## 1zweea2022002 - Preface

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---

### Mission scope, logistics and participation
- MCM conducted a virtual mission from November 16, 2020 to April 29, 2021 to assist the Reserve Bank of Zimbabwe (RBZ) on the implementation of Basel III liquidity standards: liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).
- Virtual meetings held with RBZ BSD management and supervisors, including Mr. Philip Madamombe (Director BSD), Mr. Ruzayi Chiviri, Ms. Audrey Hove, Ms. Norah Mukura, Ms. Rachel Mushosho, Ms. Susan Kabungaidze, and supervisors responsible for drafting and implementing LCR and NSFR requirements.
- A virtual workshop with representatives from all of Zimbabwe’s banks was convened (100 participants from banks and deposit-taking microfinance institutions).
- The TA was financed by the Financial Sector Stability Fund.
- Four days of training delivered; about 50 supervisors from BSD participated. Follow-up TA recommended for full implementation.

### Executive summary — key outputs and approach
- Purpose: Follow-up to the 2019 FSSR to support RBZ in implementing Basel III liquidity standards (LCR and NSFR).
- Main mission activities:
  - Reviewed RBZ drafts of the LCR and NSFR frameworks.
  - Discussed material gaps with BSD management and supervisors.
  - Provided recommendations on enhancing liquidity regulations, monitoring tools, reporting templates, and disclosure.
  - Agreed further actions for implementing Basel III liquidity standards.
- Main outputs:
  - Draft regulations detailing requirements on LCR and NSFR standards and disclosure.
  - LCR and NSFR templates for public disclosure.
  - LCR and NSFR templates for prudential reporting to RBZ.
  - Recommendations for supervisory assessment of banks’ LCR and NSFR implementation.
- Implementation approach:
  - Apply proportionality principle while ensuring regulations cover key aspects of Basel LCR and NSFR frameworks.
  - Focus on comprehensive scope for HQLA definition and assumptions on net outflows for LCR.
  - NSFR draft found comprehensive and in line with Basel requirements.
- Initial supervisory stance:
  - RBZ shall require LCR and NSFR for all banking institutions, calculated on a solo basis.
  - Supervisors recommended to closely monitor liquidity information of financial institutions belonging to the same financial group to assess group-level liquidity risk.
- Data collection and impact assessment:
  - RBZ should first collect relevant data on main parameters of the two ratios to assess implementation impact.
- Action plans and monitoring:
  - RBZ shall require banks to prepare action plans to achieve compliance; RBZ to assess and monitor those plans.
  - Detailed information template for LCR reporting recommended; RBZ to require LCR reporting on a quarterly basis, with possibility of increasing frequency to weekly or daily if needed.
  - LCR by significant currency or a maturity ladder based on significant currencies recommended.

### Key recommendations (preserved entries from Table 1)
- 1. The RBZ to finalize the draft LCR regulation:
  - Revision to take into account the comments raised on the last draft version;
  - Elaboration of instructions for completing the LCR template for public disclosure;
  - Enhancement of the LCR draft template for reporting to supervisors;
  - Elaboration of instructions for completing the LCR template for reporting to supervisors.
  - Priority: Hig h; Timeline: I
- 2. The RBZ to assess the impact of the implementation of the new liquidity regulations (LCR and NSFR).
  - Priority: Hig h; Timeline: I
- 3. The RBZ to consult on the final draft liquidity regulations (LCR and NSFR) with banks.
  - Priority: Hig h; Timeline: I
- 4. The RBZ to approve new liquidity regulations (LCR and NSFR).
  - Priority: Hig h; Timeline: ST
- 5. The RBZ to ensure that banks prepare action plans to achieve compliance with new liquidity regulations and begin its implementation.
  - Priority: Medium; Timeline: ST
- 6. The RBZ to assess banks’ action plan and monitor its implementation by banks.
  - Priority: Medium; Timeline: MT
- 7. The RBZ to ensure that banks report their LCR and NSFR on regular basis.
  - Priority: Hig h; Timeline: MT
- 8. The RBZ to prepare procedures to respond should a bank fall below minimum LCR.
  - Priority: Hig h; Timeline: MT
- 9. The RBZ to examine banks' LCR and NSFR and ensure they are in compliance with established regulations.
  - Priority: Hig h; Timeline: MT
- 10. The RBZ to monitor banks liquidity risk using data from the LCR, NSFR reports and the Monitoring Tools.
  - Priority: Hig h; Timeline: MT

Note on timelines: I, immediate, with results less than 6 months; ST, short-term, with results from 6 to 12 months; MT, medium term, with results from 12 to 24 months.

