks are not required to inform the SGCB in advance if any holdings are acquired, or of any substantial changes in their activity or overall situation. ### EC11 — Use of Independent Third Parties - Legal basis and options: - Article 21 and 29.3 of the Annex to the Convention provide the option of using external experts, the BCEAO, and external auditors to carry out on-site and off-site supervision activities on an individual or consolidated basis. - 2017 Circular on Internal Supervision allows CBU to use, at the expense of the supervised institution, services of approved auditors to conduct specific on-site supervision missions and to determine the scope. - Practice: - In practice, the supervisory authority does not use external experts. - Auditors are asked to verify that a provision has been reflected in the accounts or for accounting issues when there is disagreement with off-site supervision. - Principle: supervisor may use third parties but cannot outsource prudential responsibilities; when using third parties, supervisor assesses reliability and potential biases. ### EC12 — Information Systems and Supervision Tools - Modernization and tools procured: - Since end-2019, SGCB acquired a computer application for on-site supervision (SCAN-R) for supervision, rating, and monitoring of recommendations; SCAN-R is already effective. - SCAN-R functions: preaudit support; addresses balance, balance sheet, income statement, customers, outstanding balances; consistency checks with FISEC/FODEP data; contains questionnaires based on new regulatory texts; shortcomings identified by the tool are included in the report (report format unchanged since SCAN-R implementation). - Off-site supervision tools: - Another application dedicated to off-site supervision and incorporating the rating system is in the process of being implemented. - Current off-site supervision requires many manual data collection tasks prior to analysis; ratings are prepared with an Excel spreadsheet; accounting and prudential data are not automatically entered. - Surveillance officers lack tools to analyze financial statements or management indicators summarizing key prudential data or providing alert indicators. - The SCAN-R tool (for off-site supervision), to be implemented in the very short term, should automate tasks and provide management indicators and peer comparisons. ### AC1 — Independent Review and Quality Assurance - Periodic auditing and assessments: - SGCB is audited periodically by the Inspection and Audit Directorate of BCEAO Headquarters to assess compliance of internal procedures and adequacy of prudential tools. - One audit of the SGCB was conducted during the past five years, from April 30 until June 13, 2018. - External assessments of on-site supervision are planned under the internal quality assurance and improvement program; such assessments have yet to be carried out. - Assessment of Principle 9: Largely Compliant ### Assessment Findings and Key Comments (Principle 9) - Structure and coordination: - Appropriate combination of on-site and off-site supervision implemented by two Directorates of the SGCB. - On-site inspections: very limited time on investigations within institutions; twice as much time allocated to drafting the report and follow-up letter with a lengthy multiple review process. - No rules requiring a minimum frequency for inspections that differentiates vulnerable, systemic, and lower-risk institutions. - On-site and off-site activities appear coordinated with information sharing. - Data and reporting shortcomings: - Shortcomings highlighted in other principles: data published by banks under Pillar 3, quantitative reporting to supervisory authority on liquidity risk management, interest rates in the banking book, absence of a uniform template for internal supervision and risk management reporting. - Difficulty obtaining time series with prudential data. - Banks are not required to inform the supervisory authority of substantial changes in their activity or overall situation. - Use of internal and external audit: - Supervisory authority will evaluate internal audit work and may rely on periodic reports from internal and external audit functions. - In practice, off-site supervision does not collect reports on audits conducted by banks. - No regular meetings between off-site supervision, supervision, risk management, internal audit functions, audit and risk committees, or auditors for systemic and vulnerable institutions. - Warning system requiring internal or external auditors to report incidents is rarely used in practice. - Engagement with senior management: - SGCB will contact senior management when vulnerabilities are detected; CBU meets senior management of institutions under special surveillance in connection with disciplinary procedures. - Frequency of SGCB meetings with senior management and board of directors might be increased; a minimum meeting interval should be established for systemic and vulnerable institutions. - Reporting and follow-up: - Findings from supervision activities are reported in a timely manner and implementation of recommendations is monitored. - Given the number and sensitivity/severity of observations and recommendations, frequency of discussions with key representatives and staff and on-site missions should be increased. - Analytical work and crisis simulations: - SGCB conducts analyses of financial, governance, and risk management statements, but not horizontal peer reviews. - Examination of crisis simulations by institutions suffers from absence of a circular on crisis simulations. - BCEAO conducts crisis simulations and transmits conclusions to SGCB, but SGCB does not use them diligently. - Work in progress to enable CBU to conduct stress tests itself, which will give expertise required to assess institutions’ crisis simulations. - Tools and methodology: - Improvements made to on-site supervision tools. - Off-site supervision lacks adequate computer system (absence of management indicators; manual data collection). - Need to continue improvement and automation of tools. - Off-site supervision procedures and template for analysis of internal control, risk management, and compliance reports have not been updated since new circulars; should be updated to reflect Basel II/III regulatory developments. - Quality control exists for on-site inspections, but there is no quality control for off-site supervision. ### Recommendations (Principle 9) - Extend the quality control approach established for on-site supervision to off-site supervision. - Put internal and external supervision functions to further use for systemic institutions by: - Considering internal audit missions planned within institutions when preparing the on-site supervision program. - Ensuring internal audit findings are systematically received. - Planning regular meetings between internal and external control functions of institutions and off-site supervision for vulnerable and systemic institutions. - Increase frequency of meetings between SGCB, senior management, and board of directors (including independent directors) of supervised institutions; establish a minimum frequency for vulnerable and systemic institutions. - Streamline the multiple review process for reports to reduce time allocated to drafting and allow more time for on-site investigations. - Establish a minimum frequency for on-site supervision and differentiate between vulnerable, systemic, and lower-risk institutions. - Increase frequency of on-site missions to monitor implementation of recommendations in follow-up letters. - Require banks to report any substantial changes in activities and overall situation to the CBU in advance. - Continue improvements to SGCB tools by: - Improving information technology tools available to off-site supervision. - Developing comparisons between peer banks. - Updating off-site supervision methodology and the template for analysis of internal supervision, compliance, and risk management reports. - Finalizing tools to enable the CBU to conduct its own stress tests by improving the database with time series, more granular information, a macroeconomic model, and greater integration of stress test results into supervision activities. ### Principle 10 — Supervisory Reporting (Intro) - Principle statement: The supervisor collects, reviews and analyses prudential reports and statistical returns from banks on both a solo and a consolidated basis, and independently verifies these reports through either on-site examinations or use of external experts. ### EC1 — Power to Require Prudential Information; Frequency and Mechanisms - Regulatory basis: - Article 52 of the Banking Law: “credit institutions shall establish periodic statements with the frequency and under the conditions prescribed by the central bank.” - Institutions must submit annual accounts certified by auditors to the Banking Commission by June 30 of each year. - Individual and consolidated financial statements must be prepared in accordance with the revised Banking Chart of Accounts (BCS) and implementing instructions. - Frequency and content: - Supervised institutions required to submit 30 periodic statements, with frequencies monthly, quarterly, and semiannual. - The 39 FODEP prudential statements cover minimum capital requirements, major risks, concentration, liquidity, asset quality and provisions, transactions with related parties, and market risk factors. Prudential statements must also be submitted on a consolidated basis. - Prudential statements are prepared on a semiannual basis, with the exception of the liquidity ratio and liquidity coverage ratio which will replace it, on a monthly basis. - Semiannual frequency deemed insufficiently stringent; frequency should be reduced to a quarterly basis under the new banking law. - BCEAO has requested credit institutions submit prudential statements on a monthly basis for collaboration and more detailed monetary policy steering. - Submission mechanisms and compliance: - Declarations filed using the BCEAO reporting platform, which includes an automatic supervision system for uploaded statements plus checks conducted by the SGCB. - Submissions monitored by national directorates of the BCEAO; delays subject to penalties as provided in Instruction 013-12/2010/RB of December 13, 2010. ### EC2 — Reporting Instructions and Accounting Standards - Update of accounting standards: - Revised banking chart of accounts under Decision 357-11-2016; entered into force during the 2018 fiscal year. - Conceptual framework aligned with Organization for the Harmonization of Business Law in Africa and Basel standards. - Article 20 of Annex to Decision 357-11-2016 references internationally accepted accounting principles: consistent methods, transparency, prudence, specialization of fiscal years, inviolability of the opening balance, and preeminence of the real economic situation over legal appearance. - Banking chart of accounts strengthened conceptual framework and brought Union’s standards closer to IFRS; standardized notes to accounts with 27 notes defined. - Entry into force preceded by a cycle of 23 simultaneous missions at the end of 2017 to prepare institutions for transition. - Transition to IFRS: - To date, only listed banks are subject to IFRS publication. - BCEAO launched efforts to prepare for ultimate transition to IFRS, including a questionnaire to banks to assess level of preparation; information will determine prior conditions for transition. - BCEAO considers arrangements, particularly for provisioning for outstanding balances, to facilitate implementation for small institutions. - Instructions for prudential statements: - Process primarily covered by Instruction 03-05-2017 and Instruction 05-08-2017 on the approach for prudential statements. - Instruction supplemented with a technical annex outlining mechanisms for completing the prudential statement declaration forms (FODEP), references, and instructions for completing each of the 39 prudential statements. ### EC3 — Valuation Framework (Beginning of Description) - EC3 description begins: supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations; measurement of fair values must maximize use of relevant and reliable inputs and be consistently applied for risk management and reporting; valuation framework and controls subject to independent validation and verification; supervisor assesses reliability and prudence of valuations and can require adjustments for regulatory reporting purposes. *Source: 1wauea2022008 - Conclusions* ### Conclusions, ### Conclusions ### Definition of Fair Value and Relevant Principles - The new BCA introduces a hybrid system for asset valuation. Article 35 recognizes historical cost and fair value as assessment mechanisms for items on the balance sheet, in the off-balance sheet accounts, and income statement. - Article 37 defines fair value as "the price that would be received for the sale of an asset or paid for the transfer of a liability in a normal transaction between market participants on the valuation date, whether that price is directly observable or estimated using another valuation technique." - Article 37 identifies three approaches for fair value assessment: the market approach, the cost-based approach, and results-based approach. - Application of fair value within the Union is relatively limited because financial markets, particularly secondary markets, are insufficiently developed. - Fair value is substantially accepted for valuation of securities held by credit institutions (essentially transaction securities) and for assessment of transactions in foreign exchange, including hedging instruments. - Other assets are valuated at historical cost but including transaction costs (amortized cost). ### Use of Models to Valuate Products - Paragraph 339 of the prudential system provides valuation with reference to a model; a model can only be used when market price valuation is impossible. - Paragraph 340 requires: prior approval from the decision-making body, documentation of the assumptions, independent validation of the model, regular review of the model, etc. - Discussions with the SGCB did not indicate clear evidence of institutions using internal models for valuation and recording of results. - No supervision has been conducted to date in connection with these model-based procedures. ### EC4–EC6: Collection and Comparability of Supervisory Information - EC4: Article 7 of Circular 04-2017 adopts the principle of proportionality: prudential and reporting requirements should reflect the size, structure, nature, and complexity of activities and the risk profile of each supervised institution. - For institutions under special surveillance or provisional administration, the Authority will define a periodic report to be produced; type, quality, and frequency defined in the decision of the CBU on implementation of special surveillance. - Systemically important institutions will be expected to submit some prudential statements more frequently. - EC5: All data will be transmitted to the BCEAO in the form of uniform tables submitted at the same dates (stocks) and covering the same periods (flows). - Prudential requirements apply on a sub consolidated basis to intermediary financial holding companies and on a consolidated basis to parent credit institutions and financial holding companies. - Requirements and deadlines for sub consolidated and consolidated accounting and prudential reporting are uniform for all supervised institutions. - EC6: Supervised institutions are required, when requested by the CBU, in the specified time and forms, to provide all necessary documents, information, clarifications, and justifications under Article 53 of the Banking Law and Article 25 of the Annex to the Convention. - The CBU may require information via correspondence from the Office of the Secretary General, a decision of the Banking Commission, or administrative measures. - Article 6 of the Circular on the conditions and mechanisms for the application of the banking crisis resolution system permits the supervisory authority to request information in connection with recovery plans; institutions subject to the resolution system must report significant changes to the Resolution Board. ### EC7–EC11: Access, Enforcement, Verification, and External Experts - EC7: Regulations guarantee access to institutions' documentation. - Article 53 of the Banking Law: “credit institutions are required, on request from the CBU, to provide the latter with any documents, information, clarifications, and justifications deemed to be useful in the discharge of its duties.” - Article 25 (Annex to the Convention): institutions must provide the Banking Commission with requested documents in specified forms and time frames. - Article 21 (Annex): the CBU may carry out or order on-site or off-site supervision; on-site may extend to subsidiaries and responsible persons. Credit institutions cannot oppose such supervision (Article 59 of the Banking Law). - Article 53 and Article 26 (Annex) provide that professional secrecy is not binding on the Banking Commission. - Article 24 (Annex) authorizes the CBU to conduct simple hearings of senior management and relevant persons. - On-site supervision investigations include discussions with executive management and possibly the chair of the board; a feedback form is submitted by the general manager. - EC8: Enforcement powers and penalties - Articles 71 and 72 of the Banking Law provide penalties for refusing to report, reporting incomplete or knowingly inaccurate information, and obstructing supervision. - Instructions 03-05-2017 and 022-11-2016 specify that failure to comply with reporting quality and deadlines constitutes grounds for penalties provided by current banking regulations; a system of penalties exists for late submission of prudential statements (see EC1). - In practice, the CBU does not impose penalties solely on the basis of prudential information repeatedly incorrect or not submitted in a timely manner. - EC9: Verification and integrity checks - Four types of intervention verify prudential information: - Legal checks of accounting statements and internal control by auditors; verification of the quality of financial and prudential statements. - Automated consistency checks integrated into reporting platforms: the FODEP reporting system includes 10,000 control rules. - Off-site supervision by the DSP verifying plausibility with cross checks, consistency controls, and compliance with regulatory texts. - Targeted checks by the DCPEME in general or specific surveys; deficiencies are not uncommon related to automation and reliability of production processes. - EC10: Use of external experts - Use of external experts is limited to auditors, contributing to prudential supervision pursuant to Circular 02-2018/CB/C. - The CBU has not requested other external experts to conduct specific missions in institutions to date. - Auditors are not subject to supervision by the Banking Commission; if anomalies are identified, the DPS may notify auditors, and the SGCB or CBU may summon auditors for hearings (Article 24), though this has not been exercised to date. - EC11: Reporting by external experts - Article 19 of Circular 02-2018 requires auditors to report immediately to the CBU when they become aware of illegal events or those that may compromise business continuity. - Auditors must prepare a specific report on compliance with prudential regulations and an evaluation report on internal control; implicitly required to report significant deficiencies observed during audits as soon as possible. ### EC12: Periodic Review of Collected Information - The CBU has not introduced a procedure for periodic review of the information collected to determine it satisfies supervisory needs. ### Assessment of Principle 10 (Reporting and Accounting) - Assessment: Largely Compliant - Comments: - The revised banking chart of accounts has helped align accounting standards with international standards and supplement qualitative information accompanying submissions. - The reporting mechanism is secured with multiple automated consistency checks, but survey reports regularly highlight problems in institutions’ reporting systems. - Semiannual submission of prudential statements—excluding liquidity ratios—appears insufficient and will be reviewed in the framework of the new banking law. - Penalties are not systematically applied for recurrent errors in submission of prudential statements. - The SGCB lacks a detailed view of institutions using models for valuation of securities portfolios or foreign exchange transactions and has never checked development, governance, or supervision of such models. - Recommendations: - A quarterly periodicity should be established for the submission of prudential statements, particularly in systemic cases. - A survey of institutions should be prepared using the internal model for the valuation of the trading book, and necessary steps taken to verify regulatory requirements. - Ensure the system of penalties for delays in receiving reporting statements is properly applied. ### Principle 11 (Corrective and Sanctioning Powers of Supervisors) — EC1 Summary - The supervisor acts early to address unsafe or unsound practices and has an adequate range of tools including revocation of banking licences. - EC1: Raising concerns and monitoring corrective actions - The CBU may contact the board of directors on any matter; decisions of the CBU are binding ipso jure upon notification (Article 41, Annex to the Convention). - Off-site shortcomings are brought to governing bodies; on-site conclusions are notified to the board via a follow-up letter (LDS) per Article 27 (Annex). - Follow-up letter requests corrective steps within specified time limits, with a statement of main problems and a follow-up sheet attached; these must be returned within one month, signed by authorized persons. - Implementation of recommendations must be certified by auditors. - The CBU may conduct simple hearings of senior management under Article 24; the Banking Commission used simple hearings on September 20, 2021 for two credit institutions. - Injunctions: the CBU can issue injunctions ordering corrective or precautionary measures; injunctions are formal decisions indicating regulatory basis, justification, and substance and are announced to the chair of the board. - Placement under special surveillance (Article 29, Annex): orders may be accompanied by special surveillance requiring periodic reports; to date, placement under special surveillance has meant that an order has been issued. - Fourteen credit institutions are currently under special surveillance. - Monitoring corrective measures: - The DSP will prepare a monitoring table for recommendations; monitoring via off-site information requests or new on-site missions. - DSP organizes meetings (Director of DSP, deputy, and analyst) to assess monitoring; meetings are minuted and submitted to the Chair of the CBU. - Failure to make progress may lead to further investigation before administrative or disciplinary procedures. - Observations: - Given the number, sensitivity, or severity of comments in on-site reports, it may be useful to increase frequency of discussions with institution representatives and key staff to ensure implementation receives special follow-up. - More frequent follow-up missions could help ensure recommendations are properly implemented. *Source: 1wauea2022008 - Conclusions* ### Conclusions, ### Conclusions ### System of Administrative Measures and Penalties (EC2) - The CBU has adequate powers and a broad range of tools to intervene with institutions subject to its supervision that fail to comply with the banking regulations. These tools include administrative measures and disciplinary penalties, depending on the seriousness of the situation of the institution involved. - Administrative measures (warnings or injunctions). Injunctions entail ordering the implementation of remedial or precautionary measures. - Remedial measures may include: - Applying increased capital or liquidity requirements appropriate for the institution’s circumstances. - Requiring strengthened governance, risk management, or internal supervision systems. - Establishment of further provisions for assets. - Precautionary measures relate in particular to: - Suspension of all or part of the shareholders’ rights. - Limiting or prohibiting discretionary distributions (dividends to shareholders, remunerations of shares to members, remuneration bonuses). - Implementation of the preventive recovery plan that all supervised institutions are required to prepare. - Supervised institutions that have not obeyed an order from the CBU are considered to have violated the banking regulations. - Disciplinary penalties (Article 31.1 of the Annex to the Convention): - Warnings. - Reprimands. - Suspension or prohibition of all or some operations. - Any other limits to the professional practice. - Suspension or resignation of the responsible members of senior management. - Disqualification of the responsible persons from senior management, administration, or management of an institution subject to its supervision or one of its agencies (restriction may be permanent or limited in time; may be imposed even after they have left office). - Withdrawal of license or authorization to become established. - Fine amounts: - Instruction 06-05-2018 establishes rules for application of fines, setting penalty amounts according to type of violation and defining three categories of violations. Fine amounts are set by category of violation, not by type of disciplinary penalty. In some cases, fines correspond to the maximum penalty provided by the regulation for the category of institution involved. ### Provisional Administration - Under Articles 34 and 35 of the Annex to the Convention, the CBU may decide to place a supervised institution under provisional administration or liquidation. - The provisional administrator is appointed through regulatory channels in a decree of the minister responsible for finance of the host country of the institution's headquarters. - To date, only one institution in the Union that receives government support has been placed in provisional administration. - Observations about the current practice: - The provisional administrator has been renewed regularly since he took office in 2013, despite the institution’s situation not improving in light of minimum capital violations. - Regulations do not set a time limit for the term of a provisional administrator. - Article 6 of Circular 06-2011/CB/C specifies that the minister responsible for finance can remove a provisional administrator after having requested a decision of the Banking Commission, or at its request. Terms of office may be extended by the Minister of Finance, after having requested a decision from the CBU, or at its request. - This systematic extension, endorsed by the CBU, is at odds with the temporary nature of such a function. - Article 9 of the Circular indicates the provisional administrator must submit reports while in office and at the end of assignment. Minutes of the 117th meeting session note that the information provided in the provisional administrator’s performance reports does not change from one period to the next. ### Supervisor's Practices in Connection with Penalties - During the past three years, the CBU has made extensive use of orders and reprimands to impose corrective measures or punish institutions in violation of regulations. Financial penalties were issued only twice during the past three years. - The infrequent use of fines raises questions about: - The criticality of certain observations (governance, risk management, and AML-CFT) that appear in on-site supervision reports. - The substantial number of institutions found to be in violation of prudential ratios. - Serious violations of the regulations do not systematically lead to stringent penalties commensurate with the type of violation. - Example case (institution under special surveillance): - Included in the 2019 audit program for a specific investigation and implementation of an order issued in 2018. - Report showed the order had not been observed and violations were particularly serious. - Continued special surveillance and another order effective no later than December 31, 2020: - To correct its financial position by significantly reducing its overall debt. - To establish all required provisions. - To take steps to discontinue intermediation and investment operations. - Serious anomalies in inspection report (absence of credit program, unreliable accounting system, conflicts of interest, failure to comply with money laundering regulations) did not give rise to any penalties. - Acknowledged increase in use of penalties in early 2021: eight fines were issued between 2019 and September 2021. ### Deficiencies Identified in an On-Site Inspection (selected items) - Governance: - Charter out of date. - Representation powers of the main shareholder not submitted. - A director declared independent did not meet independence criteria. - Board of directors’ minutes not submitted to the Banking Commission. - Budget execution not monitored by the board of directors. - No indication that the board monitors the strategic plan. - Risk and Supervision: - Mechanism for approving staff loans not compliant with Article 45. - Risk appetite level not approved. - Specialized committees not effective. - Supervision functions have no resources. - No periodic meetings with internal control manager. - Annual supervision plan not prepared or approved. - No internal audit charter or manual. - Five audit reports not submitted to the board of directors. - Credit: - Accounting information system not reliable or comprehensive. - No credit policy validated by the board of directors. - No system to monitor large risks or exposures with related parties. - No system to prevent conflicts of interest when loans are granted. - No procedures for restructured loans. - No quarterly review of overdue loans. - No downgrading date for doubtful and restructured claims. - Statements of commitments not reconciled with information system for most of the 25 largest commitments. - Loans granted without recording in accounting systems. - Provisioning procedure refers to a nonexistent instruction. - Liquidity / Operational Risk / AML-CFT: - No liquidity, interbank operations, or securities management procedures. - No business continuity plan or backup site. - Data center not secure; substantial exposure to computer virus risk (Use of Windows 7). - Policy not approved by board of directors. - Procedures not updated to reflect Instruction 07-09-2017. - Know your customer information not always complete. - No suspicious transaction register. - No establishment of thresholds for unusual transactions. - No national information processing unit correspondent. - No surveillance of cash operations. ### Profile of Decisions by the Banking Commission Between 2018 and 2020 - Administrative Measures / Administrative instructions: - 2018: 50 - 2019: 31 - 2020: 9 - Administrative Measures / Special surveillance: - 2018: 1 - 2019: 2 - 2020: 3 - Disciplinary Penalties / Warnings: - 2018: 5 - 2019: 9 - 2020: 0 - Disciplinary Penalties / Reprimands: - 2018: 26 - 2019: 1 - 2020: 4 - Disciplinary Penalties / Fines: - 2018: 2 - 2019: 0 - 2020: 0 - Disciplinary Penalties / Suspension and prohibition from operation: - 2018: 0 - 2019: 0 - 2020: 0 - Disciplinary Penalties / Revocation of license: - 2018: 1 - 2019: 0 - 2020: 0 - Source: Reports from the WAMU Banking Commission (2018, 2019, and 2020). ### Publication of Disciplinary Penalties - Article 33 of the Annex to the Convention provides that disciplinary penalties imposed by the CBU may be made public. Mechanisms are provided in a 2018 circular. - To date, the CBU has not exercised this option. The SGCB indicated the CBU would consider using it. ### Early Intervention Powers and Measures (EC3 and EC4) - The supervisor has power to act where a bank falls below established regulatory threshold requirements, including prescribed regulatory ratios or measurements, and to intervene at an early stage to require a bank to take action to prevent crossing thresholds. - Under intervention powers, when a bank no longer meets certain regulatory threshold requirements (particularly prudential ratios), the CBU may require an institution to submit a plan, along with a schedule, to restore compliance. - Precautionary measures the CBU may require before regulatory thresholds are crossed include: - To sell off any activities likely to compromise its financial soundness. - To allocate all or part of its earnings for the fiscal year to strengthen its capital. - To suspend, on a temporary basis, the free disposal of all or some of the assets. - The CBU indicated these measures have been established, although not systematically applied for institutions whose situation has deteriorated. Partial or total allocation of earnings to strengthen capital had occurred. ### Breadth of Remedial and Resolution Options (EC4) - Regulatory texts offer a broad, adequate range of measures to undertake remedial action or punish fragile institutions or those that have committed violations. Possible actions include: - Restricting current activities of the bank. - Imposing more stringent prudential limits and requirements. - Withholding approval of new activities or acquisitions. - Restricting or suspending payments to shareholders or share repurchases. - Restricting asset transfers. - Barring individuals from the banking sector. - Replacing or restricting powers of managers, Board members or controlling owners. - Facilitating a takeover by or merger with a healthier institution. - Providing for interim management of the bank. - Revoking or recommending revocation of the banking licence. ### Management of Institutions in Long-Term Noncompliance - The CBU may face difficulty making rapid decisions and adopting effective measures against institutions in long-term noncompliance or that are financially very fragile. - Three examined institutions (one public bank and two privately owned banks) are in recurrent violation of minimum capital regulations and do not generally meet all regulatory requirements. Resolution is impeded by failures of senior management to fulfill commitments, interpreted as delaying tactics and indicative of member-country involvement. - These three institutions did not comply with the decision of the Council of Ministers of March 30, 2015 on capital stock (deadline for compliance expired on June 30, 2017). Disciplinary procedures have been pending since 2018. Numerous administrative instructions and reprimands issued; only one institution reportedly no longer in violation of minimum capital requirement as of minutes of the CBU from June 2021. - In 2018, after delays, the CBU placed an Ivoirian bank in provisional administration and subsequently in liquidation; process carried out under satisfactory conditions from a stability standpoint. ### Summary of Measures Adopted by the CBU Against Three Credit Institutions in Violation of Minimum Capital Requirements - Institution A: - Type of Shareholding: Private but shares held by the host country government - Systemically Important Banking Institution: No - Type of Violation: Minimum capital - Examined by the Banking Commission: Order and reprimand (December 2017, September 2018); Order (September 2019) - Measures Adopted: Under special surveillance; In provisional administration since 2010 - Delayed Decision: December 14, 2018, March 18 and June 19, 2019 - Status of disciplinary procedure: Pending - Existence of Other Prudential Violations: Yes (representation of capital with Tier 1 capital, solvency, liquidity) - Institution B: - Type of Shareholding: Private - Systemically Important Banking Institution: No - Type of Violation: Minimum capital - Examined by the Banking Commission: Order and reprimand (December 2017, September 2018) Order (2019) - Measures Adopted: Under special surveillance - Delayed Decision: December 14, 2018, March 18 and June 19, 2019 - Status of disciplinary procedure: Pending - Existence of Other Prudential Violations: Yes (representation of capital with Tier 1 capital, solvency) - Institution C: - Type of Shareholding: Public - Systemically Important Banking Institution: No - Type of Violation: Minimum capital - Examined by the Banking Commission: Order and reprimand (December 2017, September 2018) Order 2019 - Measures Adopted: Under special surveillance - Delayed Decision: December 14, 2018, March 18 and June 19, 2019 - Status of disciplinary procedure: Pending - Existence of Other Prudential Violations: Yes (representation of capital with Tier 1 capital, solvency) ### Challenges for Credibility and Independence - Review of meeting minutes shows the Chair and some board members openly questioned the credibility of the supervision authority given the duration of violations. This may lead to questioning the degree of the CBU's independence from the countries. - Observations: - Only one of the three banks is public; another receives direct government support (government holds majority shareholder securities); the third is aware of government intervention in follow-up of the case. - The Chair of the CBU reminds members to avoid excessive interference from governments. - These institutions are not systemic at the national level according to the CBU list; this argument may be (incorrectly) used in sessions to justify precautions in handling cases. - Example: SGCB proposed provisional administration for an institution in violation of almost all prudential rules (solvency and liquidity). The CBU deferred decision and issued an order instead. At the 120th Session the institution received a reprimand with an order to increase capital and comply with capital rules (representation with Tier 2 capital) and intensified collection activities. Minutes reveal government financial intervention and SGCB contribution to special surveillance. Case no longer mentioned in CBU meetings beginning with the 124th Session of June 2021. It was decided to maintain special surveillance and ask the SGCB to submit a report on the institution that had negative Tier 1 capital of CFAF 84.2 billion at December 31, 2020, at the next meeting. ### Sanctions Applied to Management and Individuals (EC5) - Disciplinary powers apply to both supervised institutions and persons involved in their administration and management. - Article 31.1 disciplinary penalties specifically target directors and members of senior management (warnings, reprimands, suspension of duties, limits to professional practice, resignation from office, disqualification from senior management, board of directors, or management). - Restrictions may be permanent or limited in time and may be issued after persons have left office. - Since 2017, the CBU has applied 18 penalties to members of senior management of institutions subject to its supervision. - During 2017-2020, 14 of the 16 penalties targeted members of senior management and directors of decentralized financial systems. *Source: Conclusions (1wauea2022008).