## 1bwaea2024001 ## Source details **Canonical URL:** [1bwaea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1bwaea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1bwaea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1bwaea2024001.pdf.json) --- ### Executive summary — major findings and context - The financial safety net framework in Botswana is incomplete; crisis preparedness and management structures must be expanded. - The Bank of Botswana (BoB) lacks an emergency liquidity support mechanism for commercial banks, bank resolution and liquidation remain under the Companies Act, and there is no deposit insurance system. - A 2016 TA mission on “Banking Sector Safety Net and Crisis Management” identified many deficiencies; limited progress has been made on those recommendations to date. - Authorities are poised to improve the Financial Safety Net (FSN) and Crisis Management framework through legal reforms: - Implementation of the Bank of Botswana Amendment Act, 2022 (BoBAA) will give the BoB power to provide liquidity assistance to banks and set up a deposit insurance scheme. - The Draft Revised Banking Act (DRBA) will establish a special bank resolution regime including expanded resolution powers and is at an advanced stage. - The draft Deposit Insurance Scheme of Botswana Regulation (DISBR) is almost complete and aims to establish a narrow mandate “paybox plus” the Deposit Insurance Scheme of Botswana (DISB). - Further improvements to these legal instruments are warranted as described in the Technical Note. ### Banking sector structure and risks - Sector composition and concentration: - Nine commercial banks, two state-owned “statutory banks”, and one building society. - Two commercial banks account for 46 percent of the banking sector assets and have been designated Domestic Systemically Important Banks (D-SIB). - Eight commercial banks are foreign owned as direct subsidiaries of United Kingdom, South Africa, Namibia, Malawi, and India. - Asset quality and NBFI linkages: - Nonperforming loans (NPL) to total loans were 3.7 percent as of June 2022 compared with 4.3 percent in 2020. - Retirement funds account for 43 percent of the NBFI sector assets; NBFIs hold nearly 20 percent of the deposits funding the banking system and have investments in bank bonds and equities. - Institutional roles: - BoB plays a key role as prudential supervisor and future resolution authority. - The Financial Stability Council (FSC) provides a forum for Ministry of Finance (MoF) engagement with BoB. - Deposit protection will be provided once the draft DISBR comes into effect. ### Financial safety net — legal gaps and operational priorities - Key legal and operational gaps: - No ELA framework in practice. - Bank resolution is court-based under the 1995 Banking Act (BA). - No operational deposit insurance. - DRBA and BoBAA address many gaps but need amendments to align with good international practices. - Priority operational items for BoB once BoBAA and DRBA are in force: - Develop policies, procedures and manuals for bank intervention and resolution, including operational manuals for Purchase and Assumption (P&A) transactions. - Prepare early intervention, resolution and liquidation plans for CAMELS 4- and 5-rated banks and CAMELS 3-rated banks that show no improvement. - Implement Recovery Plan requirements for all banks and Resolution Plans for at least systemic banks. - Prepare a simulation program for non-systemic bank resolutions. - Resolution tool preference: - P&A should be prioritized for non-systemic banks: insured deposits and certain good assets are transferred to a healthy bank; if insufficient good assets exist, the contemplated DISB would advance funds to balance the transaction; remaining assets and liabilities stay in the liquidation estate. - P&A is typically less costly than direct payout and causes much less disruption to depositor services. - DISB operationalization guidance: - Establish DISB by law, set clear funding arrangements via bank contributions and a public backstop. - Ensure operational independence by creating a separate and independent unit that reports directly to the BoB Board, with the Board overseeing the fund’s activities and ensuring resources are used as prescribed in future DISB law. - Emergency Liquidity Assistance (ELA) guidance: - Once BoBAA is effective, BoB should develop ELA policies and procedures. - ELA is a funding source of last resort for solvent but temporarily illiquid banks that are adequately regulated by BoB. - Solvency assessments should be forward-looking accompanied by an anticipated funding plan. - BoB should accept a sufficiently wide range of eligible collateral with appropriate haircuts and a suitable risk management framework. - Clarify that ELA should be subject to a penalty interest—i.e., higher than the policy rate or the prevailing market interest rate. ### Crisis preparedness and the Financial Stability Council (FSC) - FSC role and mandate: - FSC should be expanded to include an explicit crisis preparedness and management mandate in line with its statutory responsibilities in the BoBAA. - FSC would oversee high-level monitoring of the financial system, analyze risks, and discuss policies to mitigate risks; FSC is not a decision-making body but builds on each authority’s statutory duties. - Governance and meeting frequency: - Current MOU calls for semi-annual meetings; effectiveness would improve with regular quarterly meetings and more frequent technical working group meetings. - FSC priorities and operational tasks: - Prioritize operationalizing FSN tools over the near- to medium-term. - Develop an implementation framework, including communicating on activities and establishing ex-ante communications frameworks for crises. - Formally introduce system-wide crisis management protocols; none currently exist. - Use crisis simulations regularly and develop manuals and checklists for crisis management. - Communications: - Prepare ex ante a “one-voice” communication method with agreed facts and assumptions for spokespersons. ### Cross-border cooperation and parent-bank support - Supervisory and resolution MOUs: - Expand supervisory MOUs to include recovery and resolution cooperation and obtain parent bank commitments on recovery and resolution plans for local subsidiaries. - Seek letters from parent banks committing to provide sufficient liquidity and capital to local subsidiaries. - Legal hierarchy: - DRBA should supersede other laws, particularly the Companies Act and Insolvency Act, to ensure resolution actions are not delayed by competing legal regimes; remaining statutes may be supplementary if conflicts are well addressed. - Burden-sharing and coordination: - MOUs should set responsibilities on assessment, notification, group resolution options, implementation of foreign measures in Botswana, burden-sharing arrangements, confidential information sharing, and coordination of communications. ### Crisis management — safeguards and extraordinary powers - Conditions when public funds are used: - Shareholders take the first loss; management is changed; compensation limits; no dividends; clear exit strategy required. - Any capital injections or guarantees should carry strict conditions and be accompanied by close monitoring (including blocking insider and related-party transactions). - Public funds used in resolution should be recouped by levies on the banking industry. - Ministry of Finance role: - MoF should be enabled to exercise extraordinary powers in crisis situations, including guaranteeing uninsured depositors, subject to defined safeguards. - The government (MoF) is the appropriate authority to provide temporary public funding, not BoB. - Supervisory onsite use: - Consider use of supervisors onsite at problem banks with clear terms of reference to prevent asset-stripping, document destruction, and to gather information for the Resolution Authority (RA). - Legal preparedness: - Authorities may want to pass a financial stability law in advance or have one drafted for emergency passage when needed. ### Early intervention and recovery planning - Assessment and standards: - Resolution regime and deposit insurance scheme evaluated against FSB Key Attributes and IADI Revised Core Principles. - BoB currently lacks an effective early intervention regime; DRBA will improve powers once aligned with good practices. - Recommended early intervention features: - Quantitative (mandatory) triggers with qualitative elements. - Close monitoring of CAMELS (Capital adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity) particularly for CAMELS 4 and 5 and CAMELS 3 that show no improvement. - Credible, time-bound corrective plans and clear communications on enforcement actions. - Operational measures for lingering problem banks: - Place examiner(s) on-site full-time with appropriate terms of reference while avoiding assumption of management responsibilities. - Onsite examiners to limit asset stripping, prevent document destruction, and gather information for intervention and resolution planning. - Resolvability and recovery planning: - BoB should undertake resolvability assessments of all D-SIBs; NBFIRA should do the same for D-SIFIs; reviews should be regular. - Recovery plans required for all banks, based on proportionality; plans should be approved by bank boards and reviewed by BoB’s Prudential Authority and Payments Oversight Department; update annually. - Temporary Management (TM) and Official Administration (OA): - Current BA provides for TM (Article 33) as mandatory step towards resolution; publication requirement (Article 33(2)) can threaten stability via deposit runs. - DRBA expands OA; prefer resolving without TM where possible. - Recommendation: prepare lists of possible managers in advance (contacts and resumes) for immediate assignment. ### Resolution framework and operational recommendations - DRBA as Resolution Authority (RA): - DRBA designates BoB as RA and establishes a special resolution regime enabling irreversible resolution actions without court involvement, but deficiencies remain relative to international good practices. - Expanded tools: - Official administration, P&A