### Banking sector overview — key statistics (December 31, 2020 highlights)
- Sector composition:
  - 13 commercial banks, 5 building societies, and 1 savings bank.
  - Total assets: ZWL$349.59 billion (December 31, 2020).
  - Of the 19 banks, 9 banks have foreign shareholding, with a market share of over 60 percent.
- Capital adequacy:
  - Banking sector average capital adequacy ratio: 34.62 percent (December 31, 2020).
  - Banking sector average Tier 1 ratio: 22.65 percent (December 31, 2020).
  - Regulatory minimums: 12 percent (capital adequacy) and 8 percent (Tier 1).
  - Deadline for banks to comply with new minimum capital level requirements (in absolute amounts) extended to December 31, 2021.
- Asset quality:
  - Banking sector average NPLs to total loans ratio: 0.31 percent (as December 31, 2020).
- Liquidity:
  - Banking sector average prudential liquidity ratio: 73.06 percent (as at December 31, 2020).
  - Minimum regulatory requirement: 30 percent.
- Exchange rate reference:
  - Exchange rate: 1 USD= 81.7866 ZWL$ (December 31, 2020; Reserve Bank of Zimbabwe).
- Supervisory emphasis:
  - Need to prepare credible strategy for exit from pandemic-related regulatory and supervisory measures; intensify supervisory monitoring to ensure timely identification of NPLs and accurate asset classification and provisioning.

### Banking sector structure and key statistics (as of March 31, 2021)
- Total assets: 402.78 billion (ZWL$) — total market share: 100%
- Exchange rate: ZWL$ per USD 84.4001 (March 31, 2021, Reserve Bank of Zimbabwe)
- Bank list with TOTAL ASSETS (ZWL$) and MARKET SHARE (PERCENT):
  - 1 CBZ BANK — 88,340,699,607 — 21.93% — Mixed — Zimbabwe
  - 2 ECOBANK — 68,021,425,696 — 16.89% — Foreign — Togo, West Africa
  - 3 STANBIC — 45,670,564,430 — 11.34% — Foreign — South Africa
  - 4 FBC BANK — 28,362,301,904 — 7.04% — Mixed — Zimbabwe
  - 5 CABS — 26,603,749,732 — 6.60% — Foreign — Zimbabwe
  - 6 FIRST CAPITAL BANK — 18,250,220,548 — 4.53% — Foreign — Malawi
  - 7 BANCABC — 17,520,233,139 — 4.35% — Foreign — Zimbabwe
  - 8 STANDARD CHARTERED — 16,431,648,147 — 4.08% — Foreign — England
  - 9 NEDBANK — 16,259,675,075 — 4.04% — Foreign — South Africa
  - 10 ZB BANK — 16,106,932,777 — 4.00% — Local Private — Zimbabwe
  - 11 STEWARD BANK — 14,330,884,620 — 3.56% — Local Private — Zimbabwe
  - 12 METBANK — 11,785,994,407 — 2.93% — Local Private — Zimbabwe
  - 13 NMB BANK — 11,693,019,558 — 2.90% — Foreign — Zimbabwe
  - 14 AGRI BANK — 10,194,804,310 — 2.53% — State — Zimbabwe
  - 15 CBZ BS — 3,939,425,716 — 0.98% — Mixed — Zimbabwe
  - 16 POSB — 3,703,289,095 — 0.92% — State — Zimbabwe
  - 17 FBC BS — 2,505,293,636 — 0.62% — Mixed — Zimbabwe
  - 18 NBS — 1,912,201,756 — 0.47% — State — Zimbabwe
  - 19 ZB BS — 1,151,421,900 — 0.29% — Local Private — Zimbabwe

### Implementation of Basel III liquidity standards — sequencing, scope and data needs
- Sequencing and data needs:
  - RBZ should collect relevant balance sheet-specific information via call returns before implementation to assess impact and development of ratios over time.
  - Initial requirement: LCR and NSFR for all banking institutions on a solo basis.
  - Consideration to adopt LCR and NSFR for Micro Lending Financial Institutions (MFI) should be informed by BSD regulatory approach and by size, nature, and complexity of these institutions.
- Group-level monitoring:
  - Supervisors should increase monitoring of liquidity information for entities within the same financial group to assess group-level liquidity risk.
- Industry engagement and IT readiness:
  - Emphasis to banks: prepare IT systems, develop models for retail and wholesale funding runoffs, and estimate other cash outflows and inflows.