* ### References ### 1wauea2022008 - References ### Enforcement actions recorded (summarized list) - 1. PCA* Mali — Resignation, disqualification from holding office**** — 060-12-2017/CB/C — N/A — 12/11/17 - 2. DG** Mali — Resignation, disqualification from holding office — 061-12-2017/CB/C — N/A — 12/11/17 - 3. DG Senegal — Reprimand — 026-06-2018/CB/C — N/A — 06/20/18 - 4. Director Burkina — Suspension, disqualification from holding office — 028-06-2018/CB/C — - — 06/20/18 - 5. PCA Togo — Reprimand — 053-06-2019/CB/C — N/A — 06/19/19 - 6. PCA Benin — Suspension, disqualification from holding office — 054-06-2019/CB/C — - — 06/19/19 - 7. Former DG Benin — Disqualification from holding office — 056-06-2019/CB/C — - — 06/19/19 - 8. DGA*** Benin — Reprimand — 075-09-2019/CB/C — N/A — 09/18/19 - 9. Former PCA Benin — Reprimand — 076-09-2019/CB/C — N/A — 09/18/19 - 10. Former DG Benin — Reprimand — 077-09-2019/CB/C — N/A — 09/18/19 - 11. Former PCA Côte d’Ivoire — Disqualification from holding office — 091-12-2019/CB/C — Permanent ban — 16/12/19 - 12. Former Director Côte d’Ivoire — Disqualification from holding office — 092-12-2019/CB/C — Permanent ban — 16/12//19 - 13. PCA Mali — Warning — 091-12-2020/CB/C — N/A — 12/09/20 - 14. Director Mali — Reprimand — 092-12-2020/CB/C — N/A — 12/09/20 - 15. PCA Niger — Disqualification from holding office — 002-03-2021/CB/C — Five years (March 2021- March 2026) — 03/17/21 - 16. General Manager Niger — Disqualification from holding office — 003-03-2021/CB/C — Five years (March 2021- March 2026) — 03/17/21 - Notes on abbreviations: - PCA – Chair of the Board of Directors - DG – General Manager - DGA – Deputy General Manager - ****Disqualification from holding office: disqualification from holding positions in administration, senior management, or management in a decentralized financial system, credit institution, or any other institution under the supervision of the Banking Commission of the West African Monetary Union. ### Resolution framework, cooperation, and ring-fencing - Circular 3-2020/CB (conditions and mechanisms for the application of the resolution system) does not explicitly indicate the possibility of establishing ring-fencing to protect a bank from parent company or subsidiary operations; however, Articles 29, 30, and 31 might be used for that purpose. - The CBU combines supervisory (Supervision Board) and resolution (Resolution Board) roles; entry into resolution is decided by the Resolution Board at the request of the Supervision Board in accordance with Article 52 of the Annex to the Convention. - The Resolution Board may involve the Deposit Guarantee and Resolution Fund of the WAMU under Articles 53 and 58 of the Annex to the Convention. - The Chair of the Commission covers information from national host country authorities on implementation of resolution measures, per Article 55 of the Annex to the Convention. - The CBU has signed 11 cooperation agreements or memorandums of understanding with foreign supervision and resolution authorities. - Cross-border banks from the Union are present in approximately 30 countries; mapping of parties (other than the supervisor) involved in resolution activities has not been carried out comprehensively. ### Assessment of penalties, corrective actions, and supervisory practice (Principle 11) - Findings: - The WAMU CBU has a broad mix of penalties and classifies offenses by seriousness and fines amount, but tends to use orders and reprimands frequently rather than enforcement measures. - The CBU has been tolerant with institutions committing sustained prudential violations; a substantial number of credit institutions have been non-compliant with minimum capital rules and/or prudential ratios for prolonged periods. - In some cases, the CBU deferred decisions in consecutive sessions, delaying remedial action; one institution remained under special surveillance for more than 25 years; one very small institution was under provisional administration for more than eight years. - From 2017 until 2020, the CBU issued only two token fines against institutions; the CBU began moving toward increased use of fines according to decisions made in 2021. - Significant deficiencies, particularly in the AML-CFT area, were identified in on-site supervision reports and monitoring tables, which would have merited more stringent penalties. - The CBU has not used its option to publish penalties to date; the position could evolve. - Only two members of senior management of credit institutions were issued penalties during 2017-2020; most decisions involved decentralized financial systems. - The provisional administration system currently has no legal time frame; this should be corrected in proposed amendments to the banking law. - In resolution, the CBU has cooperation agreements with 11 supervisors, but presence abroad of institutions involves approximately 30 countries — further action required to ensure orderly resolution and mapping of foreign players. - Assessment: - Principle 11 — Non-compliant ### Recommendations (from the assessment) - Ensure an effective policy of penalties is in place: apply the full range of available penalties, increase use of fines, and publish penalties for deterrent purposes. - Avoid several consecutive deferrals of decisions in the same case to enable quicker decisions. - Hold extraordinary sessions to monitor cases under special supervision. - Formally establish the use of voting to adopt decisions on individual cases when no consensual solution is found. - Transfer cases meeting acceptance criteria for resolution to the Resolution Board. - Consider establishing a maximum term for appointments of provisional administrators. - Continue actions to promote signing of cooperation agreements and ensure all parties involved in resolution processes for cross-border groups or foreign institutions are properly identified and contractually included in cooperation agreements. ### Consolidated supervision (Principle 12) — scope and practice - Consolidated supervision instituted by WAMU Council of Ministers decision of June 24, 2016 (date it entered into force). Entities subject to consolidated supervision include: - Parent credit institutions having at least one subsidiary that is another credit institution. - Financial holding companies that are entities not licensed as credit institutions and are the parent company of a banking group. - Intermediary financial holding companies that are not licensed as credit institutions and that hold all of the group's stakes in its subsidiaries and credit institutions operating in the WAMU. - Any other intermediary entity of a group, particularly when warranted by circumstances or group structure changes. - Definition: group = set of entities with distinct legal personality controlled directly or indirectly by a parent company; banking group = group engaging in banking activities in the WAMU. - Scope of prudential consolidation: all financial enterprises over which the parent company directly or indirectly exercises exclusive or joint control, or significant influence. - Banking group statistics (as of 12/31/2020): - Number of banking groups at 12/31/2020: 32 - Of which, institutions supervised on a consolidated basis: 18 - Parent credit institutions: 1 - Financial holding companies: 13 - Intermediary financial holding companies: 4 - Other intermediaries: 0 - Additional findings: - Fourteen banking groups are not subject to consolidated supervision; these are foreign banking groups with parent companies outside the WAMU and without required intermediary financial holding companies. They do not submit consolidated or combined accounts or periodic internal supervision/risk management reports. - The BCEAO is required to prepare combined accounts as part of its procedure to identify systemic institutions. - Examples among the 14 not supervised on a consolidated basis include groups with significant market share (SG, BNPP, United Bank for Africa) and other foreign groups (BGFFI Bank, Libyan Foreign Bank, Citigroup, Banque pour le Commerce et l’Industrie, Afriland First Group, TLG Finance, Standard Chartered, First Bank of Nigeria, Guaranty Trust Bank, Crédit Libanais, African Guaranteed Fund). - No internal methodology or policy exists to determine when to require the creation of intermediary financial holding companies. - SGCB participation on supervision boards in 2020 involved six supervision boards, three of which involved banks not supervised on a consolidated basis within the WAMU (Standard Chartered, GT Bank, and BGFIBank); for other groups, the CBU was not invited and does not receive information. - No cooperation and information sharing agreements concluded with certain home supervisory authorities of groups not supervised within the WAMU (e.g., Libya, Tunisia). - Some non-consolidated groups include nationally systemic institutions (such as SG) or fairly large institutions (such as UBA). - Location and composition of the 32 banking groups: - 11 groups have parent companies in the WAMU (Ecobank present in 32 countries, Oragroup in 4 countries, Coris Holding in 6 countries). - 7 groups originate in the Maghreb (primarily Morocco, also Libya, Tunisia, and Mauritania). - 5 groups are European (France, U.K., and Switzerland). - 3 groups are from the West African Monetary Zone (Nigeria). - 1 group is from the CEMAC (Gabon). - Other groups: South Africa (1), Mauritius (1), Saudi Arabia (1), the U.S. (1), and Lebanon (1). - Information available to SGCB on the 18 consolidated groups: - Periodic regulatory reporting and analysis of group-wide risk management (annual reports, internal supervision reports). - Limited review reports for first half-year financial statements, opinion reports on annual financial statements, special reports on prudential compliance, and reports on the assessment of the 50 largest risks produced by auditors. - On-site supervision missions: two on-site supervision activities since 2017. - Interviews with senior management in cases of vulnerability; no scheduled periodic meetings including for systemic groups. - Information sharing with host or home supervision authorities of banking groups. - SGCB’s information on these groups is limited by few on-site inspections of financial companies and infrequent meetings of the DSP with senior management or supervision functions. - Measures and legal powers: - Penalty mechanism in the Annex to the Convention applies to institutions under consolidated supervision. - Article 9 allows CBU to limit activities and jurisdictions of supervised institutions and to deny capital or organizational structures that prevent obtaining consolidated financial data; Article 9 authority has not yet been applied. *1wauea2022008 - References* ### Conclusions, ### 1wauea2022008 - Conclusions ### Prudential standards applicable to supervised entities - The prudential system in force in the WAMU applies: - On an individual basis to banks and bank-like financial institutions. - On a sub-consolidated or consolidated basis to financial companies and parent credit institutions. - Liquidity ratios are currently applied only on an individual basis (see Principle 24). - Limits on loans to key shareholders, members of senior management, staff, and auditors apply on a consolidated basis. - Institutions monitored on a consolidated basis are subject to qualitative rules of internal supervision, compliance, and risk management, including special provisions for groups. - Article 7 of Decision 14/24/06/2016 requires supervised parties to comply on a consolidated or sub consolidated basis with Council of Ministers decisions, CBU circulars, and central bank instructions. - The banking law does not apply to financial companies; this does not currently affect application of prudential requirements to these entities. This point will be amended in the future draft banking law. ### Application of prudential requirements — observations and statistics - The 2020 Annual Report of the CBU indicates three of the 17 financial companies did not file consolidated accounting or prudential statements. Their weight in the banking sector (total balance sheet) is: 6.8 percent, 0.3 percent, and 0.3 percent. - The first of these three was established at the end of 2019, is a regional systemic institution, and has not submitted consolidated accounts since its establishment. - Some financial companies were in violation of prudential regulations at end-2020: - One for the Tier 1 capital ratio. - Six for risk limits. - Three for the leverage ratio. - Members of senior management have been summoned, but more coercive penalties have not been issued for regulatory violations present for a number of years. - Compliance with Prudential Standards by Financial Companies at End-2020: - Solvency Ratio: 13 compliant out of a total of 14; Weight in the Banking Sector (Total Assets): 95.8% - Risk Limits: 8 compliant out of a total of 14; Weight in the Banking Sector (Total Assets): 88.6% - Leverage Ratio: 11 compliant out of a total of 14; Weight in the Banking Sector (Total Assets): 94.8% - Source: CBU Annual Report, 2020. ### Surveillance by groups of their activities abroad (EC3 — EC5) - Local groups are supervised on a consolidated basis, including activities of their subsidiaries outside the WAMU. - Internal control and risk management circulars require: - Adequate control activities incorporated into routine functions at all staff levels (Article 11). - A consistent internal audit approach for all subsidiaries; each subsidiary must have its own internal audit function reporting to it and submitting reports to the parent company's internal audit (Article 22). - An internal supervision system aligned with good practices and adapted to the size, structure, nature, complexity, and risk profile of the institution and group. - Governance circular requires parent company decision-making body to ensure a system to facilitate sharing between group entities (Article 35). - Three local groups have subsidiaries outside the WAMU: Ecobank, Oragroup, and Coris Holding. - SGCB collaborates with supervisors in the countries involved via Supervision Boards for Oragroup and Ecobank (annual board since 2015). - The same approach has yet to be established for Coris Holding due to its recent cross-border dimension. - Off-site supervision uses internal supervision and risk management reports; absence of a harmonized template results in non-uniform information. - On-site supervision covers surveillance abroad but: - In the past five years, Ecobank and Oragroup have only been subject to one supervision activity each. - Joint supervision activities have yet to be conducted in the foreign offices of these groups. - For foreign parent groups with subsidiaries in WAMU (including three regional systemic institutions of Moroccan origin), contacts with home authority Bank Al-Maghrib are highly developed; SGCB participates in supervision boards and joint supervision of parent companies established in Morocco. - On-site inspections of financial companies began in 2019 and a supervision methodology including financial companies exists. - Off-site supervision focuses substantially on internal supervision reports; there is no rating system for financial companies. A project exists to fine tune rating criteria after automation of the rating tool in progress. - For the two cross-border local groups with annual supervision boards, a group analysis sheet is prepared to present risk profile. Meetings with senior management may be organized in cases of vulnerability, but there are no periodic meetings. Assessments are in progress to introduce periodic bilateral meetings between SGCB and senior management of systemically important institutions. ### Cooperation, on-site visits, and joint missions (EC4) - Annex to the Convention provides the CBU can: - Enter into cooperation agreements in supervision and resolution with any competent authority (Article 59). - Provide information on the situation of a supervised institution under another supervisory or resolution authority, subject to reciprocity and confidentiality. - Establish supervision boards with other supervisory authorities for each financial holding company and parent credit institution engaging in significant international activities (Article 60). - Participate, as host supervisory authority, in the supervision board of foreign groups when asked by the home supervisory authority. - WAMU SGCB organizes: - Annual bilateral meetings with the Central African SGCB. - Sharing of information between supervisors on annual inspection schedules to facilitate joint mission plans. - The Supervision Boards of Oragroup and Ecobank, as the home supervisor. - Participation in meetings of supervision boards of foreign banking groups whose subsidiaries are located in the Union for Moroccan groups (Attijariwafa Bank-AWB, Bank of Africa, and Atlantic Business International), Nigerian groups (UBA and FBNBANK), and others (Standard Bank Group and BGFI). - Joint missions with other supervisors were scheduled each year (four in 2017, two in 2018, and eight in 2019). In 2019, joint missions were conducted with: - Bank Al-Maghrib, with two parent companies of banks having Moroccan capital established in the WAMU and two subsidiaries of Moroccan banking groups established in the WAMU. - Central Africa Banking Commission, with two financial companies that have subsidiaries in the CEMAC area. - The French Prudential Control and Resolution Authority, with one bank operating in the Union whose parent company is located in France. - The Central Bank of Nigeria, with one subsidiary of a Nigerian banking group. - By contrast, for local cross-border groups (Ecobank and Oragroup), the CBU does not conduct supervision alone or jointly in the foreign facilities of these groups. ### Powers to limit group activities and structures (EC6 — EC7) - Decision 014/24/06/2016 (Article 9) authorizes CBU to: - Limit the scope of activities a supervised institution may undertake and the jurisdictions in which it conducts them when it considers: - The security and soundness of the supervised institution are jeopardized by these activities, they expose the institution to excessive or improperly managed risks, or supervision by other authorities is unsatisfactory. - It is prevented from carrying out effective consolidated supervision. - Not authorize capital structures or organizations that prevent authorities from obtaining consolidated financial data or impede effective group supervision. - Although regulatory framework has been in force since 2016, these powers have not been used to date. - CBU may apply other precautionary measures on a sub consolidated basis, for example limiting dividends to the parent company if the establishment is vulnerable individually. During COVID, the supervisory authority issued a circular letter asking for caution on this matter. - The prudential system states applicability bases: - Individual, for banks and bank-like financial institutions. - Sub consolidated, for intermediary financial holding companies. - Consolidated, for parent credit institutions and financial holding companies. - Article 21 of the Annex to the Convention provides CBU will conduct or assign on-site and off-site supervision activities individually or consolidated to ensure provisions are observed. Supervision activities are effectively conducted in subsidiaries established within the WAMU. ### Additional criterion on fit and proper standards (AC1) - Regulatory texts do not provide that the supervisory authority is authorized to define and apply standards for expertise and moral standing to shareholders and members of senior management of parent companies. ### Assessment of Principle 12 — summary - Assessment: Materially Non-compliant. - Comments and key observations: - WAMU has approximately 10 local groups (some with subsidiaries abroad) and approximately 20 groups with a parent company abroad. - Consolidated supervision for more than half of these groups, including the largest, has been in place since 2016. - Quantitative prudential standards (capital adequacy and major risks) are applied to entities monitored on a consolidated basis; liquidity standards are applied only on an individual basis (see Principle 24). - One regional systemic group financial company does not meet consolidated financial reporting requirements. - Several financial companies violate regulations on solvency, leverage ratio, and major risks; coercive penalties have not been applied despite violations persisting for years. - Supervision of groups is being established gradually, partly via supervision boards; on-site inspections of financial companies began in 2019. - Off-site supervision relies on internal supervision reports and lacks a rating tool for groups (including six regional systemic institutions). - CBU’s information on consolidated-supervised groups is limited by few on-site inspections of financial companies and infrequent interviews by DSP with senior management. - For WAMU groups with subsidiaries abroad, there is no on-site supervision of those subsidiaries and financial companies are subject to infrequent supervision; CBU cannot assess the quality of group surveillance of their subsidiaries abroad. - Fourteen foreign groups are not subject to consolidated supervision. There is no procedure specifying criteria for requiring an intermediary financial holding company. SGCB asserts these groups are subject to satisfactory consolidated supervision by home authorities, but information to verify home supervision effectiveness may be limited because memorandums of understanding have not been signed with all home authorities and CBU is not systematically invited to supervision board meetings. These 14 groups include nationally systemic institutions. - BCEAO is required to establish combined accounts to identify regional systemically important institutions. ### Recommendations - Strengthen supervision of groups by: - Establishing a rating system for groups in the framework of the SNEC. - Increasing frequency of meetings between SGCB, senior management, and the board of directors of groups and introducing a minimum frequency for systemic groups. - Strengthening on-site supervision for financial companies with the introduction of on-site supervision in major foreign subsidiaries of local cross-border groups. - Apply enhanced coercive measures to groups that do not meet consolidated requirements. - Include financial companies in the future draft banking law. - Establish an internal policy and methodology to determine cases in which creation of an intermediary financial holding company is not required, including: - Verification of existence of consolidated supervision. - Assessment of quality of supervision. - Existence of a memorandum of understanding with the home foreign authority. - Regular sharing of information on group entities. - Size criterion, systemic nature, and implications on financial stability. - Method for monitoring these groups. - Conduct regular analyses for groups not subject to consolidated supervision under the defined methodology, to determine those for which consolidated supervision should be required. *Source: Conclusions (1wauea2022008 - Conclusions).* ### Conclusions ### Conclusions ### Colleges of supervisors and cross-border cooperation (EC1–EC4) - The regulatory framework allows the CBU to establish, with other supervisory authorities, a college of supervisors for each financial holding company and parent credit institution with significant operations, and to participate as host country supervisory authority in colleges of foreign groups at the invitation of the home country supervisory authority (Article 61 of the Annex to the Convention). - Since 2015, the CBU has established colleges of supervisors for the Ecobank and Oragroup groups, in its capacity as the home country supervisor of banking groups with headquarters in a WAMU country. - Ecobank group: the first WAMU group in terms of balance sheet totals at end-December 2020; notably present in more than 30 countries. - Coris Holding group: the second group originating in the Union; has only one recently created (2020) subsidiary outside the WAMU and does not yet have a college of supervisors. - Oragroup: the third group set up in the WAMU; has subsidiaries in the CEMAC, in Guinea, and in Mauritania. - The type of college set up in the WAMU is universal; all foreign supervisors are invited. This can represent some twenty authorities for a group like Ecobank, although not all participate. - Central banks and supervisory bodies of subsidiaries are invited, for each college, to sign a statement of confidentiality and mutual cooperation among members. - For subsidiaries of foreign groups present in the WAMU, the SGCB states they are subject to monitoring on a consolidated basis by a foreign home country authority and that colleges of supervisors were set up by these authorities. The SGCB is not always invited to participate in home country colleges, but it has participated systematically when invited (5 or 6 times per year since 2016). - Home and host supervisors share appropriate information on a timely basis both bilaterally and through colleges, including information on material risks, risk management practices of the banking group, and supervisors’ assessments of safety and soundness. Informal or formal arrangements (such as memoranda of understanding) enable exchange of confidential information. ### Memoranda of understanding, information sharing, and joint supervision (EC2–EC4, EC10) - The regulatory framework allows the CBU to reach cooperation agreements with any competent authority on supervision and resolution (Article 59 of the Annex to the Convention). - The CBU has concluded ten conventions or memoranda of understanding on cooperation with foreign supervision and resolution authorities: Morocco, France, Nigeria, CEMAC, Guinea, Liberia, Ghana, Sierra Leone, Gambia, and Congo. - Article 60 permits providing information on a supervised bank’s condition to another authority, subject to reciprocity and confidentiality; memoranda include provisions on confidentiality. - When colleges meet once a year, information is shared on governance, the prudential situation, and strategic factors. A data collection template on each entity is completed by each participating authority prior to the meeting; the template includes identity, financial and prudential situation, and the supervisor’s assessment of principal risks. - Memoranda of understanding provide for information-sharing in off-site monitoring; authorities must inform counterparts of any event likely to affect the financial stability of a subject institution established within their jurisdiction. - Supervisors coordinate and plan supervisory activities: each authority informs counterparts of its annual audit schedule for banks with capital ties or other ties to banks under other authorities’ oversight. - At the start of each year, the SGCB prepares an audit schedule subject to validation by the CBU Chair; proposed joint audits are shared with counterparts. The SGCB receives notice of joint oversight programs conducted by supervisory authorities of foreign groups with presence in WAMU. - Joint oversight missions (practically limited to foreign groups with subsidiaries within the WAMU) were conducted: four in 2017, two in 2018, and eight in 2019. - Cooperation agreements provide collaboration arrangements for consequential actions based on information from another supervisor; agreements include provisions that information provided should be used only for the reasons presented and that parties inform counterparts if information will be used in disciplinary, administrative, or criminal procedures (no such instance has occurred to date). ### Crisis management, resolution, and recovery planning (EC5–EC6) - The Annex to the Convention allows concluding cooperation agreements (Article 59), sharing information (Article 60), establishing a crisis management committee for banks subject to the resolution regime, and participating as host resolution authority in crisis management committees of foreign groups at the invitation of the home country resolution authority. - Cooperation agreements mention a “mutual benefit to be drawn from close collaboration,” but only some explicitly commit to coordinate in addressing difficulties and resolving crises. - Coordination in preparation of recovery plans or potential collaboration within a crisis management committee for systemic banking groups is only rarely mentioned in memoranda of understanding. - The CBU has not yet engaged in actions to transmit information regarding crisis management for the two systemic cross-border groups for which it is the home supervisor. According to the SGCB, this cooperation will begin once recovery plans are finalized. - Title III of the Annex specifies the framework for prevention and resolution of banking crises. The resolution regime applies to any systemically important bank (SIB) and may be extended to any other entity the failure of which could significantly impact financial stability or the economy of one or more member states (Article 45). - Requirements include supervised entities preparing preventive recovery plans validated by the College of Supervisors and forwarded by the latter to the Resolution College (Article 49), and requirements related to the Resolution College’s preparation of recovery plans for banks subject to the resolution regime (Article 50). - Collaboration between home and host authorities for preparation or updating of recovery plans for systemic banks is rarely mentioned in memoranda of understanding. In practice, this deficiency stems from the resolution authority not working with home or host country authorities to prepare recovery plans. - For groups where the CBU is the home country authority, the first recovery plans have not yet been completed. - Recommendation points (see Recommendations section below) highlight the need to introduce explicit commitments in agreements on coordination in handling banking difficulties, resolving crises, and cooperating in preparing recovery plans, at least for SIBs. ### Host supervisor powers, on-site access, and booking offices (EC7–EC9) - Article 1 of the banking law stipulates applicability of the law to credit institutions operating in State territory, regardless of legal status, head office location, principal place of business in the WAMU, and nationality of capital holders or officers. - Section II on scope of application: the prudential framework applies: - On a solo basis, to banks and non-bank financial institutions. - On a sub-consolidated basis, to intermediary financial holding companies. - On a consolidated basis, to parent credit institutions as well as financial holding companies. - All entities subject to the CBU’s supervision are subject to the same regulatory and prudential provisions, regardless of domestic or foreign origin. - Cooperation agreements provide for the ability to conduct inspections in foreign subsidiaries of WAMU banking groups; at the request of a counterpart, an authority may, by itself or jointly, conduct inspections of institutions within its jurisdiction having capital ties or other ties with an institution subject to the requesting authority. - Shell banks are not authorized in the WAMU; several regulatory provisions of the banking law relate to the presence of effective on-site management. - Branches of foreign banks are not authorized within the WAMU; foreign groups are required to set up a subsidiary within the Union. Foreign banks may open representative offices in WAMU member states, subject to authorization by competent national authorities; these offices do not carry out banking operations and are not supervised by the CBU. ### Assessment of Principle 13 and key observations - Assessment: Largely Compliant. - Key observations: - The CBU has set up colleges of supervisors with annual meetings for the two main cross-border groups established in the Union. - For subsidiaries of some twenty foreign groups present within the WAMU, the CBU participates in colleges organized by home country authorities when invited, which is not systematic. - Memoranda of understanding with ten foreign countries have established a framework for cooperation and confidential information sharing; however, memoranda do not mention establishing a coordinated communication strategy and do not always explicitly commit to coordinate in addressing banking difficulties, resolving crises, or cooperating in preparation of recovery plans. - In practice, on-site supervision activities and communication strategies are coordinated between the CBU and foreign supervisory authorities. - In contrast, there is a noted absence of information-sharing between host and home country authorities on preparing for a crisis situation in the area of resolution. - The CB has not finalized the first recovery plans for systemic institutions and has not established cooperation with host authorities in this area, nor have recovery plans been shared with home authorities. - Recommendations: - Introduce in the information-sharing and coordination agreements concluded by the CBU with foreign supervision and resolution authorities an explicit commitment on coordination in handling banking difficulties and resolving crisis, as well as a commitment to cooperate in preparing recovery plans, at least those of SIB. - Strengthen information-sharing and cooperation with foreign supervision and resolution authorities on managing crisis situations and preparing recovery plans for systemic cross-border groups. ### Corporate governance (Principle 14, EC1–EC2 beginning) - The WAMU issued a circular on the governance of credit institutions in 2017. Circular No. 01-2017/CB/C is described as exacting and exhaustive, including: - General principles in governance. - Roles and responsibilities of deliberative and executive bodies. - Functions of specialized committees. - Rules of governance expected within groups. - Good conduct and transparency obligations. - The circular and paragraph 518 of the prudential framework require institutions to have a solid governance framework, consistent with requirements defined in the circular and including: - An organizational structure clearly and consistently defining the roles and responsibilities of the various participants. - Effective processes for detection, management, monitoring, and notification of the risks to which the institution is or could be exposed. - References to principles of good governance are explicitly indicated in Article 5 of Circular No. 01-2017/CB/C; responsibilities of the deliberative body are stated in Articles 6 and 7; those of the executive body are stated in Articles 26 and 27. - Overall, Circular No. 01-2017/CB/C seems consistent with the best standards. *Source: Conclusions section of the provided IMF country report excerpt (WAMU).