## tarea2026023 ## Source details **Canonical URL:** [tarea2026023](https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026023.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2026/english/tarea2026023.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2026/english/tarea2026023.pdf.json) --- ### Mission and Engagement - IMF Monetary and Capital Markets (MCM) hybrid mission to Cabo Verde from March 19 to 28, 2025, in response to a request from the Central Bank of Cabo Verde (BCV). - Mission objectives: provide assistance in operationalizing macroprudential policy and enhancing capacity for monitoring vulnerabilities. - Key BCV and MOF participants met: Mr. Óscar Santos (Governor, BCV); Ms. Maria Tereza Henriques (Executive Director, BCV); Ms. Vania Cardoso Marta (Coordinator, Macroprudential Supervision and Resolution Office); Mr. Gilson Pina (Director of National Planning, Ministry of Finance (MOF)); Ms. Soeli Santos (Director of Treasury, MOF); staff from Macroprudential Supervision and Resolution Office, Microprudential Supervision Department, Economics and Statistics Department, Markets and Reserve Management Department, Insurance and Pension Fund Supervision Office, Legal Department, Board of National Institute of Social Security (INPS); executives of domestic and foreign banks. - Participation detail: Vina Nguyen (IMF) joined remotely; Martin O’Brien (STX) attended in person. - Mission expressed gratitude to BCV and MOF for cooperation and hospitality. ### Executive Summary — Key Findings - Legal and institutional framework: - BCV is the designated macroprudential authority; a new Organic Law to solidify BCV responsibilities and powers is in progress but has not yet been passed by parliament. - The macroprudential toolkit remains at an early stage despite a robust and nearly complete legal framework. - BCV has issued a Domestic Systemically Important Banks (D-SIBs) framework mandating an additional capital buffer for systemically important banks. - Progress and capacity: - Authorities have made commendable progress since the 2022 Financial Sector Stability Review (FSSR) mission, but staffing constraints remain a challenge. - BCV has developed a macroprudential strategy; however, the published strategy is generic and lists many possible tools based on other countries’ experiences. - Systemic risk monitoring: - Current monitoring toolkit relies on an annual stress test, aggregate indicators (credit gap), and a few quarterly indexes (Banking Soundness, Financial Vulnerability, External Economic Climate, Financial Stability index). - Indicator results and interpretations are not integrated into the policy narrative and decision-making. - Existing indexes could be enhanced by incorporating asset prices and developing a more comprehensive financial conditions index. - Data and data management: - Data should reflect both stocks and flows of key assets and liabilities, including terms, pricing, maturities, counterparty characteristics, collateral values, and borrower incomes. - Real estate and labor market data need improvement; BCV could collaborate with the National Institute of Statistics (INE) or use alternative sources (e.g., scraping property sales websites). - Prioritize completing the upgrade to the Central Credit Register (CRC), enforce data quality standards, and centralize datasets into a data warehouse to enable time series analysis and cross-checking. - In the absence of a harmonized BCV-wide solution, prioritize data management skills in near-term recruitment for the Financial Stability Office. - Macroprudential toolkit recommendations: - Introduce capital, liquidity, and borrower-based tools: - Introduce the Capital Conservation Buffer (CCB) and Counter-cyclical Capital Buffer (CCyB) framework; consider setting a non-zero cycle-neutral CCyB as a precaution given data and structural uncertainties. - Consider an additional Systemic Risk Buffer (SRB) over time if specific systemic risks are identified that are not covered by D-SIB buffer and CCyB. - Implement the Liquidity Coverage Ratio (LCR) framework to improve liquidity stability given high deposit concentration and a nascent interbank market. - Introduce borrower-based measures starting with a Loan-to-Value (LTV) limit for mortgages. - Coordinate capital and liquidity tools with microprudential measures and adopt Basel III definitions for HQLA to allow LCR calculation. - Institutional and operational recommendations: - Finalize the macroprudential institutional framework by expediting passage of the new Organic Law. - Restructure BCV to strengthen systemic risk monitoring and macroprudential policy capacity: update the BCV Financial Stability Committee (FSC) mandate, increase FSC meeting frequency to accommodate a bi-annual macroprudential policy cycle, elevate the Financial Stability Office to a Department, create a formal mechanism for information sharing and policy discussions, and revive the National Financial Stability Council (NFSC) for inter-agency policy coordination. - Improve macroprudential communication: develop a clear BCV-wide communication strategy, tailor messaging to audiences and channels, layer publications (simple summaries, opinion blogs, detailed analyses, visual cues), and present macroprudential strategy as a webpage with hyperlinks and optional PDF download. - Technical assistance: - Future follow-up TA missions recommended to support calibration and implementation of macroprudential tools; authorities will also benefit from planned TA on Basel III adoption. ### Key Recommendations (selected) - 1. Finalize the legal framework for the BCV as the macroprudential authority. Expedite discussion and voting on the new Organic Law in Parliament to strengthen the macroprudential framework (¶13, 14, 24). Institutions: BCV, MOF, and Legal Departments at both institutions. Priority: H. Timeframe: I. - 2. Improve institutional arrangement inside BCV: (1) Update mandate and operation of BCV Financial Stability Committee to ensure coverage of macroprudential matters; (2) Increase frequency of FSC meetings to accommodate a bi-annual macroprudential policy cycle; (3) Elevate the soon-to-be Financial Stability Office to a Department. (¶19, 25). Institutions: BCV, FSC, Macroprudential Supervision and Resolution Office. Priority: H. Timeframe: S-to-MT. - 3. Enhance coordination between BCV and MOF: create a regular meeting schedule for Technical Commission for Macroeconomic Monitoring (CTAM) and revive the National Financial Stability Council (NFSC). (¶21, 22, 23, 26, 27). Institutions: BCV, MOF. Priority: H. Timeframe: MT. - 4. Enhance resource allocation: (1) Implement proactive internal mobility regime; (2) Establish multi-department annual work plan for FSC, led by Financial Stability Office; (3) Prioritize filling two existing vacancies in Financial Stability Office with skills in data management and analytics and policy experience. (¶16, 25). Institutions: BCV, Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: MT. - 5. Tailor macroprudential policy strategy to Cabo Verde specifics and present as a webpage with hyperlinks to existing data and monitoring approaches, with optional PDF download. (¶38, 43). Institution: Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: ST. - 6. Develop overall communication strategy for BCV and a communication plan for each publication; consult media experts to ensure consistency in policy framework, objectives, tools, and their communication. (¶44). Institutions: BCV, Macroprudential Supervision and Resolution Office, Communication Office. Priority: M. Timeframe: MT. - 9. Set up a bi-annual macroprudential policy cycle for the FSC that includes updating systemic risk assessment and policy considerations, based on intermediate objectives in the Macroprudential Strategy. (¶19). Institutions: BCV, Financial Stability Committee, Macroprudential Supervision and Resolution Office. Priority: H. Timeframe: MT. - 10. Enhance systemic risk assessment focusing on both stocks and flows. Prioritize updating the CRC, enforce minimum data quality standards, and ensure staff can access and analyze CRC and other financial data through a central data platform. (¶57, 58). Institutions: Macroprudential Supervision and Resolution Office, Microsupervision Prudential Department, Economics and Statistics Department. Priority: H. Timeframe: MT. - 11. Collect real estate and labor market data more systematically, including supporting INE development of administrative-data-based series; alternatively implement BCV options (e.g., scraping property price and characteristics data). (¶59, 60). Institutions: INE, Macroprudential Supervision and Resolution Office, Microsupervision Prudential Department, Economics and Statistics Department. Priority: H. Timeframe: MT. - 13. Introduce the CCB and a CCyB framework; potentially consider a non-zero cycle-neutral CCyB. (¶63–66). Institution: Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: MT. - 14. Introduce LTV limits for mortgages; refine calibration as more data become available. (¶70). Institution: Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: S-to-MT. - 15. Introduce LCR framework with highly differentiated runoff rates across sight, term, and lumpy deposits; issue guidance for banks to implement a penalty for early withdrawal of term deposits; coordinate with microprudential supervision authority; adopt Basel III HQLA definition to allow LCR calculation. (¶73–75). Institutions: Macroprudential Supervision and Resolution Office, Microsupervision Prudential Department. Priority: H. Timeframe: MT. ### Monetary policy stance and objectives - The BCV aims to ensure convertibility of the Cabo Verde Escudo and create conditions for price stability. - Safeguarding the peg's credibility by targeting a level of net international reserves sufficient to cover short-term external liabilities is an explicit objective. - During the COVID-19 pandemic, monetary policy was accommodative. - Since 2023, monetary policy has been tightened to narrow the interest rate differential and maintain the peg. - Targeting net international reserves sufficient to cover short-term external liabilities (no numerical target specified in source text). ### Financial sector structure, concentrations, and risks - Financial sector structure: - Eight banks holding assets equivalent to 127 percent of GDP by end-2024. - Private non-bank financial intermediary assets at 5 percent of GDP. - Two systemically important banks dominate the industry in terms of assets and deposits. - INPS represents just 20 percent of total system deposits (but for some banks the share of INPS deposits in their total deposits is much higher). - Sale of Portugal’s Caixa Geral de Deposito’s majority share in Banco Comercial Atlântico is nearing completion, pending approval from the Central Bank of Cabo Verde. - Banking sector risks and recent dynamics: - Bank credit to GDP has been relatively stable since the Global Financial Crisis. - The banking system is generally resilient to liquidity risk, but high dependence on INPS deposits posed challenges at the end of 2023 when INPS auctioned some of its deposits among the banks. - Financial stability risks may arise from large sovereign exposures, high nonperforming loans (NPLs) for some banks, high credit and deposits concentration for most banks. - Key statistics and indicators: - Banking sector assets: 127 percent of GDP. - Private non-bank financial intermediary assets: 5 percent of GDP. - Two largest institutions account for approximately 30 percent of banking system assets each. - Three banks, accounting for approximately 25 percent of the market, are wholly owned subsidiaries of foreign banks. - Credit growth during 2024 averaging 7 percent annually up to Q3. - Credit-to-GDP ratio averaged 52 percent in the five years prior to the COVID-19 pandemic and has averaged 53 percent since 2023. - Tourism accounts for 18 percent of total credit to the economy. - Households account for 45 percent of total credit to the economy. - Lending terms: LTVs ranging from 70–80 percent depending on borrower type; DSTIs between 35 and 50 percent. - Funding and deposit concentration: approximately 17 percent of total demand deposits and 21 percent of term deposits sourced from INPS (2022 data). - Deposits account for almost 90 percent of total liabilities; demand deposits approximately 55 percent of the deposit base. - Term deposits of between 6 to 12 months are common; Cape Verdean emigrants account for 50 percent of the volume of term deposits. - Capital adequacy ratios: 22 percent (current), required minimum: 12 percent. - Interest margin to gross income exceeds 82 percent. - Return on Equity (ROE) after interest and tax exceeding 11 percent. - NPL ratio declined to 7 percent. - D-SIB additional buffers effective in May 2025: 2 percent for Class 3 banks and 1 percent for Class 1 banks. ### Macroprudential legal and policy framework - Legal status and reforms: - Current Organic Law: Law No. 10/VI/2002, of 15 July, amended by Law No. 84/IX/2020, of 4 April, designates BCV as sole macroprudential authority. - New Organic Law amendments aim to emphasize price stability as primary objective and financial stability as secondary, ensure financial independence of BCV, formalize leadership appointments, introduce a majority non-executive board, and strengthen resolution and oversight framework. - Changes received general approval in May 2025 and are pending final parliamentary approval. - Toolkit status: - Most standard macroprudential tools, ranging from broad-based to sectoral tools, have yet to be introduced. - Banking system adheres to a mix of Basel I and II standards while the project to adapt Basel III is just commencing. - BCV issued a D-SIBs framework (Aviso No.2/2023, Republic of Cape Verde Official Bulletin, December 28, 2023). - Institutional governance: - Current Executive Board chaired by the Governor comprises five members; Advisory Board includes the Governor, former Governors, three external members, and financial system representatives. - New structure will create a Supervisory Board and a Board of Directors; Supervisory Board will oversee budget, capital, strategic planning, audit, and annual report. - Macroprudential Supervision and Resolution Office (MSRO) currently has five staff; BCV budget includes plans to hire two additional staff. ### Systemic risk monitoring, data gaps, and analytics - Organizing framework: - Macroprudential strategy adopts three intermediate objectives in line with IMF and European guidance: 1. Enhance resilience of the financial system to aggregate shocks by building capital and liquidity buffers. 