### Liquidity Coverage Ratio (LCR) — phase-in, HQLA, reporting and supervisory expectations
- Stress scenarios and general approach:
  - Liquidity stress scenarios that generate the LCR’s net cash outflows should follow Basel recommendations.
  - Reference: The scenario for the LCR standard is described in Paragraph 2 of the document BCBS ‘LCR Liquidity Coverage Ratio – LCR20 Calculation’.
- Phase-in timing and impact assessment:
  - RBZ decided to implement a minimum 80 percent LCR by December 31, 2021.
  - The phase in period will last 2 years, with an annual 10 percent increase in the minimum level.
  - It is expected that full LCR compliance shall be in force by December 31, 2023.
  - RBZ plans to carry out an impact assessment of the new liquidity regulations (LCR and NSFR) which may give room to adjustments in the implementation timeline.
- HQLA composition and Levels:
  - Central Bank reserves may count as Level 1 assets in the stock of HQLA, as they can be used in times of stress.
  - RBZ decided to limit the stock of CB Reserves to be allowed in the stock of HQLA to the amount maturing in 30 days.
  - Level 2A and 2B requirements should be included in the draft regulation following market-related and HQLA fundamental characteristics.
  - Expectation: only Level 1 assets will be eligible for the stock of HQLA from the onset given current market development; Level 2 requirements included to set thresholds for future acceptance.
- Estimation of outflows and inflows (two particularities):
  - Estimation should follow LCR’s Basel recommendations.
  - Particularities:
    - i) Foreign currency deposits runoff: the same runoff rates could be applied to domestic and foreign currency deposits, as RBZ considers that currency does not influence depositors’ behavior in Zimbabwe.
    - ii) Small business customers definition: this definition should be the same as established in the Zimbabwean regulation for capital requirement.
- LCR public disclosure requirements:
  - LCR disclosure information requirements should follow Basel recommendations.
  - Data for disclosure shall be calculated based on monthly observations (instead of daily observations) of LCR to align with RBZ draft regulation.
  - Implementation of LCR disclosure information should be deferred to the ratio’s implementation date.
  - RBZ intends to require LCR disclosure by December 31, 2023.
  - Caution: Implementing LCR disclosure during the phase-in period may invalidate the phase-in process because banks may be unwilling to disclose a LCR ratio below 100 percent even if permitted.
  - RBZ should implement procedures to monitor the quantitative liquidity information disclosed by banks to ensure consistency with information reported to supervisors.
- LCR prudential reporting requirements and frequency:
  - Banks will report LCR information to RBZ on a quarterly basis, with preparedness to increase frequency in times of stress.
  - Banks are required to calculate LCR at least on a monthly basis for internal liquidity risk management.
  - RBZ should specify a detailed information template for LCR reporting and collect some LCR data monthly.
  - Recommendation: the quarterly report should contain LCR data on a monthly basis to:
    - (1) construct a database for indirect liquidity risk assessment, and
    - (2) assess quantitative information to be disclosed by banks as a monthly average each quarter.
  - RBZ could consider moving to monthly supervisory reporting of LCR in the future.
- Principles for the LCR reporting template:
  - a. Although LCR will be reported in a single currency, significant amounts should be segregated by currency.
  - b. Each bucket should contain unweighted and weighted amounts.
  - c. Each line item should relate to a single weight factor.
  - d. HQLA assets should be reported by asset type. Different asset types with the same weight factor should be reported in different lines.
  - e. All information, both inflows and outflows, should be segregated by customer/counterparty type, even those with the same factor.
  - f. Information where a 0 percent weight factor is applied should be required (e.g., deposits maturing over 30 days, bank’s operational deposits in other institutions, revocable credit and liquidity facilities provided to clients, revocable and irrevocable credit and liquidity facilities granted to the bank).
  - g. Operational deposits information should be segregated at least into three buckets: (1) amount covered by deposit insurance; (2) amount not covered by deposit insurance; and (3) excess balance on operational deposits.
  - h. Secured funding/lending operations should be segregated by the asset type (same types specified in the HQLA buckets) of the posted collateral.
- Onsite inspection expectations to ensure proper LCR implementation:
  - HQLA operational requirements: banks must demonstrate capacity to identify and segregate encumbered from unencumbered assets; have adequate controls to monitor legal entity and physical location of HQLA assets; and show that the HQLA portfolio is under control of the liquidity manager.
  - Level 2 assets buffer: banks intending to include Level 2 assets must demonstrate compliance with liquidity and market requirements specified in the LCR regulation.
  - HQLA double counting: ensure no asset in the HQLA buffer is also counted as inflows.
  - Additional liquidity risk management: banks must present their own stress testing scenarios suitable for their business and longer horizons than the LCR’s.
  - Retail deposits identification: banks must identify retail and small business clients’ balances and segregate stable deposit portions.
  - Deposits maturing over 30 days: banks must exclude retail deposits and wholesale unsecured funding maturing over 30 days from client/counterparty balances only when they can assure no possibility of early withdrawal.
  - Unsecured wholesale funding: banks must segregate unsecured wholesale balances by client type and demonstrate identification of clients with total balances fully covered by deposit insurance.
  - Operational deposits: banks must identify operational deposit accounts and segregate excess balances and insured portions per client balance.
  - Secured funding/lending: supervisors must ensure collateral in secured operations can be legally transferred to the counterparty in case of bankruptcy, insolvency, liquidation or resolution; banks must classify posted collateral according to HQLA levels.
  - Net cashflows from derivatives: net cashflows should be calculated only for counterparties with valid and enforceable netting agreements.
  - Collateral management in derivatives: banks must demonstrate capacity to manage collateral and estimate collateral needs under LCR scenarios.
  - Committed credit and liquidity facilities: banks must identify irrevocable committed facilities by counterparty type and the undrawn portion by counterparty.
  - Other contractual and contingent funding obligations: supervisors should verify identification and methodologies to estimate cash outflows, at least using historical behavior.
  - Contractual inflows by counterparty: banks must identify fully performing contractual inflows by counterparty type.
  - Other contractual cash inflows: if included in LCR calculation, banks must provide explanations and supervisors shall assess adequacy of inflow rates.