transactions, bridge banks, bail-in, and asset management companies; most tools relevant mainly to systemic banks. - DRBA strengthening recommendations (selected): - Allow resolution measures without shareholders’ consent and without prior appointment of an official administrator. - Ensure bridge bank ownership by government institutions without residual original shareholder ownership; establish clear prudential treatment rules. - Strengthen resolution triggers (including definition of non-viability) and amend resolution objectives (including dropping protection of shareholders and uninsured creditors). - Allow flexibility to depart from pari-passu treatment of creditors of the same class when applying resolution powers; strengthen early termination provisions. - Ex-post funding mechanism: - Introduce an ex-post resolution fund to cover resolution costs outside DISB’s paybox plus mandate to avoid taxpayer-funded resolutions. - Preconditions: procedure to determine systemic failing institutions; mechanism to make public funding available at short notice; legal mechanism linking temporary support to recoveries and levies on banking industry (KA 6.2). - Organizational setup for BoB as RA: - Establish a Resolutions Unit (RU) outside the Bank Supervision Department (BSD) to draft resolution plans and develop manuals. - RU should maintain few staff in normal times and be authorized to activate staff from other BoB departments when needed. - Formally appoint a Resolution Manager when a bank appears likely to fail; provisionally appoint a liquidator, preferably from BoB staff. - Develop operational intervention and resolution manuals, instructions for official administrators or bridge-bank managers, and directions for liquidators. - Non-systemic bank strategy: - Prioritize P&A; then Insured Deposit Transfer (IDT) to an acquiring bank; fallback: straight liquidation and direct payment of insured depositors. - Resolution planning cadence: - Develop resolution plans for all systemic banks based on resolvability assessments. - Plans should include business lines, ownership, assets/liabilities/accounting, critical function locations, potential strategies, funding needs, operational requirements, and cross-border coordination arrangements. - Revise and update at least annually and more often if significant changes occur. ### Emergency Liquidity Assistance (ELA) — legal framework and implementation - Legal progress: - Pending Bank of Botswana Amendment Act 2022 (BoBAA) provides general framework for extension of ELA. - Article 38A(1)(i) BoBAA: BoB can provide liquidity assistance to banks that BoB determines are solvent and secured by adequate collateral; banks must prepare a business plan specifying measures to resolve liquidity problems. - BoBAA provides for government guarantees for liquidity assistance when necessary to preserve financial stability. - Implementing regulation recommendations: - ELA provisions are discretionary and should be reinforced by an implementing regulation specifying policies and procedures for prompt access. - Implementing regulation should specify a maximum time limit; slightly punitive interest rate (e.g., above the standing facility rate); and an itemized list of acceptable collateral with conservative haircuts based on asset risk. - Consider acceptance of pools of low risk performing loans (e.g., mortgage or consumer loans) where high-quality collateral is lacking, subject to extremely conservative haircuts and legal/operational feasibility (e.g., pre-positioned segregated promissory notes). - Ensure risk equivalence when determining haircuts using adequate and up-to-date market-, credit- and liquidity risk information. - Supervision and preparedness: - Liquidity provision should be accompanied by intensified supervision and corrective measures, including high frequency liquidity flow reporting. - BoB must be prepared to discharge more intrusive supervision of ELA recipients; failure to abide by business plan or becoming insolvent would be grounds for resolution actions. - Conduct periodic and comprehensive simulations involving banks to ensure timely mobilization of liquidity assistance. - ELA for NBFIs: - NBFIRA regulates NBFIs and has designated three entities as Non-Bank Systemically Important Financial Institutions (NB-SIFI). - BoBAA contemplates ELA only for banks; there is currently no legal basis for BoB to provide ELA to NBFIs. - General principle: central banks should not provide ELA to NBFIs; NBFIRA should provide information on entities and call emergency FSC meetings for NB-SIFI distress. - Transparency and governance: - ELA arrangements must safeguard central bank independence and accountability. - Ex-ante communication of ELA conditions should facilitate preparedness and reduce stigma where possible. - Ex-post transparency should be arranged with adequate delay and appropriate granularity to avoid jeopardizing central bank credibility or ELA recipient stability. - ELA framework should enable forward-looking solvency and viability assessments of applicants. ### ELA for a bank in resolution - A central bank should be able to provide liquidity, subject to safeguards, to an institution which is considered systemic and viable and whose solvency concerns will be resolved with certainty in the context of a realistic, time-bound resolution plan. - The resolution and/or supervisory authority should make a positive determination of viability. - Liquidity provision by the central bank should be backed by an indemnity from the government. - Bailed-in entities may need significant liquidity in the immediate aftermath of a crisis; this should be reflected in the resolution scheme. ### Deposit insurance — design, coverage, and operational readiness - Current status and legal form: - There is currently no deposit insurance system in Botswana, but inception is imminent. - BoB plans to issue a DISBR, but IMF recommends DISB be established by a standalone law to set a strong legal basis for mandate, governance, membership, resources, use of funds, accountability, and transparency. - BoBAA currently includes a broad enabling clause for DISB rather than defining key aspects in law. - DISBR should be harmonized with DRBA and key deficiencies addressed prior to introduction. - Identified DISBR deficiencies (selected): - (i) lack of specific designation of license revocation as trigger for insured depositor repayment; - (ii) provision for the DISB to backstop a voluntary liquidation; - (iii) lack of a specific target reserve fund ratio and specific designation of periodic premium amount; - (iv) lack of explicit allowance that DISB can support transfer of deposits via P&A or IDT as fulfillment of reimbursement duty. - Funding and backstops: - Article 7 of the DISBR provides for borrowing from BoB at set-up; emergency funding to finance repayment of insured deposits should come from the MOF (via a pre-approved line of credit). - Contemplated DISB calls for narrow mandate (“paybox plus”), ex ante funded DISB, contained within BoB but with separate operations, funding, and accounting. - The DISR contemplates a separate Deposit Insurance Committee to oversee the DISB. - Operational independence: direct reporting to the BoB Board, with the Board overseeing the fund’s activities. - Coverage level and distributional implications: - Regulation contemplates a coverage level of P250,000 per depositor per bank. - Calculation based on per capita income; IMF notes per capita income may be an inconsistent basis. - Analysis of deposit distribution supports this coverage level as it fully covers roughly 84 percent of depositors but only around 14 percent of the value of system-wide deposits. - At this level, DISB meets the primary objective to fully cover a great number of depositors at a relatively small value of deposits amount. - Deposit distribution table (exact figures from IMF analysis of BoB data): - 100,0006,941,611,371.00 1,887,650 1,887,650 83%376,187 8% - 150,0008,629,200,854.80 16,354 1,904,004 84%359,833 2% - 200,00010,074,645,673.28 10,841 1,914,845 85%348,992 2% - 250,00011,418,734,210.15 8,731 1,923,576 85%340,261 2% - 300,00012,636,903,703.47 7,443 1,931,019 85%332,818 1% - 350,00013,931,032,328.51 7,064 1,938,083 86%325,754 2% - 400,00015,144,671,467.72 6,503 1,944,586 86%319,251 1% - 500,00017,568,714,636.07 8,111 1,952,697 86%311,140 3% - >500,00050,533,301,899.43 311,140 1,626,124 100%- 79% - Total and > 500,000 - 2,263,837 100% - Payout preparedness and simulations: - BoB and DISB staff should conduct non-systemic bank resolution simulations including BoB’s bank supervision departments, with training on bank intervention and resolution. - Simulations should cover best practices for intervention and resolution, including P&A methodology to avoid suspending operations and ensure access to deposits. - DISB must prepare for payout as a backup if P&A is not feasible. - Communications and public awareness: - Develop communications program and a public awareness policy for DISB covering coverage level, instruments covered, and exclusions. - Communications principles: one-voice method; use all media channels; prepare talking points, FAQs, and draft press releases in advance; do not communicate problems without solutions; deliver bad news in clear, non-alarmist terms; do not over promise. - For P&A, communications should stress depositors’ funds are available via transfer to a stronger bank; communications by acquiring bank must be reviewed and approved by BoB communications department. ### Crisis preparedness, simulations, and operational capacity - Simulation program: - Regular program of crisis exercises should be developed and maintained, covering all elements of crisis resolution. - Simulations can be targeted or comprehensive, single agency or multi-agency, domestic or cross-border. - Start with “what if?” exercises based on extreme stress tests and progress to more comprehensive exercises. - BoB should conduct periodic and comprehensive simulations to ensure liquidity assistance can be mobilized timely. - BoB staff indicated participation in a crisis simulation exercise with seven other African countries February 