* ### Conclusions ### Conclusions ### Entry into force and implementation of the new circular - The entry into force and implementation of the new circular represented a significant challenge for institutions in the WAMU. - WAMU authorities undertook various initiatives since dissemination of the text to ensure institutions’ correct adoption and fair interpretation of the new rules, including awareness-raising actions (peripatetic missions bringing together Board of Director chairs, independent directors, senior bank managers). - The BCEAO implemented a training and mentoring program intended for concerned audiences. - The CBU is sure to discuss the supervisor’s issues and expectations in the area of governance during annual meetings with all credit institution directors in the Union. ### DSP audit tasks and governance assessment - Institutions’ governance practices are assessed using a governance-specific questionnaire in the rating system. - The questionnaire has some forty questions related to regulatory expectations and provides good coverage of different aspects of the subject. - It is completed with assistance from various supports (survey reports, report on internal supervision, auditors’ reports, information collected in the context of sharing with institutions). ### DCPEME missions and on-site findings - The DCPEME has not conducted thematic missions on bank governance; thematic missions were listed in the 2020 survey schedule but the health crisis caused them to be postponed. - DCPEME inspectors conduct systematic investigations on governance subjects in the context of specific surveys representing most on-site surveys over 2017-2020. - DCPEME audits have highlighted inadequacies regarding compliance with obligations related to composition of boards of directors (failure to comply with the proportion of independent directors within independent bodies and/or specialized committees) and updating of procedures. ### Correcting deficiencies found - Detection of regulatory gaps leads to recommendations starting with a follow-up letter calling for quick correction. - Review of some follow-up letters has shown that these procedures were carried out. - Effective implementation of corrections by institutions is still not prompt or effective; a follow-up mission report verified this. ### EC3 — Board composition and specialized committees - WAMU regulations are exacting regarding composition of deliberative bodies and specialized committees. - The CBU requires the deliberative body include a balanced number of members with additional skills and experiences in the institution’s areas of interest. - Pursuant to Article 10 of Circular No. 01-2017/CB/C, most members of the deliberative body should at all times be non-executive directors. - One-third of the members of the deliberative body should be independent directors. - The chair of the deliberative body should be a non-executive or independent director. - Creation of specialized committees: - National SIBs should have an audit committee, a risks committee, and a compensation committee. - Regional SIBs require an audit committee, a risks committee, a compensation committee, and an appointments committee. - Non-systemic institutions are required to have an audit committee and a risks committee. - Specialized committees must consist exclusively of non-executive directors and mostly independent directors (cf. Articles 18 and 20 of the circular on governance). - Definition of independent director: - Circular No. 01-2017/CB defines an independent director as one who “does not maintain relationships of any kind with the institution or its group that could alter his or her independence of judgment or put him or her in an apparent or potential conflict of interest situation.” Article 11 of the circular adds to this definition. - Implementation status: - Credit institutions have made significant efforts to strengthen governance and comply with rules on composition of deliberative bodies. - According to the IMF questionnaire submitted by a panel of the Union’s banks, presence of independent directors is now widespread, although the proportion required in the circular is still not observed, as confirmed by anomalies noted by the DCPEME. - DCPEME missions confirm existence of specialized committees, the proportion of directors within them, and procedures to ensure compliance. ### EC4 — Board members’ skills, training, and evaluations - Filtering and approval: - Article 14 of Circular No. 02-2017/CB/C stipulates the CBU should rule on directors with respect to competence based on degrees and professional experience criteria defined by banking law for non-nationals and based on good character and absence of convictions entailing disqualification. - Board member appointments must be approved in advance by the supervisor (Article 14 of Circular No. 02-2017/CB/C). - Regulatory framework requires institutions to enable boards to ensure appointed board members are qualified (Article 13 of the circular). - Implementation status: - These requirements are still not strictly implemented by supervised entities. - According to the Union’s institutions questionnaire, only 44 percent of the banks indicate having established fit and proper standards for appointment of their leaders (general management and directors). - Training and evaluation: - Article 14 requires institutions to establish ongoing training programs for members of deliberative bodies; DCPEME confirms compliance but reports disparities between small and large institutions. - Article 17 requires at least annual evaluation of the deliberative body, its specialized committees, and each committee member, recorded in a report submitted to the general assembly. - Conduct of this exercise is not widespread nor always compliant with frequency; consistency of reports varies widely depending on whether prepared by outside firms or internal self-evaluations. ### EC5 — Board oversight of strategy, risk appetite, culture, and conflicts of interest - The DSP primarily utilizes minutes of deliberative bodies to evaluate Board involvement in strategy implementation, risk policies, and risk appetite framework. - These aspects are covered by DCPEME inspection checkpoints but could be expanded in investigations. - General management’s execution of Board-decided strategies is not systematically developed in on-site survey reports. ### EC6 — Fit and proper standards, succession, and oversight of senior management - According to the DCPEME, formalization of fit and proper standards by institutions is still not systematic despite efforts. ### EC7 — Compensation oversight and alignment with prudent risk taking - Circular on governance governs compensation system and establishes obligations for the Board regarding design and operation of compensation. - Obligations on deliberative body and management: - Deliberative body must oversee design and implementation of compensation system and monitoring processes. - Pursuant to Article 8, deliberative body assigns members of general management performance targets and adequate compensation levels consistent with bank’s long-term strategy and financial soundness. - Expected requirements (Article 45) — compensation system should be: - Accompanied by appropriate incentives consistent with prudent risk taking. - Compatible with bank’s long-term objectives and financial soundness and adjusted if necessary. - Governed by a policy approved by deliberative body covering all aspects of compensation, particularly fixed compensation, variable compensation, fringe benefits, discretionary pensions, and all similar benefits. - Draft circular considerations: - Mission was informed that draft circular contained additional provisions on compensation (particularly on variable compensation) but these were eliminated from the final version following consultation, given basic compensation systems and limited variable compensation in Union’s banks. - Compensation committees (Article 23) — Regional and national SIBs required to have compensation committee responsible for: - Developing compensation policy for Board members, executive body, and top management and ensuring compliance with legal and regulatory requirements. - Overseeing development and implementation of compensation system. - Ensuring system is appropriate and consistent with bank’s culture, risk appetite, long-term activities, long-term risk management strategy, performance, and internal control system. - Examining, analyzing, and monitoring at least once a year the plans, procedures, and results of compensation system to determine whether it creates incentives allowing for good risk, capital, and liquidity management. - Confirmation of procedures: - Compliance with compensation obligations is included in DCPEME checkpoints. - Inspections confirm existence of compensation committees for SIBs and that compensation levels of board members and managers are appropriate for the bank’s risk profile, but reports consulted do not point to specific observations and these aspects are not systematically checked. ### EC8 — Board and management understanding of operational structure and risks - Article 519 of prudential framework stipulates deliberative body should “acquire sufficient knowledge of all the bank’s lines of business so as to understand the nature and breadth of the related risk, in order to ensure that risk policies, controls, and monitoring systems are adequate and effective.” - Circular duties: - Deliberative body must be informed of significant changes in economic or operational environment and act timely to protect bank’s long-term interests (Article 6 of Circular No. 01-2017/CB/C). - Must ensure knowledge and expertise of executive body members remain suited to bank’s activities and risk profile (Article 8 of the Circular). - DCPEME methodology contains checkpoints covering these aspects but not always in great detail. - Risks from structures that impede transparency (Article 38): - Parent company deliberative bodies must establish procedures to detect and manage risks from such structures, ensure independent periodic review of supervisory processes and activities, re-evaluate relevance at least once a year, and abandon structures when legal obstacles or severe restrictions substantially call into question control or influence by parent company. ### EC9 — Supervisor’s power to require board composition changes - Prudential framework gives CBU power to require changes in deliberative body composition. - Article 15 of the circular gives CBU this power if some members are not fulfilling their duties. - Article 31.1 of the banking law provides for compulsory retirement of officers responsible for regulatory offenses. - In off-site and on-site supervision missions, CBU evaluates governing bodies and performance; if deficiencies in function or unsuitable composition (e.g., number of independent Board members, diversity, experience), CBU will require changes. ### Additional Criterion AC1 — Notification requirements - Laws, regulations, or supervisor require banks to notify the supervisor as soon as they become aware of any material and bona fide information that may negatively affect fitness and propriety of a bank’s Board member or a member of senior management. *Source: 1wauea2022008 - Conclusions* ### Conclusions ### Conclusions ### CA1 — Governance reporting and referrals to the CBU - The Union requires referral to the CBU of any significant information on reputational risk even if lack of fitness or propriety of Board members or senior management is not expressly targeted. - Requirements and expected procedures: - The deliberative body must ensure an internal mechanism for collecting information on mismanagement that allows anyone in the bank to report to the CBU without delay, directly, in total confidence, and without following the hierarchical route or indirectly through internal audit or compliance, any practices contrary to the code of ethics as well as any events, motions, actions, or circumstances that could jeopardize the bank’s interests or reputation. Referral as indicated in Article 44 of Circular No. 01-2017/CB/C is intended primarily for the Board and could extend to potential deficiencies in senior management performance. - Significant deficiencies in internal control should be reported without delay by the person responsible for internal audit to the governing bodies and to the CBU in accordance with Article 14 of the circular. - The Chairman of the deliberative body must inform the CBU as soon as a member of the governing bodies is in default on payment of his/her commitments to the bank or is banned from banking by virtue of Article 42 of the circular. - The bank must inform the CBU without delay of any deficiencies detected by the compliance function having a significant impact on the bank’s reputation and/or financial soundness. ### Assessment of Principle 14 — Governance - Overall assessment: Largely Compliant - Key observations: - Circular No. 01-2017/CB/C imposes demanding governance duties consistent with best practices. - Prescriptions regarding the compensation system require strengthening. - Recent entry into force of the text, limited targeted missions on governance, and uneven information in internal control and risk management reports do not afford the supervisor a complete view of implementation. - Deficiencies remain regarding: - Participation of independent directors in committees. - Formalization of selection criteria (propriety, fitness). - Ongoing training. - Conduct of an annual evaluation of deliberative bodies. - Increasing disparities noted between small and large banks in applying provisions; caution urged in exercising proportionality to avoid overly differentiated supervision. - Absence of recent governance missions in several government-owned banks experiencing great difficulties. - Recommendations: - Broaden governance provisions regarding compensation, particularly compensation assigned to supervisory functions. - Schedule an audit cycle on government-owned banks to verify implementation and application of the circular’s principles. - Finalize as soon as possible a governance report template for usable reporting by the DSP. - Encourage DCPME inspectors to conduct more in-depth investigations on executive and deliberative bodies’ involvement in strategic and operational guidance and risk control; extend mission lengths as needed. - Complete the credit institution rating system using a questionnaire on banks’ business model and strategic planning. ### Principle 15 — Risk Management Process (overview) - Principle summary: Supervisor determines banks have a comprehensive risk management process (including effective Board and senior management oversight) to identify, measure, evaluate, monitor, report and control or mitigate all material risks on a timely basis and to assess adequacy of capital and liquidity relative to risk profile and market and macroeconomic conditions; extends to contingency arrangements and recovery plans where warranted; process commensurate with risk profile and systemic importance. ### EC1 — Board-approved risk management strategies and risk appetite - Regulatory framework: - Circular No. 04-2017/CB/C establishes a new risk management framework; defines duties in risk governance and specifies requirements for credit, operational, liquidity, market, rate risks. - Article 4 requires governing bodies to: - Provide a risk management process consistent with the circular. - Establish a bank-level risk management function with powers distinct from operational units. - Preserve an independent risk management function with necessary resources and authority. - Fully exercise duties assigned in risk area. - Article 11 requires a risk appetite mechanism approved, supervised, and reviewed annually by the deliberative body and implemented by the executive body. - Circular No. 01-2017/CB/C requires the deliberative body to approve policies, risk appetite and limits, outsourcing and new products decisions, and risk governance and internal control mechanisms. - Supervisor controls: - DSP reviews minutes of deliberative bodies and risk management reports; formalized review based on examples from SGCB. - Lack of an outline disseminated for preparing risk management reports compromises information collection; reviewed reports show inconsistent content, non-exhaustive presentation of risk factors, lack of information on strategic directions and risk appetite, and incomplete descriptions of risk management mechanisms. - Assessment of the “risk management and internal control” factor in the SNEC rating has at times seemed inconsistent with submitted reports or special surveillance status. - DCPEME specific surveys verify organization of risk management function (reporting lines, committees, tools) and deliberative body involvement in procedure validation. - Analysis of risk appetite, resourcing relative to risks, and Board involvement in risk culture dissemination merits deeper coverage. ### EC2 — Comprehensive, bank-wide risk management processes - Regulatory framework: - Regulations require banks to have a risk management process suited to size, structure, nature and complexity of activities, risk profile and group where appropriate (Article 7, Circular No. 04-2017/CB/C). - Process must be based on well-documented strategies, policies, procedures to identify, evaluate, monitor, report, and control or mitigate all material risks (Article 8). - Obligations checked through documentary and on-site inspection work. - Supervisor checks: - DSP actions include verification of existence and analysis of regularly updated risk mapping (noting a significant number of credit institutions lack risk mapping per the banking survey). - Analysis of half-yearly risk management reports and their transmission to the deliberative body. - Assessment of adequacy of risk management processes for SIBs relative to their risk profiles. - DCPEME checks recorded in customary investigation fields; limited number of missions since new regulations provides only a partial view. ### EC3 — Documentation, review, communication, and exceptions - Regulatory framework: - Circulars Nos. 01-2017/CB/C, 03-2017/CB/C, and 04-2017/CB/C are reference framework for governance, internal control, and risk management. - Article 8 requires dynamic, well-documented strategies, policies, procedures reflecting changes in risk appetite, risk profile, market and macroeconomic conditions; must provide an overall organizational view of exposures. - Article 10 (internal control) requires dissemination and application of objectives and policies in risk management. - Risk appetite and limits requirements in Circular No. 04-2017/CB/C: - Establish overall and operational limits at entity levels consistent with risk appetite, risk profile, and capital base. - Ensure correct adoption of limits by staff and regular internal communications. - Have process for identifying and managing deviations from limits, including reporting, correcting overages, monitoring corrections, and penalties for persistent overages. - Define procedures for submission of exceptions for review and authorization by authorized bodies. - Internal control circular: compliance with risk-related limits is monitored and exceeded limits are corrected per bank policy. - Verification and implementation: - DCPEME primarily exercises verification via on-site audits; BCEAO conducted awareness-raising on risk appetite when circular issued. - DSP uses banks’ risk management reports but does not hold up-close interviews with internal supervisors to discuss risk situations. - DCPEME has not conducted enough missions to form a representative opinion; banks have made progress in formalizing procedures though survey reports still show lack of updating and incomplete procedures. - Limit-setting and management mechanisms are generally not operational across Union banks except for large or complex banks; many banks have not defined non-regulatory limits, impeding precise risk evaluation. - Deviations typically managed by returning to previous limits. - Banking survey indicates absence of a risk and internal control culture; banks reported need to improve updating of internal control procedures, development of risk mapping, and strengthening risk management culture. ### EC4 — Board and senior management information and understanding - Regulatory framework: - Regulations require regular forwarding of risk information to the deliberative body and define responsibilities for risk supervision. - Article 8 of the governance circular: deliberative body must hold regular meetings with the executive body to gather information and explanations. - Executive body duties (Articles 26 and 27): must have sufficient information on nature and level of risks, interrelationships among risks, and required capital and liquidity to cover exposures. - Supervisory function heads must provide precise, up-to-date, and intelligible information for decision-making (Article 29, Circular No. 01-2017/CB/C). - Information systems must ensure timely submission to governing bodies of relevant information on the bank’s risk profile relative to capital and liquidity (Article 12, Circular No. 4-2017/CB/C). - Observations: - Widespread use of risk committees, particularly in SIBs, fosters collegial information sharing. - Several assessed reports showed risk management reports were not approved by the deliberative body. - DCPEME methodology provides checkpoints for study during on-site investigations; DSP utilizes banks’ risk management reports. ### EC5 — Internal processes for assessing capital and liquidity adequacy - (EC5 text begins in the source but detailed Description and Conclusions for EC5 are not included in the supplied content.) *Source: Conclusions section of 1wauea2022008 - Conclusions* ### Conclusions ### Conclusions ### EC5 — Internal capital adequacy assessment and capital/liquidity planning - Banks must have processes for assessing overall adequacy of internal capital relative to their risk profile and strategies to maintain capital levels (cf. paragraphs 506 and 513 of prudential framework). - Banks are required to assess capital adequacy in terms of their liquidity risk profile and market liquidity; stress tests for capital and liquidity must be complementary (cf. paragraph 540 of the prudential framework). - The deliberative body must continuously ensure adequacy of the bank’s capital and liquidity in terms of its risk profile (cf. Article 7 of Circular No. 1-2017/CB/C). - As of now, the large majority of banks do not have formalized capital adequacy frameworks of the ICAAP type (see BCP 16). - The supervisor has not yet established a report format for ICAAP submissions. - The supervisory tasks of the DCPEME and DSP do not specifically include ICAAP subjects at present. ### EC6 — Use and validation of models - WAMU banks do not use internal models except for trading book valuation processes (see BCP 22). - Of the 149 banks and financial institutions required to report their trading books to the supervisor, only ten have trading books representing more than one percent of their assets. - Market risk management models have not led to audits by the DSP nor the DCPEME, including the value-at‑risk model used by a large international group. - Off-site controller assessment: the risk management report submitted by that bank offers no real added value compared to information in the annual report. ### EC7 — Information systems, performance, and cybersecurity - Regulatory requirements on information systems are specified in Article 12 of Circular No. 04-2017/CB/C and scattered across two other circulars. - Identified inadequacies in banks’ information systems include: - Obsolescent software and management systems in some banks. - A widespread lack of automation of certain accounting treatments, notably subordination/provisioning of non-performing loans. - Weakness in the quality of intelligence and the handling of customer data. - Information systems security and cyber risk: - Article 12 on procedures in this area is cursory. - BCEAO indicated a draft regulatory text was being formalized. - In CP 25, BCEAO launched a partnership with the World Bank and the University of Tel-Aviv for evaluation of cybersecurity in the WAEMU financial sector, in parallel with the FSAP; project tasks focus on regulatory framework, supervision in terms of cybersecurity, and maturity of the central bank’s cybersecurity capabilities. - Procedures on outsourcing of IT services and business continuity are more developed. - DCPEME conducts systematic investigations on IT asset security, access systems, existence of business continuity plans, and backup sites; a questionnaire on system security practices was sent to banks at the beginning of 2021 and analysis of responses was being finalized at the time of the mission. ### EC8 — Governance for new products and material changes - Article 32 of Circular No. 04-2017/CB/C requires banks to identify and assess risks inherent to new products, new activities, major acquisitions, and changes in systems, processes, or business model. - Banks should have policies and procedures enabling governing bodies to understand and manage new risks; processes should consider: - The inherent risks. - Resulting changes in the risk profile, risk appetite. - Necessary controls, strategies, and processes for mitigating risks as well as residual risk. - Circular No. 01-2017/CB/C on governance establishes duties of the deliberative body regarding approval of new products. - DCPEME inspections show processes for launching new products are not well-structured, lacking a clearly formalized framework, and the compliance manager is not always associated with evaluations. ### EC9 & EC10 — Risk management functions and CRO requirements - Circulars Nos. 01/2017/CB/C and 04/2017/CB/C require a risk management function and specify roles and responsibilities. - CBU regulations require, proportionate to size/complexity/structure/risk profile, control functions in internal audit, risk management, and compliance with sufficient competent staff, independence, reputation and authority. - The deliberative body must ensure the General Director respects and promotes independence of control functions; control functions may access the deliberative body and specialized committees. - Supervisory observations: - The requirement to establish a risk management function appears observed according to SGCB and the banking survey. - Positioning of the risk function within banks is now well understood; access to the Board is generally respected. - The number of staff assigned to the risk management function seems insufficient for one out of every two banks according to the IMF banking survey. - SGCB verifies separation of functions and reporting lines. - It was not mentioned whether periodic internal audits of the risk function are verified. - Article 28 of Circular No. 01-2017/CB/C states regional and national SIBs must have at least internal audit, risk management, and compliance functions; SIBs respect this per SGCB. - Article 31 requires appointment, change, or removal of the person responsible for the risk management function to be subject to prior approval by the deliberative body on the suggestion of the General Director; these decisions should be made known to the CBU. ### EC11 — Risk standards issuance and need for supplementary guidance - The circular on risk management establishes requirements for all risk factors; conversion of Basel II and III rules into the framework is accompanied by issuance of standards for credit risk, market risk, liquidity risk, interest rate risk in the banking book, and operational risk. - Recommendation: the WAMU supervisor would benefit from supplementing texts with guidelines to give greater specificity regarding expectations and to facilitate monitoring of banks’ formalization and reporting approaches. ### EC12 — Contingency arrangements and recovery planning - Regulatory framework elements: - Paragraphs 519 and 522 to 525 of the prudential framework require deliberative body to ensure a capital planning process is part of the overall strategic plan, describing strategies to address anticipated or unforeseen capital inadequacy, including during stress. - Articles 45 and 53 of Circular No. 04-2017/CB/C require banks to have a contingency funding plan to resolve liquidity shortages in an emergency. - Since January 2021 and in accordance with Circular No. 001-2020/CB/C, SIBs, finance companies, and parent company credit institutions are required to submit for assessment by the CBU a preventive recovery plan; this plan must consider essential services and critical functions to ensure continuity. - Requirement to submit a recovery plan will be mandatory for other banks and non-bank financial institutions as from January 2022 and 2023, respectively. - Assessment and supervisory status: - Considering delays noted in BCP 11 in the schedule for submitting recovery plans, the CBU does not have an exhaustive view of the solidity of the plans. - All the SIBs concerned by a submission in 2021 have still not sent their recovery plans. - DCPEME audit methodology contains checkpoints on banks’ emergency plans. ### EC13 — Stress testing programmes - Article 13 of Circular No. 04-2017/CB/C requires banks to develop stress testing programs for risk management to assess potential impact of adverse but plausible scenarios on financial soundness; the article’s terms are described as cursory. - CBU response: a draft circular on stress testing is being finalized and should be complete by the end of 2021; objectives include proportionality in stress testing programs and strengthening governing bodies’ responsibilities. - Stress testing requirements: - Programs should include all material risks and provide corrective measures when tests detect potential weaknesses affecting financial soundness. - Banks should perform in-depth analysis of capital instruments and their performance during stress periods, including ability to absorb losses and maintain operations (paragraphs 544 and 545 of the prudential framework). - Observed practice: - Only 36 percent of banks questioned in the banking survey state they conduct regular stress testing exercises. - Stress tests primarily cover credit risk and liquidity risk (quarterly and monthly frequency, respectively), and to a lesser extent market risk (quarterly frequency). - Stress testing exercises do not systematically trigger extensive investigations (methodology, choice of variables, validation of guidelines) by SGCB teams of DSP and DCPEME, including for groups. *Conclusions — 1wauea2022008 (Conclusions section of source PDF).