### Supervisory processes and procedures to develop
- Establish a liquidity risk monitoring process to identify potential liquidity issues early and mitigate them; monitor compliance with minimum liquidity requirements, funding profile, vulnerabilities, and other non-LCR liquidity sources.
- Develop and implement procedures to respond where banks fall below minimum LCR, including guidance on supervisory actions, data requirements, and communication protocols between supervisors, banks, and RBZ’s Board.
- Supervisors should be prepared to receive and process banks’ information more frequently than during normal times, and may require additional information to assess issues.
- Supervisory actions should be proportionate to drivers, magnitude, duration and frequency of breaches; at minimum require bank’s liquidity assessment and close monitoring of remedial measures; consider idiosyncratic vs system-wide stress.
- RBZ should prepare IT systems to receive LCR information more frequently in times of stress and be able to require additional information as needed.

### Net Stable Funding Ratio (NSFR) — recommendations and reporting
- Draft NSFR regulation reviewed: no material deficiencies; NSFR leverages off LCR implementation and should mirror LCR definitions.
- NSFR is simpler to implement than LCR; consideration should be given to IT systems.
- NSFR requirements should be applied to all banking institutions licensed by RBZ on a solo basis.
- Recommendation: banks should comply with a minimum NSFR ratio of 100 percent with no phase-in period.
- NSFR shall be met and reported in local currency.
- NSFR disclosure information requirements follow Basel recommendations; RBZ should implement procedures to monitor quantitative liquidity information disclosed by banks to ensure consistency with supervisory reports.
- Banks should report NSFR to RBZ on a quarterly basis and use NSFR as an ongoing internal liquidity risk management tool.
- NSFR reporting template principles:
  - a. Each bucket should contain unweighted and weighted amounts.
  - b. Each item should refer to a single weight factor.
  - c. HQLA assets should be informed by asset type.
  - d. All information, both Available Stable Funding (ASF) and Required Stable Funding (RSF), based on customer/counterparty/asset class should be segregated by customer/counterparty/asset class, even those with the same weight factor.
  - e. Information where a 0 percent weight factor is applied should be required.

*IMF MCM mission report (Preface and Executive Summary, implementation details, and Table 1 key recommendations).*

### Preface ................................................................................................................

### 1zweea2022002 - Preface ................................................................................................

### Preface and Mission Logistics
- MCM conducted a virtual mission from November 16, 2020 to April 29, 2021 to assist the Reserve Bank of Zimbabwe (RBZ) on the implementation of Basel III liquidity standards: liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).
- Virtual meetings were held with RBZ BSD management and supervisors, including Mr. Philip Madamombe (Director BSD), Mr. Ruzayi Chiviri, Ms. Audrey Hove, Ms. Norah Mukura, Ms. Rachel Mushosho, Ms. Susan Kabungaidze, and supervisors responsible for drafting and implementing LCR and NSFR requirements.
- A virtual workshop with representatives from all of Zimbabwe’s banks was convened.
- The TA was financed by the Financial Sector Stability Fund.