15–17, 2023, by the Financial Stability Institute of BIS. - Nature of systemic crises: - Systemic crises are chaotic events; they may build gradually or emerge suddenly and are interlaced with political and social problems. - Crisis management requires prompt and decisive response; advanced crisis preparedness is key. - ELA transition to solvency support: - BoB should be able to provide ELA (with government guarantee) based on expanded collateral. - If a systemic bank is insolvent, liquidity support should shift to MoF as solvency support and may entail public funds; MoF could provide capital or funding for a bridge bank in systemic cases. - Extraordinary powers and safeguards: - Extraordinary powers may include capital injections, asset purchases, loans or guarantees, protection of uninsured depositors, and even nationalization. - Such powers should be a last resort and could be prearranged as a draft emergency law to be enacted if needed. - Recommended safeguards include shareholder loss-first, management change, dividend restrictions, limits on compensation, blocking insider transactions, business reorganization plan with exit strategy, and recoupment via levies on the banking industry. - Banks receiving guarantees should be prohibited from dividend declaration and payment. ### Status of selected 2017 TA recommendations (as of January 2023) — selected statuses - Implement remaining recommendations from February 2017 TA Report and align DRBA with good practices; establish DISB by standalone legislation. — Timeline: I; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA and DISB). - Ensure DRBA supersedes other laws, particularly Companies Act and Insolvency Act. — Timeline: ST; Initiative/Responsible Party: BoB. - Prepare early intervention, resolution and liquidation plans for CAMELS 4- and 5-rated banks and CAMELS 3-rated banks showing no improvement. — Timeline: ST; Initiative/Responsible Party: BoB. - Develop comprehensive bank intervention, resolution manuals, instructions for bridge bank managers, and directions for liquidators. — Timeline: MT; Initiative/Responsible Party: BoB. - Develop Resolution Plans for systemic banks and foreign bank subsidiaries in Botswana. — Timeline: ST; Initiative/Responsible Party: BoB. - Develop an ELA framework with expansion of acceptable collateral and safeguards once BoBAA comes into force. — Timeline: ST; Initiative/Responsible Party: BoB. - Ensure DRBA and DISR harmonized to establish license revocation as trigger for insured deposit repayment and automatic repayments based on failed bank records. — Timeline: ST; Initiative/Responsible Party: BoB. - Develop simulation program for non-systemic bank resolutions. — Timeline: MT; Initiative/Responsible Party: BoB, DISB. - Prepare ex ante a “one-voice” method of communication. — Timeline: ST; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA and DISB). - Enhance crisis preparedness by enabling FSC simulations and developing manuals and checklists. — Timeline: MT; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA and DISB). - Expand supervisory MOUs to include recovery and resolution cooperation and request parent bank recovery and resolution plans. — Timeline: MT; Initiative/Responsible Party: BoB. - Seek letters from parent banks committing to provide sufficient liquidity and capital to local subsidiaries. — Timeline: ST; Initiative/Responsible Party: BoB. - Conduct periodic and comprehensive simulations to ensure liquidity assistance mobilization. — Timeline: MT; Initiative/Responsible Party: BoB. - Consider supervisors onsite at problem banks to prevent asset-stripping and gather information for RA. — Timeline: ST; Initiative/Responsible Party: BoB. - Require all banks to prepare comprehensive Recovery Plans, updated annually, respecting proportionality. — Timeline: MT; Initiative/Responsible Party: BoB. - Plan for possible need of extraordinary resolution and guarantee powers with strong safeguards for systemic risk. — Timeline: MT; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA, and DISB). - Timeline codes: I: Immediately=within 6 months; ST: short term= less than 1 year; MT: medium term= 1–5 years. ### Observations on the Draft Revised Banking Act (DRBA) — selected operational and legal issues - Remove references to Minister of Finance in routine central bank operational/resolution matters to protect central bank independence. - Eliminate Article 18(2) advance notice requirement of not less than 30 calendar days before license revocation to avoid asset stripping and insider abuse. - Use Article 56(2)(d) prudently to prohibit upstreaming of assets to parent. - Article 57 should enable BoB to revoke a bank’s license before capital reaches zero; prompt corrective action requires revocation when a bank is severely undercapitalized. - Article 60(1) permits resolution plans for non-systemic banks “on a need basis” — BoB should prefer P&A, then IDT, then liquidation and direct insured depositor payment. - Article 61(1) permits BoB to establish a resolution fund via levies; a paid-in resolution fund is not recommended where DISB has not reached target funding level. - Article 64 posting/publication requirements for Official Administration risk deposit runs; OA should be avoided except for fraud/criminal seizure. - Article 65 provisions: sale/transfer/dispose of assets and liabilities should be used for non-systemic banks simultaneous with license revocation; bridge banks reserved for systemic cases under BoB/MoF control. - Article 65(2)(j) bail-in power requires sufficient loss-absorbing liabilities; Batswanan banks are largely deposit funded so bail-in advantages limited to systemic cases. - Article 73 references Companies Act winding up provisions; Banking Act should supersede other legislation in bank intervention and resolution. - Article 84(1) order of priority aligns with best practices; recommend raising wages and salaries claim status (capped at P100 000 per employee) and add shareholders’ claims class last. ### Appendix III — Deposit Insurance observations (selected numbered items) - 1. DISB should be established by a standalone law rather than by regulation. - 2. Article 3(2) has overlapping objectives; combine to provide only 2 objectives consistent with best practices. - 3. Article 4(3) list of member institutions should be continuously updated on DISB website. - 4. Article 4(6) require banks to use DISB written materials so institutions do not misrepresent deposit insurance benefits/limitations. - 5. Article 5(1)(a): clearly state license revocation is trigger for insured depositor repayment; membership and license must go together. - 6. Article 5(1)(d): DISB should not be involved in voluntary liquidation. - 7. Article 6 actions on cessation of membership should be performed by BoB and DISB since institution no longer exists on license revocation. - 8. Article 7 borrowing from BoB: emergency funding to finance repayment of insured deposits should come from MOF via pre-approved line of credit. - 9. Article 8: consider initial membership fees and liquidator recoveries as fund sources. - 10. Article 9(1): target reserve fund lacks a specific target range. - 11. Article 9(2)(b)(i): suspension of premium payments after target fund reached is discouraged; premium payment should remain. - 12. Article 10(a): add “in the event of a bank failure” at sentence end. - 13. Article 11 Fund Investment: law should be general, with specific allowable instruments in formal investment policy. - 14. Articles 15 and 16 Deposit Insurance Committee: central bank board could serve as DISB board reporting via a Deputy Governor. - 15. Article 20(3) risk-based premiums: start with flat-rate premiums initially and introduce risk-based premiums after DISB matures. - 16. Article 20(4) late payment penalties: simpler to allow DISB to debit member accounts at BoB automatically. - 17. Article 22 excluded deposits item (i) “any other deposit” is too arbitrary and should be removed. - 18. Article 23(1): establish license revocation rather than determination of non-viability as trigger for insured depositor reimbursement. - 19. Article 23(3): explicitly permit and favor funding insured deposits via transfer to a stronger bank via P&A or IDT. - 20. Article 29(2)(a): allow DISB staff to go on site to analyze and audit deposit related issues; DISB staff should complement BoB examiners. - 21. Deposit Insurance Regulation/Law must be harmonized with Banking Act (Article 84) by adding subrogation right to the second claim class. *Source: IMF Technical Note (FSAP), “EXECUTIVE SUMMARY”* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Major findings and context - The financial safety net framework in Botswana is incomplete, while crisis preparedness and management structures must be expanded. - The Bank of Botswana (BoB) lacks an emergency liquidity support mechanism for commercial banks, bank resolution and liquidation remain under the Companies Act, and there is no deposit insurance system. - A 2016 TA mission on “Banking Sector Safety Net and Crisis Management” identified many deficiencies. To date, there has been limited progress in achieving the recommendations. - The authorities are poised to significantly improve the Financial Safety Net (FSN) and Crisis Management framework through legal reforms: - Implementation of the Bank of Botswana Amendment Act, 2022 (BoBAA) will give the BoB power to provide liquidity assistance to banks and set up a deposit insurance scheme. - The Draft Revised Banking Act (DRBA) will, inter alia, establish a special bank resolution regime including expanded resolution powers and is at an advanced stage. - The draft Deposit Insurance Scheme of Botswana Regulation (DISBR) is almost complete and aims to establish a narrow mandate “paybox plus” the Deposit Insurance Scheme of Botswana (DISB). - Further improvements are warranted in each of these legal instruments as described in the Technical Note. ### Banking sector structure and risks (Introduction) - The banking sector of Botswana is concentrated, and relatively small: it consists of nine commercial banks and two state-owned “statutory banks” (specially chartered banks), and