* ### Conclusions ### 1wauea2022008 - Conclusions ### Additional Criterion AC1 — Other material risks (reputational, strategic) - Description and results: - Consideration of other risks is clearly stipulated in the regulations. In Article 56 of Circular No. 04-2017/CB/C on risks management, the CBU requires the deliberative body to ensure that country, transfer, reputational, and strategic risk exposures are monitored, managed, and mitigated based on formalized policies and procedures. - The bank is also required to monitor and assess their development and to react by taking the appropriate measures. - These requirements would gain from being clarified with specific – qualitative or quantitative – requirements, for example, with guidelines. - These requirements are not well covered by the DCPEME methodology. - Assessment of Principle 15: Materially Non-compliant - Comments: - Circular No. 04/2017/CB imposes strict requirements on supervised banks in the area of risk management, but coverage of some regulatory aspects could be improved (e.g., security of information systems, new products). - Implementation in banks’ risk management procedures is still gradual based on review of various reports consulted (on-site survey reports, auditors’ reports in particular). - Most banks lack adequate risk measurement and monitoring methodologies and do not have effective or appropriate tools, preventing detailed monitoring of risks and compliance with regulatory requirements. - Banks struggle to formalize their risk appetite framework and to establish sets of limits strictly governing operations. - Insufficient involvement of deliberative bodies in risk supervision is an additional obstacle. - The supervisor’s control approach is generally well-organized, but inadequate staffing for control prevents full utilization of available information (DSP); in-person discussions with banks’ risk management functions are limited. - The DCPEME has not expedited specific missions on risk management. - Some aspects of risk supervision (risk management by executive bodies, dissemination of a risk culture, definition and breakdown of a risk appetite policy) are not sufficiently developed in on-site investigations. - The supervisor should secure expert resources to develop stress tests to regularly assess banking sector resiliency and better support banks in conducting such exercises. - It would be advisable to design a report outline so banks can formalize ICAAP first, followed by ILAAP as soon as regulations on the new liquidity ratios are published. - Regarding cybersecurity, the supervisor should issue strong and preventive recommendations to banks highly exposed to these risks; partnerships with the World Bank and the University of Tel Aviv and a roadmap of cyber-capacities to be developed represent significant advances. - Recommendations: - Expand investigations on the development, use, and governance of stress tests (credit, liquidity, market) that can be used by the banks. - Expedite on-site supervision visits on the subject of risk management and control. Strengthen investigations on the involvement of deliberative bodies in defining risk appetite and in risk supervision, and impose increased penalties in the event of non-compliance. - Instruct banks that do not have expert internal capabilities in information system security to arrange for external audits. - Strengthen the regulations on information system security, including, for example, the conduct of intrusion tests at regular intervals by external audit firms. - Set up an organization ensuring formalization and regular updating of recovery plans. ### Principle 16 — Capital Adequacy (overview) - Principle statement summary: - The supervisor sets prudent and appropriate capital adequacy requirements reflecting risks undertaken, defines components of capital with emphasis on loss-absorbing elements, and ensures that, at least for internationally active banks, capital requirements are not less than applicable Basel standards. ### EC1 — Laws, regulations and capital calculation - Conclusions (EC1): - Regulatory framework for the solvency ratio in place since 2000 (Basel I) was revised in 2016 to converge toward Basel II/III. The WAMU Council of Ministers adopted the new “prudential framework” in June 2016, which entered into force on January 1, 2018. - Applicability: solo basis to credit institutions (banks and non-bank financial institutions) and sub-consolidated or consolidated basis to groups subject to consolidated supervision (intermediary financial holding companies, financial holding companies, and parent company credit institutions). - Definition of Capital (three categories): - Core capital (common equity tier 1 capital - CET1): includes paid-up share capital (common or member shares meeting inclusion criteria), premiums linked to issuance of shares, retained earnings, unallocated intermediate or year-end earnings (limited to net amount after deduction of foreseeable expenses and dividends), special reserves, statutory, contractual, optional, and regulated reserves. - Additional core capital (additional tier 1 capital - AT1): capital instruments issued by the bank that meet inclusion criteria, and premiums linked to issuance of these instruments. - Supplementary capital (tier 2 capital - T2): items subject to eligibility criteria (investment grants, allocated funds, blocked accounts of shareholders or associates, capital instruments, subordinated loans, and premiums linked to issuance of these instruments) as well as regulated provisions. - Notable differences from Basel III: - Regulations provide for Basel III eligibility criteria relating to conversion/depreciation of AT1 instruments, but do not specify the threshold that triggers the absorption mechanism. WAMU regulations also provide for an absorption mechanism at the point of non-viability for AT1 and T2 instruments, triggered by the competent authority. - Supplementary capital includes regulated provisions not subject to Basel III eligibility criteria; these regulated provisions are being transferred gradually over a transitional ten-year period (2018 to 2028). They represent only a small fraction of capital, on the order of one percent. - Other points: - Components no longer meeting Basel III requirements are excluded or transferred pursuant to transitory provisions from 2018 to 2028. - Supervisory approval is required to include a new instrument in capital; requests are handled through off-site supervision. Off-site supervision has not yet had to review AT1 instruments. In practice, capital primarily consists of common shares and secondarily of type T2 subordinated loans. - Deductions for each category of capital correspond to those in the Basel framework, including deductions from core capital for losses carried forward, losses for the year in progress, intangible fixed assets, deferred tax assets (with the deductibles mechanism for deferred tax assets resulting from a timing difference), cross shareholdings, holdings in financial institutions (with the deductibles mechanism for some of them). - Some conservative options retained relative to Basel: cannot deduct short positions from long positions for deduction of holdings in financial institutions. - Additional deductions compared to international standards: limit applicable to non-operating fixed assets, limit applicable to fixed assets and holdings, and limit applicable to loans of major shareholders, managers, and staff. - The deductions framework is generally consistent with and sometimes more conservative than Basel rules, but the concept of indirect holdings is not specified. - Treatment of consolidated capital is well-defined, including treatment of minority interests. ### Minimum Requirements and Buffers - Minimum requirements: - The capital requirements established are slightly higher than the Basel minimums of 4.5, 6, and 8 percent, respectively, for CET1, AT1, and total capital. - The total capital requirement is being gradually implemented up to 2022 with a one-year delay due to the pandemic. - Additional buffers provided: - Conservation buffer: being introduced gradually with a current requirement of 1.875% that should reach 2.5% in 2022. - Counter-cyclical buffer: framework still not fully specified; macro-prudential authority responsible for activating it has not yet been designated. - Surcharge for regional systemic banks: introduced with gradual implementation at 0.4% in June 2020, 0.7% in 2021, and 1% in 2022. This schedule has been postponed by one year due to the pandemic. - Capital Requirements (Requirements in 2020 and Target Solvency Ratio — Buffers): - Core Capital (CET1): 5% + 1.875% Target or Max +2.5% (2022) + 2.5% max 1 % (2023) - Core Capital (T1): 6% - Effective Capital: 8.25% Target 9% (2023) - Legal and law issues: - Banking law requires banks’ core capital (T1) to be at least equal to minimum share capital. Capital should not be less than half of share capital (OHADA uniform act on commercial companies and economic interest groups, Article 664). - Banking law has not been updated following adoption of the prudential framework defining different categories of capital (does not mention core capital). SGCB indicates this lack of updating has not prevented entry into force of the prudential framework. ### Controls on Compliance with Capital Requirements (EC1 continued) - Reporting and supervision: - Every six months, banks send their prudential declaration form, which is checked by off-site supervision and on-site supervision directorates. - On-site supervision has a procedure that considers latest regulatory developments. Off-site supervision does not have a control methodology incorporating the introduction of Basel II/Basel III. - BCEAO has conducted major training actions for the banking sector in different countries of the Union on the new definition of capital; these sessions involved CBU staff and software companies. ### Compliance with Prudential Standards — Sector outcomes - As of December 31, 2019: - About ten banks, mostly in Côte d’Ivoire and Togo and representing 4.8 percent of the sector’s total balance sheet, showed negative capital. - 19 banks representing 12.7 percent of the banking sector’s total balance sheet (including banks with negative capital), were in breach of the solvency requirement. These breaches involve government-owned banks in particular. - For some banks, the situation persists after several years engaged in recapitalization plans with slow implementation. Actions taken include issuance of administrative instructions, imposition of special surveillance arrangements or administrative censure-type penalties by the CBU. - Solvency ratio trend: - The solvency ratio of the banking sector has increased by about one point over the course of the last five years. - In the absence of issuance of type AT1 capital instruments, the T1 ratio seems less than the CET1 considering deductions. - Change in the Banking Sector’s Solvency Ratio (source: SGCB): - 2016: CET1 11.3% - 2017: CET1 11.7% - 2018: CET1 10.1% ; T1 10% ; TOTAL 10.8% - 2019: CET1 10.7% ; T1 10.3% ; TOTAL 11.6% - 2020: CET1 11.7% ; T1 11.4% ; TOTAL 12.4% ### EC2 — Alignment with Basel for internationally active banks - Conclusions (EC2): - The definition of capital is consistent with Basel requirements (cf. Criterion 1). - The thresholds applicable to the requirements are higher than the Basel requirements and apply to all credit institutions whether internationally active or not. - Risk coverage: - Adoption of the 2016 prudential framework moved from a solvency ratio based on Basel I (credit risk only) to a ratio based on Basel II incorporating credit, market, and operational risk. - Credit risk: reform adopted in June 2016 based on the consultative document related to the new standard approach (final Basel document published December 2017). Introduced more refined weighting and methodologies including: - Sovereign: weighting of 0% to 150% (100% in the absence of rating), 0% for the WAMU/BCEAO states if claims denominated and financed in CFAF. - Government agencies other than central government: weighting of 20% to 100% (100% in the absence of rating), 0% for WAMU government agencies if claims denominated and financed in CFAF. - Multilateral development banks: weighting from 0% to 150% (50% in the absence of rating). - Financial institutions: weighting from 20% to 150% (20% in the absence of rating). - Companies: weighting between 20% and 150% (100% in the absence of rating). - Retail customer: weighting of 75%. - Loans secured by residential property: weighting of 35% (first mortgage, “loan to value” conditions, and debt service coverage). - Loans secured by commercial property: weighting of 75% (first mortgage, “loan to value” condition). - Non-performing loans: weighting of 100% to 150%. - High risk claims: weighting of 150%. - Other assets: weighting of 0% to 250%. - Off balance sheet: conversion in equivalent credit risk (ERC) by means of conversion factor in equivalent credit, five categories from 10% to 100%. - The reform introduced mechanisms such as “loan to value” ratio to anticipate final Basel III; full compliance is not contemplated in the short term given the new application date of January 1, 2023 announced by the Basel Committee in the context of the pandemic. Supervisor does not want to impose new changes in solvency method soon given recent entry into force of the prudential framework. - Calculation of credit risk requirements includes treatment of counterparty risk and credit risk mitigation technique with expansion of eligible securities. - Internal approaches for calculating credit risk have not been introduced. - Market risk: a market risk requirement calculation based on a certain threshold was introduced by the 2016 reform. Rules governing the trading book were introduced. Survey: 18 out of 149 banks declare a trading book. Capital requirements are calculated separately for each market risk category based on standard rates (Basel II standard approach). - Operational risk: prudential framework established two approaches from Basel II: the basic indicator approach (coefficient of the average of gross annual proceeds over the last three years) and the standard approach (subject to prior authorization from the CBU). Banks’ operations are divided into eight business lines. Advanced measurement approaches based on banks’ models have not been retained. - The new standard approach for operational risk published by the Basel Committee in December 2017 (which takes into account measurement of historic losses) has not been established; compliance is not contemplated in the short term. *Source: 1wauea2022008 - Conclusions.* ### Conclusions ### Conclusions ### Capital requirements: scope and calculation - Capital requirements prescribed in the prudential framework include risks appearing both on-balance sheet and off-balance sheet. - For purposes of calculating the amounts of exposures weighted for credit risk, a bank must apply risk weights to all its on-balance sheet and off-balance sheet exposures (cf. Criterion 2). - The leverage ratio also incorporates on-balance sheet and off-balance sheet exposures (cf. Criterion 4). - Reference documents cited: Enhancements to the Basel II framework, July 2009; International convergence of capital measurement and capital standards: a revised framework, comprehensive version, June 2006. ### Islamic finance - Some banks in the WAMU are involved in Islamic banking operations. - Approval conditions and Islamic finance products have been defined in the regulations. - The accounting framework is being finalized. - There is also a draft prudential framework specific to Islamic finance. - The BCEAO has an asset trained in this area, but the SGCB has no specialist as yet. - Recommendation: Introduce the prudential provisions related to Islamic finance and give the SGCB specialized human resources in this area. ### Pillar 2, ICAAP, and supervisory powers - Pillar 2 powers to impose capital requirements and specific limits are included in: - The prudential framework (2016): the CBU must assess banks’ strategies and procedures to ensure adequacy of capital vis-à-vis risks and may impose a capital threshold higher than the regulatory level. - The Annex to the Convention (2017): the CBU may establish differentiated prudential standards and impose administrative measures; may establish capital requirements higher than regulatory targets based on a bank’s risk profile and take precautionary measures to limit risk-taking or strengthen soundness. - Requirements in ICAAP terms were included in the prudential framework applicable since January 1, 2018 (paragraphs 516-547). - The prudential framework lacks the implementing text regarding the outline enabling banks to transmit information on the internal capital assessment process; this text should be established in 2022. - The SGCB does not yet supervise banks’ ICAAP processes. - In practice, no bank is subject to supplementary capital requirements or differentiated prudential standards in the context of Pillar 2 (cf. Principle 1). - Recommendations: - Finalize the implementing texts related to the ICAAP and to stress testing and introduce methodologies to ensure in-depth supervision by the SGCB in these areas. - Implement the provisions for imposing additional capital requirements under Pillar 2 to cover risks not taken into account in Pillar 1, in particular public and private concentration risk and emerging risks such as interest rate risk in the banking book. ### EC4 — Capital adequacy, buffers, systemic banks, and leverage ratio - To take into account WAMU banks’ risk profiles and macroeconomic conditions, solvency ratios are slightly higher than the minimums recommended by the Basel Committee (cf. Criterion 1). - The prudential framework introduced the conservation buffer, increasing gradually to reach the Basel minimum of 2.5% in 2022. - The counter-cyclical buffer was established; its implementation necessitates appointment of the authority responsible for its activation (cf. Criterion 1). - The supervisor has the power to require capital higher than regulatory targets based on a bank’s risk profile; this ability has not yet been used in practice (cf. Criterion 3). - Systemic banks: - The Annex to the Convention defines regional SIBs and national SIBs. - For regional SIBs, a surcharge is provided in the regulations (prudential framework, paragraph 101) published in 2016 and in force as of January 1, 2018. - The methodology for identifying SIBs and determining capital surcharge was published by the BCEAO in December 2019 (Opinion No. 001-12-2019), based on Basel Committee guidelines and a score on criteria (size, interdependence, substitutability/financial infrastructure, and complexity) plus supervisor judgment. - The first list of SIBs was published by decision of the CBU in April 2020. It includes six regional SIBs and 22 national SIBs. - The application of the systemic buffer scheduled for June 2020 was postponed by one year due to the health crisis; this requirement is in effect since June 2021. - Leverage ratio: - A minimum leverage ratio of three percent was introduced to control balance sheet growth and constrain leverage (paragraphs 466 to 469). - The CBU can raise or lower this standard for a bank to account for systemic importance, risk profile, or effectiveness of risk management. - This ratio is in effect since January 1, 2018, with no transitional provision. - It is applicable on a solo and consolidated basis and takes into account on-balance sheet and off-balance sheet items. - As of December 31, 2020, the WAMU banking sector’s leverage ratio is 6.4% and 108 banks hold 88.5% of the assets in compliance with the leverage standard. ### EC5 — Use of internal assessments for regulatory capital - Conditions for approved use of banks’ internal assessments (if supervisor approves) include: - (a) adherence to rigorous qualifying standards; - (b) supervisor approval required for cessation or material modification of processes/models; - (c) supervisor capacity to evaluate the internal assessment process; - (d) supervisor power to impose conditions on approvals; - (e) supervisor power to revoke approval if standards/conditions not met. - Description and conclusions: - Banks in WAMU are not authorized to use internal risk assessment procedures for calculating regulatory capital. - The WAMU prudential framework transposes only the standard and comprehensive approaches recommended by the Basel Committee. - Under Pillar 1, Basel I standard approaches were retained for credit risk and market risk; core indicators and standard approaches for operational risk. - Prior to transposition, BCEAO conducted quantitative impact studies and a preparedness study; findings on deficiencies (information systems, lack of long-term data) led to choosing simple Basel II/Basel III approaches. - SGCB on-site supervision performs analyses of information and counterparties rating systems; variation exists between small banks and some banking groups. - A survey indicates three-quarters of banks do not calculate probabilities of default in assessing credit risk; those that do provided only summary methodology descriptions. - Recommendation: Exclude from the definition of capital the regulatory provisions that do not meet the eligibility requirements of Basel III. ### EC6 — Forward-looking capital management, stress testing, and recovery planning - The supervisor has power to require banks to: - (a) set capital levels and manage available capital in anticipation of possible events or market condition changes that could have an adverse effect; - (b) have feasible contingency arrangements to maintain or strengthen capital positions in times of stress, as appropriate to risk profile and systemic importance. - Description and conclusions: - Prudential framework requires banks in ICAAP to: - Have a capital planning process integral to their strategic plan to provide a view of current and future capital requirements commensurate with their risk profile (paragraphs 522 to 525). - Incorporate a forward-looking view that includes potential impact of an economic slowdown on earnings and capital and to incorporate rigorous and forward-looking stress testing exercises (cf. paragraph 544). - Work on a circular specifying stress testing requirements was expected to be completed between now and the end of 2021. - SGCB’s supervision is currently more focused on capital components than on capital planning requirements. - Banks must develop a preventive recovery plan defining measures for reestablishing financial equilibrium in event of significant deterioration (Annex to the Convention, Article 21). - Delays in submission of recovery plans mean the CBU does not have an exhaustive view of plan solidity; all SIBs scheduled to submit plans in 2021 have not actually sent their recovery plans (cf. Principle 8). - Recommendation: Finalize the regulatory texts related to introduction of Basel II/Basel III including provisions needed to introduce the counter-cyclical buffer and finalize texts on threshold triggering conversion/depreciation of AT1 and indirect holdings. ### Additional Criteria (AC1, AC2) and group-level capital distribution - AC1: The WAMU prudential framework transposes Basel principles and is applicable on a solo basis to banks and financial institutions and on consolidated/sub-consolidated basis to finance companies and parent company credit institutions; it applies to banks not internationally active. - AC2 / CA2: Banking groups with a parent company located in the WAMU determine capital requirements on a consolidated/sub-consolidated basis at parent level and also determine solo capital requirements for each subsidiary credit institution in the WAMU, allowing adequate distribution of capital among entities based on risk allocation. - Assessment of Principle 16: Largely Compliant. ### Sector assessment, solvency, and specific observations - The definition of capital and requirements adhere to Basel Committee provisions, but mechanisms need more detailed definition (conversion/depreciation of AT1, counter-cyclical buffer, indirect holdings). - Off-site supervision teams need up-to-date procedures for implementing more complex regulations. - New requirements introduced for operational and market risks; internal risk measurement approaches not incorporated due to unmet prerequisites. - Sovereign risk is weighted at 0% for claims on WAMU governments in domestic currency; the Basel minimum is applied without taking into account sovereign risks proper to the region. - The more granular treatment for some unrated counterparties under the standard Basel III approach (December 2017) has not been adopted and remains under consideration. - Banking sector solvency and problem banks: - Some twenty banks fail to meet the minimum solvency ratio and ten of them have negative capital (this situation relates in particular to government-owned banks and in some cases has continued for many years). - The banking sector’s solvency ratio amounts to 12.4% in 2020, higher than the minimum requirement of 10.1%. - A strengthening of capital is expected of the banks over the course of the next two years to respond to the increasing need for capital buffers. - Additional observation: The SGCB does not have a specialist in Islamic finance. ### Key recommendations (enumerated) - Complete the regulatory texts related to introduction of Basel II/Basel III: - Finalize regulatory texts related to provisions: threshold triggering the conversion/depreciation of AT1, indirect holdings. - Finalize provisions needed to introduce the counter-cyclical buffer. - Update the banking law by introducing the new categories of capital in particular, as well as the Pillar 2 and 3 requirements. - Exclude from the definition of capital the regulatory provisions that do not meet the eligibility requirements of Basel III. - Introduce prudential provisions related to Islamic finance and give the SGCB specialized human resources in this area. - Finalize implementing texts related to the ICAAP and to stress testing and introduce methodologies to ensure in-depth supervision by the SGCB in these areas. - Strengthen off-site supervision capabilities on the new ratios by introducing control methodologies. - Consider introducing the more granular treatment of the standard Basel III approach (December 2017) for certain unrated counterparties. - Implement provisions for imposing additional capital requirements under Pillar 2 to cover risks not taken into account in Pillar 1, including public and private concentration risk and emerging risks such as interest rate risk in the banking book. - Take more forceful measures with banks not consistently compliant with solvency ratio requirements. *Source: 1wauea2022008 - Conclusions.* ### Conclusions ### Conclusions ### Regulatory framework and supervisory tools - Requirements for banks’ credit risk management are defined in Title IV of Circular No. 04-2017/CB/C, including underwriting approach, approvals, credit risk assessment, portfolio review, tools and data systems, treatment of non-performing loans, provisioning, related party transactions, and concentration risk management. Article 17 requires a comprehensive, bank-wide view of credit risk exposures based on prudent underwriting, evaluation, administration, and monitoring standards. - Supervision of implementation is based on the work of the DSP and DCPEME. The DSP uses documents submitted by banks (annual risk management report, annual internal control report, semi-annual reports on comprehensive review of loan portfolios), auditors’ reports (reports on the largest 50 exposures, reports on compliance with prudential standards) and DCPEME reports. Credit risk is captured via a questionnaire of about 30 closed questions. - DCPEME has not conducted thematic missions on credit risk alone over the last five years; credit components are quasi-systematically included in specific surveys. ### Bank governance, policies and control environment - Regulations provide that the deliberative body approves and regularly reviews credit risk management strategy and significant policies (paragraph 519 of the prudential framework; Article 7 of Circular No. 01-2017/BC/C). Executive body responsibilities for implementing Board-approved strategy are also specified. - DCPEME confirms Board approval of: - All the bank’s policies. - The bank’s risk appetite and risk limits. - The risk governance and internal control processes. - Observance of procedures is more compliance-oriented than analytical due to limited on-site investigation time. - Conflict of interest and governance requirements are set out in Circular No. 01-2017/CB/C (Articles 39–42). Banks must have a code of ethics or code of good conduct. DCPEME regularly detects irregularities in these areas. ### Credit risk profile and key statistics - Gross rate of non-performing loans: 11.8% for the entire population in December 2020 (improvement from 12.4% in 2019). - Only 35% of banks state that final decisions on granting loans or making investments are contingent upon the systematic and mandatory opinion of their risk manager. - DCPEME notes heterogeneity in rating systems: larger/foreign-group banks have more sophisticated systems; smaller banks often have basic, manual tools. Rating systems are not always correlated with accounting classification. - CIB / balance sheet center statistics and projects: - The center currently has 18,886 balance sheet entries and slightly more than 700 of them have a credit rating based on financial (four ratios) and qualitative (existence of arrears) factors. - The first rating exercise based on statistical models was meant to start in 2020. - Stress testing usage: - Sixty-six WAMU banks indicate that they do not do stress testing. - Only 36% of banks declare that they have regularly conducted stress test exercises, generally on a quarterly basis. ### Underwriting approach, approval processes and documentation - Mortgage underwriting: BCEAO weighting system for loans secured by residential property (35%) contingent on an LTV (loan-to-value) ratio of no more than 90% during underwriting and a debt service coverage ratio of no more than 40%. - DCPEME observations: - Loan file appraisal is not always well-defined in audit reports; compliance with underwriting criteria (LTV ratios, capital contributions) is not always reviewed. - Approval/validation: decision-making is often decentralized with delegation of powers by risk thresholds; prior review by the risk manager is not systematic. - Contractual documentation: Article 20 of Circular 04/2017/CB requires methods for monitoring documentation, covenants, contractual obligations, collateral, and other mitigation methods; DCPEME and auditors’ reports show inadequate monitoring of contractual obligations and deficiencies in archiving and inventories of collateral. - Portfolio reviews: banks must send semi-annual information on the quality of their credit portfolios (50 largest commitments). Reviews are typically focused on largest exposures, exposures confronting events/renewals, and non-performing loans. ### Information systems, indebtedness monitoring and credit information bureaus - Regulatory requirements: - Article 20 of Circular No. 04-2017/CB/C requires banks to have credit policies and procedures to monitor borrowers’ total indebtedness and risk factors that may result in payment defaults. - Instruction No. 79-06 of April 23, 1979 requires monthly declaration of risks by banks and financial institutions. - Decision No. CM/UMOA/007/06/2013 of June 28, 2013 established credit information bureaus (CIBs). - Issues: - Unavailability of accounting and financial statements from corporate clients impedes initial appraisal and renewal. Example audit findings: - For one bank, lack of recent financial statements in 41 of 50 files. - For another bank, absence during three consecutive years of ratios on financial autonomy, repayment capacity, profitability, and liquidity in one third of the cases. - Downloading and consultation of solvency reports/scoring data by credit institutions before granting new loans is not widespread. - Ongoing projects: expansion of collection from large decentralized financial systems (DFS), standardization and automation of collection formats, centralization of the collection process, strengthening reliability of financial data, and development of regular rating exercises. ### Limits, controls and model governance - Setting and monitoring limits: differences across banks; small banks often lack granular limits and effective IT infrastructure for implementing caps and security. - Control mechanisms: DCPEME methodology checks existence of permanent first- and second-level controls and periodic control governing credit activities; attention paid to separation of functions between commitment and risk monitoring. - Model validation: rating systems have not been audited for design assumptions or governance. Recommendation to confirm predictive performance and introduce regular back testing. ### Stress testing frameworks - Article 13 of the circular on risk management and paragraph 544 of the prudential framework require banks to establish rigorous and forward-looking stress testing programs on credit risks and to provide corrective measures. - Current practice: limited use of stress testing, especially among smaller banks lacking quantitative skills and tools. BCEAO is drafting a circular to specify methods for designing stress tests; some banks have requested access to stress test models. ### Assessment of Principle 17 (Evaluation of Assets) - Assessment: Largely Compliant. - Key observations: - Credit risk is well regulated and captured by DCPEME questionnaires and missions, but thematic missions on credit risk would be beneficial. - Improvements in loan approval collegiality exist, but prior risk manager review is not widespread; credit file management quality is uneven. - Underwriting standard for housing loans (LTV of 90%) is considered rather lax. - High NPL rates, poor financial/accounting data quality, and information asymmetry are significant challenges. - Deficiencies in information systems and credit risk management tools (including stress testing) impair operational process quality, reporting reliability and forward-looking risk management. ### Recommendations (from the mission) - Conduct thematic missions on credit to explore the underwriting approach in greater depth (definition of underwriting standards, appraisal approach, quality of scoring tools, rating systems validation process). - Utilize the statistics sent in CIB reporting on credit institutions’ consultation of solvency reports for the purpose of summoning and potentially penalizing the most recalcitrant banks without awaiting the confirmation of irregularities by DCPEME investigations. - Review in a more conservative sense the standard (LTV) governing the granting of housing loans. - Introduce regular credit stress tests and monitor the banks in the implementation of such tools. ### Principle 18 (Problem Assets, Provisions and Reserves) — introduction - Principle 18 requires that supervisors determine banks have adequate policies and processes for early identification and management of problem assets, and maintenance of adequate provisions and reserves. EC1: laws, regulations or supervisor require banks to formulate such policies and processes and to regularly review problem assets, asset classification, provisioning and write-offs. *Source: Conclusions, 1wauea2022008 - Conclusions* ### Conclusions ### Conclusions ### Asset identification and management (EC1) - Regulations require credit institutions to have precise policies for identifying and managing problem assets. - Article 23 of the circular on risk management stipulates that credit risk management policies and processes should allow for: - the early detection of deteriorating claims, - the prompt treatment of such claims, - the maintenance of an adequate level of provisions, - the recovery of arrears. - Banking institutions must perform a comprehensive semi-annual review of their portfolio and submit semi-annual reports with the results to the CBU no later than August 31 and February 28, respectively. - The comprehensive review is used to analyze: - evolving quality of the bank’s commitments, - profitability of loan operations, - ratings potentially given to various signatures, - level of non-performing loans (NPLs) and related provisions, - results of the latest review of loans, - comparison of evolution of the overall quality of NPLs, - estimate of current or expected deterioration of credit portfolio quality. - Instruction No. 026-11-2016 defines methods for recording and evaluating past-due commitments and aligns treatment of non-performing loans with internationally accepted practices, particularly: - classification of non-performing loans (material exposures that are more than 90 days past due, unlikeliness to pay - UTP), - restructured loans, - reclassification of sound loans. ### Supervisory verification and on-site audits (EC2) - The supervisor determines adequacy of a bank’s policies and processes for grading and classifying assets and establishing provisioning levels. - Verification primarily occurs in the context of on-site audits; these aspects are included among DCPEME’s systematic control points. - The supervisor does not use external experts/assessors – besides the auditors – for valuation of the bank’s past-due assets. - Reviews supporting the supervisor’s opinion may be conducted by external experts, with the supervisor reviewing the experts’ work to determine adequacy of the bank’s policies and processes. ### Off-balance sheet exposures (EC3) - Article 23 of the Circular on risk management explicitly requires that classification of non-performing loans and provisioning include off-balance sheet commitments. - Compliance with this requirement is audited by the auditors and DCPEME inspectors during on-site investigations. - Note: the source recognizes two different types of off-balance sheet exposures: those that can be unilaterally cancelled by the bank (and may not be subject to provisioning), and those that cannot be unilaterally cancelled. ### Provisions, provisioning rules, and write-offs (EC4) - Article 24 of the circular on risk management requires banks to establish evaluation and measurement processes ensuring reliable estimates and prompt consideration of provisions. - Estimated provisions should combine: - a precise analysis of the level of credit risk associated with loans, - consideration of forward-looking information, including macroeconomic factors. - Provisioning rate trend for banks in the Union: - 2012: 64.1 - 2013: 60.9 - 2014: 61 - 2015: 60.1 - 2016: 49.5 - 2017: 61.6 - 2018: 62.2 - 2019: 62.8 - 2020: 67.5 - Source: WAEMU - Key provisioning rules (Article 16 of Directive No. 026-11-2016): - Provisioning of direct risks to WAMU countries, government agencies other than the central governments of WAMU countries, and risks secured by these economic agents is optional. - Provisioning for private risks defined as restructured debt is optional. - Provisioning is optional during the first two years for private doubtful or disputed loans covered by prudential-framework guarantees or by first mortgages; it is set at 50% at the end of the third year and at 100% as of the fourth year. - These options can delay or limit banks’ provisioning efforts; optional nature of provisioning of restructured debts is noted as particularly inconsistent because they are not broken down into performing restructured debts and healthy restructured debts. - For risks secured by governments, enforcement of guarantees would not pose problems provided they are legally secured. - For private claims not covered by a guarantee, rules are conservative: - at least 20% upon transfer to doubtful debt, - at least 50% three months after transfer, - 100% nine months after transfer. - Write-offs: - Bad loans and write-off rules are defined in Article 13: bad loans are loans for which the supervised bank’s rights as creditor are legally extinguished. - Doubtful or disputed debts not recovered at the end of the fifth accounting year following the transfer to doubtful debt are regarded as bad loans and must be written off for their full amount. - Implementation of the write-off provision has not been fully effective within the Union; it was suspended upon adoption of the directive on standardizing the fiscal system regarding doubtful and disputed claims. - The instruction authorizing write-off and tax deduction for the amount of the provision was adopted in June 2020; incorporation into member states’ law is ongoing. To date only three member states have incorporated it in their tax code. - Majority of banks do not apply clearing irremediably compromised bad debts at the end of five years. - Collective provisions: - Regulations do not provide for a collective provisioning mechanism. - Provisions for general banking risk were eliminated to avoid tax optimization opportunities. - Transition to IFRS and impacts on provisioning of performing loans may remedy this; no schedule set to date. - DSF noted a study on banks’ preparation for transition to IFRS has been completed; results can identify relief possibilities for small banks regarding modeling parameters. - DCPEME controls: - Review of loan provisioning and write-off policies and methods is included in DCPEME’s audit methodologies and leads to controls during specific or general investigations. - Additional provisioning requirements are regularly imposed on audited banks. ### Early identification, classification, and problem-asset oversight (EC5) - Rules for classification and provisioning are in the prudential framework and Directive No. 026-11-2016; WAMU classification includes restructured debts as well as bad debts, deviating from international definitions. - Entry into force of the prudential framework and instruction on recording NPLs in early 2018 did not cause a one-off rise in NPL rate; the rate of NPLs has been halved since 2005 but with significant disparities within the Union. - Change in the rate of non-performing loans between 2014 and 2020: - 2014: 14.9 - 2015: 14.4 - 2016: 13.8 - 2017: 13.9 - 2018: 12.5 - 2019: 11.8 - 2020: 10.9 - Source: IMF - Methods for identifying doubtful loans: - Revised in 2016: shift to doubtful category based on transaction risk (arrears outstanding for more than 90 days) or counterparty risk (UTP). - Change from 180 to 90 days for identifying doubtful loans adopted; no materiality threshold defined for classifying to doubtful. - Exception: 90-day period is kept at 180 days for exposures to WAMU countries, government agencies other than central government of WAMU countries, and loans granted to SME/SMIs — not strictly in line with Basel Committee standards. - Article 9 lists events that could qualify a UTP (collective procedures, management problems, disputes among partners/shareholders); no financial or quantitative indicator is specified as basis for UTP. - Regulations do not address the concept of technical default. - Criteria for leaving the doubtful category: - Article 10: doubtful loans can be recorded as performing when payments are resumed regularly over one year; recorded under a specific sub-category for two years; any failure to pay more than 30 days during that period returns loan to bad loans. - Forborne loans: - Defined in Article 7 as loans subject to renegotiation measures (concessions to a counterparty experiencing or about to experience difficulties). - Definition is consistent with usual standards, though a distinction between concessions related to payment and concessions unrelated to payment would be useful. - Classification of forborne loans is more conservative than international norms: automatic classification under non-performing loans even if additional downgrading criteria are not met. - Observation (probation) period: twelve months upon completion of restructuring; added 24-month “cure period” under a specific sub-category — cumulative three-year period. - Any new failure to pay for more than 30 days during the cumulative three-year period entails transferring all outstanding loan amounts to doubtful debts. - Contagion rules: - Reclassifying a counterparty’s debt as bad entails automatic reclassification of all outstanding amounts and related off-balance sheet commitments (conservative for non-retail debts). - Principle of contagion does not apply to retail clients. - For counterparties belonging to a group, bank should examine consequences at group level and assess need to downgrade related entities’ debts. - Moratoria and COVID-19 response: - In spring 2020 BCEAO asked credit institutions to grant clients requesting it deferral of due dates for three months, renewable once, without interest charges, fees, or late payment penalties. - Targeted and time-limited deferral for clients the banks consider solvent is not included in non-performing loans; deferred loans classified in a specific account under healthy loans. - SGCB set up specific reporting statements to allow BCEAO to monitor deferred deadlines (three-month deferral authorized, renewable once). - Banks were permitted to reschedule 3.1 percent of private sector loans until end-2020; of these, 6 percent were reclassified as nonperforming by end-September 2021 (less than a fifth of a percentage point of total loans). - Banks’ compliance with classification rules: - Implementation of Instruction No. 026-11-2016 is gradual and requires more significant efforts. - DCPEME audits systematically highlight anomalies in loan classification and impose additional provisioning requirements that can be significant and impact prudential ratios. - Procedures often not updated with regulatory developments; not all banks have systems for automatic downgrading of loans. - Recovery approach: - Conditions for recovering doubtful loans are hampered by long judicial processing times and bank lax monitoring of guarantees. - DCPEME notes recovery mechanisms are improving with recovery monitoring committees and reporting, but recovery objectives remain unambitious. - Banks’ recovery mechanisms are subject to a checkpoint (relevance of recovery plans, setting and meeting recovery objectives, reporting, guidance by deliberative bodies on recovery policy). - No study conducted by SGCB or BCEAO staff on bad debt recovery rate; DERI highlighted data problems and lack of a template for collecting recovery-rate data. ### Reporting, documentation, and supervisory access (EC6) - Regulatory framework requires credit institutions to prepare statements during the current year according to BCEAO-prescribed frequency (Article 52 of the banking regulation law). - Institutions must submit statements on interbank operations and operations with clients (Instruction No. 003-05-2017, Article 4). - Article 21 of Circular No. 04-2017/CB/C requires semi-annual reports on overall review of loan portfolios including NPL levels and related provisions. - Credit institutions must submit, no later than April 30 N+1, an annual report on overall risk management framework, including provisions on assets where applicable. - Reporting statements: - Declarative statements for accounting requirements (FISEC) and prudential requirements (FODEP) for NPLs and high-risk loans. - Prudential statements (états prudentiels – EP 9 and 10) identify bad debts on-balance sheet and off-balance sheet, respectively. - Other prudential statements identify credit risk exposures by category (sovereign, business, government). - Periodic statements include data on NPLs and installment loans. - Suggested reporting enhancements: - Statements on loans moving into and out of doubtful loans, - Breakdown of payment arrears for doubtful and performing loans, - Recording of reasons for downgrading, - Accurate statements on collateral and write-offs. - Note: a periodic FISEC statement submitted monthly identifies healthy loans with past due amounts but this statement is not used by the DSP. ### Supervisor powers to require corrective action (EC7) - Regulations empower the CBU to require additional provisions where provisions are inadequate for prudential purposes or do not adequately reflect foreseeable losses (Article 25 of the circular on risk management). - Required additional provisions must be established without delay by supervised banks pursuant to Article 5 of Circular No. 04-2017/CB/C. - Estimation of provisions primarily falls to DCEPEME during on-site audits; compliance with classification rules and depreciation levels is subject to systematic controls during specific surveys. - Inspectors restate capital based on depreciation amounts, regularly leading to solvency ratio violations. - Immediate establishment of additional provisions found by on-site missions is required; SGCB issued a circular letter in early 2021 reiterating this requirement after banks sometimes delayed action citing favorable developments. - Banks may later record justifiable recoveries in the context of quarterly closings. ### Valuation of risk mitigants (EC8) - The supervisor requires banks to have appropriate mechanisms for regularly assessing the value of risk mitigants, including guarantees, credit derivatives, and collateral. - The valuation of collateral should reflect the net realisable value, taking into account prevailing market conditions. *Source: Conclusions (1wauea2022008 - Conclusions)* ### Conclusions ### Conclusions ### Collateral valuation and credit risk mitigation - Prudential framework Paragraph 230: collateral taken into account under the simple approach for credit risk mitigation (CRM) must be pledged at least for the duration of the exposure, be expressed in market prices, and revalued at least every six months. - Circular Article 20: credit policies must include appropriate policies allowing for evaluation at least annually of the value of property-based collateral or personal collateral received by the bank. - March 2021 SGCB circular letter (after discussion with the DSF): while awaiting new provisions on frequency and method for revaluation of mortgage guarantees, supervised banks were authorized to proceed with revaluation of mortgages at least every two years. - Circular letter stipulations: - Collateral should be valued by a property expert designated by the credit institution, during underwriting, renewal, or restructuring of a loan backed by a mortgage guarantee. - Periodic revaluation could be done by an independent appraiser in the division responsible for processing the credit files concerned. - Complete documentation on the method, results, and related control should be retained and kept available to the on-site supervision missions of the CB. - Identified gaps and weaknesses: - Circular letter does not require valuation following a loan’s classification as doubtful. - Regulations do not issue a guideline on collateral valuation method. - No provision for a haircut on the amount of the collateral to account for asset deterioration or transaction costs. - No rule on the method for selecting and renewing appraisers. - Review of DCPEME reports shows significant weaknesses (guarantees not inventoried, lack of revaluation). - Auditors’ report on the 50 largest exposures: lack of property-based collateral in 30 files and inadequate property-based collateral in eight files. ### Asset classification, provisioning, and problem assets - EC9: CBU has set criteria for classifying problem assets and conditions for reclassifying non-performing loans as healthy loans (see EC5 references). - EC10: CBU requires the deliberative body to approve a report on the nature and level of exposure to each type of risk; report should account for: - (i) credit facilities and guarantees collected, specifying the entity that granted the facilities and the limits of its powers, - (ii) the quality of the credit portfolio and the corresponding provisions, - (iii) the nature and level of the bank’s exposures to concentration risk, including exposures by counterparty, by sector, and by geographic region, - (iv) main operational loss events, - (v) transactions with related parties, including non-performing loans and unrecoverable loans, and - (vi) salient facts related to each type of risk identified in the bank’s risk mapping (Article 15 of Circular No. 04-2017CB/C). - EC11: CBU requires auditors to produce a specific report each year on compliance with prudential regulations and a report on the 50 largest exposures (Article 16 of Circular No. 002-2018/CB/C). Regulations define “large exposures” as clients or groups whose credit risk-weighted assets amount to at least 10% of the bank’s core capital (T1). Large exposure limit currently set at 45%, to be set at 25% in 2023. - Observed shortcomings in classification and provisioning: - Rate of doubtful loans stable at about 12% but masks wide disparities. - Writing off uncollectable loans after the sixth year is still not effective nor applied by most banks due to member states’ failure to transpose the directive to associated tax regimes. - Optional nature of provisioning for doubtful or disputed loans covered by a recognized guarantee or a first mortgage during the first two years, and lack of collective provisioning, delay or diminish depreciation effort. - Many banks do not strictly apply instruction on recording non-performing loans; internal procedures not updated; lack of information systems for automatic downgrading and provisioning. - DCPEME inspectors’ classification and provisioning requirements can involve sizeable amounts that may lead to violations of solvency rules. - Prospects for recovery are very weak and uncertain due to judicial practices and lack of professionalism among bank staff. ### Reporting, supervision, and risk monitoring - Deliberative body reporting and meeting minutes were confirmed by review of a panel of on-site inspection reports. - DCPEME’s checkpoints include existence and quality of reports sent to deliberative body. - SG does not conduct regular studies on risk trends, concentrations, and build-up of risks at the banking sector level; this work is done by the DSF and would benefit from a fixed schedule. - The reporting mechanism has been strengthened, but quality of information could be improved and is not always fully utilized by the DSP. - DCPEME inspectors’ investigations are of good quality given time allowed. ### Concentration risk and large exposures (Principle 19) - Regulatory requirements and definitions: - Article 27 of Circular 04-2017/CB/C: banks must have policies and processes providing a comprehensive bank-wide view of concentration risk; exposures include on- and off-balance sheet items and contingent liabilities. - Article 520 and Article 531 of the prudential framework: banks must set up an internal control mechanism to identify risk concentrations; concentration risk defined and captures different types except market risk. Article 537: internal evaluation of capital adequacy relative to market risk should include an evaluation of concentration risk. - Article 444 defines a “group of connected clients” by control relationship or economic interdependence; Articles 445–448 specify criteria; Article 450 excludes central administration and directly controlled entities from being considered an exposure to a group of connected clients. - CBU may grant a special exemption from application of the large exposure limit for a defined period to normalize non-compliance (paragraph 453). - Information systems and monitoring: - Article 27 requires banks to have information systems to promptly identify and aggregate exposures leading to concentration risk and large exposures. - Weakness of information systems, particularly in small banks, is a real weakness in compliance. - Reporting channels to the CBU on concentrations: - Annual risk management report (sectoral and geographic concentration). - Semi-annual reports on review of the loan portfolio. - Duty to provide information to BCEAO and CBU on solo, sub-consolidated, and/or consolidated basis related to identification of clients or groups with large exposures (paragraph 464). - Submission of four prudential statements (EP29 to EP32) on concentration risk with respect to clients and groups of related clients. - Observed practice deficiencies: - Review of several DCPEME audit reports shows Union’s banks do not have systems for monitoring large exposures and do not set concentration limits other than those for large exposures — indicating lack of maturity in managing concentration risk. ### Assessment and key statistics - Assessment of Principle 18: Materially Non-compliant. - Key numeric references preserved from the texts: - Revaluation frequency requirements: at least every six months (prudential framework), at least annually (Article 20), at least every two years (March 2021 circular letter interim authorization). - Definition threshold for large exposures: at least 10% of the bank’s core capital (T1). - Large exposure limit: currently 45%, to be set at 25% in 2023. - Rate of doubtful loans: about 12%. - Writing off uncollectable loans after the sixth year not effectively applied. - Consideration to use 90-day arrears threshold recommended (see Recommendations). ### Recommendations - Complete regulatory requirements in credit risk with precise provisions on monitoring and valuation of collateral and methods for calling on appraisers. - Consider possibility of using the 90-day arrears threshold for classification of all non-performing exposures. - Formalize guidelines on management of non-performing loans to specify supervisor’s expectations (governance of non-performing loans, concept of technical default, criteria for downgrading to UTP, quantitative examples, identification of structured loans, and asset valuation methodology). - Instruct banks without automated systems for downgrading loans to promptly remedy this situation. - Reiterate need to rapidly transpose the instruction on standardization of the tax system related to losses on doubtful and disputed loans to member states that have not yet done so. - Schedule an in-depth review of the quality of assets of banks with very deteriorated loan rates, using sampling and homogeneous research methods by type of portfolio. - Encourage banks to strengthen amicable recovery mechanisms and require recovery indicators in risk management reports; proceed with studies on recovery of doubtful loans by credit institutions. - Develop cross-cutting studies on banks’ loan portfolios and give more consideration to results of credit stress tests in bank ratings. *Source: Conclusions (1wauea2022008 - Conclusions).* ### Conclusions ### Conclusions ### Large exposure limit (EC6) — Transitory provisions and compliance - Paragraph 502 of the prudential framework requires banks to observe a large exposure limit of 25%. A transitional mechanism extends implementation until end-2022; this period was extended by one year due to the public health crisis. - Transitory maximum large risks concentration ratio by year: - 2018: 65% - 2019: 55% - 2020: 45% - 2021: 35% - 2022: 25% - Key statistics as of December 31, 2020: - The large exposure limit for the Union averaged 60.5%. - Only 68% of the Union’s banks — or 86 banks — met the transitory threshold of 55%. - With regard to the target large exposure limit of 25%, only 27 banks were in a position to reach it as of 12/31/2020, representing 21.4% of supervised banks. - Assessment and observations: - Deviations from the transitional standard involve more than 30% of banks and are persistent. - The pace of convergence toward the large exposure limit of 25% seems ambitious. - Structural concentration of commitments exists due to a tight market and preference for large companies with reliable financial statements; absence of active portfolio diversification strategies and vulnerability of counterparties to raw materials fluctuations. - Weak information systems impede identification of related clients and concentration monitoring. - Recommendations related to large exposures: - Require banks to introduce large exposures identification and monitoring systems incorporating formalized policies and processes and appropriate tools. - For implementation of the large exposure limit of 25%, encourage banks to utilize syndicated loans or additional guarantees and to strengthen their capital. - Provide action plans for banks, as needed, using Pillar 2 measures for banks unable to achieve the ratio by the deadline. Conduct investigations on banks’ identification procedures for connected groups. Establish indicators to monitor client diversification. - Regularly conduct banking studies on Union banks’ exposures to systematic counterparties and/or those most vulnerable to fluctuations in raw materials. ### Stress testing and concentration risk (EC7) - Supervisory expectations: - The supervisor requires banks to include the impact of significant risk concentrations into their stress testing programmes for risk management purposes. - The CBU expects banks to ensure stress testing programs take into account all significant risks; the impact of concentration risks is implicitly included. This requirement is mentioned in Article 13 of the circular on risk management and paragraph 544 of the prudential framework. - Observations: - The requirement is not observed by a large number of banks; lack of SGCB support and specialized resources within banks are explanatory factors. - The DSF’s stress tests seek to incorporate concentration risk in modeling exercises. ### Additional criteria on large exposures (AC1 / CA1) - Regulatory thresholds: - A large exposure is defined as ten per cent or more of a bank’s capital (10% of core capital). - Twenty-five per cent of a bank’s capital is the limit for an individual large exposure to a private sector non-bank counterparty or a group of connected counterparties (implementation date postponed to 2023). - Compliance and assessment: - Deviations from the transitional standard involve more than 30% of banks and are persistent. - As of 12/31/2020, only 27 banks — slightly more than 20% of the total — adhered to the 25% target ratio; the transitional ratio of 55% was achieved by 68% of banks. - The lack of maturity in many banks regarding concentration risk; many banks do not have large exposures monitoring systems and limit systems do not consider concentration limits other than those for large exposures. - Strengthened support measures and increased core capital will be necessary to promote compliance. ### Transactions with related parties (Principle 20 — EC1 to EC7) - Definitions and scope (EC1): - The concept of related parties is explicitly defined in Circulars Nos. 01/2017/CB/C (governance) and 04-2017/CB/C (risk management), Article 3, which identifies categories: - (i) Parent company and any entity over which it exercises exclusive control, joint control, or significant influence. - (ii) Any entity over which the bank exercises exclusive control, joint control, or significant influence. - (iii) An individual who exercises exclusive control, joint control, or significant influence over the bank. - (iv) An individual or legal entity holding at least 10% of the voting rights within the bank. - (v) The bank’s directors and officers. - (vi) Private companies in which individuals in iii), iv), and v) perform executive, management, or governing functions or hold more than 25% of share capital. - (vii) Individuals having close family ties with the individuals in iii), iv), and v). - Close family tie is defined: “when someone is the ancestor of another person, including by adoption, or when both have a common ancestor in the first or second degree. Married or common-law couples, including their children, are also taken into account.” - No exemption from these regulatory requirements is provided. - Transaction terms and conflicts (EC2–EC4): - Article 26 of the circular on risk management prohibits transactions with related parties on more favourable terms than with non-related parties, with limited exception for preferential staff compensation. - Article 26 requires prior approval and validation for granting and write-off of related-party loans; members of the deliberative body with conflicts of interest must be excluded (EC3). - Banks are expected to have procedures preventing beneficiaries and related persons from participating in granting/managing the transaction; monitoring and reporting through credit review or independent audit are required (EC4). - DCPEME methodology includes checkpoints for identifying related parties and monitoring their transactions. - OHADA uniform act Articles 438 and 440 require banks to send auditors information on related-party transactions and auditors to perform procedures; review noted auditors’ investigations on irregular agreements are not always apparent and some agreements were not submitted to auditors. - Limits, reporting and compliance (EC5–EC7): - Regulatory ceilings: - Paragraph 493: banks must notify BCEAO and CBU of any support to a single manager, shareholder, or staff participating in management/administration/governance/controls/operations amounting to at least 5% of effective capital. - Paragraph 491: individuals/entities holding 10% or more of voting rights are subject to this provision. - Paragraph 490: total loan amount to individuals participating in management/administration/governance/control/operations should not exceed 20% of effective share capital; each loan must be accompanied by collateral covering total exposure. - Amounts exceeding limits must be deducted in full from the bank’s core capital (cf. paragraph 28). - Compliance data: - More than 14% of banks (a total of 17) did not comply with the 20% cap as of 12/31/020 (compared to 11% in 2019). - Observations: - Expanding the concept of related parties and including all related parties in threshold calculations has increased violations, especially for institutions with significant exposures to sister subsidiaries and intra-group transactions. - DCPEME detected anomalies including contracts transferring commitments to related parties to other banks to ensure regulatory compliance. - Reporting requirements: - Banks must submit semi-annual EPs: - EP 38: level of loans granted to major shareholders, managers, staff, auditors, and other related parties. - EP 39: identifies the major shareholders, managers, staff members, and other related parties benefiting from a significant loan. - Banks must notify CBU and BCEAO of any lending to an individual manager, shareholder, or staff member totaling at least 5% of effective capital. - Assessment and recommendation: - Assessment of Principle 20: Largely Compliant. - Comments: regulatory framework is satisfactory with precise definitions, limits, and reporting, but implementation by banks is incomplete; share of banks failing to adhere to the 20% capital ceiling increased by three points in 2020 to reach 14%. - Recommendation: - Remind auditors of the requirement to conduct in-depth investigations on all information, contracts, and transactions involving related parties and verify the normal nature of agreements signed with related parties. ### Country and transfer risks (Principle 21) — introduction - Principle summary: - The supervisor determines that banks have adequate policies and processes to identify, measure, evaluate, monitor, report and control or mitigate country risk and transfer risk in international lending and investment activities. - Definitions: - Country risk: risk of exposure to loss caused by events in a foreign country; broader than sovereign risk and covers lending or investment to/with individuals, corporates, banks or governments. - Transfer risk: risk that a borrower cannot convert local currency into foreign exchange and so cannot make debt service payments in foreign currency, normally arising from exchange restrictions imposed by the government in the borrower’s country. _Italic: Conclusions (content unit: 1wauea2022008 - Conclusions)._ ### Conclusions ### Conclusions (Content unit: 1wauea2022008) ### Country Risk and Transfer Risk — Principle 21: Findings and Assessment - Country risk and transfer risk do not represent significant risks at the Union level despite increased internationalization of certain banking groups. - Country risk and transfer risk are defined in Article 3 of Circular No. 04/2017/CB/C on risk management. - Requirements related to these risks are presented in Article 56 of the circular: exposures must be monitored, managed, and mitigated on the basis of formalized policies and processes; banks are expected to ensure monitoring by borrower or counterparty; exposures including intra-group transactions, as applicable, must be identified, monitored, and managed by region and by country. - Article 15 of the circular requires banks to develop risk mapping including salient facts related to each type of risk and forward it to the deliberative body. - Supervisor determinations: - Boards have approved banks’ strategies, policies and processes for management of country and transfer risks and oversee implementation (EC2). - Information systems, risk management systems and internal control systems for timely aggregation, monitoring and reporting of country exposures are expected but not specifically audited by DCPEME (EC3). - Supervisor oversight exists for setting appropriate provisions against country risk and transfer risk; international practices include (a), (b), (c) as described in the source (EC4). - Instruction No. 026-11-2016 on loan classification does not include provisions on provisioning for country risk and transfer risk; earlier Instruction 94-05 had required full provisioning for interest not paid for more than three months related to country risk (EC4). - The CBU does not directly require stress testing programs to include country/transfer risk scenarios; Paragraph 13 of Circular No. 04/207/CB/C on stress testing indicates programs should include all significant risks, but consideration of country risk is not clearly required; in practice, this risk is not a priority in stress tests by top banks (EC5). - Supervisor regularly obtains information primarily through the annual risk management report (Article 16 of Circular No. 04/2017/CB/C); a standard reporting template is being developed by the DSP to remedy information disparities (EC6). - Assessment of Principle 21: Materially Non-compliant. - Comments: - Exposure to country risk and transfer risk is weak within the Union and basically involves cross-border groups although the SGCB does not have a very precise view. - Monitoring of country risk and transfer risk is not well covered in SGCB methodological tools and does not lead to off-site or on-site supervision. - Some annual reports reviewed did not contain information on these risk factors. - Regulatory prescriptions on monitoring this risk are noted in the circular on risks but in quite summary fashion. ### Country Risk Recommendations - Establish mapping of banks potentially