2. Contain the build-up of systemic macro-financial vulnerabilities over time. 3. Control structural vulnerabilities within the financial system. - Current monitoring and limitations: - Monitoring relies on annual stress tests, aggregate indicators (credit gap), and quarterly indexes (Banking Soundness, Financial Vulnerability, External Economic Climate, Financial Stability index). - Data mostly sourced from regulatory balance sheet and income statement returns, monetary statistics, and loan officer surveys—primarily “stock” variables and backward looking. - Need to increase focus on “flow” variables and sectoral detail, including maturities (original and residual), LTV, LTI, and DSTI. - CRC and data platform priorities: - Make the “new” CRC system fully operational and enable appropriate access to granular borrower-level detail, subject to data protection safeguards. - Use CRC to gather information systematically on credit conditions (LTV, DSTI), interest rates, household and business financial conditions, and collateral values (e.g., real estate prices). - Enforce minimum standards on data quality and store enhanced CRC and prudential/monetary data in an appropriate data platform (e.g., SQL data lake or data warehouse). - Real estate and labor market data: - Lack of frequent and reliable labor and real estate market data complicates systemic risk assessment. - Explore alternative data sources: sentiment surveys, INPS data, quarterly Continuous Multi-Purpose Survey from INE. - Short-term option: scrape asking prices and property characteristics from property sales websites; long-term objective: hedonic house price index based on administrative data. - Advanced analytical suggestions: - Consider aggregate financial conditions or stress measures, “gap”-type measures similar to the credit-to-GDP gap, Growth-at-Risk models, and a financial conditions index. - Annual stress tests should be informed by a coherent risk narrative; current stress test scenarios (baseline, adverse, severe) have sectoral default rates not anchored in macroeconomic assumptions or a coherent risk narrative. ### Contagion analysis, systemwide liquidity stress testing, and Growth‑at‑Risk - Contagion and liquidity stress testing: - Use network technology to estimate systemic importance and propagation channels given a structurally small system with limited corporate borrowers. - Joint solvency-liquidity contagion impact: assumes failure of an entity with maximum capacity to cause contagion losses. - Solvency contagion impact: examines shocks to lenders if each entity fails, focusing on the top borrowers. - Systemic liquidity stress test: assesses vulnerabilities to economy-wide liquidity shocks transmitted through direct financial linkages. - Growth‑at‑Risk framework: - Suggest systematic approach using Growth-at-Risk to provide forward-looking perspective on systemic risk. - Given limited time series for Cabo Verde, complement estimation with multi-country panel data and fixed effects panel quantile regressions. - Include estimates of cyclical conditions and financial market stress conditions in quantile regressions. - Scenario calibration for sectoral default rates: - In the adverse scenario, sectoral default rates set at one standard deviation above the historical average. - In the severe scenario, sectoral default rates set at one standard deviation above the historical maximum default rates. ### Capital, sectoral, borrower-based, and liquidity measures - Capital framework and policy suggestions: - Minimum capital requirement is set at 12 percent, which is 4 percentage points higher than Basel standards. - Current capital adequacy ratios: 22 percent; all banks surpass the 12 percent threshold. - Definition of capital adheres to Basel II; risk-weighted asset calculation follows Basel I. - Since the entire 12 percent is under the Capital Adequacy Ratio (CAR), banks do not have a releasable buffer; there is no CCB or CCyB in place. - Consider converting 2.5 percent of the current CAR to a standard CCB and introducing a CCyB framework; consider a positive neutral CCyB (PnCCyB). - Examples cited: Ireland PNCCyB at 1.5 percent; Lithuania PNCCyB at 1 percent; Netherlands set at 2 percent. - Calibration approaches: historical losses, stress tests, assessments of buffer releases, expert judgement. - Consider a calibrated leverage ratio as a backstop given high sovereign exposure; adopt Basel III risk weights. - Sectoral and borrower-based measures: - Sectoral SRB could address structural vulnerabilities once broader capital framework is in place; initially a broad-based buffer may be more suitable. - Introduce an LTV limit for mortgages; cross-country experiences show LTV limits in the range of 70 to 90 percent. - Complement LTV with stressed DSTI when more borrower income data are available. - Liquidity measures and LCR design: - Current minimum ratio: 20 percent liquid assets to total liabilities. - As banks adopt Basel III, BCV should establish a definition of HQLA with appropriate discounts for certain assets. - Adopt an LCR requiring banks to hold enough HQLA to cover potential cash outflows over a 30-day stress period; numerator should align with HQLA definition and denominator should reflect expected net cash outflows over 30 days. - Differentiate runoff rates across sight, term, and lumpy deposits; consider higher run-off rates on lumpy deposits above a given share in total deposits. - Consider guidance for penalties on early withdrawal of term deposits proportional to withdrawal size. - Consider inclusion/exclusion practices for required reserves (RR) in HQLA based on accessibility during stress and maintenance period length. ### Governance, coordination, and communication - Financial Stability Committee (FSC) and BCV internal governance: - FSC chaired by the Governor; membership spans departments and offices; analyzes national and international financial system evolution; holds quarterly meetings and may be convened exceptionally. - FSC mandate currently extends beyond macroprudential policy to ELA, microprudential oversight, resolution, the deposit guarantee fund, and crisis management. - Recommendation: separate macroprudential and supervision responsibilities within FSC so respective departments initiate and lead