one building society. - Two commercial banks account for 46 percent of the banking sector assets and have been designated Domestic Systemically Important Banks (D-SIB). - The eight commercial banks are foreign owned as direct subsidiaries of United Kingdom, South Africa, Namibia, Malawi, and India. - Nonperforming loans (NPL) to total loans were 3.7 percent as of June 2022 compared with 4.3 percent in 2020. - The NBFI sector is growing fast and raises financial stability concerns: retirement funds account for 43 percent of the NBFI sector assets; NBFIs hold nearly 20 percent of the deposits funding the banking system and have investments in bank bonds and equities. - The BoB plays a key role in contingency framework as prudential supervisor and future resolution authority. The Financial Stability Council (FSC) provides a forum for Ministry of Finance (MoF) engagement with BoB. Deposit protection will be provided once the draft DISBR comes into effect. ### Financial safety net: gaps and recommended operational priorities - Key legal and operational gaps: no ELA framework in practice, bank resolution is court-based under the 1995 Banking Act (BA), and there is no operational deposit insurance. The DRBA and BoBAA will address many gaps but need amendments to align with good international practices. - Priority operational items for BoB once BoBAA and DRBA are in force: - Develop policies, procedures and manuals for bank intervention and resolution, including operational manuals for Purchase and Assumption (P&A) transactions. - Prepare early intervention, resolution and liquidation plans for CAMELS 4- and 5-rated banks and CAMELS 3-rated banks that show no improvement. - Implement Recovery Plan requirements for all banks and Resolution Plans for at least systemic banks. - Prepare a simulation program for non-systemic bank resolutions. - P&A (sale of assets and transfer of liabilities) should be prioritized as the preferred resolution tool for non-systemic banks: insured deposits and certain good assets are transferred to a healthy bank; if insufficient good assets exist, the contemplated DISB would advance funds to balance the transaction; remaining assets and liabilities stay in the liquidation estate. P&A is typically less costly than direct payout and causes much less disruption to depositor services. - DISB operationalization: establish DISB by law, set clear funding arrangements via bank contributions and a public backstop, and ensure operational independence by creating a separate and independent unit that reports directly to the BoB Board, with the Board overseeing the fund’s activities and ensuring resources are used as prescribed in future DISB law. - Emergency Liquidity Assistance (ELA): once BoBAA is effective, BoB should develop ELA policies and procedures: ELA is a funding source of last resort for solvent but temporarily illiquid banks that are adequately regulated by BoB; solvency assessments should be forward-looking accompanied by an anticipated funding plan; BoB should accept a sufficiently wide range of eligible collateral with appropriate haircuts and a suitable risk management framework; clarify that ELA should be subject to a penalty interest—i.e., higher than the policy rate or the prevailing market interest rate. ### Crisis preparedness and Financial Stability Council (FSC) role - The FSC should be expanded to include an explicit crisis preparedness and management mandate in line with its statutory responsibilities in the BoBAA. - The FSC would oversee high-level monitoring of the financial system, analyze risks affecting the system, and discuss appropriate policies to mitigate those risks; the FSC is not a decision-making body but builds on each authority’s statutory duties. - Governance and meeting frequency: the FSC’s current MOU calls for semi-annual meetings; effectiveness would improve with regular quarterly meetings and more frequent technical working group meetings. - The FSC should: - Prioritize work on operationalizing FSN tools over the near- to medium-term. - Develop an effective and comprehensive implementation framework, including communicating on activities and establishing ex-ante communications frameworks for crises. - Formally introduce system-wide crisis management protocols to plan and implement solutions in the event of a crisis; no effective underlying framework currently exists. - Use crisis simulations regularly that inform crisis management procedures, and develop manuals and checklists for crisis management. ### Cross-border and cooperative arrangements - Given the dominance of foreign-owned banks, supervisory MOUs should be expanded to include recovery and resolution cooperation and to obtain parent bank commitments on recovery and resolution plans for local subsidiaries. - Authorities should seek letters from parent banks committing to provide sufficient liquidity and capital to local subsidiaries to meet potential risks. - The DRBA should supersede other laws, particularly the Companies Act and Insolvency Act, to ensure resolution actions are not delayed by competing legal regimes; remaining statutes may be supplementary if conflicts are well addressed. ### Crisis management: safeguards and exceptional powers - Authorities should be prepared to provide financial assistance in a crisis subject to robust safeguards and conditions: shareholders take the first loss, management is changed, compensation limits, no dividends, and a clear exit strategy. - The Ministry of Finance should be enabled to exercise extraordinary powers in crisis situations, including guaranteeing uninsured depositors, subject to defined safeguards. - Consider use of supervisors onsite at problem banks with clear terms of reference to prevent asset-stripping, document destruction and to gather information for the Resolution Authority (RA). - Require all banks to prepare comprehensive Recovery Plans, updated annually, respecting proportionality. ### Key recommendations (selection from Table 1) - Implement remaining recommendations from the February 2017 Technical Assistance Report on Banking Sector Safety Net and Crisis Management; make further amendments to align the DRBA with good international practices and establish the DISB by standalone legislation. (Timeline: I; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA and DISB)) - Ensure that DRBA supersedes other laws, particularly the Companies Act and Insolvency Act. (Timeline: ST; Initiative/Responsible Party: BoB) - Prepare early intervention, resolution and liquidation plans for any CAMELS 4- and 5-rated banks, as well as banks that show no improvement in their situation (CAMELS 3-rated banks). (Timeline: ST; Initiative/Responsible Party: BoB) - Develop comprehensive (i) bank intervention manuals; (ii) bank resolution manuals; (iii) detailed instructions including conservative operating procedures for bridge bank managers; and (iv) wide-ranging and thorough directions for liquidators. (Timeline: MT; Initiative/Responsible Party: BoB) - Develop Resolution Plans for systemic banks and foreign bank subsidiaries in Botswana. (Timeline: ST; Initiative/Responsible Party: BoB) - Develop an ELA framework for an expansion of acceptable collateral (with appropriate haircuts), other appropriate safeguards, and guarantees from the government if needed in systemic circumstances (once the BoBAA comes into force). (Timeline: ST; Initiative/Responsible Party: BoB) - Ensure that DRBA and DISR are harmonized to establish license revocation as the trigger for insured deposit repayment, in accordance with the DISB law, and stipulate that insured depositor repayments be automatic, based on the failed bank’s records. (Timeline: ST; Initiative/Responsible Party: BoB) - Develop a simulation program for non-systemic bank resolutions. (Timeline: MT; Initiative/Responsible Party: BoB, DISB) - Prepare ex ante a “one-voice” method of effective communication with the public, whereby all spokespersons would use the same set of agreed upon facts and assumptions. (Timeline: ST; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA and DISB)) - Enhance crisis preparedness and management regime by enabling the FSC to engage in simulations that inform crisis management procedures, and develop manuals and checklists for crisis management. (Timeline: MT; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA and DISB)) - Expand extant supervisory MOUs or develop resolution MOUs to include cooperation regarding recovery and resolution issues and ask home authorities for foreign banks’ recovery and resolution plans to determine if they are acceptable for treatment of the local subsidiaries. (Timeline: MT; Initiative/Responsible Party: BoB) - Seek letters from parent banks committing to provide sufficient liquidity and capital to the local subsidiaries to meet potential risks. (Timeline: ST; Initiative/Responsible Party: BoB) - Conduct periodic and comprehensive simulations to ensure that liquidity assistance can be mobilized in a timely manner. (Timeline: MT; Initiative/Responsible Party: BoB) - Consider the use of supervisors onsite at problem banks, with clear terms of reference, to prevent asset-stripping, document destruction and to gather information for the RA. (Timeline: ST; Initiative/Responsible Party: BoB) - Require all banks to prepare comprehensive Recovery Plans, updated annually, respecting proportionality. (Timeline: MT; Initiative/Responsible Party: BoB) - Plan for the possible need of extraordinary resolution and guarantee powers with strong safeguards for a systemic risk. (Timeline: MT; Initiative/Responsible Party: FSC: (BoB, MoF, NBFIRA, FIA, and DISB)) - Timeline codes: I: Immediately=within 6 months; ST: short term= less than 1 year; MT: medium term= 1–5 years *Source: IMF Technical Note (FSAP), “EXECUTIVE SUMMARY”* ### 8. Despite progress to date, the authorities need to ensure that the draft BoBAA and ### 8. Despite progress to date, the authorities need to ensure that the draft BoBAA and ### Financial Safety Net — Early Intervention and Recovery Planning - Assessment: Resolution regime and deposit insurance scheme were evaluated against