exposed to country risk and transfer risk and gather information on provisions established to manage these risks, as needed. - Include in the future risk management template a heading for these risks. ### Market Risk — Principle 22: Findings and Conclusions - Principle definition: Supervisor determines banks have adequate market risk management process in line with risk appetite, risk profile, market and macroeconomic conditions, and risk of significant deterioration in market liquidity. - Regulatory references include Revisions to the Basel II market risk framework, February 2011; Interpretive issues, February 2011; Guidelines for computing capital for incremental risk in the trading book, July 2009; Supervisory guidance on fair value practices, April 2009; Amendment to the Capital Accord to incorporate market risks, January 2005. - EC1 (laws, regulations or supervisor require banks to have appropriate market risk management processes): - Circular on risk management requires implementation of strategies, policies, and processes providing a comprehensive bank-wide view of exposures including market risk (Article 8) and understanding of different types of market risk including deterioration of market liquidity (Article 42). - Prudential framework (paragraphs 536-537) and circular on risk management (Articles 4, 5, 6) require clear definition of risk management roles and separation of front, middle, and back offices (Article 42). - SGCB on-site missions review market risk policies, operational monitoring system, and methods for calculating capital requirements; however, on-site supervision has not carried out subject-matter or specific controls on market risks and does not make market risk specific recommendations in mission conclusions. - EC2 (Board approval and oversight): - Prudential framework (paragraph 519) and circular on governance (Articles 7, 8, 18, 22) require deliberative body to approve and review strategies and policies and be assisted by a Risks Committee with specified duties. - SGCB reviews approval of risk management policies by the deliberative body and its supervision of implementation. - Off-site oversight does not carry out specific controls on market risk nor incorporate it in the rating process; no control methodology for market risk is in place. - Oversight manager has indications on the trading book in financial statements but lacks a dashboard or tabulation table to flag banks with more significant market activity. - Lack of assigned rating is justified by low level of this risk: at end-December 2020, the trading book represents 0.43% of the banking sector’s total balance sheet; however, some banks have more significant market activity that for the top bank could reach up to 28% of the total balance sheet. - EC3 (market risk environment — systems, limits, exceptions, models, trading book allocation): - Circular requires effective information systems for timely transmission of relevant market risk information to governing bodies (Articles 12 and 42). - Deliberative body must ensure limits are set consistently with risk appetite, profile, and capital strength, and that limits are adopted and communicated (Article 11); limits are set on trading book positions and monitored (paragraph 331). - Executive body must report at least every six months on degree of use of risk appetite and limit management (Article 22). - Banks must have mechanisms for identifying and managing limits breaches, reporting, normalization, monitoring, and penalties (Article 11). - Regulatory framework transposes standard approaches and does not require internal models for market risk; when no market price is available banks may use internal models subject to conditions in paragraphs 339 and 340 (listed conditions include external review, independent development/validation units, formal change control, secure copy, risk management awareness of model weaknesses, periodic review). - Banks required to have adequate systems and controls to provide prudent and reliable estimates for trading book evaluation (paragraph 335). Deliberative body must ensure clear policies for allocation between trading book and banking book (Article 43; paragraph 329 of prudential framework). - SGCB verifies regulatory requirements in general reviews but does not verify valuation models used by banks. - EC4 (valuation and transaction capture): - Prudential framework requires trading book positions to be marked to market at least once a day or by reference to a model with parameters reviewed daily (paragraphs 328 and 331). - Valuation mechanism should provide prudent and reliable estimates (paragraph 335). - Market prices must come from independent sources and the more prudent valuation between buying and selling price should be used (paragraphs 337 and 338). - Model-based valuation requires compliance with conditions (paragraph 340) and independent periodic verification of market prices or model assumptions at least once a month (paragraph 341). - Banks must adjust valuations when price sources are not available or subjective (paragraph 342); set up procedures to assess valuation reserves for less liquid positions considering liquidation prices of concentrated/stale positions (paragraphs 345 and 346). - Internal evaluation of capital adequacy in market risk must evaluate concentration risk and illiquid positions in market turbulence scenarios (paragraph 537). - Banks must have a transactions monitoring system to: - Record exchange, commodities, and trading book transactions on a daily basis. - Measure risks daily arising from trading book positions in accordance with the prudential framework. - Distinguish transactions on the bank’s behalf from those for third parties. - SGCB verifies that trading book management policies and internal control mechanisms are validated by the deliberative body but does not exercise control over trading book valuation methods. - EC5 (capital and valuation adjustments): - The source text introduces EC5 but the provided excerpt ends before the EC5 conclusions are presented. *Source: Conclusions (Content unit: 1wauea2022008)* ### Conclusions ### 1wauea2022008 - Conclusions ### EC5 — Capital requirements for market risk - The bank is required to comply with the capital requirements set by the prudential framework. - Required actions: - Establish minimum capital in terms of market risk calculated according to the standard approach (paragraphs 348 to 443). - In accordance with Pillar 2 of the prudential framework, have internal capital sufficient to cover significant market risks not subject to capital requirements under Pillar 1 (Article 42 of the circular on risk management), particularly concentration list and the risk of illiquid positions in market turbulence scenarios (paragraphs 516 to 537 of the prudential framework). - Take stress testing results into account when setting internal capital targets (paragraph 545 of the prudential framework). - Valuation adjustments: - Banks are required to set up or keep in force processes for adjusting valuations of positions exposed to market risk or establishing reserves for the uncertainty of these valuations. - When the bank uses third-party valuations or values its positions with reference to a model, it should examine the need for such adjustments/reserves (paragraphs 341 and 344 of the prudential framework). - Supervisor role: - The SGCB checks the calculation of minimum capital requirements with respect to market risk. ### EC6 — Stress testing inclusion of market risk - Regulatory requirement: - The circular on risk management requires the deliberative body to ensure the bank uses rigorous and forward-looking stress testing programs including all significant risks to which the bank is exposed, including market risk (Articles 13 and 42 of the circular). - Programs should provide for corrective measures when stress testing results detect potential weaknesses. - Banks should regularly evaluate risk in the event of sharp variations in market or market segment parameters. - Purpose of exercises: - Detect events that could harm the bank and provide deliberative and executive bodies with understanding of risks and their interactions under stress. - Results should be taken into account in the internal process for evaluating capital adequacy (paragraphs 544 and 545 of prudential framework). - Supervisor verification and practice: - The SGCB verifies that stress testing programs take market risk into account when it is significant. - Stress test exercises conducted by banks do not systematically lead to extensive investigations (methodology, choice of variables, validation of guidelines) by SGCB teams, from the DSP as well as the DCPEME, including for groups. ### Assessment of Principle 22 — Market risk - Rating: Largely Compliant - Key observations and statistics: - Trading portfolios represent on average 0.43% of the total balance sheet as of end-December 2020. - In the FSAP banking survey, most banks indicate that the degree of exposure to market risk is marginal; only 18 banks report non-zero portfolios. - Certain banks have trading portfolios that may amount to 28% of the total balance sheet. - The regulatory framework was expanded in 2017 with more detailed rules on market risk and a parallel capital requirement. - Supervisory gaps: - Market risk is not incorporated in the rating and is not subject to specific monitoring at the level of off-site supervision. - The supervision manager lacks a warning indicator to flag banks with more significant market activity. - On-site supervision does not carry out topical verification or include this risk in terms of reference for specific missions; to date no recommendations have been made by the supervisor regarding market risk management. - Governance and risk management mechanisms allow verification of existence of strategy, procedures, limits, separation of function principles, and independent control functions, even if market risk is not covered as such. - Conclusion: - Rules related to market risk management and capital requirements represent notable progress. - Despite limited current exposure, better integration of market risk monitoring into control tools and procedures is necessary to identify and verify banks developing market activity. - Recommendations: - Further integrate market risk in the control process for off-site supervision: - Mandatory heading in the internal control report template with a description of the types of market activity and control products, procedures, and methodology. - Warning indicator in case of growth in the trading book to detect market risks, map them, and oversee banks with growing trading books or that have new financial market products. - Expedite more in-depth controls, particularly on trading book valuation models, for banks with significant market activity. ### Principle 23 — Interest Rate Risk in the Banking Book (IRRBB) - Principle summary: - Supervisor determines banks have adequate systems to identify, measure, evaluate, monitor, report and control or mitigate interest rate risk in the banking book. - EC1 (strategy and framework): - The circular on risk management requires a risk management framework based on documented strategies, policies, and processes to: - Have a comprehensive, bank-wide view of exposures by each type of risk. - Identify, measure, evaluate, monitor, report, and control or mitigate all the bank’s risks. - Reflect changes in the bank’s risk appetite and risk profile as well as market conditions and the macroeconomic environment. - Types of risks to be covered include overall interest rate risk in the banking book (Articles 3 and 54). - EC2 (Board and senior management oversight): - Prudential framework (paragraphs 519 and 538) requires the deliberative body to approve and regularly review strategies and policies, including interest rate risk in the banking book (Article 3 (aa) of the circular). - Circular on governance requires deliberative body or risks committee to ensure executive body establishes processes promoting effective implementation (Article 22). - The SGCB verifies implementation in context of general governance and risk management controls. - EC3 (measurement, models, limits, reporting): - Requirements: - (a) Comprehensive and appropriate interest rate risk measurement systems (Article 55). - (b) Regular review and independent (internal or external) validation of models used, including review of key model assumptions (Article 55). - (c) Appropriate limits approved by Boards and senior management, consistent with risk appetite, profile, and capital strength; understood and regularly communicated to relevant staff (Article 11). - (d) Effective exception tracking and reporting processes ensuring prompt action and procedures for exceptions (Article 11). - (e) Effective information systems and IT infrastructure for timely transmission of relevant information to governing bodies (Article 12). - SGCB indicates interest rate risk in the banking book is limited because fixed rates apply to most loans and banks’ financing; corresponds to maturity mismatches. - Off-site supervision: - Information from internal control reports and minutes from Boards and Risk Committees is available, but lack of a standard internal control report template makes information not always comparable or sufficient. - No periodic quantitative reporting on interest rate risk. - IRRBB is not incorporated in the rating process; no procedures ensuring minimum review to identify banks with material exposure. - No methodology for control of this risk in off-site supervision. - On-site supervision: - No topical control on management of interest rate risk. - Controls occur during specific missions when liquidity stress exists; liquidity risk controls can verify organizational aspects like assets-liabilities committee or limits. - Inspectors do not have a methodology for controlling IRRBB. - EC4 (stress testing scenarios): - Circular on risk management requires stress testing programs to take into account all material risks (Article 13). - Regulations do not include more specific requirements, particularly the scenario of adverse interest rate movements. - AC1 (reporting of internal IRR results): - Circular on internal control requires semi-annual internal control report (Article 26) and annual report on overall risk management mechanism (Article 16). - Regulatory texts do not specify nature of information to be provided on stress tests; an internal control report template and more precise stress test requirements are needed. - Supervisor does not have quantitative reporting on IRRBB exposure. - CA2 (ICAAP and IRRBB): - Prudential framework requires banks to establish an internal process to evaluate adequacy of capital, including internal evaluation of IRRBB (paragraphs 513, 516, and 538). - Implementing text on the template allowing banks to send information on their internal capital evaluation process is lacking. - The SGCB still does not exercise control over banks’ ICAAP. - Assessment of Principle 23: - Rating: Materially Non-compliant - Key points: - Circular incorporates IRRBB, but does not specify that stress testing should include rate variation scenarios; circular on stress testing should fill this gap. - SGCB indicates IRRBB seems limited due to most fixed rate loans and short maturity of private loans; increasing share of government securities portfolios (relatively long maturities) exposes banks to reduced intermediation margins if interest rates increase. - Risk not incorporated in banks’ rating system; SGCB uses heterogeneous risk reports to monitor. - On-site supervision verifies governance aspects during liquidity risk missions but lacks dedicated procedures and methodology. - Absence of quantitative reporting and precise information requirements prevents SGCB from having sufficient information. - No procedure or control methodology at off-site or on-site supervision levels for IRRBB. - Recommendations: - Make credit institutions subject to quantitative reporting on the exposure to interest rate risk. - Specify the information expected from banks on the management of interest rate risk and stress testing. - Establish control procedures and methodologies for this risk at the level of off-site supervision and on-site supervision and incorporate this risk in the overall assessment of each bank’s risk profile. - Supplement the stress testing requirements by requiring the incorporation of interest rate scenarios. ### Principle 24 — Liquidity Risk (start) - Principle summary: - Supervisor sets prudent and appropriate liquidity requirements reflecting liquidity needs; requires a strategy that enables prudent management of liquidity risk and compliance with liquidity requirements; strategy should account for risk profile and market and macroeconomic conditions. - Reference documents: - Basel III: International framework for liquidity risk measurement, standards and monitoring, December 2010. - Principles for Sound Liquidity Risk Management and Supervision, September 2008. *Source: WEST AFRICAN ECONOMIC MONETARY UNION — INTERNATIONAL MONETARY FUND (Conclusions).* ### Conclusions ### Conclusions ### Regulatory Liquidity Requirements — Quantitative Standards - The WAMU prudential framework transposes the minimum liquidity requirements defined in the Basel III framework: the short-term liquidity ratio, the structural liquidity ratio, and the liquidity monitoring tools (paragraphs 577 to 586 of the prudential framework). The methods for implementing these ratios are being defined. - Until transposition is complete, banks are subject to two pre-existing liquidity standards that differ from Basel standards in time horizon, components, and requirement levels and seem less conservative: - Liquidity ratio: numerator = assets available and realizable or mobilizable in the short term (maximum of three months); denominator = short-term liabilities or signature commitments to be honored at any moment. The standard to be met is a minimum of 75%. - Ratio of coverage for medium and long-term assets by stable resources: requires coverage of at least 50% for fixed assets by stable resources. - These standards: - Seek to prevent excessive transformation of short-term resources into medium- or long-term assets. - Expose banks to corrective measures and regulatory penalties for non-compliance. - Are applied solely on an individual basis and are subject to monthly or quarterly reporting (for financial institutions and the transformation ratio). - Other Basel monitoring tools (contractual maturity mismatch, concentration of funding, available unencumbered assets, etc.) are not currently part of the quantitative reporting framework. - An impact study conducted in June 2019 of 90 banks on a solo basis and eight banks on a consolidated basis showed difficulty for more than half of the banks in complying with the liquidity coverage ratio (LCR) despite an average LCR above 100%; banks struggling are generally small. The study proposes new ratios take effect in 2024 with a transitional mechanism and adaptations for local context, though the schedule has not been definitely adopted. ### Qualitative Standards (Circular on Risk Management and Governance) - The circular on risk management requires a liquidity management mechanism enabling maintenance of sufficient liquidity to deal with crisis periods (Article 45). This mechanism should include (Articles 46 to 52): - Liquidity indicators to identify, measure, manage, and monitor funding situations. - Appropriate policies and processes for liquidity risk management, approved by the deliberative body. - Funding strategies and policies to measure and continuously monitor funding needs and manage funding risk. - Framework for analysis and monitoring of funding needs for significant foreign-currency transactions or significant exposure in a particular currency. - Framework for managing encumbered assets on the balance sheet within acceptable limits. - Funding strategy ensuring effective diversification of funding sources and methods. - Framework for active management of intraday liquidity positions. - The circular on governance requires the deliberative body to continuously ensure adequacy of liquidity levels in terms of the bank’s risk profile; the risk committee should understand the nature and extent of risks, their interrelationships, and the capital and liquidity levels required to cover exposures (Articles 7 and 22). - The circular requires strategies, policies, and processes to be dynamic, reflecting changing risk appetite, risk profile, market conditions, and macroeconomic environment (Article 8). Banks must assess adequacy of capital and liquidity relative to their risk profile and market liquidity (paragraph 540). - Reporting requirements include submitting to the deliberative body a report on the nature and level of exposure to each risk (including liquidity) and liquidity needs at least once every six months (Articles 15 and 48). The Risks Committee must review risk management policies and processes at least annually (Article 22). ### Supervisor Practices — Off-site and On-site Supervision; Audits - Off-site: The SGCB reviews compliance with liquidity standards and the liquidity risk management framework. In rating: - Liquidity assessment quantitative weight: the two regulatory ratios (80%) and the deposits/loans ratio (20%). The deposits/loans ratio monitors transformation. - Evaluation of liquidity risk management framework uses a questionnaire that includes 15 questions; final operational risk profile rating can be adjusted by expert judgment. - On-site audits: - No topical audits on liquidity since the circular on risk management came into effect in 2018, but liquidity is frequently included in mission terms of reference. - In 2020, 14 banks were subject to audits in this area, six of which are systemic. - Supervisor formulates recommendations, particularly regarding contingency funding plans. - Inspection reports indicate the supervisor does not investigate the liquidity monitoring tools, methodologies, and assumptions used by banks; these points are not developed in on-site supervision methodology. - Documents analyzed by supervisor as controls on liquidity risk management: bank risk management strategies, processes and limits, reports on internal control and risk management, Board and Risks Committee meeting minutes. ### Levels of Banks’ Liquidity Ratios and Sector Coverage - As of December 31, 2020: - 108 credit institutions met the liquidity requirement. - These institutions concentrate 85.9% of assets and 90.5% of weighted risks. - Sectoral liquidity ratio: 105.8%. - Banks not in compliance are generally small. SGCB requires an action plan when the liquidity ratio is not met and notes recurring violations involve banks also in violation of solvency. For other banks, violations tend to be one-time. ### Transition to Basel III Ratios and Coverage Gaps (EC2) - Current standards incorporate on- and off-balance sheet risks and allow short-term liquidity monitoring and transformation risk measurement, but do not fully reflect banks’ liquidity risk: - Current liquidity ratio does not permit measurement of high-quality liquid assets. - It has not been defined according to a stress test scenario and its time horizon (three months) seems too long. - Ratios are applied only on a solo basis, not consolidated. - No quantitative reports to determine funding concentration. - Basel III liquidity ratios provide improved coverage: - LCR (short-term): bank must hold high-quality liquid assets at least equal to net cash outflows for 30 calendar days; includes on- and off-balance sheet items with different inflow/outflow rates under stress assumptions. - NSFR (long-term): encompasses on- and off-balance sheet items with different weightings of required stable funding (RSF) and available stable funding (ASF); requires ASF ≥ RSF to limit transformation. ### Assessment of Banks’ Liquidity Management Framework (EC3–EC5) - The supervisor determines banks have a robust liquidity management framework requiring maintenance of sufficient liquidity to withstand a range of stress events, with policies and processes approved by Boards and providing a comprehensive bank-wide view consistent with risk profile and systemic importance. - SGCB verifies: - Existence of policies and processes for liquidity risk management consistent with regulatory provisions. - Approval by the deliberative body of the overall risk management framework (strategies, policies, processes, risk appetite, liquidity limits). - Availability of sufficient liquidity to fulfill obligations in normal and crisis periods. - Ability of strategies, policies, and processes to provide an overall view of liquidity exposure. - These points are captured in the SNEC rating questionnaire; detected deficiencies affect ratings. - Specific requirements in circulars (Article references are preserved in prior sections) include: - Clear articulation of liquidity risk appetite approved by the deliberative body, taking bank activities and role in the financial system into account. - Sound day-to-day and, where appropriate, intraday liquidity management practices. - Adequate oversight by the deliberative body to ensure management implements policies consistent with the liquidity risk appetite. - Effective information systems for timely, suitable, reliable, integrated, aggregated data on liquidity risk (Article 12). - Reporting of liquidity exposure and needs to the deliberative body at least once every six months. - SGCB audit checkpoints include: - Formalization of liquidity risk management policies and processes and their content. - Existence and work of the assets-liabilities committee (no regulatory provisions for this committee). - Intraday liquidity management framework compliance. - Effective information system for forward-looking identification, aggregation, monitoring, and control of liquidity risk. - Timely transmission of liquidity exposure information to deliberative body and oversight of implementation by executive body. ### Funding Strategies, Contingency Planning, and Concentration Risks (EC5–EC6) - Circular requires banks to establish and regularly re-examine funding strategies and policies to continuously measure and monitor funding requirements and manage funding risk, taking into account other risks (credit, market, operational, reputational) (Article 48). - Required elements include: - Analysis of funding requirements under alternative scenarios. - Maintenance of a cushion of high quality, unencumbered, liquid assets usable without impediment in stress. - Diversification in sources (counterparties, instruments, currencies, markets) and tenor of funding; regular review of concentration limits. - Regular efforts to establish and maintain relationships with liability holders. - Regular assessment of capacity to sell assets. - Oversight and active control of liquidity exposures and funding requirements by legal entity, business line, currency, and group, accounting for legal and operational impediments to liquidity transfers. - Observed shortcomings: - Several checkpoints (process for analyzing funding under scenarios, mechanism for maintaining high quality liquid assets, regular assessment of capacity to sell assets) do not appear in SNEC liquidity questionnaire. - No periodic reporting of quantitative data on high quality, liquid assets or funding concentration. - FSAP survey indicates sector funding concentration risk: the five largest depositors represent an average of 31% of total deposits, reaching 95% in certain banks. - Contingency funding plans (EC6) expectations: - Plans should be formally articulated, adequately documented, set out strategies for addressing liquidity shortfalls across stress environments without reliance on lender of last resort, establish clear lines of responsibility, include communication plans (including with supervisor), and be regularly tested and updated. The supervisor assesses feasibility given risk profile and systemic importance and requires banks to address deficiencies. _Conclusions (source: 1wauea2022008 - Conclusions)_ ### Conclusions ### Conclusions ### Contingency funding plans and recovery (EC6) - The circular on risk management requires the deliberative body to ensure the bank has a contingency funding plan clearly presenting its strategies for resolving liquidity shortfalls in emergencies (Article 53). - The contingency funding plan should explain the banks’ strategy for resolving liquidity shortfalls in a series of stress scenarios without having recourse to the support of the BCEAO or the government (Article 53). - Required contents and practices for the contingency funding plan: - Describe the policies to be applied in various stress environments. - Clearly define the chain of responsibilities incumbent on concerned parties. - Establish precise processes for triggering these policies and alerting the higher level in the chain of command. - Be regularly tested and updated to ensure it remains fully operational. - Provide clear communication plans, including with the Banking Commission. - Be regularly tested and updated to confirm that it is operationally sound. - The contingency liquidity function plan is a component of the bank’s preventive recovery plan and should be adapted to the bank’s size, structure, nature, complexity of activities, risk profile, and group as appropriate (Articles 7 and 16). - The CBU may require amendment of the recovery plan when it finds inadequacies or obstacles to implementation (Articles 8 of the circular on the recovery plan). - Submission schedule status: - As of now, only SIBs, finance companies, and parent company credit institutions have begun to submit their plans to the CBU. - Non-systemic banks should submit their plan in January 2022 and the other institutional categories in July 2023. - SGCB oversight: - SGCB reviews contingency funding and preventive recovery plans and verifies approval by the deliberative body and compliance with regulatory requirements. - Recommendations are frequently made to banks in this area. - Banking survey finding in the FSAP: - When faced with a sudden liquidity crisis and assuming the bank would not have guarantees eligible for regular BCEAO liquidity provision operations: - 80% of the banks would resort to unsecured interbank loans. - 8% would resort to freezing loans and investigation. - 2% would ration withdrawals of client deposits. ### Liquidity stress testing (EC7) - The circular requires deliberative bodies to ensure rigorous, forward-looking stress testing including severe but plausible adverse scenarios and all material risks, including liquidity risk (Article 13). - Stress testing programs must provide corrective measures when results detect potential weaknesses that could negatively affect the bank’s financial strength. - The contingency funding plan must incorporate stress test results and the bank should regularly test and update the plan to ensure operational readiness (Article 53). - Gap identified: current stress testing requirements do not specify that liquidity stress scenarios should be short- and long-term, bank-specific and system-wide (and any combination). An upcoming circular specifying stress testing requirements is expected to address this gap. - SGCB verifies that: - The stress testing methodology is validated by the deliberative body. - Liquidity risk is taken into account. - Corrective measures are detailed when exercises detect weaknesses. - Stress testing is well documented. - Banking survey findings: - 74% of the banks conduct stress tests on the bank’s liquidity. - 44% do so regularly. - Most include assumptions on rates of withdrawal and/or non-renewal of different sources of funding. - 18 banks use the same assumptions as for the short-term liquidity ratio. - 57 banks use bank-specific assumptions. ### Foreign currency liquidity (EC8) - The circular requires banks with significant foreign currency transactions or exposures in a particular currency to: - Undertake separate analysis of strategy and monitor liquidity needs for each significant currency (Article 49). - Use stress testing to determine the degree of mismatch in that currency and, where necessary, set and regularly review limits on foreign currency cash flow mismatches in aggregate and for each significant currency (Article 49). - Monitor and actively control liquidity risk exposures and funding requirements for each legal entity, line of business, currency, and group as a whole, taking into account legal, regulatory, and operational impediments to liquidity transfers (Article 48). - SGCB audits verify that banks: - Proceed with separate analysis and monitoring for each significant currency. - Use stress testing to determine currency mismatches. - Gap identified: no periodic quantitative reporting is sent to the supervisor on liquidity requirements in each significant currency. - Context note: Capital controls and regulations on external financial relations of WAMU member states considerably limit banks’ foreign currency exposures. ### Encumbered assets and unencumbered liquid assets (Additional Criterion AC1 / CA1) - The circular requires deliberative bodies to ensure levels of encumbered assets are managed within acceptable limits to mitigate risks to funding cost and long-term liquidity sustainability, and to maintain a range of high quality unencumbered liquid assets (Article 48). - Banks are required to provide sufficient information and set appropriate limits to mitigate detected risks (Article 50). - SGCB verifies whether banks have a framework for limits on encumbered assets, but there is no periodic reporting to the supervisor on available unencumbered assets. ### Assessment of Principle 24 (Liquidity risk management) - Assessment: Largely Compliant. - Observations and findings: - Banks are subject to a short-term liquidity ratio and a transformation ratio not applied on a consolidated basis; calculation methods differ from the Basel standard and include minimal requirements below 100%. - The current liquidity ratio is not based on stress testing and its time horizon of three months seems too long to properly reflect liquidity risk. - Implementation of Basel III liquidity standards is underway: quantitative standards (LCR and NSFR) and Basel III monitoring tools have been introduced without detailed specification. - An impact study conducted in 2019 defined implementation proposals that have not been validated. - Banks request greater transparency regarding the schedule for implementing new ratios. - For the LCR, the plan is to authorize WAMU government-owned securities in HQLA level 1; this is debatable given the shallow secondary market for government securities in WAMU. - To facilitate reform implementation, and considering limited assets meeting HQLA requirements, the possibility of including all Central Bank reserves, including the required reserve, in HQLA level 1 should be analyzed, assuming BCEAO policies authorize withdrawals on these reserves during stress. - Certain small banks representing about 14% of the banking system’s assets at end-December 2020 do not comply with current liquidity ratios. - SGCB