topics. - Recommendation: adopt a unified process for designing FSC annual work agenda and implement a six-month macroprudential cycle (bi-annual). - Interagency coordination: - NFSC created via MOU in 2011 between BCV and MOF but has not convened since inception; could serve as forum for cross-agency information sharing and crisis management. - CTAM (Technical Commission for Macroeconomic Monitoring) exists under a Memorandum of Macroeconomic Coordination signed in November 2011; meets quarterly and provides an information-sharing forum without policy decision authority. - INPS role: assets make up 50 percent of GDP, with nearly half deposited in Cabo Verde banks; INPS is a significant shareholder in two banks; INPS currently not directly supervised by MOF or BCV. - Recommendation: enhanced coordination and supervision of INPS decisions is highly beneficial. - Communication improvements: - Communication objectives: improve transmission of macroprudential action, public understanding, counter inaction bias, enhance legitimacy and accountability. - Current practice: Communication Office primarily interacts with Board; publications released without presentations, press conferences, or outreach events. - Recommendations: - Publish records of FSC meetings (¶35). - Publish a macroprudential policy strategy that designates authority, objectives, stages of policy cycle, tools and rationale, and interactions with other policies (¶36). - Make strategy dynamic with regular updates and embedded links; present as a webpage with optional PDF download (¶38). - Enhance FSR timeliness: set data cutoff no more than three months prior to publication; release key messages simultaneously in Portuguese and English; use AI for translation; make highlights more message-driven (¶40). - Prepare communication plans simultaneous with publications; layer messages (explanation, engagement, education); evolve Bulletins into thematic updates and monthly data releases. ### Next steps and technical assistance priorities - Sustain momentum to complete the macroprudential framework. - Key actions: improve data collection and management (quality and quantity) and timely implement mission recommendations including introduction of standard tools. - Future TA mission considerations: - (i) refining and calibrating certain macroprudential tools such as the PNCCyB and the LTV using multiple techniques, - (ii) expanding the systemic risk dashboard for better risk monitoring, - (iii) financial crisis management plan and procedures at the BCV, - (iv) risk management approach regarding reserve management, - (v) improved solvency and liquidity stress testing. - Adoption of Basel III standards should proceed according to the multi-year plan. *IMF Technical Assistance Report — Preface and Executive Summary (tarea2026023)* ### Preface _________________________________________________________________________ 5 ### tarea2026023 - Preface ### Mission and Engagement - IMF Monetary and Capital Markets (MCM) hybrid mission to Cabo Verde from March 19 to 28, 2025, in response to a request from the Central Bank of Cabo Verde (BCV). - Mission objectives: provide assistance in operationalizing macroprudential policy and enhancing capacity for monitoring vulnerabilities. - Key BCV and MOF participants met: Mr. Óscar Santos (Governor, BCV); Ms. Maria Tereza Henriques (Executive Director, BCV); Ms. Vania Cardoso Marta (Coordinator, Macroprudential Supervision and Resolution Office); Mr. Gilson Pina (Director of National Planning, Ministry of Finance (MOF)); Ms. Soeli Santos (Director of Treasury, MOF); staff from Macroprudential Supervision and Resolution Office, Microprudential Supervision Department, Economics and Statistics Department, Markets and Reserve Management Department, Insurance and Pension Fund Supervision Office, Legal Department, Board of National Institute of Social Security (INPS); executives of domestic and foreign banks. - Participation detail: Vina Nguyen (IMF) joined remotely; Martin O’Brien (STX) attended in person. - Mission expressed gratitude to BCV and MOF for cooperation and hospitality. ### Executive Summary — Key Findings - Legal and institutional framework: - BCV is the designated macroprudential authority; a new Organic Law to solidify BCV responsibilities and powers is in progress but has not yet been passed by parliament. - The macroprudential toolkit remains at an early stage despite a robust and nearly complete legal framework. - BCV has issued a Domestic Systemically Important Banks (D-SIBs) framework mandating an additional capital buffer for systemically important banks. - Progress and capacity: - Authorities have made commendable progress since the 2022 Financial Sector Stability Review (FSSR) mission, but staffing constraints remain a challenge. - BCV has developed a macroprudential strategy; however, the published strategy is generic and lists many possible tools based on other countries’ experiences. - Systemic risk monitoring: - Current monitoring toolkit relies on an annual stress test, aggregate indicators (credit gap), and a few quarterly indexes (Banking Soundness, Financial Vulnerability, External Economic Climate, Financial Stability index). - Indicator results and interpretations are not integrated into the policy narrative and decision-making. - Existing indexes could be enhanced by incorporating asset prices and developing a more comprehensive financial conditions index. - Data and data management: - Data should reflect both stocks and flows of key assets and liabilities, including terms, pricing, maturities, counterparty characteristics, collateral values, and borrower incomes. - Real estate and labor market data need improvement; BCV could collaborate with the National Institute of Statistics (INE) or use alternative sources (e.g., scraping property sales websites). - Prioritize completing the upgrade to the Central Credit Register (CRC), enforce data quality standards, and centralize datasets into a data warehouse to enable time series analysis and cross-checking. - In the absence of a harmonized BCV-wide solution, prioritize data management skills in near-term recruitment for the Financial Stability Office. - Macroprudential toolkit recommendations: - Introduce capital, liquidity, and borrower-based tools: - Introduce the Capital Conservation Buffer (CCB) and Counter-cyclical Capital Buffer (CCyB) framework; consider setting a non-zero cycle-neutral CCyB as a precaution given data and structural uncertainties. - Consider an additional Systemic Risk Buffer (SRB) over time if specific systemic risks are identified that are not covered by D-SIB buffer and CCyB. - Implement the Liquidity Coverage Ratio (LCR) framework to improve liquidity stability given high deposit concentration and a nascent interbank market. - Introduce borrower-based measures starting with a Loan-to-Value (LTV) limit for mortgages. - Coordinate capital and liquidity tools with microprudential measures and adopt Basel III