### Executive Summary — Key Findings and Outputs
- Purpose: Follow-up to the 2019 FSSR to support RBZ in implementing Basel III liquidity standards (LCR and NSFR).
- Main mission activities:
  - Reviewed RBZ drafts of the LCR and NSFR frameworks.
  - Discussed material gaps with BSD management and supervisors.
  - Provided recommendations on enhancing liquidity regulations, monitoring tools, reporting templates, and disclosure.
  - Agreed further actions for implementing Basel III liquidity standards.
- Main outputs:
  - Draft regulations detailing requirements on LCR and NSFR standards and disclosure.
  - LCR and NSFR templates for public disclosure.
  - LCR and NSFR templates for prudential reporting to RBZ.
  - Recommendations for supervisory assessment of banks’ LCR and NSFR implementation.
- Implementation approach:
  - Apply proportionality principle while ensuring regulations cover key aspects of Basel LCR and NSFR frameworks.
  - Focus on comprehensive scope for HQLA definition and assumptions on net outflows for LCR.
  - NSFR draft found comprehensive and in line with Basel requirements.
- Initial supervisory stance:
  - RBZ shall require LCR and NSFR for all banking institutions, calculated on a solo basis.
  - Supervisors recommended to closely monitor liquidity information of financial institutions belonging to the same financial group to assess group-level liquidity risk.
- Data collection and impact assessment:
  - RBZ should first collect relevant data on main parameters of the two ratios to assess implementation impact.
- Action plans:
  - RBZ shall require banks to prepare action plans to achieve compliance with new liquidity regulations; RBZ to assess and monitor those plans.
- Reporting and monitoring:
  - Recommend a detailed information template for LCR reporting; RBZ to require LCR reporting on a quarterly basis, with the possibility of increasing frequency to weekly or daily if needed (including under stressed situations).
  - Supervisors to establish liquidity risk monitoring processes, including procedures to respond to breaches of LCR and NSFR.
  - LCR by significant currency or a maturity ladder based on significant currencies recommended.
- Industry engagement and capacity building:
  - Workshop with 100 participants from banks covered accounting, liquidity risk management, market operations, compliance, and IT; stressed importance of IT readiness and models for estimating retail and wholesale runoffs.
  - Four days of training: about 50 supervisors from BSD participated; follow-up TA recommended for full implementation.

### Key Recommendations (Table 1) — Preserved Entries
- 1. The RBZ to finalize the draft LCR regulation:
  - Revision to take into account the comments raised on the last draft version;
  - Elaboration of instructions for completing the LCR template for public disclosure;
  - Enhancement of the LCR draft template for reporting to supervisors;
  - Elaboration of instructions for completing the LCR template for reporting to supervisors.
  - Priority: Hig h; Timeline: I
- 2. The RBZ to assess the impact of the implementation of the new liquidity regulations (LCR and NSFR).
  - Priority: Hig h; Timeline: I
- 3. The RBZ to consult on the final draft liquidity regulations (LCR and NSFR) with banks.
  - Priority: Hig h; Timeline: I
- 4. The RBZ to approve new liquidity regulations (LCR and NSFR).
  - Priority: Hig h; Timeline: ST
- 5. The RBZ to ensure that banks prepare action plans to achieve compliance with new liquidity regulations and begin its implementation.
  - Priority: Medium; Timeline: ST
- 6. The RBZ to assess banks’ action plan and monitor its implementation by banks.
  - Priority: Medium; Timeline: MT
- 7. The RBZ to ensure that banks report their LCR and NSFR on regular basis.
  - Priority: Hig h; Timeline: MT
- 8. The RBZ to prepare procedures to respond should a bank fall below minimum LCR.
  - Priority: Hig h; Timeline: MT
- 9. The RBZ to examine banks' LCR and NSFR and ensure they are in compliance with established regulations.
  - Priority: Hig h; Timeline: MT
- 10. The RBZ to monitor banks liquidity risk using data from the LCR, NSFR reports and the Monitoring Tools.
  - Priority: Hig h; Timeline: MT

Note on timelines: I, immediate, with results less than 6 months; ST, short-term, with results from 6 to 12 months; MT, medium term, with results from 12 to 24 months.

### Introduction — Context and Prior Work
- Mission dates: November 16, 2020 to April 29, 2021.
- This TA follows the 2019 FSSR follow-up TA roadmap to address weaknesses in supervision, resolution, and crisis-management arrangements.
- Prior IMF TA in 2019 and 2020 supported legislative enhancements (RBZ Act, Banking Act, Deposit Protection Corporation Act) and strengthening risk-based supervision, offtsite and onsite functions, and the Risk Assessment System (RAS).