requires action plans when liquidity ratios are not met; some violations are one-time, while sustained violations often correspond to banks with other vulnerabilities (cf. Principles 11 and 16). - The 2017 regulatory framework on liquidity risk management is largely consistent with Basel core principles except for stress testing requirements specifying short- and long-term bank-specific and system-wide scenarios. - Liquidity risk control is frequently included in on-site mission terms of reference, but there has been no topical (cross-bank) control since release of the circular. - Investigations into liquidity monitoring tools, methodologies, and banks’ assumptions are insufficiently developed and not specified in on-site supervision methodology. - Off-site supervision tools could be improved: the questionnaire allows assigning a rating but does not cover some important analysis points (e.g., process for analyzing funding needs by scenario, framework for maintaining high-quality liquid assets, regular assessment of capacity to sell assets). - Current reporting to the supervisor on liquidity is incomplete compared to international standards (beyond LCR and NSFR, should include monitoring tools such as mismatches of contractual maturities, concentration of funding, available unencumbered assets). - Recommendations: - Introduce LCR/NSFR reporting and certain Basel II monitoring tools for liquidity; in particular, make credit institutions subject to quantitative reporting on the remaining maturity mismatches between assets and liabilities, without waiting on the entry into force of minimal LCR/NSFR requirements. - Study the possibility of introducing haircuts on government securities based on the degree of liquidity on the secondary market and the member state’s sovereign risk, providing transitory provisions as needed to introduce this more conservative measure or at a minimum provide a uniform haircut for government securities in the WAMU. - Analyze at the BCEAO level the possibility of including all Central Bank reserves, including the mandatory reserve, in HQLA level 1 of the LCR. - Finalize the schedule for introducing LCR/NSFR and inform the banks. - Complete the questionnaire on liquidity risk management used for rating and revise the quantitative indicators used, taking into account the new Basel III ratios and monitoring tools. - Strengthen the controls carried out on the liquidity monitoring tools used by the banks and develop the on-site supervision methodology. - Complete the requirements on stress testing, indicating that the stress scenarios on liquidity should be short- and long-term, bank-specific and system-wide (or any combination of these options). ### Operational risk (Principle 25, EC1) - The circular requires banks to adopt, based on proportionality, a risk management framework incorporating operational risk including strategies, policies, and processes (Article 8), mapping of different risks (Article 9), a risk culture (Article 10), risk appetite, management of limits (Article 11), an information system (Article 12), stress testing programs (Article 13), reporting to the deliberative body (Article 15) and reporting to the Banking Commission (Article 16). - Operational loss events/incidents are to be categorized into seven classes (Article 28): - Internal fraud. - External fraud. - Employment and workplace safety practices. - Practices with regard to clients, products, and commercial activity. - Damage done to physical assets. - Business interruptions and system failures. - Execution of operations, delivery and process management. - Audit and supervision practices: - Documents analyzed by the supervisor include the bank’s risk management policies and processes, semi-annual reports on internal control, annual reports on risk management, and Board minutes. - Off-site supervision: annual bank rating assesses operational risk quantitatively using the arithmetic average of two quantitative indicators, net banking income and the number of branches; a questionnaire of 32 closed questions covers operational risk management and business continuity; final rating may be adjusted by expert judgment. - On-site supervision: audit procedures include evaluation of the operational risk management framework and review of risk management for information systems/ICT. - Operational risk is not subject to topical supervision except for information systems checked during introduction of the revised BCA; the topic is frequently included in terms of reference for specific missions. - Controls lead to recommendations for inadequacies such as lack of Board validation of risk mapping, deficiencies in tools compiling operational loss data, lack of a continuity plan, and IT security weaknesses. - Resources and capability gaps: - On-site supervision has two inspectors with ISACA certifications with plans to improve skills; no specialized information system controls team exists. - Supervisor does not use external auditors specializing in information systems but requests computer scientists from the BCEAO when needed. *Source: 1wauea2022008 - Conclusions* ### Conclusions ### Conclusions ### Governance and Board responsibilities (EC2) - The prudential framework (paragraph 519) and the circular on governance (Article 7) require that the deliberative body approve the bank’s overall strategy, all policies in this area, its risk appetite, and the bank’s risk limits with regard to operational risk as for the other risks. - The circular on governance (Article 8) requires the Board: - To supervise the management of the bank’s activities carried out by the executive body and ensure that the latter acts in accordance with the strategy and policies it has defined and approved. - To hold regular meetings with the executive body on the bank’s situation, particularly to gather information and explanations that can clarify its judgment. - The Risk Committee (Article 22), established by the deliberative body and reporting to it twice a year, serves as the liaison between the deliberative body and the executive body and is charged with analyzing in depth subjects that deal with risk. Risk Committee tasks on operational risk management include, inter alia: - To ensure the establishment of an integrated risk management framework consistent with the requirements indicated in the circular on risk management. - To participate in developing the bank’s risk management strategies and to review them annually. - To ensure the establishment of a healthy risk management culture at the bank level. - Based on minutes from the deliberative body, the SGCB reviews internal control reports as well as the risk management report, that processes are updated by the deliberative body and effectively adhered to by the executive body. ### Implementation and supervisory verification (EC3) - The supervisor determines that the approved strategy and significant policies and processes for the management of operational risk are implemented effectively by management and fully integrated into the bank’s overall risk management process. - The circular on governance requires senior management to continuously ensure compliance with internal policies as well as legal and regulatory requirements and to ensure implementation of the risks strategy approved by the deliberative body (Article 27). - The prudential framework (paragraph 314) requires that when the bank applies the standard approach for calculating capital requirements for operational risk, the management processes and the system for assessing operational risk are subject to validation and independent periodic verification, covering activities of units and the operational risk management function. - The SGCB reviews, through internal control and risk management reports and during on-site supervision, that approved strategy, policies, and significant processes for operational risk management are effectively applied and fully integrated. ### Disaster recovery and business continuity (EC4) - The supervisor reviews the quality and comprehensiveness of disaster recovery and business continuity plans to assess feasibility in severe business disruption scenarios and determine the bank’s ability to operate as a going concern and minimize losses, including disturbances to payment and settlement systems. - The circular on risk management requires banks to establish emergency and business continuity plans to guarantee uninterrupted operations and limit losses in the event of severe business disruption (Article 39), including designation of a responsible person, establishment of a credit and business continuity management committee, definition of principal roles, identification of critical human resources, and staff information. - Regulations define essential components of the continuity plan (Article 40) and require impact analyses and tests at least once a year (Article 41). - The SGCB reviews the quality and comprehensiveness of plans, verifies regulatory points and that internal audit periodically verifies the plan. The operational risk management questionnaire includes seven questions on business continuity. On-site supervision reviewed this point in 14 banks in 2020. - The supervisor has not yet reviewed all the continuity plans of systemic banks. ### Information technology governance and infrastructure (EC5) - The supervisor determines banks have appropriate IT policies and processes to identify, assess, monitor and manage technology risks and appropriate IT infrastructure to meet current and projected business requirements (normal and stress), ensuring data and system integrity, security and availability. - The circular on risk management (Article 12) requires a governance framework for risk data, a risk-related data architecture, and an IT infrastructure. - The circular on internal control (Article 12) requires information and communication channels allowing staff to perform control activities; information systems should cover all significant business and guarantee quality of accounting, prudential, operational, or compliance-related data. - Prescriptions in information system security are not specified by means of guidelines (cf. Principle 15). - The SGCB ensures: - Based on business or strategic plan review, the bank has an IT master plan formalizing the information systems strategy. - Based on Board minutes, the deliberative body has approved the IT master plan. - Based on a sample of user accounts, the bank has established restrictions on access for each profile/security category detailed in responsibility matrices. - The bank has a policy or process, approved by the deliberative body, for managing ICT risks to identify threats, vulnerabilities, and weaknesses and evaluate frequency and consequences. - Based on a sample of IT project files, internal committee reports, and control functions reports, an IT risk management process is implemented for all major changes. - Survey result: banks declare that 81% of their institutions have a “core system” type IT system that allows them to produce complete accounting statements at the end of each accounting day (109 answered yes, compared to 25 that answered no, for a total of 134 responses). ### Operational risk information systems and data (EC6) - The circular on risk management requires establishment of an information system (Article 12) that: - Provides capabilities for aggregating risk data and reporting risks at the organizational level. - Is tailored, under normal circumstances and in periods of stress, to measure and evaluate the size, composition, and quality of exposure to risk at the bank level and for all types of risks, products, and counterparties. - Ensures availability, quality, reliability, and integrity of the data. - Guarantees timely transmission to governing bodies of relevant information useful for decision-making. - The bank should collect data related to operational loss events (Article 28) according to the seven categories defined (cf. Criterion 1). ### Reporting to supervisor and governance reporting (EC7) - The circular on risk management requires banks to send no later than April 30 an annual report on the risk management framework validated by the deliberative body (Article 33). - The circular on internal control requires the internal audit head to report significant internal control deficiencies to governing bodies and the CBU without delay (Article 14). - On a semi-annual basis, supervised banks should send a properly completed prudential statement to allow monitoring of capital requirements and collection of losses related to operational risk. - The SGCB verifies during off- and on-site supervision that appropriate reporting mechanisms are established to keep informed regarding events that could influence operational risk. ### Outsourcing and third-party risk (EC8) - The supervisor determines banks have policies and processes to assess, manage and monitor outsourced activities covering due diligence, structuring, monitoring risks, control environment, and contingency planning, with comprehensive contracts/SLA and clear allocation of responsibilities. - The circular on risk management governs outsourcing activities (Articles 33 to 38). Key points: - Use of outsourcing does not relieve the bank’s governing bodies of obligations regarding compliance and vis-à-vis clients, auditors, and monetary/control authorities. - The deliberative body should review at least twice a year the complete list of outsourcing contracts and absorb executive body reports on contract performance. - Banks are required to prepare solid service contracts with legal opinion prior to deliberative body approval; have policies/processes to define outsourcing methods and identify associated risks; have internal monitoring capabilities; contingency and continuity plans for outsourced activities; adequate monitoring; internal control report summary of controls on outsourced activities; favorable opinion from the CBU and due diligence before signing contracts; and ensure all physical and electronic data are available in the WAMU despite outsourcing. - Additional provisions apply for intra-group contracts with parent/sister entities, especially regarding monitoring performance in the risk management report. - The SGCB verifies regulatory requirements based on Board minutes, sample files (feasibility study, legal consultation), and control function reports; controls are carried out in on-site supervision. Off-site supervision includes 12 questions on outsourced services in the rating. ### Common points of exposure and cybersecurity (AC1 / CA1) - Additional Criterion AC1: The supervisor regularly identifies any common points of exposure to operational risk or potential vulnerability (e.g., outsourcing of key operations by many banks to a common service provider). - Conclusion CA1: Review of common points of exposure to operational risk is still not done by the supervisor. The base for global collection of losses associated with operational risks of different banks, which is being set up, should allow for introduction of this analysis. - Operational risk is seen as a significant risk by banks; the main operational risk indicated during FSAP sector interviews is cyber risk. The SGCB confirms losses tied to cyber-attacks, particularly takeover of IT systems managing prepaid bank cards. - Cybersecurity is part of the BCEAO’s strategic priorities. For banking supervision, there are plans to establish a regulatory framework with requirements in cybersecurity and to strengthen controls; plans to create a regional platform on cybersecurity at the financial sector level. - In 2021 the BCEAO launched a program to evaluate cybersecurity in the WAEMU financial sector in partnership with the World Bank and the University of Tel Aviv (interdisciplinary cyber research center) to perform a sectoral evaluation of current cybersecurity capabilities and improve cyber-resilience by improving regulatory framework and supervision. ### Assessment of Principle 25 — Operational Risk - Assessment: Compliant - Comments and findings: - The framework governing operational risk strengthened with quantitative requirements in solvency ratio and more developed qualitative rules; regulatory framework revised in 2017 and in force since July 1, 2018. - New requirements introduced for collection of losses, business continuity plan, outsourced services, and management of new products. - Operational risk is rated by off-site supervision based on a detailed questionnaire; on-site supervision includes methodology for control of this risk. - No topical control (focused on this risk and common to several banks) since introduction of the circular (cf. Principle 15). - SGCB has some information systems control capabilities but no dedicated unit nor use of external consultants. - Banks are making efforts to establish operational risk management frameworks; deficiencies remain given relative newness of some requirements (loss collection, business continuity plans). - Prescriptions in information security need more detailed guidance (cf. Principle 15). - Supervisor does not currently review common points of exposure; the planned loss collection base should enable introduction of such analysis. - Recommendations: - Strengthen the supervisor’s capabilities in information systems by forming a team dedicated to on-site supervision of information systems and using external consultants. - Develop cross-cutting analyses of operational risk to identify common points of vulnerability. ### Internal Control and Audit — Principle 26 (introductory elements / EC1) - Principle summary: The supervisor determines that banks have adequate internal control frameworks to establish and maintain a properly controlled operating environment taking into account risk profile. Controls are the responsibility of the Board and/or senior management and address organisational structure, accounting policies and processes, checks and balances, and safeguarding of assets and investments, including prevention and early detection/reporting of misuse such as fraud, embezzlement, unauthorised trading and computer intrusion. - EC1 areas specified: - Organisational structure: definitions of duties and responsibilities, clear delegation of authority (e.g., loan approval limits), decision-making policies and processes, separation of critical functions (business origination, payments, reconciliation, risk management, accounting, audit and compliance). - Accounting policies and processes: reconciliation of accounts, control lists, information for management. - Checks and balances: segregation of duties, cross-checking, dual control of assets, double signatures. - Safeguarding assets and investments: physical control and computer access. *Source: Conclusions — 1wauea2022008* ### Conclusions ### Conclusions ### Internal control framework and Circular No. 03/2017/CB/C - Circular No. 03/2017/CB/C structures internal control around four main aspects: the responsibilities of participants; the components of internal control (control environment, risk assessment, control activities, information and communication, monitoring of control activities); the internal audit function; relations between the supervisor and the various parties involved in the controls (governance bodies, internal audit functions, auditors). - Article 9: “the deliberative body should ensure the establishment of an adequate control environment, which constitutes the framework and structure necessary for achieving the objectives of the internal control system.” - Article 11 requires regulated activities to be covered by adequate controls incorporated in daily functions and prescribes appropriate separation of functions. - Article 12 requires that the internal control system guarantee good quality accounting and financial information and “ensure the existence of an audit trail and compliance with the provisions of the applicable accounting standards.” - Physical protection of sites and computer access and investments appears in circulars on risk and internal control; safeguarding of assets and investments is not explicitly mentioned in the 2017 circulars but Circular No. 01/2017/CB refers to the due diligence obligation of Board members. ### The Lines of Defense Principle (Article 13) - The circular requires monitoring of control activities based on the three lines of defense model and guarantees strict separation of functions: - First line of defense: operational units exercise ongoing, first-level control over daily operations. - Second line of defense: support and control functions (risk management, internal control, compliance, finance, information systems, legal affairs), independent of the first line, exercise ongoing, second-level control to ensure first-level controls exist, are effective, and properly conducted. - Third line of defense: internal audit function assesses on a fully independent basis the effectiveness of the control processes established by the first and second lines and performs periodic controls over all components of the internal control system. - Article 13 states banks should ensure strict coordination of the different lines of defense so the internal control system works effectively. - The 2017 circulars require a locally based internal audit function and audit team for the subsidiaries of large groups. - Banks’ responses to the IMF banking survey: the three lines of defense system is cited as one of the truly strong points; except for banks in three countries, the mechanism is now prevalent within banks in the Union. ### DSP, DCPEME on-site reviews and audits - DSP tasks: internal control reports and on-site supervision reports complete a questionnaire on internal control containing a list of 34 questions covering all aspects related to internal control operations. - DCPEME audits: review organization of control functions, separation of functions principle, breakdown of appropriate controls; verify existence of ongoing accounting control with two levels of control and independence of second level accounting control. - DCPEME on-site investigations audit back-office functions (notably back-office credit), focusing on separation of tasks, the four eyes principle, and personnel evaluations. - Automation: automation of processes is quite complete in the back office of large groups; automation is much less advanced in medium-sized banks, though the pandemic has accelerated digitization and elimination of certain manual procedures. ### Quality and frequency of internal control and compliance reporting - Banks are required to send the CBU a semi-annual report on internal control as of June 30 and December 31, prepared by the person responsible for the internal audit function and approved by the deliberative body. - Review of internal control reports shows uneven maturity in presentation and comprehension of the three lines of defense framework and highly variable quantity of information. - Compliance reports: the supervisor receives semi-annual compliance reports. A tabulation of nine compliance reports showed: - Submission deadlines are not always met. - The quality of information varies significantly and is sometimes very brief, prompting reminders from the SGCB regarding the supervisor’s expectations. ### Compliance function (EC3) and staffing - Article 5 of Circular No. 05-2017/CB/C requires the executive body to establish a permanent compliance function; Article 9 requires sufficient staff suited to the bank’s size, complexity, and risk profile. - AML-CFT control units may report to compliance or risk management depending on bank size; SIBs are required to have a dedicated compliance function; non-systemic banks may assign responsibilities to risk management or off-site supervision. - Questionnaire results: nearly all banks (92%) indicate having a permanent and independent compliance function reporting to the Board; only one out of two indicate having assigned sufficient staff to this function. - Country disparities: 21% for Niger compared to 73% for Benin. - DCPEME observations confirm great disparities and generally insufficient staff to cover network and activities. - DCPEME could be more thorough in assessing compliance function’s authority vis-à-vis operational business areas and its influence on executive management. ### Internal audit function (EC4, EC5) — coverage, independence, methodology, resources - DCPEME audit methodology covers internal audit aspects: existence of control processes to assess sturdiness of operational processes and effectiveness of first- and second-line control; verification of an audit chart defining audit tasks and links to the audit committee validated by the Board. - Formalization of an audit chart is viewed as important by banks, but not yet universal. - The DSP and DCPEME find banks have undertaken numerous actions to strengthen their control environment; deficiencies remain but to a lesser extent. - Requirements and practices: - Article 4 of Circular No. 03/2017/CB: deliberative body should ensure internal audit has suitable resources and independence. - Circular on governance requires appointment, transfer, or dismissal of internal audit leaders be submitted to deliberative body approval and brought to CB attention. - Article 5 requires the executive body to inform internal audit in time of new developments, initiatives, projects, products, and operational changes. - Article 15 stipulates internal audit should enjoy full access to all physical and electronic data necessary. - Regulations require internal audit to report at least twice a year to the audit committee; in practice communication is much closer. - Article 20 requires an audit plan based on strict assessment of risks inherent to all bank activities and entities. - Article 19 requires internal audit scope to cover each of the bank’s entities and activities, including outsourced activities. - Article 4 of Circular 03/2017/CB requires an external quality assurance review of internal audit at least every five years. - Resources and independence: - On-site investigations show audit staff size still remains insufficient, though not among the main weaknesses detected. - In the large majority of cases, reporting lines from internal audit to the audit committee and to senior management/parent company exist. - DCPEME verifies internal audit does not engage in incompatible operational activities. - Methodologies and follow-up: - SIBs systematically assess criticality of observations and prioritize recommendations with implementation deadlines; smaller banks less likely to set implementation deadlines. - Audit plans are evaluated for Board approval, coverage of all risks, and incorporation of risk mapping; internal audit services generally rely on group mapping rather than developing parallel mapping tools. - Follow-up tools vary: SIBs may use software; smaller banks often use Excel files. - Quality of internal audit reports is uneven between large and small banks; smaller banks often use external audit and consulting firms for technical missions to strengthen audit approach. - Outsourcing: - Regulations require audit clauses allowing supervisor to verify third-party deliveries; in practice no procedure has been conducted on providers to date. - Regulations forbid outsourcing of all internal audit activities. ### Assessment of Principle 26 - Rating: Largely Compliant - Comments: - The regulatory framework on internal control and compliance functions was significantly improved with the 2017 circulars. - Implementation is gradual; ambitious prescriptions could accentuate disparities among banks. - Insufficient staff in control functions is a major challenge, requiring strong corrective measures from the supervisor. - Report quality from supervised banks is very uneven, showing lack of maturity among small banks. - Lack of a report template from the supervisor hinders consistency; some banks need strengthened support. - Assessment of internal control operation relies heavily on DCPEME audits; DSP should organize working meetings with banks’ internal control (second and third line of defense: risk management, off-site supervision, audit) and compliance teams to gain regular understanding and be directly informed of deficiencies and progress. ### Recommendations - Finalize as soon as possible the templates for returning information on the organization and tasks of the control and compliance functions. - Make it general practice for the DSP to conduct up-close interviews with the banks’ control functions. - Take strong corrective measures against banks that have under-staffed control functions and/or have not implemented the three lines of defense principle. ### Principle 27 (Financial Reporting and External Audit) — introductory note - Principle 27 summary: supervisor determines banks and banking groups maintain adequate and reliable records, prepare financial statements in accordance with accounting policies and practices widely accepted internationally, publish information that fairly reflects financial condition and performance, and bear an independent external auditor’s opinion; supervisor also determines adequate governance and oversight of the external audit function. *Source: Conclusions (Content unit 1wauea2022008) from the provided IMF chapter/section.* ### Conclusions ### Conclusions ### Responsibility of the Deliberative Body - The instruction published in 2016 on the preparation and publication of solo and consolidated financial statements makes financial statements the responsibility of corporate bodies (Article 2). - The 2017 circular on governance: the deliberative body adopts the annual financial statements, in accordance with regulatory requirements on the subject (Article 7). ### Accounting Standards in Effect - The BCA, revised in November 2016 by decision of the BCEAO Governor, took effect in 2018. - New structuring of financial statements introduced, notably with semi-annual statements, to ensure convergence with common law applicable to commercial companies and begin transition to the IFRS standards, particularly in terms of the conceptual framework. - IFRS 9 has still not been taken into account in the chart of accounts. - Since 2019 listed companies are required to apply the IFRS standards. - Discussions ongoing to determine methods for transition to all the IFRS standards, including IFRS 9, for all banks in the banking sector. - A questionnaire to assess banks’ preparation was sent in 2021. - Option considered: simultaneous application on a solo and consolidated basis, following benchmarks of Union countries such as Nigeria. - Introduction of IFRS 9 would have a major impact because currently there are no requirements on provisioning of performing loans (e.g., collective provision). ### Audits Conducted (SGCB practices) - SGCB audit procedures: - Reconciliation between items in the position statement and balances in accounts linked to each item, based on the balance sheet as of the verified accounting close date. - Appropriate normalization (balance correction and/or additional depreciation), upon the bank’s request for justification of balance differences, based on discrepancies statements. - Appropriate accounting corrections, based on statements of abnormal debit and/or credit balances. - On-site supervision audit procedures related to process: - Verifying composition and operation of a bank’s deliberative body and special committees. - Verifying quality and operation of a bank’s executive body and management committees. - Review of the accounts. - Accounting controls are conducted by on-site supervision when included in terms of reference for specific missions (e.g., when off-site oversight detects significant amounts in suspense accounts). - Controls were conducted when the new chart of accounts was introduced and are systematically done for newly licensed banks. ### External Audit Framework (EC2–EC9 and AC1) - EC2: Requirement that financial statements issued annually to the public bear an independent external auditor’s opinion in accordance with internationally accepted auditing practices and standards. - 2018 circular on auditor’s performance requires financial statements to be accompanied by an auditor’s opinion on consistency, accuracy, and fair presentation following a review based on applicable standards (Article 12). - 2016 instruction requires annual statements to be approved by general shareholders meeting (Article 4) and communicated to the CBU prior to June 30 with auditors’ reports (Article 6). - Financial statements to be sent to the CBU at end of first six months of the year, within two months, with an auditors’ report on accuracy (Article 8). - SGCB verifies implementation and has on-site audit procedure on controls conducted by auditors and others. - EC3: Valuation practices - Two asset valuation rules in WAMU bank accounting framework: fair value and historical cost (section 2 of revised BCA annex). - Revised BCA restricts fair value to trading securities and transactions in foreign currencies; historical cost remains principal method. - Fair value determination based on three approaches: - Market approach - Income approach - Cost approach - 2016 instruction on accounting and valuation of securities requires banks to use valuation techniques commonly used by market participants if reliable (Article 9). - Prudential framework requires independent valuation in addition to daily market price or model valuation (paragraphs 337 to 342; independent verification at least once a month; paragraph 341). - SGCB does not have much information on portfolios valued at fair value and valuation models used but checks that independent verifications are conducted. - EC4: Scope and standards of external audits - 2018 circular requires auditors submit annual mission letter via supervised banks specifying work extent, human resources, time budget (Article 18). - Title IV defines auditors’ tasks: review of financial statements (Article 12), verification of CBU-required adjustments (Article 13). - Title V specifies reports on financial statements and specific reports on internal control, prudential regulation, and the 50 largest risks. - Article 12: auditors issue opinion in accordance with applicable standards and proceed with audits as provided by OHADA uniform act. - Regulations published in 2017 on standardization of accounting and audit professionals specify International Standards on Auditing (ISA) as the professional standards. - Circular on governance (Article 21) assigns audit committee to supervise, review, and approve internal and external audit programs and scope/frequency. - SGCB verifies auditors’ annual mission letter and that audit committee exercises its powers and reports to deliberative body. - EC5: Audit coverage requirements - 2018 circular requires auditors, in reviewing financial statements solo or consolidated, to: - Assess quality of internal control system, operations of corporate bodies, risk management framework, and compliance with prudential regulations (Article 12). - Assess reliability, integrity, and security of accounting and financial information processing system, including valuation methods and rules (Article 12). - Produce a specific report each year on