definitions for HQLA to allow LCR calculation. - Institutional and operational recommendations: - Finalize the macroprudential institutional framework by expediting passage of the new Organic Law. - Restructure BCV to strengthen systemic risk monitoring and macroprudential policy capacity: update the BCV Financial Stability Committee (FSC) mandate, increase FSC meeting frequency to accommodate a bi-annual macroprudential policy cycle, elevate the Financial Stability Office to a Department, create a formal mechanism for information sharing and policy discussions, and revive the National Financial Stability Council (NFSC) for inter-agency policy coordination. - Improve macroprudential communication: develop a clear BCV-wide communication strategy, tailor messaging to audiences and channels, layer publications (simple summaries, opinion blogs, detailed analyses, visual cues), and present macroprudential strategy as a webpage with hyperlinks and optional PDF download. - Technical assistance: - Future follow-up TA missions recommended to support calibration and implementation of macroprudential tools; authorities will also benefit from planned TA on Basel III adoption. ### Key Recommendations (selected, from Table 1) - 1. Finalize the legal framework for the BCV as the macroprudential authority. Expedite discussion and voting on the new Organic Law in Parliament to strengthen the macroprudential framework (¶13, 14, 24). Institutions: BCV, MOF, and Legal Departments at both institutions. Priority: H. Timeframe: I. - 2. Improve institutional arrangement inside BCV: (1) Update mandate and operation of BCV Financial Stability Committee to ensure coverage of macroprudential matters; (2) Increase frequency of FSC meetings to accommodate a bi-annual macroprudential policy cycle; (3) Elevate the soon-to-be Financial Stability Office to a Department. (¶19, 25). Institutions: BCV, FSC, Macroprudential Supervision and Resolution Office. Priority: H. Timeframe: S-to-MT. - 3. Enhance coordination between BCV and MOF: create a regular meeting schedule for Technical Commission for Macroeconomic Monitoring (CTAM) and revive the National Financial Stability Council (NFSC). (¶21, 22, 23, 26, 27). Institutions: BCV, MOF. Priority: H. Timeframe: MT. - 4. Enhance resource allocation: (1) Implement proactive internal mobility regime; (2) Establish multi-department annual work plan for FSC, led by Financial Stability Office; (3) Prioritize filling two existing vacancies in Financial Stability Office with skills in data management and analytics and policy experience. (¶16, 25). Institutions: BCV, Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: MT. - 5. Tailor macroprudential policy strategy to Cabo Verde specifics and present as a webpage with hyperlinks to existing data and monitoring approaches, with optional PDF download. (¶38, 43). Institution: Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: ST. - 6. Develop overall communication strategy for BCV and a communication plan for each publication; consult media experts to ensure consistency in policy framework, objectives, tools, and their communication. (¶44). Institutions: BCV, Macroprudential Supervision and Resolution Office, Communication Office. Priority: M. Timeframe: MT. - 9. Set up a bi-annual macroprudential policy cycle for the FSC that includes updating systemic risk assessment and policy considerations, based on intermediate objectives in the Macroprudential Strategy. (¶19). Institutions: BCV, Financial Stability Committee, Macroprudential Supervision and Resolution Office. Priority: H. Timeframe: MT. - 10. Enhance systemic risk assessment focusing on both stocks and flows. Prioritize updating the CRC, enforce minimum data quality standards, and ensure staff can access and analyze CRC and other financial data through a central data platform. (¶57, 58). Institutions: Macroprudential Supervision and Resolution Office, Microsupervision Prudential Department, Economics and Statistics Department. Priority: H. Timeframe: MT. - 11. Collect real estate and labor market data more systematically, including supporting INE development of administrative-data-based series; alternatively implement BCV options (e.g., scraping property price and characteristics data). (¶59, 60). Institutions: INE, Macroprudential Supervision and Resolution Office, Microsupervision Prudential Department, Economics and Statistics Department. Priority: H. Timeframe: MT. - 13. Introduce the CCB and a CCyB framework; potentially consider a non-zero cycle-neutral CCyB. (¶63–66). Institution: Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: MT. - 14. Introduce LTV limits for mortgages; refine calibration as more data become available. (¶70). Institution: Macroprudential Supervision and Resolution Office. Priority: M. Timeframe: S-to-MT. - 15. Introduce LCR framework with highly differentiated runoff rates across sight, term, and lumpy deposits; issue guidance for banks to implement a penalty for early withdrawal of term deposits; coordinate with microprudential supervision authority; adopt Basel III HQLA definition to allow LCR calculation. (¶73–75). Institutions: Macroprudential Supervision and Resolution Office, Microsupervision Prudential Department. Priority: H. Timeframe: MT. ### Background (selected) - Cabo Verde rebounded strongly after the Covid 19 pandemic, driven by a resurgence in tourism, robust export performance, and private consumption growth (¶1). - GDP growth remains volatile due to reliance on tourism and susceptibility to geopolitical and climate-related shocks, including droughts, sea level rise, and natural disasters that may impact long-term outlook through potential damage to coastal infrastructure and tourism (¶2–3). *IMF Technical Assistance Report — Preface and Executive Summary (tarea2026023)* ### 2. Monetary policy in Cabo Verde is focused on safeguarding the conventional peg to the ### 2. Monetary policy in Cabo Verde is focused on safeguarding the conventional peg to the euro ### Monetary policy stance and objectives - The BCV aims to ensure convertibility of the Cabo Verde Escudo and create conditions for price stability. - Safeguarding the peg's credibility by targeting a level of net international reserves sufficient to cover short-term external liabilities is an explicit objective. - During the COVID-19 pandemic, monetary policy was accommodative. - Since 2023, monetary policy has been tightened to narrow the interest rate differential and maintain the peg. ### Key statistics and facts on monetary context - Targeting net international reserves sufficient to cover short-term external liabilities (no numerical target specified in source text). ### Financial sector structure and concentrations - The financial sector is highly concentrated, with eight banks holding assets equivalent to 127 percent of GDP by end-2024. - The financial system is predominantly bank-based, with virtually no presence of non-bank financial institutions. - Two systemically