### Banking Sector Overview — Key Statistics and Observations
- Sector composition:
  - 13 commercial banks, 5 building societies, and 1 savings bank.
  - Total assets: ZWL$349.59 billion (December 31, 2020).
  - Of the 19 banks, 9 banks have foreign shareholding, with a market share of over 60 percent.
- Capital adequacy:
  - Banking sector average capital adequacy ratio: 34.62 percent (December 31, 2020).
  - Banking sector average Tier 1 ratio: 22.65 percent (December 31, 2020).
  - Regulatory minimums: 12 percent (capital adequacy) and 8 percent (Tier 1).
  - Deadline for banks to comply with new minimum capital level requirements (in absolute amounts) extended to December 31, 2021.
- Nonperforming loans:
  - Banking sector average NPLs to total loans ratio: 0.31 percent (as December 31, 2020).
  - RBZ attributes improvement to increase in total banking sector loans, enhancement in credit risk management, recoveries and write-offs.
- Prudential liquidity:
  - Banking sector average prudential liquidity ratio: 73.06 percent (as at December 31, 2020).
  - Minimum regulatory requirement: 30 percent.
- Exchange rate reference:
  - Exchange rate: 1 USD= 81.7866 ZWL$ (December 31, 2020; Reserve Bank of Zimbabwe).
- Supervisory emphasis:
  - Need to prepare credible strategy for exit from pandemic-related regulatory and supervisory measures; intensify supervisory monitoring to ensure timely identification of NPLs and accurate asset classification and provisioning.

### Implementation of Basel III Liquidity Standards — Strategy and Early Steps
- Sequencing and data needs:
  - RBZ should collect relevant balance sheet-specific information via call returns before implementation to assess impact and development of ratios over time.
- Scope and calibration:
  - Initial requirement: LCR and NSFR for all banking institutions on a solo basis.
  - Consideration to adopt LCR and NSFR for Micro Lending Financial Institutions (MFI) should be informed by BSD regulatory approach and by size, nature, and complexity of these institutions.
- Group-level monitoring:
  - Supervisors should increase monitoring of liquidity information for entities within the same financial group to assess group-level liquidity risk.
- Industry engagement:
  - Workshop participants: 100 (banks and deposit-taking microfinance institutions), covering accounting, liquidity risk management, market operations, compliance and IT.
  - Emphasis to banks: prepare IT systems, develop models for retail and wholesale funding runoffs, and estimate other cash outflows and inflows.

### Supervisory Capacity Building
- Training:
  - Four days of training delivered; about 50 supervisors from BSD participated.
  - Core Team developed skills through close work with the IMF; follow-up TA recommended for full implementation.

*IMF MCM mission report (Preface and Executive Summary, implementation details, and Table 1 key recommendations).*

### 14. In implementing  LCR requirements in Zimbabwe, the mission recommended to RBZ

### 1zweea2022002 - 14. In implementing  LCR requirements in Zimbabwe, the mission recommended to RBZ

### LCR implementation: stress scenarios and general approach
- Liquidity stress scenarios that generate the LCR’s net cash outflows should follow Basel recommendations.
- Banks required to monitor liquidity risk exposures under various stress situations to protect operations from disruption and adverse financial consequences.
- Reference: The scenario for the LCR standard is described in Paragraph 2 of the document BCBS ‘LCR Liquidity Coverage Ratio – LCR20 Calculation’.

### LCR phase-in timing and impact assessment
- Review the phase-in period established for implementation of LCR based on the outcome of the impact assessment.
- RBZ decided to implement a minimum 80 percent LCR by December 31, 2021.
- The phase in period will last 2 years, with an annual 10 percent increase in the minimum level.
- It is expected that full LCR compliance shall be in force by December 31, 2023.
- RBZ plans to carry out an impact assessment of the new liquidity regulations (LCR and NSFR) which may give room to adjustments in the implementation timeline.

### HQLA composition and Levels
- Central Bank reserves may count as Level 1 assets in the stock of HQLA, as they can be used in times of stress.
- RBZ decided to limit the stock of CB Reserves to be allowed in the stock of HQLA to the amount maturing in 30 days.
- Level 2A and 2B requirements should be included in the draft regulation following market-related and HQLA fundamental characteristics.
- Expectation: only Level 1 assets will be eligible for the stock of HQLA from the onset given current market development; Level 2 requirements included to set thresholds for future acceptance.