compliance with prudential regulations and evaluation of the 50 largest risks (Article 16) with breakdown by counterparty of classification agreements, number and age of possible delinquencies, collateral, and level of depreciation provisions. - SGCB reviews legal and regulatory reports for quality, accuracy, and compliance; auditors provide expected reports. - Reservations regarding accounts are not frequent; mission’s review found disparities in content of reports on internal control and the 50 largest commitments. - EC6: Power to reject/rescind auditor appointment - Banking law requires accounts certified by auditors chosen from list approved by Court of Appeals or other authorized body (Article 51). - Circular requires auditors to be recorded in ONECCA; banks should appoint two auditors and two alternates (Article 5); small non-public banks require a single auditor. - Circular and Annex to Convention require supervised banks submit auditor appointment/renewal to CBU for approval before tasks begin; approval file includes minutes, resumés, ONECCA certificate, and commitments on incompatibilities (Article 9; Annex Article 39). - Auditor approval may be withdrawn by CBU for reasons including removal from ONECCA table, suspension, serious violations, deficiencies, or incompatible activities (Article 11). Withdrawal may entail prohibition within WAMU banks for limited or unlimited period. - Incompatibilities for auditor’s function defined: provisional Board member, business provider activities, advisory functions, participation in capital (Article 8). - Legal office responsible for approving auditors; in practice no auditor has been denied approval, though there has been a withdrawal of approval. - SGCB verifies on-site the regularity of approvals and absence of incompatibilities and checks outstanding amounts available to auditors; notes potential redundancy since approvals are granted by SGCB. - EC7: Auditor rotation - Circular does not authorize renewal when assignment duration is three years (banking law) if auditor acts individually and has completed two consecutive assignments. - If accounting firm involved, renewal beyond two consecutive assignments may occur once, provided signatory partner is changed. Beyond these consecutive assignments, appointment may only occur after expiration of a period of three years (Article 7). - EC8: Meetings with external audit firms - Circular requires periodic or ad hoc meetings between auditors and CBU and auditors’ participation during on-site supervision (Article 20). - CBU organized five annual meetings with the banking profession since 2015; most recent held in November 2020 and brought together 138 auditors. - On-site supervision frequently meets auditors during missions; off-site meetings are more infrequent when managers are accompanied by auditors. - EC9: Auditor reporting to supervisor on material matters - Circular requires reporting to CBU on criminal offenses or actions that would compromise bank continuity; auditors cannot be held liable for such disclosures (new requirement, Article 19). - Auditors should inform CBU without delay via detailed report when they expect an unfavorable or qualified opinion or cannot express an opinion (Article 15). - Relations maintained by written communication (Article 20). - In practice, no reporting of criminal offenses under Article 19 to date; there has been referral for action compromising business continuity and the bank was put under close surveillance. - AC1: Access to auditors’ working papers - Circular requires auditors submit to the CBU all required documents, particularly working files containing all supporting documentation on procedures carried out and, when applicable, statement of inaccuracies, irregularities, and violations found (Article 18). ### Assessment of Principle 27 - Overall assessment: Largely Compliant - Key points: - BCA revised in 2016 to align more with common law and initiate transition to IFRS; fair value concept introduced for certain asset classes, but historical cost remains main rule. - IFRS 9 not yet introduced; work in progress for application of all IFRS standards to banking sector. - IFRS 9 impact significant on provisioning; data needs could be a major challenge for small banks. - Accounting controls were conducted when BCA revised and are systematic for newly licensed banks; on-site supervision has updated control guide. - Regulatory framework for appointment and work of auditors strengthened by 2018 circular; appointments approved by CBU with checks on professional membership, skills, and incompatibilities; rotation requirements exist. - Auditors’ responsibilities extended beyond account accuracy to internal control, prudential regulations, and the 50 largest risks; standards specified. - Mission review found disparities in content of auditors’ reports on internal control and the 50 largest commitments. - Regular meetings organized with profession as a whole; frequent meetings during on-site supervision; less frequent contacts during off-site supervision. ### Recommendations - Continue the convergence with international accounting standards. - Schedule meetings between off-site supervision and auditors without the presence of managers to discuss the individual situation of a bank when vulnerabilities are detected. - Establish more precise guidelines for auditors’ reports to promote more homogeneous content and set up templates for tabulating these reports. - Eliminate redundant checks by on-site supervision regarding approval of auditors when these points have already been checked by the legal office of the SGCB; limit controls to developments in auditors’ quality of work, skills, and independence. - Strengthen the level of the SGCB’s information on portfolios valued at fair value. *Conclusions (Content unit: 1wauea2022008 - Conclusions).* ### Conclusions ### Conclusions ### Pillar 3 financial disclosure: legal framework and gaps - Regulatory requirements: - Circular on governance requires shareholders, depositors, investors, and other participants to have all relevant and useful information to evaluate governing bodies (Article 47). - Title XII of the prudential framework requires publication of information on the risk management framework, prudential consolidation, the definition of capital, capital and liquidity requirements, leverage, and the compensation policy. - Prudential framework indicates banks should publish a general description of objectives and policies for each category of risk (paragraph 569) and report information on solvency ratio risks (paragraph 574). - Pillar 3 requirement applies on a consolidated basis and on a solo basis for banks that do not belong to a group. - Prudential framework defines five guiding principles for Basel 3 financial disclosures: clarity, comprehensiveness, relevancy, consistency, and comparability; provides exceptions for sensitive, confidential, or insignificant information. - Banks are required to send a Pillar 3 report (Article 557); the report may be an annex or a separate part of the financial report and should be published on the bank’s website for the last five years. - Banks should publish solo and consolidated financial statements in accordance with the revised BCA and the 2016 instruction; publication in the Official Journal should specify how the Board’s management report and the semi-annual activity report are made available to the public (Articles 9 and 13 of the instruction). - Notes attached to financial statements intended for the public include 27 notes covering accounting rules and methods, advances to customers, changes in capital, distribution of capital and voting rights, breakdown of applications and resources according to remaining life, financing and guarantee commitments, foreign currency operations, securities and collateral, cost of risk, managers’ compensation and benefits, loans to managers, transactions with related parties, network, staff, wage earners, and outside personnel (Article 48). - Financial information should be relevant, accurate, comparable, verifiable, and comprehensible (Article 14 of the Annex to the decision establishing the revised BCA). - Gaps and uncertainties: - The prudential framework does not specify detailed information to be provided on each risk (e.g., credit risk, amounts of non-performing exposures, restructured amounts, amount of provisions, age of arrears, collateral, sector and geographic distribution of credit exposures). - Formats of tables describing detailed information expected for Pillar 3 implementation have not yet been published. - Information to be disclosed on governance has not been specified. - A directive to detail disclosure requirements and application is drafted but not validated or communicated to banks; publication date is not determined. - The BCEAO directive should specify conditions for applying provisions related to sensitive, confidential, or insignificant information and should specify the Pillar 3 report model to be used. - The SGCB does not conduct off-site or on-site supervision of banks’ compliance with Pillar 3 requirements. ### Supervisor enforcement and oversight of disclosure - Supervisor powers and practices: - Supervisor requires banks to send Pillar 3 report, financial statements, and all reports, documents, and information needed for its functions (Article 25 of the Annex to the Convention governing the CBU; paragraph 557 of the prudential framework). - Supervisor collaborates with auditors; auditors’ tasks include assessing banks’ compliance with regulations, including disclosure requirements. SGCB indicates auditors are not subject to observations regarding quality of information disclosed in the context of Pillar 3. - SGCB still does not perform on-site or off-site supervision of compliance with Pillar 3. - Assessment: - Principle 28: Materially Non-compliant. - Reasons: Instruction defining the template and methods for implementing Pillar 3 has not been published (completed but not validated); Pillar 3 requirements are far from being observed in practice; some banks do not disclose financial condition on their website or do not have a website; SGCB does not exercise control regarding quality of supervised banks’ financial disclosure. ### Aggregate publications and public reporting - CBU publications: - Each year the CBU publishes a report that includes information on the banking system and its yearly activities. The CBU’s 2020 report was published in July 2021 and reflected efforts to reach publication at the end of the first half of the year. - Report contents: business environment of supervised banks (economic and financial environment and institutional and regulatory framework), activity of supervised banks (banking sector, microfinance, and EMIs), supervision of the sector and crisis resolution, cooperation and training actions. - CBU also publishes balance sheets and profit and loss statements of banks and financial institutions for each reporting period. - Publications include aggregate data on balance sheet indicators and statistical parameters reflecting principal aspects of banks’ operations (balance sheet structure, capital ratios, income earning capacity, and risk profile). ### Assessment, additional criterion, and specific recommendations - Additional Criterion AC1: - CBU expects prudential framework and Basel III–based disclosure to promote user understanding of bank exposures; draft instruction specifies banks should supplement quantitative information with qualitative explanations of any material change between reports. - Financial statements intended for publication are meant to provide useful data on banks’ financial condition and performance. - Recommendations: - Ensure rapid entry into force of the methods for implementing the Pillar 3 requirements of the prudential framework to make it operational. - Establish controls regarding the banks’ observance of the Pillar 3 requirements. - Extend the obligation to disclose on the website now in existence for Pillar 3 to all financial disclosure requirements (financial statements, annual reports). ### AML/CFT framework and supervisory responsibilities (Principle 29, selected findings) - Regulatory framework and responsibilities: - Enactment of AML-CFT regulatory framework is the responsibility of the BCEAO; framework includes the uniform act, an instruction, two regulations (Regulation No. 14/2002/CM/UEMOA of September 19, 2002; Regulation No. 09/2010/CM/UEMOA of October 1, 2010), and instructions. Directive was transposed in member states’ legal systems; instructions specify law provisions. - Decrees and implementing orders on the uniform act have been issued by national authorities. - Article 86 of the Uniform Act outlines supervisor duties: issue instructions/guidelines, cooperate and exchange information with competent authorities, define standards for suspicious transaction reports in consultation with FIUs, ensure measures adopted for foreign branches/subsidiaries, report suspicious transactions without delay to the FIU, provide rapid cooperation with similar bodies in other states, and maintain statistics on measures and penalties. - Article 11 of Instruction No. 007-09-2017 provides for on-site supervision of internal prevention frameworks by supervisors. - Observations and weaknesses: - BCEAO does not have authority to issue lists other than United Nations lists; lists are not available on the BCEAO website; BCEAO no longer coordinates member states in issuing lists; national committees for preparing and disseminating lists are not yet operational in several states. - Provisions on freezing assets are cursory and lack operational guidelines for comprehensive supervision. - Article 21 obligations for preventive measures in arms-length relationships are not sufficiently precise; Article 40 additional due diligence measures lack specifics. - Thresholds for identifying casual customers are high: ten million CFA francs or more than 15,000 euros. - Easing of vigilance for certain products (Articles 18, 46, 47) includes: - Electronic money meant solely for purchase of goods or services; repayment requests reaching at least 600,000 CFA francs in the same calendar year trigger obligations under Articles 18 and 19. - Consumer credit operations not exceeding 2,600.000 CFA francs provided repayment is through an account with a financial institution in a member state. - Insurance contracts specified by a CIMA Regulation. - Proportionality provisions (Articles 11 and 90) allow measures “in proportion to the nature and the size (...) as well as the volume of their business,” which can legally permit uneven application across banks and weaken AML/CFT effectiveness. - Rules on identification and treatment of Politically Exposed Persons (PEPs) are imprecise; authorization to onboard PEPs requires approval “from an appropriate management level”; family members and close associates are treated differently between national and foreign PEPs. - EC1 summary (AML-CFT supervisory powers): BCEAO and national authorities have transposed framework but transposition discrepancies have not been analyzed; duties of supervisors are set out but operational shortcomings and lack of guidance undermine comprehensive supervision. *Source: Conclusions (Content unit: 1wauea2022008 - Conclusions).* ### Conclusions ### Conclusions ### Regulatory Framework - The CBU requires banks to have internal processes to ensure compliance with legal and regulatory provisions in the area of preventing money laundering and combating the financing of terrorism in the WAMU, consistent with Article 5 of Instruction No. 007-09-2017. - The obligations and methods for reporting suspicious transactions are established in Chapter III of the law (Articles 79, 80, 81, and 82). The specific provisions in the AML-CFT regulations in effect do not require banks to report suspicious activities to the supervisor but only to the FIU. - Article 75 of the law states that “when in the performance of their mission, supervisors and professional bodies discover facts that are potentially related to money laundering or terrorism financing, they report them to the FIU, which, as applicable, addresses them in terms of reporting suspicious transactions.” - Article 112 of the AML-CFT law gives the supervisor disciplinary power to act ex officio under the conditions provided in specific laws and regulations in effect. - Article 24 of the AML-CFT law requires banks to ensure designation of a compliance officer at the management level and deployment of an ongoing training program for personnel. - Article 38, 50, 51, and 52 of the uniform act and Instruction No. 007-09-2017 contain provisions on correspondent banking, including a suggested model questionnaire and requirements to identify and verify client institutions and evaluate their AML-CFT controls. - Article 52 prohibits financial institutions from “forming or maintaining a correspondent banking relationship with a credit institution or company engaged in equivalent activities established in a country where this bank has no effective physical presence for the performance of leadership and management activities, if it is not attached to a regulated bank or group.” - The Uniform Act does not provide for the ability to put an end to relationships with financial institutions located in higher-risk countries (interpretative note to FATF Recommendation 19 (g)). ### The Work of the DSP and ML-FT Mapping - The DSP makes use of reports submitted by the banks, summarized in a table identifying: - performance of the compliance function; - human and material resources allocated to the function; - incidents and deficiencies detected by the banks; - action plans implemented. - The summary exercise should conclude with a manager’s assessment, a rating, and recommendations. - It was noted that the risk assessment by supervisors upon analysis of reports could seem lenient with regard to deficiencies, some in highly vulnerable areas, particularly financing of terrorism. - An AML-FT mapping exercise at the DSP level used input based on a cycle of 18 on-site surveys conducted in 2018 and on ratings assigned to the ML-FT risk factor in the SNEC annual rating exercise, survey reports, auditors’ reports, and banks’ reports. - The latest updated mapping indicated global weaknesses including: - Not always appropriate positioning of the person responsible for the compliance function, limiting independence. - The lack of an IT device allowing the detection of suspicious transactions. - Inadequacies in the identification of politically exposed persons. ### DCPEME Supervision Tasks and Methodology - DCPEME supervisors use a dedicated supervision methodology for AML-CFT in the form of questionnaires with checkpoints including: - review of the solidity and quality of the AML-CFT framework (control structure, appointment of an AML-CFT manager, existence of a committee addressing AML-CFT subjects); - check of existence and quality/implementation of procedures validated by the deliberative body; - check of training and awareness framework for management, administrators, and staff; - confirmation of the existence of a risks classification resulting in a client rating in terms of AML-CFR risk; - confirmation of proper identification of the client (identity, address, income, profession/activity); - check on the existence of a transaction monitoring framework suitable for detecting suspicious transactions and forwarding findings to the deliberative body; - check on the existence of an internal control framework, taking particular note of AML-CFT in the audit program. - Inspectors test functionality of the framework by analyzing samples of cash transactions and transfers issued and received to detect discrepancies between transaction nature and client reported income. - The DCPEME has planned to purchase software to facilitate control tasks; a tool is now being tested. - Criteria for establishing the survey program are risk-based, particularly the rating assigned to the ML-FT risk factor; BCEAO information and warnings are also incorporated. ### Figures and Typology of DCPEME Missions (2017–2021) - The DCPEME has been conducting thematic AML-CFT surveys since 2017 but has conducted only eight over the last three years. - Since 2019, ML-FT has been detected more rapidly in the context of global or specific surveys. - The lack of a mission in 2020 is explained by the health crisis linked to COVID-19. - The duration of AML-CFT topical missions is very short with an average on-site presence of five and a half days. - Typology table (Between 2017 and 2021): - Topical AML-CFT Missions: 2, 14, 2, 6, 24 - General Missions Including AML-CFT: 3, 4, 8, 3, 18 - Specific Missions Including AML-CFT: 0, 4, 1, 6, 11 - Total: 5, 14, 10, 9, 15, 53 ### Reporting by Banks (EC3) - Banks report suspicious activities to the FIU; AML-CFT regulations in effect do not require reporting to the supervisor but banks record reporting activity in their compliance report sent to the SGCB. - Only significant fraud cases should be brought to the attention of the supervisor in the context of operational risk management. Regulations do not provide the threshold for qualifying frauds deemed significant. - Reporting activity increased over recent years, despite a slowdown in 2020: - 2,332 suspicious transaction reports (STRs) filed compared to 699 in 2015. - In terms of number of banks, there are only about 15 STRs on significant discrepancies per bank. - Review of nine compliance reports confirmed weak reporting activity: 54 STRs identified, or an average of six transactions per bank. - For certain banks in countries particularly at risk for FT, preparation of a panel would concentrate 60 percent of the STRs recorded (32). - In certain banks, reporting rate related to detected atypical transactions is very low; the mission noted a rate of one per thousand in a bank where it consulted the report certified by an audit firm. - Causes include lack of awareness and training, lack of expertise in setting tool parameters, or insufficient tools. ### Information Sharing and Coordination (EC4) - The uniform law requires supervisors to report facts potentially related to money laundering or terrorism financing to the FIU. - In practice, the law is not applied by the BCEAO: its departments do not send information to the FIU, particularly supplemental STRs detected by inspectors during on-site missions. - The BCEAO and FIU have not always formalized a memorandum of agreement governing information-sharing. - There are no systematic exchanges between SGCB staff and the FIU prior to or upon completion of supervisory visits, nor contacts made when preparing on-site survey programs to consider subjects of concern to the FIU. - More generally, the BCEAO does not actively carry out its coordination functions as provided in Article 77 of the uniform act. ### Customer Due Diligence (EC5) - Essential elements of a CDD management program on a group-wide basis include: - a) customer acceptance policy identifying business relationships the bank will not accept; - b) customer identification, verification, and due diligence on an ongoing basis, including beneficial ownership verification and understanding purpose and nature of the business relationship; - c) policies and processes to monitor and recognize unusual or potentially suspicious transactions; - d) enhanced due diligence on high-risk accounts with escalation to senior management; - e) enhanced due diligence on politically exposed persons (PEPs) with escalation to senior management; - f) clear rules on records and retention period (at least a five year retention period). - Findings: - Most banks define customer acceptance policies by proscribing certain sectors and business relationships with sanctioned countries. - Customer identification weaknesses include lack of comprehensiveness and updating of collected information (absence of sources of income) and unreliable data in information systems affecting tool performance. - Inspectors analyze quality of monitoring systems and treatment of warnings to ensure resource coverage for suspicious transactions. - DCPEME audits highlight significant deficiencies in identification and monitoring of transactions involving PEPs: - Inspectors assess at 10% the number of banks that have not contracted with specialized providers. - PEP lists and sanctions lists are not always well implemented or updated in banks’ information systems. - Transactions for very significant amounts involving PEPs are regularly detected and do not lead to STRs even when atypical (large cash amounts, inconsistency with reported income). - AML-CFT risk rating tools vary significantly; not all banks have such tools. - Banks do not always save information in digital format, complicating regulatory processing; customer data stored outside the Union (prohibited in circular on risks) was detected. ### Correspondent Banking (EC6) - Procedures and obligations for correspondent banking are set out in Articles 38 and 53 and related provisions of the uniform act; Instruction No. 007-09-2017 suggests a model questionnaire for cross-border correspondents. - Required actions under Article 38 include: - identify and verify client institutions with which they maintain correspondent relationships; - gather information on the nature of the client institution’s business; - evaluate the reputation and degree of supervision of the client institution based on publicly available information; - evaluate the controls introduced by the client institution to combat money laundering and terrorism financing. - Authorized officers should previously authorize concluding a relationship with a banking correspondent. - Article 53 provides strengthened supervisory measures applicable to banks offering correspondent banking services. - DCPEME audits: - methodology provides checkpoints on correspondent banking but is incomplete on audits of certain SWIFT messages or technological developments (e.g., Relationship Management Application (RMA)); - audits show procedures for identification of correspondent banks are not strictly applied and do not cover the entire partner portfolio. ### Controls, Systems, and Tools (EC7) - The supervisor determines banks should have sufficient controls and systems to prevent, identify, and report potential abuses. - DCPEME inspectors note near-systematic deficiencies in identifying suspicious transactions in the absence of existing or effective tools. - A large number of banks do not have an automatic detection tool for suspicious transactions. - Where banks seek to acquire AML-CFT software, inspectors find such software: - is not always well interfaced with customer data, at risk of being inoperable, and is not appropriately parameterized; - is not always of good quality. - Compliance reports from banks highlight these weaknesses. ### Supervisory Powers and Enforcement (EC8) - Article 112 grants disciplinary power to the supervisor. - Sanctions history: - Several sanctions (warning + injunction) were issued against six banks following topical AML-CFT missions in 2018. - In 2021, monetary sanctions were imposed on banks upon conclusion of topical AML-CFT missions. ### Governance, Staffing, and Training (EC9) - Supervisor determines banks must have: - a) requirements for internal audit and/or external experts to independently evaluate risk management policies, with supervisor access to reports; - b) policies and processes to designate compliance officers at management level for reporting potential abuses; - c) adequate screening policies and processes to ensure ethical and professional standards when hiring staff or entering agency/outsourcing relationships; - d) ongoing training programs for staff on CDD and detecting criminal/suspicious activities. - Findings: - DCPEME inspectors determine banks incorporate AML-CFT tasks in periodic supervision missions and confirm organization of AML-CFT frameworks, particularly designation of a compliance officer; cases of vacant positions occur (example: a compliance officer position remained unfilled in a bank for more than two years, from 2018 to 2021). - The DCPEME’s methodology lacks precise provisions for assessing ethics and professionalism in recruitment and outsourcing relationships. - Disparities exist in banks’ training frameworks: many rely on basic ad hoc training and awareness meetings, while others have online certification; most bank action plans include strengthening training and awareness. ### Reporting Lines and Management Information (EC10) - The supervisor determines banks should have clear policies and processes for staff to report problems related to abuse of financial services to local management or the dedicated officer, and adequate management information systems to provide Boards, management, and dedicated officers with timely and appropriate information. - Observed weaknesses in reporting, systems interoperability, parameterization, and data retention undermine timely detection and escalation of suspicious activities. *Source: Conclusions (1wauea2022008 - Conclusions).* ### Conclusions ### Conclusions ### Whistleblower protections and liability exemptions (EC10–EC11) - The Uniform Act has not established obligations related to the introduction of a whistleblower mechanism. - The Uniform Act establishes liability exemptions for suspicious transaction reports made in good faith. - Article 44 of the circular on governance expressly provides for whistleblower mechanisms. - Laws provide that a member of a bank’s staff who reports suspicious activity in good faith either internally or directly to the relevant authority cannot be held liable. - Article 83 of the Uniform Act: staff, managers, and agents who, in good faith, have sent information or made any statement, in accordance with the provisions of this law, are exempt from any sanctions for violation of professional secrecy. - Article 83 further states that no action for civil or criminal liability can be attempted, nor may any professional penalty be issued against such persons even if judicial decisions made on the basis of the statements in said paragraph produced a conviction. ### Cooperation and information-sharing (EC12) - The Uniform Act on AML-CFT embodies principles of cooperation and information-sharing among all relevant authorities at the national and international level (Articles 74 to 78 and 86). - Article 74: the supervisor introduces effective mechanisms allowing it to cooperate and coordinate its activity at the national level with regard to the definition and implementation of AML-CFT policies and actions. - Article 75: the supervisor shares all information useful to the achievement of its missions for the implementation of the AML-CFT law. - In practice, sharing with national authorities (FIUs) remains limited. ### Supervisor resources and expertise (EC13) - The supervisor does not have in-house specialist expertise for addressing criminal activities; the Union’s regulations do not provide it. - AML-CFT expertise is found in other WAMU agencies, particularly the FIU. - The supervisor does not regularly provide information on risks of money laundering and the financing of terrorism to the banks. - Assessment of Principle 29: Non-compliant. ### Overall assessment and key weaknesses - The regulatory framework within the Union was significantly strengthened with the entry into effect of the Uniform Act of 2015 and Instruction No. 07-09-2017 on implementing methods. - Several provisions are relatively vague or are not applied, risking the effectiveness of AML-CFT. - The process of issuing national lists on freezing of assets is not operational in all jurisdictions due to the failure to set up national committees authorized for this purpose. - The only effective list is the U.N. list, which does not fully cover all persons at risk within the Union. - Provisions on freezing assets are cursory and lack guidelines, limiting technical-operational support to supervised banks. - Specific regulatory provisions needing clarification: Article 21 on remote account opening, Article 40 on additional supervisory measures, Article 25 on validating the opening of a relationship with a PEP. - The definition of national PEPs should be supplemented to take into account close relatives and affiliates. - The principle of proportionality indicated in Articles 11 and 90 could reduce the effectiveness of the AML-CFT mechanism; it is advisable to insist on the need to use a risk-based approach in all circumstances. - The BCEAO does not fully perform the coordination function assigned to it; e.g., the BCEAO and the FIUs have not always formalized a memorandum of understanding on information-sharing. - SGCB and FIU staff do not collaborate; structured exchanges would facilitate better targeting of at-risk banks and the use of information collected by on-site supervision missions. - The DCPEME does not send to the FIU the cases of failure to report suspicious transactions detected by the inspectors. - Review of DCPEME reports (missions’ duration: five and a half days on average) and auditors’ reports highlight numerous and significant weaknesses in all AML-CFT components: - Incomplete customer identification. - Inadequate risk assessment. - Detection of atypical transactions limited by the nearly systematic lack of customer profiling tools. - Lack of strict monitoring of PEPs. - Very limited formalization of suspicious transaction reports. - Insufficient training of bank personnel. - Increased number of AML-CFT missions undertaken by the supervisor in 2021 is noted. - Utilization of information on AML-CFT provided by off-site supervision could be strengthened and produce strong measures without awaiting launch of an on-site audit mission. ### Recommendations - Formalize guidelines – in accordance with FATF Recommendation 34 – providing clarification on various missing or imprecise regulatory issues (establishing relations remotely, additional due diligence measures, definition of national PEPs, validation of relations established with PEPs by senior management staff, incentives for ending correspondent banking activities in at-risk countries, duty to report suspicious activities to the supervisor). - Remind member states of the requirement to promptly set up national committees responsible for issuing lists of sanctions and asset-freezing measures. - Complete the DCPEME’s methodology on AML-CFT risk factors and controls required by the specific nature of certain lines of business (correspondent banking). - Ensure the inclusion of a series of topical AML-CFT missions in the annual surveys program. - Develop an AML-CFT expertise center within the SGCB (off-site supervision) and be sure to formalize AML-CFT risk mapping, highlighting all weaknesses identified. - Continue the policy of strengthening sanctions against banks deemed to be in violation of the AML-CFT regulations. - Formalize a memorandum of understanding between BCEAO and the CENTIFs 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. *Conclusions (EC10–EC13), Assessment of Principle 29, Comments, and Recommendations from the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wauea2022008.pdf_