important banks dominate the industry in terms of assets and deposits. - Of these two, one is state-owned, including a significant shareholding by the Cape Verdean social security fund (INPS). - The other has a majority shareholding from a Portuguese state-owned bank. - The remainder of the system comprises five foreign-owned subsidiaries of Portuguese, pan-African and Gulf banking groups or private investors, and a domestically owned bank. - INPS represents just 20 percent of total system deposits, but for some banks the share of INPS deposits in their total deposits is much higher. - The sale of Portugal’s Caixa Geral de Deposito’s majority share in Banco Comercial Atlântico is nearing completion, pending approval from the Central Bank of Cabo Verde. ### Banking sector risks and recent dynamics - Since the Global Financial Crisis, bank credit to GDP has been relatively stable. - The banking system is generally resilient to liquidity risk, but high dependence on INPS deposits posed challenges at the end of 2023 when INPS auctioned some of its deposits among the banks, causing liquidity concerns for certain banks. - Financial stability risks may also arise from: - large sovereign exposures, - high nonperforming loans (NPLs) for some banks, - high credit and deposits concentration for most banks. ### Macroprudential legal and policy framework - Cabo Verde's macroprudential legal framework is described as robust and nearly complete, while the toolkit is still in its early stages. - The BCV has developed a macroprudential strategy and a new Organic Law which further clarifies BCV responsibilities and powers for financial stability purposes. - Under the previous Organic Law and other frameworks, the BCV was already designated as the sole macroprudential authority. - The new law is close to being passed by parliament; the changes received general approval in May 2025 and are now pending final parliamentary approval. - Following FSSR recommendations, the BCV has issued a D-SIBs framework mandating additional capital buffers for systemically important banks. - Most standard macroprudential tools, ranging from broad-based to sectoral tools, have yet to be introduced. - The banking system currently adheres to a mix of Basel I and II standards while the project to adapt Basel III is just commencing. - Cabo Verde aligns with other small island nations such as Mauritius and Seychelles in the current stage of toolkit development. ### Mission objectives, activities, and progress - Core task of the mission: support authorities in developing the macroprudential framework, monitoring vulnerabilities, and implementing macroprudential policies. - Mission activities included: - Reviewing roles and responsibilities of BCV departments in formulating macroprudential policies and proposing a division of labor. - Developing recommendations on the policy process within BCV structure and with other agencies to operationalize the macroprudential framework. - Reviewing BCV's communication of macroprudential decisions and suggesting improvements. - Assessing the authorities' systemic risk assessment framework and identifying data gaps for monitoring vulnerabilities. - Providing guidance on important indicators for monitoring and supporting policy decisions, including those linked to authorities' intermediate objectives. - Reviewing the macroprudential toolbox, its interaction with microprudential tools, and suggesting additional tools to build resilience. - Progress has been made on several recommendations from the 2022 FSSR, but many recommendations related to data collection, analysis, and systemic risk monitoring are still ongoing due to limited resources and experience. - Authorities appreciated the mission’s deliverables; senior management and staff actively engaged in the process. ### Institutional framework: responsibilities and governance - Formal institutional arrangements are essential to ensure effective macroprudential policies—framework should foster willingness to act, ability to act, and effective cooperation and coordination. - Best practice often designates a clearly defined authority; in many jurisdictions responsibility and power lie exclusively in the central bank. - In small economies with limited capacity like Cabo Verde, more centralized authority could be beneficial. - The BCV’s macroprudential strategy adopts three intermediate objectives in line with IMF guidance and European guidance: 1. Enhance resilience of the financial system to aggregate shocks by building capital and liquidity buffers. 2. Contain the build-up of systemic macro-financial vulnerabilities over time (reduce procyclicality, contain excessive increases in credit and leverage, mitigate excessive maturity or FX mismatches and market illiquidity). 3. Control structural vulnerabilities within the financial system (manage risks from market characteristics, interlinkages, and exposure concentration). - Cross-country challenges for macroprudential policy include: - Inaction bias driven by visible upfront costs vs. delayed benefits. - Dynamic evolution of systemic risk due to financial innovation, regulatory constraints (leakage), and distortions from other policies. ### Ability to act: legal powers and reforms - The "hard power" granted to the BCV provides its ability to act; BCV needs legal frameworks to identify, monitor, and adopt measures to prevent, mitigate, or reduce systemic risks. - The current Organic Law (Law No. 10/VI/2002, of 15 July, amended by Law No. 84/IX/2020, of 4 April) already designates the BCV as the sole macroprudential authority. - New Organic Law amendments aim to: - Emphasize price stability as the primary objective and financial stability as the secondary objective. - Ensure financial independence of the BCV, including by reinforcing its capital and regulating government recapitalization. - Formalize leadership appointments and introduce a majority non-executive (independent) board. - Strengthen resolution and oversight framework, improve systemic risk management, and adopt guidelines more consistent with IMF’s Central Bank Transparency Code. - Ensure consistency across several laws governing the financial system (including Law No.61/VIII/2014 and Law No. 62/VIII/2014 provisions assigning macroprudential supervisor role to BCV). - Under the new Organic Law: - BCV will continue to be responsible for defining and implementing macroprudential policy. - BCV will establish cooperation mechanisms with other public authorities and entities as per relevant laws. - Changes received general approval in May 2025 and are pending final parliamentary approval. ### Governance, staffing, and capacity constraints - Governance: - Current Executive Board chaired by the Governor comprises five members overseeing departments and offices. - Advisory Board (without voting power) consists of the Governor, former Governors, three external members, and financial system representatives. - New structure will create a Supervisory