### Estimation of outflows and inflows (two particularities)
- Estimation should follow LCR’s Basel recommendations.
- Particularities:
  - i) Foreign currency deposits runoff: the same runoff rates could be applied to domestic and foreign currency deposits, as RBZ considers that currency does not influence depositors’ behavior in Zimbabwe.
  - ii) Small business customers definition: this definition should be the same as established in the Zimbabwean regulation for capital requirement.

### LCR public disclosure requirements
- LCR disclosure information requirements should follow Basel recommendations.
- Data for disclosure shall be calculated based on monthly observations (instead of daily observations) of LCR to align with RBZ draft regulation.
- Implementation of LCR disclosure information should be deferred to the ratio’s implementation date.
- RBZ intends to require LCR disclosure by December 31, 2023.
- Caution: Implementing LCR disclosure during the phase-in period may invalidate the phase-in process because banks may be unwilling to disclose a LCR ratio below 100 percent even if permitted.
- RBZ should implement procedures to monitor the quantitative liquidity information disclosed by banks to ensure consistency with information reported to supervisors.

### LCR prudential reporting requirements and frequency
- Banks will report LCR information to RBZ on a quarterly basis, with preparedness to increase frequency in times of stress.
- Banks are required to calculate LCR at least on a monthly basis for internal liquidity risk management.
- RBZ should specify a detailed information template for LCR reporting and collect some LCR data monthly.
- Recommendation: the quarterly report should contain LCR data on a monthly basis to:
  - (1) construct a database for indirect liquidity risk assessment, and
  - (2) assess quantitative information to be disclosed by banks as a monthly average each quarter.
- RBZ could consider moving to monthly supervisory reporting of LCR in the future.

### Principles for the LCR reporting template
- a. Although LCR will be reported in a single currency, significant amounts should be segregated by currency.
- b. Each bucket should contain unweighted and weighted amounts.
- c. Each line item should relate to a single weight factor.
- d. HQLA assets should be reported by asset type. Different asset types with the same weight factor should be reported in different lines.
- e. All information, both inflows and outflows, should be segregated by customer/counterparty type, even those with the same factor.
- f. Information where a 0 percent weight factor is applied should be required (e.g., deposits maturing over 30 days, bank’s operational deposits in other institutions, revocable credit and liquidity facilities provided to clients, revocable and irrevocable credit and liquidity facilities granted to the bank).
- g. Operational deposits information should be segregated at least into three buckets: (1) amount covered by deposit insurance; (2) amount not covered by deposit insurance; and (3) excess balance on operational deposits.
- h. Secured funding/lending operations should be segregated by the asset type (same types specified in the HQLA buckets) of the posted collateral.

### Onsite inspection expectations to ensure proper LCR implementation
- HQLA operational requirements: banks must demonstrate capacity to identify and segregate encumbered from unencumbered assets; have adequate controls to monitor legal entity and physical location of HQLA assets; and show that the HQLA portfolio is under control of the liquidity manager.
- Level 2 assets buffer: banks intending to include Level 2 assets must demonstrate compliance with liquidity and market requirements specified in the LCR regulation.
- HQLA double counting: ensure no asset in the HQLA buffer is also counted as inflows.
- Additional liquidity risk management: banks must present their own stress testing scenarios suitable for their business and longer horizons than the LCR’s.
- Retail deposits identification: banks must identify retail and small business clients’ balances and segregate stable deposit portions.
- Deposits maturing over 30 days: banks must exclude retail deposits and wholesale unsecured funding maturing over 30 days from client/counterparty balances only when they can assure no possibility of early withdrawal.
- Unsecured wholesale funding: banks must segregate unsecured wholesale balances by client type and demonstrate identification of clients with total balances fully covered by deposit insurance.
- Operational deposits: banks must identify operational deposit accounts and segregate excess balances and insured portions per client balance.
- Secured funding/lending: supervisors must ensure collateral in secured operations can be legally transferred to the counterparty in case of bankruptcy, insolvency, liquidation or resolution; banks must classify posted collateral according to HQLA levels.
- Net cashflows from derivatives: net cashflows should be calculated only for counterparties with valid and enforceable netting agreements.
- Collateral management in derivatives: banks must demonstrate capacity to manage collateral and estimate collateral needs under LCR scenarios.
- Committed credit and liquidity facilities: banks must identify irrevocable committed facilities by counterparty type and the undrawn portion by counterparty.
- Other contractual and contingent funding obligations: supervisors should verify identification and methodologies to estimate cash outflows, at least using historical behavior.
- Contractual inflows by counterparty: banks must identify fully performing contractual inflows by counterparty type.
- Other contractual cash inflows: if included in LCR calculation, banks must provide explanations and supervisors shall assess adequacy of inflow rates.