the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs) and the International Association of Deposit Insurers’ Revised Core Principles for Effective Deposit Insurance Systems (DICPs). - Current gap: BoB currently lacks an effective early intervention regime; powers will be significantly improved with passage of DRBA once further aligned with good practices. - Recommended features of an effective early intervention program: - Early intervention ability based on quantitative (mandatory) triggers with qualitative elements. - Close monitoring of Capital adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to market risk (CAMELS or BoB equivalent), particularly for banks rated 4 and 5, and banks showing no improvement. - Imposition of credible, time-bound corrective plans and clear communications on enforcement actions. - Operational measures for lingering problem banks: - Place examiner(s) on-site full-time with appropriate terms of reference while avoiding assumption of management responsibilities. - Onsite examiner roles: (i) limit asset stripping by monitoring insider and related-party transactions and other large transactions; (ii) prevent document destruction; (iii) gather and provide information for the RU to set out intervention and resolution plans for CAMELS 4- and 5-rated banks, and CAMELS 3-rated banks that show no improvement. - Resolvability and recovery planning: - BoB should undertake resolvability assessments of all D-SIBs; NBFIRA should do the same for D-SIFIs; assessments to be reviewed regularly and updated. - Recovery plans required for all banks, based on proportionality; BoB could prescribe main scenarios (assumed level of capital depletion, liquidity stress, extent of parent support). - Recovery plans should be approved by the bank’s board of directors and reviewed by the Prudential Authority and Payments Oversight Department, BoB, and updated annually. - Temporary Management (TM) and Official Administration (OA): - Current Banking Act provides for TM by BoB appointee (Article 33) and TM is a mandatory step towards resolution; publication requirement (Article 33(2)) can threaten financial stability via deposit runs. - DRBA expands tool of Official Administration (OA); preferable to resolve a bank without TM where possible. - Recommendation: prepare lists of possible managers in advance (contacts and resumes) for immediate assignments when necessary. ### Resolution Framework - DRBA designates BoB as Resolution Authority (RA) and establishes a special resolution regime enabling irreversible resolution actions without court involvement, but deficiencies remain relative to international good practices. - Expanded DRBA tools include Official administration, Purchase and Assumption (P&A) transactions, bridge banks, bail-in and asset management companies; most expanded tools are relevant only to systemic banks. - DRBA strengthening recommendations (specific items): - Allow implementation of resolution measures without shareholders’ consent and without requiring prior appointment of an official administrator. - Ensure that a bridge bank is wholly or partially owned by one or more government institutions, without residual ownership by original shareholders, and establish clear rules for its prudential treatment. - Strengthen provisions governing resolution triggers (including to define non viability) and amend resolution objectives (including to drop protection of shareholders and uninsured creditors). - Allow flexibility to depart from pari-passu treatment of creditors of the same class when applying resolution powers and strengthen provisions pertaining to early termination rights. - Ex-post funding mechanism: - Proposal to introduce an ex-post resolution fund to cover resolution costs outside of DISB’s paybox plus mandate to avoid taxpayer-funded resolutions; consistent with the Key Attributes. - Preconditions for effectiveness: - Establish procedure to determine that failing institutions are systemic and that temporary public funds are needed to preserve financial stability. - Establish mechanism to make public funding available at short notice. - Create legal mechanism linking temporary support to recoveries from firms’ stakeholders and creditors and, if necessary, via levies on the banking industry (KA 6.2), phased in to mitigate procyclicality. - Appropriate authority to provide temporary public funding is the government, not BoB. - Organizational and operational recommendations for BoB as RA: - Establish a Resolutions Unit (RU) outside the Bank Supervision Department (BSD) to draft resolution plans and develop intervention and resolution manuals. - RU should maintain few staff in normal times; authorized to activate resolution staff from other BoB departments when needed. - Formally appoint a Resolution Manager when a bank appears likely to fail; provisionally appoint a liquidator, preferably from BoB staff. - Develop operational intervention and resolution manuals, instructions for official administrators or bridge-bank managers, and directions for liquidators. - For non-systemic banks, prioritize P&A as most effective tool; less preferable: Insured Deposit Transfer (IDT) to an acquiring bank; fallback: straight liquidation and direct payment of insured depositors. - Commit to intervention and resolution simulations (including DISB, once established). - Resolution planning content and cadence: - Develop resolution plans for all systemic banks based on resolvability assessments. - Resolution plans should include: (i) detailed business lines and corporate organization; (ii) ownership structure; (iii) comprehensive accounting of assets, liabilities, contractual obligations; (iv) locations of critical functions (IT, treasury), and other relevant operational details. - Identify potential resolution strategies, preconditions, funding needs, operational requirements, and cross-border coordination arrangements. - Revise and update resolution plans at least annually and more often if significant changes occur. ### Emergency Liquidity Assistance (ELA) - Legal framework progress: - Pending Bank of Botswana Amendment Act 2022 (BoBAA) provides general framework for extension of ELA, addressing gaps in current Bank of Botswana Act (BoBA). - Article 38A(1)(i) BoBAA: BoB can provide liquidity assistance to banks that BoB determines are solvent and secured by adequate collateral; banks must prepare a business plan specifying measures to resolve liquidity problems. - BoBAA provides for government guarantees for liquidity assistance when determined necessary to preserve financial stability. - Implementing regulation recommendations: - ELA provisions are discretionary and should be reinforced by an implementing regulation specifying policies and procedures for prompt access. - Implementing regulation should specify a maximum time limit; slightly punitive interest rate (e.g., above the standing facility rate); and an itemized list of acceptable collateral with conservative haircuts based on asset risk. - Consider acceptance of pools of low risk performing loans (e.g., mortgage or consumer loans) where high-quality collateral is lacking, subject to extremely conservative haircuts and legal/operational feasibility (e.g., pre-positioned segregated promissory notes). - Ensure risk equivalence when determining haircuts for riskier assets using adequate and up-to-date market-, credit- and liquidity risk information. - Supervision and preparedness: - Any liquidity provision should be accompanied by intensified supervision and corrective measures, including high frequency liquidity flow reporting. - BoB must be prepared to discharge more intrusive supervision of ELA recipients; failure to abide by business plan or becoming insolvent would be grounds for resolution actions. - Conduct periodic and comprehensive simulations involving banks to ensure timely mobilization of liquidity assistance. - ELA for Non-Bank Financial Institutions (Box summary): - NBFIRA regulates NBFIs and has designated three entities as Non-Bank Systemically Important Financial Institutions (NB-SIFI). - Legally, no provisions for liquidity assistance under current BoBA; BoBAA contemplates ELA only for banks. - General principle: central banks should not provide ELA to NBFIs; there is currently no legal basis for BoB to provide ELA to NBFIs. - NBFIRA, as member of Financial Stability Council (FSC), should provide information on entities under remit and call emergency FSC meetings for NB-SIFI distress; robust regulation and supervision are first line of defense. - Transparency and governance: - ELA arrangements must safeguard central bank independence and accountability. - Ex-ante communication of ELA conditions should facilitate preparedness and reduce stigma where possible. - Ex-post transparency should be arranged with adequate delay and appropriate granularity to avoid jeopardizing central bank credibility or ELA recipient stability. - ELA framework should enable forward-looking solvency and viability assessments of applicants. *IMF staff.