Board and a Board of Directors; Governor and one Vice Governor will serve on both. - Board of Directors will have three Executive Directors (EDs); Supervisory Board will have three non-executive members who cannot be from the MOF. - Supervisory Board will oversee budget, capital, strategic planning, audit, and annual report; operational matters managed by Board of Directors. - New structure formalizes role of non-executive members and emphasizes operational independence. - Staffing and capacity: - The Macroprudential Supervision and Resolution Office (MSRO) carries out both functions with only five staff members. - This year's BCV budget includes plans to hire two additional staff. - Finding suitably skilled and experienced candidates in the external market is challenging. - Understaffing across most departments and offices limits internal mobility within the BCV. - Under the proposed structure, separation of macroprudential and resolution functions into a Financial Stability Office and a Resolution Office will facilitate more staff recruitment. - With the Financial Stability Office title, it is important that macroprudential responsibilities are not diluted by other financial stability matters. ### Willingness to act and recent policy initiatives - The BCV has shown strong commitment to action: - The MSRO was established in 2019 and fully staffed with five members by 2021. - Issuance of the 2023 regulation requiring banks identified as D-SIBs to apply a D-SIB buffer calibrated to each institution’s relative degree of systemic importance (Aviso No.2/2023, as published in the Republic of Cape Verde Official Bulletin, December 28, 2023). - The new Organic Law under consideration in Parliament represents another effort to strengthen BCV’s macroprudential role. ### Coordination mechanisms - Financial Stability Committee (FSC) is an important internal BCV coordination mechanism: - Chaired by the Governor. - Includes members of the Administrative Council; Coordinator of the Office of Macroprudential Supervision and Resolution; Director of the Microprudential Supervision Department; General Auditor of the Securities Market; Coordinator of the Office of Supervision of Insurance and Pension Funds and of Management of the Automobile Guarantee Fund; Coordinator of the Behavioral Supervision Office; Coordinator of the Microfinance Office; Directors of Departments of Economic and Statistical Studies, Markets and Management of Reserves, Issuance, Treasury and Payments System; and other members indicated by the Governor. - FSC analyzes national and international financial system evolution, identifies and evaluates emerging risks, assesses market behavior, provides recommendations to support Board of Directors’ decision-making. - FSC holds regular quarterly meetings and may be convened exceptionally by the Governor; minutes are produced and distributed to the Administrative Council. - BCV setup with combined supervisory and stability functions is not uncommon for small central banks. *IMF Technical Assistance Report — Cabo Verde (content unit: “2. Monetary policy in Cabo Verde is focused on safeguarding the conventional peg to the euro”) * ### 19. However, the mandate of the FSC goes beyond macroprudential policy. These include ### tarea2026023 - 19. However, the mandate of the FSC goes beyond macroprudential policy. These include ### Governance and institutional responsibilities - The FSC mandate extends beyond macroprudential policy to Emergency Liquidity Assistance (ELA), microprudential oversight, resolution, the deposit guarantee fund, and crisis management. - A separation of macroprudential and supervision responsibilities within the FSC should be enforced so that each topic is initiated and led by the respective department. - In 2024, the Committee met four times in April, August, October, and December where they discussed the Bulletin, the Financial Stability Report (FSR), risk heatmaps, resolution framework, and asessment of feasibility of implementing proposed macroprudential tools. - Currently, each department creates its own work plan and proposes an annual agenda to the Committee without early inter-departmental coordination to leverage synergies across topics. - Recommendation: adopt a more unified process for designing the FSC's annual work agenda to allow for: - regular systemic risk assessments, - evaluations of systemic resilience, - macroprudential policy reviews and decisions, - other committee tasks. - Given the typically slow-moving nature of systemic risk, a six-month macroprudential cycle is reasonable. ### Information gathering and flagship publications - The BCV’s annual FSR work typically begins three months before its publication date in August, focusing on the previous year. - The MSRO reaches out to relevant units within the BCV during this period to collect information. - The Report follows a standard template but can include topical issues in dedicated boxes; the 2023 Report, published in August 2024, features a box on the methodology for determining systemically important national banks (Table 2). - The BCV also publishes a biannual Bulletin describing recent market developments, which is under the Macroprudential section of the website and not on the regular list for all Publications. - Assessment: the Report offers valuable analysis, but its timeliness could be enhanced by incorporating more current conjuncture assessments alongside more in-depth analysis. ### Table 2 — Classification of Systemically Important Banks - Indicator Weight (percent) - Size 35 - Interconnectivity 20 - Substitutability 35 - Domestic Sentiment 10 - Score Range Classification - > 200 High Systemic Importance - 150–200 Moderate Systemic Importance - 95–150 Light Systemic Importance - < 95 Without Systemic Importance - Source noted: Banco de Cabo Verde. ### Interagency coordination and existing bodies - An interagency body NFSC was created via an MOU signed in 2011 between the BCV and the MOF to provide a platform for coordination on financial stability and crisis management; the Council has not convened since its inception. - Existing and pending legislation does not establish any high-level stability committee; legislation states the BCV shall establish cooperation mechanisms with other public authorities and entities. - The dormant NFSC could serve as a forum for sharing information across agencies on upcoming policy decisions with financial stability implications and play a crucial role for timely crisis management policy decisions. ### Operational information‑sharing forum (CTAM) - A “technical committee for economic and financial monitoring” (CTAM) exists under a Memorandum of Macroeconomic Coordination signed in November 2011 by the Minister of Finance and Planning and the Governor of the Bank of Cabo Verde. - CTAM is made up of technical staff from the MOF and BCV, including representatives from Treasury, National Planning, the Minister's office (MOF), and BCV’s Economics and Statistics, and