### Supervisory processes and procedures to develop
- Establish a liquidity risk monitoring process to identify potential liquidity issues early and mitigate them; monitor compliance with minimum liquidity requirements, funding profile, vulnerabilities, and other non-LCR liquidity sources.
- Develop and implement procedures to respond where banks fall below minimum LCR, including guidance on supervisory actions, data requirements, and communication protocols between supervisors, banks, and RBZ’s Board.
- Supervisors should be prepared to receive and process banks’ information more frequently than during normal times, and may require additional information to assess issues.
- Supervisory actions should be proportionate to drivers, magnitude, duration and frequency of breaches; at minimum require bank’s liquidity assessment and close monitoring of remedial measures; consider idiosyncratic vs system-wide stress.
- RBZ should prepare IT systems to receive LCR information more frequently in times of stress and be able to require additional information as needed.

### Specific recommendations on Net Stable Funding Ratio (NSFR)
- Draft NSFR regulation reviewed: no material deficiencies; NSFR leverages off LCR implementation and should mirror LCR definitions.
- NSFR is simpler to implement than LCR; consideration should be given to IT systems.
- NSFR requirements should be applied to all banking institutions licensed by RBZ on a solo basis.
- Recommendation: banks should comply with a minimum NSFR ratio of 100 percent with no phase-in period.
- NSFR shall be met and reported in local currency.
- NSFR disclosure information requirements follow Basel recommendations; RBZ should implement procedures to monitor quantitative liquidity information disclosed by banks to ensure consistency with supervisory reports.
- Banks should report NSFR to RBZ on a quarterly basis and use NSFR as an ongoing internal liquidity risk management tool.

### NSFR reporting template principles
- a. Each bucket should contain unweighted and weighted amounts.
- b. Each item should refer to a single weight factor.
- c. HQLA assets should be informed by asset type.
- d. All information, both Available Stable Funding (ASF) and Required Stable Funding (RSF), based on customer/counterparty/asset class should be segregated by customer/counterparty/asset class, even those with the same weight factor.
- e. Information where a 0 percent weight factor is applied should be required.

### Banking sector structure and key statistics (as of March 31, 2021)
- Total assets: 402.78 billion (ZWL$) — total market share: 100%
- Exchange rate: ZWL$ per USD 84.4001 (March 31, 2021, Reserve Bank of Zimbabwe)
- Bank list with TOTAL ASSETS (ZWL$) and MARKET SHARE (PERCENT):
  - 1 CBZ BANK — 88,340,699,607 — 21.93% — Mixed — Zimbabwe
  - 2 ECOBANK — 68,021,425,696 — 16.89% — Foreign — Togo, West Africa
  - 3 STANBIC — 45,670,564,430 — 11.34% — Foreign — South Africa
  - 4 FBC BANK — 28,362,301,904 — 7.04% — Mixed — Zimbabwe
  - 5 CABS — 26,603,749,732 — 6.60% — Foreign — Zimbabwe
  - 6 FIRST CAPITAL BANK — 18,250,220,548 — 4.53% — Foreign — Malawi
  - 7 BANCABC — 17,520,233,139 — 4.35% — Foreign — Zimbabwe
  - 8 STANDARD CHARTERED — 16,431,648,147 — 4.08% — Foreign — England
  - 9 NEDBANK — 16,259,675,075 — 4.04% — Foreign — South Africa
  - 10 ZB BANK — 16,106,932,777 — 4.00% — Local Private — Zimbabwe
  - 11 STEWARD BANK — 14,330,884,620 — 3.56% — Local Private — Zimbabwe
  - 12 METBANK — 11,785,994,407 — 2.93% — Local Private — Zimbabwe
  - 13 NMB BANK — 11,693,019,558 — 2.90% — Foreign — Zimbabwe
  - 14 AGRI BANK — 10,194,804,310 — 2.53% — State — Zimbabwe
  - 15 CBZ BS — 3,939,425,716 — 0.98% — Mixed — Zimbabwe
  - 16 POSB — 3,703,289,095 — 0.92% — State — Zimbabwe
  - 17 FBC BS — 2,505,293,636 — 0.62% — Mixed — Zimbabwe
  - 18 NBS — 1,912,201,756 — 0.47% — State — Zimbabwe
  - 19 ZB BS — 1,151,421,900 — 0.29% — Local Private — Zimbabwe

*Source: Reserve Bank of Zimbabwe / IMF mission recommendations as contained in the provided chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1zweea2022002.pdf_