* ### 24. The issue of ELA for a bank in resolution needs to be addressed. A central bank should ### 24. The issue of ELA for a bank in resolution needs to be addressed. A central bank should ### Emergency Liquidity Assistance (ELA) for a bank in resolution - A central bank should be able to provide liquidity, subject to safeguards, to an institution which is considered systemic and viable and whose solvency concerns will be resolved with certainty in the context of a realistic, time-bound resolution plan. - The resolution and/or supervisory authority should make a positive determination of viability. - Liquidity provision by the central bank should be backed by an indemnity from the government. - In a resolution, bailed-in entities may need significant liquidity to preserve confidence in the immediate aftermath of a crisis; this possibility should be reflected in the resolution scheme as necessary. ### Deposit Insurance (overview and design) - There is currently no deposit insurance system in Botswana, but its inception is imminent. - BoB plans to issue a DISBR, but the DISB should be established by a standalone law to set a strong legal basis for: mandate; governance; membership; resources and the use of funds; accountability; and transparency. - The BoBAA currently includes a broad enabling clause for the establishment of the DISB, instead of defining its key aspects in the law. - The DISBR should be harmonized with the DRBA and key deficiencies addressed prior to introduction of deposit insurance. Deficiencies identified include: - (i) lack of specific designation of license revocation as trigger for insured depositor repayment; - (ii) a provision for the DISB to backstop a voluntary liquidation; - (iii) the lack of a specific target reserve fund ratio, specific designation of periodic premium amount; and - (iv) the explicit allowance that the DISB can support the transfer of deposits, as agreed with the resolution authority, to a stronger bank via a P&A or IDT which will represent fulfilment of the DISB’s duty to reimburse depositors by making them available at a stronger bank. - Article 7 of the DISBR provides for borrowing from BoB as appropriate assistance at set-up; however, any emergency funding to finance the repayment of insured deposits should come from the MOF (via a pre-approved line of credit) since that represents a fiscal responsibility and not a monetary policy function. - The contemplated DISB calls for a narrow mandate (“paybox plus”), ex ante funded DISB, contained within BoB, but with separate operations, funding, and accounting. - The DISR contemplates a separate Deposit Insurance Committee to oversee the DISB. - Operational independence should be assured by establishing direct reporting to the BoB Board, with the Board overseeing the fund’s activities and ensuring that resources are used as prescribed in a DISB law. - In accordance with the IADI Core Principles for Effective Deposit Insurance Systems, the pending regulation provides for compulsory membership for all banks; limited coverage to protect small, financially unsophisticated depositors; and periodic premiums to build a target reserve fund determined by, inter alia, coverage levels, impact on the banking sector, and other transparent criteria. ### Deposit coverage level and distributional implications - The regulation contemplates a coverage level of P250,000 per depositor per bank. - Calculation of this coverage level was based on per capita income, which does not always provide a consistent basis for determining coverage level. - An analysis of deposit distribution supports this coverage level as it fully covers roughly 84 percent of depositors but only around 14 percent of the value of system-wide deposits. - At this level, DISB meets the primary objective to fully cover a great number of depositors at a relatively small value of deposits amount. - Deposit distribution table (exact figures from IMF analysis of BoB data): - 100,0006,941,611,371.00 1,887,650 1,887,650 83%376,187 8% - 150,0008,629,200,854.80 16,354 1,904,004 84%359,833 2% - 200,00010,074,645,673.28 10,841 1,914,845 85%348,992 2% - 250,00011,418,734,210.15 8,731 1,923,576 85%340,261 2% - 300,00012,636,903,703.47 7,443 1,931,019 85%332,818 1% - 350,00013,931,032,328.51 7,064 1,938,083 86%325,754 2% - 400,00015,144,671,467.72 6,503 1,944,586 86%319,251 1% - 500,00017,568,714,636.07 8,111 1,952,697 86%311,140 3% - >500,00050,533,301,899.43 311,140 1,626,124 100%- 79% - Total and > 500,000 - 2,263,837 100% ### Payout preparedness, simulations, and communications - Once established, BoB and DISB staff should conduct non-systemic bank resolution simulations, including BoB’s bank supervision departments, with training on bank intervention and resolution. - Simulations should cover best practices for intervention and resolution, including the use of the Purchase and Assumption (P&A) methodology, to avoid suspending bank operations and ensure continued access to deposits. - DISB will need to prepare for a payout as a backup option if a P&A is not feasible. - A communications program should be developed to address proper communication methods and tools in the event of a bank failure, and a public awareness policy for DISB covering basic information about deposit insurance (e.g., inter alia, level of coverage, which instruments are covered, and which are not, etc.). - Box 3: Communications in Bank Resolution, Crisis Preparedness and Management — key points: - Advance preparation for effective communications is paramount. - Authorities should plan on a “one-voice” method of communication with the public. - Use all media channels (press releases, television and radio announcements, social media, web-based platforms) and provide FAQs. - For non-systemic bank resolution, basic public information should include: when, where and how insured depositors will be repaid and what information a depositor must provide to claim deposits. - In situations of a P&A, communications should stress that depositors’ funds are available via transfer to a stronger bank. - Any communications by the acquiring bank must be reviewed and approved by BoB communications department. - Talking points, FAQs and draft press releases can be prepared in advance; public statements should describe measures taken positively and emphasize actions taken in the best interest of depositors and to restore banking system stability. - Communications should be simple, clear on solutions, and use established media relationships to boost treatment in crisis times. - Additional principles: (i) do not communicate problems without solutions, (ii) deliver bad news in clear definitive non-alarmist terms, (iii) do not over promise. ### Crisis preparedness, FSC role, and coordination - Contingency planning should be a living, comprehensive framework of up-to-date laws, rules, processes, organizational structures, and skilled personnel. - Effective crisis preparedness begins with establishment of a high-level crisis management committee, to include, inter alia, the Governor and the Minister of Finance. - The FSC—established by an MOU in February 2019 and designated a statutory Committee under BoBAA—should be expanded to include crisis preparedness and management responsibilities within BoBAA legal responsibilities. - The FSC is not a decision-making body but facilitates information sharing and relies on each authority’s statutory responsibilities for coordinated response. - The FSC’s MOU calls for semi-annual meetings; it would be more effective to hold quarterly meetings with technical level working groups meeting more frequently. - The FSC’s broadened MOU enabling conditions should define responsibilities for systemic bank crisis situations and develop key aspects including: - Institutional arrangements for domestic and international coordination and crisis preparedness and management; - The crisis management options available to address a range of systemic bank distress situations; - Discussing methods for resolution and funding; - Crisis communication during and after a crisis; and - Crisis simulations to test capacity and identify gaps. - In times of crisis, the FSC would review diagnostics made by primary technical units, agree on basic measures, and oversee and coordinate execution. - The FSC must address agencies’ responsibilities and cooperation on: - The assessment of the systemic and wider economic impact of a bank in distress (BoB); - The assessment of the bank’s financial position, including capital position, solvency, and liquidity (based on input from BoB’s supervision department); - The options for resolution, assuming recovery is not feasible, and assessment of each option (based on BoB’s Resolution Unit); - Coordination with foreign counterparts where applicable; - Possible need for government financial support; and - Key stakeholders for communication and coordination. - Box 4: Central Bank and MoF Roles in the FSC — selected items - BoB: Define and execute a policy for financial stability; ensure access to secure payments, clearing, and securities settlement systems; notify the FSC in case a financial institution may need solvency support; develop frameworks for early identification of crises; provide banks’ FSIs and CAMELS ratings; trends and forecasts on banks’ loans, liquid assets, deposits, profitability, and capital (in amounts and percent of GDP); banks’ stress test results; list of SIFIs and D-SIFIs; problem banks; main fiscal and tax indicators, etc. - MoF: Main fiscal and tax indicators with trend analysis and forecasts; information on outstanding government securities listed by maturity, interest rate forecasts, and opinions on probable implications of a crisis on debt sustainability; data on public borrowings from foreign financial institutions, listed by maturity; sources of financial support for exceptional measures; short-term liquidity situation of the general budget; a list of expenditures that cannot be legally blocked. ### Cross-border issues and parent-bank support - Given the substantial presence of foreign banks’ subsidiaries, BoB should maintain discussion with foreign authorities and parent banks. - BoB participates in supervisory colleges but no resolution colleges; BoB and the MoF should seek to expand supervisory MOUs (or seek new MOUs with foreign resolution authorities) from all home countries to cover resolution plans and issues. - MOUs should set out responsibilities and coordination matters including: - The assessment of the financial position of the bank in Botswana and, where applicable, the parent bank, including capital position, solvency, and liquidity; - Notifying other authorities in home countries of emergency situations; - Approaches and options for group resolution, assuming recovery is not feasible, and assessment of each option; - Implementation of foreign resolution measures in Botswana if they do not have direct effect; - Ideally, burden-sharing arrangements between parent authorities and authorities in Botswana; - Allowing for sharing firm-specific confidential information, subject to confidentiality; - Coordination of key stakeholders for communication responsibilities. - Parent-bank support should be the first line of defense for foreign-owned subsidiaries; BoB should request support-commitment letters from parent banks. - BoB should avoid upstreaming of local subsidiary assets to the parent to the detriment of domestic depositors and creditors. - Authorities in Botswana should prepare alternative plans in case the resolution decision deviates from agreed group resolution plans and endangers financial stability in Botswana. *Source: IMF staff.* ### 38. Crisis preparedness requires expertise, resources, and operational capacity. Objectives, ### 1bwaea2024001 - 38. Crisis preparedness requires expertise, resources, and operational capacity. Objectives, ### Crisis preparedness and simulation exercises - Crisis preparedness requires expertise, resources, and operational capacity. Objectives, tools, strategies, processes, and procedures need to be fully understood. - Simulation exercises can be targeted or comprehensive, and include single agency or multi-agency, domestic or cross-border. - A regular program of crisis exercises should be developed and maintained, covering all elements of crisis resolution. - Simulations can begin with relatively simple “what if?” exercises, perhaps based on extreme stress tests, designed to elicit how the competent authorities (e.g., BoB, MOF) would react to specific situations, such as a liquidity shortfall at a large bank, or the default of several large borrowers. - The BoB should conduct periodic and comprehensive simulations to ensure that liquidity assistance can be mobilized in a timely manner. - Simulations can be useful to help prepare and improve departmental level checklists and contingency plans and to test these procedures to detect any shortcomings. - More comprehensive exercises could be developed later. - BoB staff informed that they will be participating in a crisis simulation exercise with seven other African countries February 15–17, 2023, put on by the Financial Stability Institute of BIS. ### Nature of systemic crises and operational implications - Systemic crises are chaotic events. They may build up gradually, but commonly emerge suddenly. They are interlaced with political and social problems. - Crisis management is challenging—there is usually little time to prepare and strategize, as there is a pressing need for prompt and decisive response. - There can be many unknowns regarding the condition of banks and without an effective framework, there could be legal and institutional limitations. - Advanced crisis preparedness is key. ### Emergency Liquidity Assistance (ELA) and transition to solvency support - A systemic bank may experience illiquidity, requiring ELA, perhaps due to massive deposit withdrawals. - As there is no time to determine whether it is a liquidity or solvency problem, the BoB should be able to provide ELA (with a government guarantee), based on expanded collateral for the liquidity support as discussed above. - When or if it becomes clear that the systemic bank is not only illiquid, but also insolvent, then BoB liquidity support should shift to the MOF as solvency support and will likely entail expenditures from public funds. - The MOF would not be responsible for providing ELA, but could possibly provide capital or necessary funding for a bridge bank in systemic cases. ### Extraordinary powers, their use, and safeguards - Extraordinary provisions may be required to maintain financial stability in a crisis. These can include provisions for the MOF to use public funds to: - inject capital, - make asset purchases, - provide loans or guarantees to weak systemic banks, - protect uninsured depositors and creditors, and - even nationalization. - Such tools may be needed to prevent depositor panic or liquidity freezes, depending on the size and significance of the problems, their potential adverse consequences on the banking sector and the economy, and the urgency with which they need to be resolved. - Since such guarantees represent a potentially large government liability, along with their impact on moral hazard, these powers should be used only as a last resort—otherwise, market discipline will suffer. - These extraordinary provisions do not need to be enshrined in law (for moral hazard reasons), but could be prearranged in form of a draft emergency law to be enacted in case of need. - Such powers ultimately must be a decision by the responsible entity following consultation in the FSC and the MOF, keeping them only as a last resort. ### Recommended safeguards/conditions when public funds are used - Specific safeguards for extraordinary powers can be provided in implementing regulations and/or executory contracts with the recipient banks. For example, capital injections or other financial assistance should carry strict conditions such as, inter alia: - Shareholders take the first loss; - Management changes; - Restrictions on dividends; - Limits on executive compensation (including bonuses and severance packages); - Close monitoring (and blocking, if necessary) of insider and related-party, intra-group and large transactions to mitigate asset stripping; - Providing a business reorganization plan detailing the exit strategy, with repayment of the assistance at a reasonable rate of return within a reasonable timeframe. A resolution plan, or living will, could be quite useful in developing the exit strategy. - Any public funds used in a resolution action should be recouped by levies on the banking industry. - Banks receiving such guarantees should be prohibited from dividend declaration and payment. ### Legal and institutional gaps in Botswana and recommended actions - Botswana’s legal system does not currently foresee extraordinary powers that can be used in situations of systemic risk. - The authorities may want to pass a financial stability law in advance or to have one drafted for emergency passage when needed. The latter may eliminate the temptation to misuse emergency powers, e.g., to provide open bank assistance inappropriately, if an existing law permits it. - Specific safeguards for extraordinary powers can be provided in implementing regulations and/or executory contracts with the recipient banks. - Such powers ultimately must be a decision by the responsible entity following consultation in the FSC and the MOF, keeping them only as a last resort. ### Appendix I: Status of selected 2017 TA Report recommendations (as of January 2023) — key items and statuses - Amend the legislation (BA and BoBA) to strengthen the legal powers for enabling the BoB to respond quickly, effectively, and decisively to banking problems, as well as to strengthen and clarify the powers and mandate to extend ELA (paragraphs 19 and 59). — Relevant Authority: BoB, MFDP — 2023 FSAP Status: In process - Develop a corrective action framework and contingency plan for responding to banking problems (paragraph 21). — Relevant Authority: BoB — 2023 FSAP Status: In process - Strengthen the early warning system arrangements to enable early detection of bank stress and liquidity vulnerabilities (paragraph 25). — Relevant Authority: BoB — 2023 FSAP Status: ... - Review the existing liquidity management capabilities of the banking system, including the effectiveness of current BoB liquidity-providing market operations and the functioning of the interbank market (paragraph 79). — Relevant Authority: BoB — 2023 FSAP Status: ... - The BoB should establish an ELA framework to respond to idiosyncratic liquidity needs of banks and internal ELA governance and authorization procedures should be clearly set out (paragraph 81). — Relevant Authority: BoB — 2023 FSAP Status: In progress - once BoBAA is effective. - Clear criteria as to when and why to provide ELA funding to a bank should be set out, including reliable solvency, systemic importance, viability, and capital assessments to enable correct ELA decisions to be made (paragraph 84). — Relevant Authority: BoB — 2023 FSAP Status: Not Done - Internally, the BoB should document and duly authorize the ELA principles, guidelines, and criteria to be followed in order to ensure that it is adequately collateralized and not unduly exposed to potential losses (paragraph 92). — Relevant Authority: BoB — 2023 FSAP Status: Not Done - Devise a detailed and robust collateral assessment and valuation approach surrounding ELA (paragraph 95). — Relevant Authority: BoB — 2023 FSAP Status: Not Done - Develop clear trigger points and metrics against which the provision of funding by the BoB to a counterparty can be assessed on an ongoing basis (paragraph 104). — Relevant Authority: BoB — 2023 FSAP Status: Not Done - Devise a framework for ongoing ex post monitoring of banks’ use of funds, business practices, transactions carried out, and any additional conditionality imposed on ELA borrowers should be devised (paragraph 106). — Relevant Authority: BoB — 2023 FSAP Status: In process - Revise and strengthen the proposed amendments to the BoBA and the BA to establish a comprehensive set of powers for bank recovery and resolution, benchmarking against the FSB Key Attributes (paragraph 28). — Relevant Authority: BoB, MFDP — 2023 FSAP Status: In process - Establish a Financial Stability Council to facilitate coordination between the BoB, the MFDP, and the NBFIRA on financial stability (including resolution) issues (paragraph 54). — Relevant Authority: BoB, MFDP, NBFIRA — 2023 FSAP Status: Done - Establish a Financial Stability Committee within the BoB to oversee and coordinate all aspects of financial stability (paragraph 83). — Relevant Authority: BoB — 2023 FSAP Status: Done - Develop and implement the policies and arrangements needed to require all banks to establish recovery plans, and require all banks to develop, maintain, and regularly test those plans (paragraph 28). — Relevant Authority: BoB — 2023 FSAP Status: In process - Develop the policies and arrangements needed for the BoB to undertake resolvability assessments and develop resolution plans for, at least, all systemically important banks, and for other banks, if resources permit (paragraph 39). — Relevant Authority: BoB — 2023 FSAP Status: Not Done - Establish liquidity management, bank recovery and resolution MOUs between the BoB and its foreign counterparts, and seek to participate in cross-border crisis management groups for systemically important banks (paragraph 56). — Relevant Authority: BoB — 2023 FSAP Status: Not Done - Develop a program of workshops, staff training, and regular bank crisis exercises to build capacity in crisis resolution (paragraph 58). — Relevant Authority: BoB, MFDP, NBFIRA — 2023 FSAP Status: Not Done - Develop comprehensive policy proposals for a deposit insurance scheme, with a view to establishing the scheme within the next two to three years, if possible (paragraph 46). — Relevant Authority: BoB, MFDP — 2023 FSAP Status: In process - Develop comprehensive policy proposals for resolution funding arrangements (beyond deposit insurance), with associated safeguards (paragraph 51). — Relevant Authority: BoB, MFDP — 2023 FSAP Status: Not done beyond paybox plus - Review and assess the adequacy of existing resolution arrangements for payment and settlement systems, and develop proposals as appropriate (paragraph 17). — Relevant Authority: BoB — 2023 FSAP Status: In process ### Appendix II: Selected observations on the Draft Revised Banking Act (DRBA) — operational and legal risks identified - Many Articles of the DRBA call for input, decisions and/or approval from the Minister of Finance; this is inappropriate for central bank routine and technical matters and compromises central bank independence. References to Ministerial involvement in operational issues for bank resolution should be removed. - Article 18(2) advance notice requirement of not less than 30 calendar days before license revocation should be eliminated to avoid asset stripping and insider abuse. - Article 56(2)(d) could be used prudently to preserve a foreign subsidiary’s assets by prohibiting transactions with the parent involving “upstreaming” assets. - Article 57 lacks a clause enabling BoB to revoke a bank’s license before capital reaches zero; Prompt Corrective Action calls for license revocation when a bank is severely undercapitalized, but still has positive capital. - Article 60(1) allowing resolution plans for non-systemic banks “on a need basis” — BoB should prefer P&A as the most desirable tool for non-systemic banks, followed by an IDT, then liquidation and direct payment to insured depositors. - Article 61(1) permits BoB to “establish a resolution fund, financed through levies on banks”; a paid-in resolution fund is not recommended where the DISB fund has not reached its target funding level, as it would impose additional levies on the banking sector. - Article 64 posting and publication requirements for Official Administration (OA) risk deposit runs and contagion; OA should be avoided except for discovered fraud or criminal activity requiring seizure of control. - Article 65(2)(b) sale/transfer/dispose of assets and liabilities can and should be used for non-systemic banks, simultaneous with license revocation. - Article 65(2)(i) bridge bank creation should be reserved for top officials of BoB and MOF; bridge banks should be used only for systemic banks and be under authority control and ownership temporarily. - Article 65(2)(j) bail-in power requires sufficient loss-absorbing liabilities; Batswanan banks are largely deposit funded, so bail-in advantages should be carefully assessed and likely apply only in systemic cases. - Article 67 tools to increase capital (issuing shares, mergers, transferring shares) are unlikely to succeed for banks in OA; most banks in OA require resolution or liquidation. - Article 67 (5)(a) bridge bank ownership by shareholders and/or bail-in creditors should be revised; shareholders should not be rewarded with continued ownership if they failed prudential standards. - Article 71(4)(a) returning shareholders’ rights should not be permitted unless they have contributed all funds necessary to recapitalize the bank. - Article 73 references Companies Act winding up provisions; the Banking Act should supersede other legislation in relation to bank intervention and resolution. - Article 78(1) transfer of assets and liabilities by liquidator is appropriate for executing a P&A for a non-systemic bank and supports provisional appointment of a liquidator in advance. - Article 84(1) order of priority in claims payment is in line with best practices; recommend raising wages and salaries of employees (capped at P100 000 per employee) to a higher claim status and add a shareholders’ claims class to come last. *Source: 1bwaea2024001 - 38. Crisis preparedness requires expertise, resources, and operational capacity. Objectives,* ### Appendix III. Some Observations on the Deposit Insurance ### Appendix III. Some Observations on the Deposit Insurance Scheme of Botswana Regulation—Selected Issues ### Main observations and recommendations (numbered corresponding to source) - 1. Bank of Botswana plans to issue a Deposit Insurance Scheme of Botswana Regulation (DISBR). However, in the interests of stability and legal certainty, a deposit insurance scheme should be established by a standalone law. - 2. Public policy objectives are covered in Article 3(2) (a), (b) and (c), of which the latter 2 are similarly covering the same objective and could usefully be combined to provide for only 2 objectives which represents best practices. - 3. Article 4(3) regards publishing a list of member institutions in the Gazette annually. This list should be constantly present and updated as necessary on the DISB’ website. - 4. Article 4(6) requires that member institutions provide their clients information regarding the extent to which their deposits are protected. It is important that the DISB require banks to use DISB written informative brochures, etc. in order that an institution(s) not misrepresent the benefits and limitations of deposit insurance. - 5. Article 5(1)(a) regarding cessation of membership indicates that revocation of the institution’s license terminates DISB membership. It should be clearly stated that license revocation is the trigger for insured depositor repayment. Moreover, it should be explicit that membership and a banking license go together—there cannot be a licensed bank that is not a DISB member and there can be no DISB member that is not a licensed bank. - 6. Article 5(1)(d) provides for DISB involvement in a voluntary winding up. A DISB should never be involved in voluntary liquidation. Voluntary liquidation should never be allowed unless the financial institution can make immediate payment to depositors and creditors. [Voluntary liquidation must be closely monitored in order to prevent asset stripping by the owners and managers.] - 7. Article 6 lists some actions that a financial institution must take upon cessation of membership. This is misguided because upon license revocation, the financial institution no longer exists. These actions, therefore, should be performed by BoB and DISB. - 8. Article 7 provides for borrowing from BoB. It is appropriate for BoB to assist the DISB as it becomes established; however, emergency funding to finance the repayment of insured deposits should come from the MOF (via a pre-approved line of credit) since that represents a fiscal rather than monetary policy operation. - 9. In Article 8 regarding establishment of the Fund, the authorities may want to consider imposing initial membership fees for existing banks and entry membership fees for de novo banks. Another source of funds which should be mentioned in this Article is the liquidator’s distribution of recoveries on asset liquidation. - 10. Article 9(1) provides that there should be a target reserve fund; however, it lacks a specific target range. - 11. Article 9(2)(b)(i) provides for suspension of premium payments after the target fund has been reached. Deposit insurance is a good, premium payment of which is a normal operating expense. Deposit insurance will promote confidence in the banking sector from which all member institutions benefit, so they should always be required to pay some amount for this benefit. - 12. Article 10 (a) should add “in the event of a bank failure” at the end of the sentence. - 13. Article 11, Fund Investment should be more general in the law/regulation, with specific allowable instruments itemized in a formal investment policy. [the “any other security” clause is arbitrary and could be subject to abuse.] - 14. Articles 15 and 16 regard creation of a Deposit Insurance Committee to act as de facto board of the DISB. Since the DISB is housed in the central bank, it is more expedient to simply let the CB’s board also be the DISB board, reporting via a Deputy Governor. - 15. Article 20(3) seems to provide for risk-based premiums. Simpler language could provide for flat-rate premiums initially, with the ability to introduce risk-based premiums after the DISB matures. - 16. Article 20(4) contemplates penalties for late payment of premiums. A simpler workaround for such situations is to provide for the DISB to automatically debit the member institutions’ account at BoB & late payments would not be an issue. - 17. Item (i) of Article 22 regarding excluded deposits should be removed as “any other deposit” is too arbitrary. - 18. Article 23(1) should establish license revocation (rather than a determination of non-viability) as the trigger for insured deposit reimbursement. Viability and non-viability issues are applicable to systemic banks while deposit insurance is designed for closure and liquidation for non-systemic banks. - 19. Article 23(3) regarding insured depositor payment should specifically permit (and favor) funding insured deposits via a transfer to a stronger bank via P&A or IDT. - 20. Article 29(2)(a) should specifically allow DISB staff to go to member institutions on site to analyze and audit deposit related issues. Ideally the DISB staff would join the BoB on-site examination team, but not duplicate BoB’s asset quality, risk management, etc. analysis. They would complement BoB examiners, not duplicate their efforts. - 21. The Deposit Insurance Regulation/Law must be harmonized with the Banking Act (Article 84) by adding the right of subrogation to the second claim class in the creditor hierarchy. *IMF staff observations as presented in Appendix III of the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1bwaea2024001.pdf_