Markets and Reserve Management departments. - Officials typically meet on a quarterly basis with the location rotating between the Ministry and BCV; the committee provides opportunities to share information and assessments but does not make policy decisions. ### Role of INPS and need for coordination - INPS is the largest state-run pension fund; its assets make up 50 percent of GDP, with nearly half deposited in Cabo Verde banks. - INPS is a significant shareholder in two banks (CAIXA and BCA) and an insurance company. - INPS operates semi-independently with decisions made by its own Board of Directors with representatives from the MOF, Ministry of Family, Inclusion, and Social Development, labor unions, and private sector representatives. - INPS is currently not directly supervised by either the MOF or the BCV. - Risk: INPS investment and deposit decisions can significantly impact banking system liquidity and central bank reserves; shifting INPS deposits between banks could disrupt system-wide liquidity, particularly when the interbank market is less efficient. - Recommendation: enhanced coordination and supervision by the appropriate authorities is highly beneficial. ### Recommendations (numbered paragraphs preserved) - 24. Finalize the legal framework: The new Organic Law, currently under parliamentary consideration, should be discussed and brought to a vote as soon as possible. - 25. Preserve macroprudential responsibilities under the new governance structure: - The split of the MSRO into the Financial Stability Office and the Resolution Office is welcome to allow more focused responsibilities. - With the new title of “Financial Stability”, avoid diluting responsibilities of the macroprudential team with broader financial stability matters. - Recruit additional staff with complementary skills for macroprudential policy, including by enhancing the mobility within BCV, to ensure adequate oversight and analysis. - 26. Improve coordination across BCV departments and offices: - Establish an interdepartmental process to devise each unit's workplan and leverage synergies across teams. - Set and update the Financial Stability Committee's agenda with input from all relevant units. - Ensure continuous information sharing and provide relevant staff access to a centralized data repository. - 27. Consider strengthening existing fora for discussing financial stability topics between BCV and other agencies: - The current technical committee should commit to a regular meeting schedule. - The NFSC can serve as a forum to discuss policies impacting financial stability. - Ad-hoc attendance at this Council can include members from the INPS Board of Directors to discuss their management and investment strategies. ### Macroprudential communication and policy strategy - Communication objectives: - Clear communication improves transmission of macroprudential action, promotes public understanding, counters biases in favor of inaction, and enhances legitimacy and accountability. - Achieve this by setting and maintaining a policy strategy, periodically publishing risk assessments, and publishing records of policy meetings. - Current communication venues: - Published macroprudential strategy (see paragraphs 35 and 36). - Annual FSR and the Bulletin on Financial Stability. - Legislative decisions published as Decrees and Notices in the official gazette. - Occasional speeches by the Governor and Directors on the BCV website. - Recent trends: - Financial stability policy communication is increasingly used as a tool to achieve policy goals and as a lever to enhance monetary and financial stability. - Communication is not a substitute for a solid policy framework. ### Accountability, objectives hierarchy, and communication principles - Accountability and transparency have risen with central bank independence and the assignment of financial stability as a policy goal. - The reaction function (timeframe for achieving the goal and available tools) should be clearly defined to safeguard democratic legitimacy and facilitate accountability. - Macroprudential authorities should establish a clear hierarchy of objectives with financial stability at the forefront; secondary objectives (supporting economic growth, protecting depositors) must be weighed against systemic stability. - Monetary policy in Cabo Verde should fully align with defending the fixed exchange rate regime. - Key considerations for effective communication: - Transparency and periodic reporting: publish frequent reports on financial stability and assessments of systemic risks. - Consistency and authority in messaging to avoid contradictions. - Engage multiple stakeholders and make materials accessible. - Proactive risk communication with warnings about potential risks and incentives for preventive actions. ### Communication good practices and BCV-specific suggestions - Use multiple communication channels and layer messages following the three E’s: explanation, engagement, and education. - BCV reporting is largely statistical and aimed at a single, general audience; it would benefit from layered, audience-focused messaging and educational initiatives. - 35. Consider publishing records of FSC meetings to enhance transparency and accountability; records should highlight key decisions and, where possible, identify individual votes. - 36. Publish a macroprudential policy strategy that: - Clearly designates a macroprudential authority, - Lays out overarching and intermediate objectives and stages of the policy cycle, - Describes existing tools and rationale for their use, - Addresses interactions with other policies and complementarities across tools. - 37. The BCV published a macroprudential policy strategy in 2023 that lays out objectives and the legal framework; improvements suggested include: - Focus on rationale for existing tools and their effectiveness, - More specificity on interaction with monetary policy (how interest rates and reserve requirement are calibrated to defend the exchange rate versus other purposes). - 38. Make the strategy dynamic with regular updates and embedded links; consider a user-focused dynamic webpage with layered content (simple explanations, in-depth analysis, visual aids). - Example referenced: Bank of England approach. ### Financial Stability Report (FSR) and Bulletin — improvements and actionable steps - 39. The FSR is the primary platform for communicating systemic risk assessments; it identifies headline risks and vulnerabilities with judgment-based severity assessments and includes sectoral sections. - The bi-annual Bulletin complements the FSR but currently serves more as statistical summaries than timely analytical updates. - 40. Suggested FSR enhancements: - Adopt a more forward-looking, streamlined systemic risk assessment aligned with intermediate objectives and indicators. - Improve timeliness by setting a data cutoff no more than three months prior to publication. - Release key messages simultaneously in Portuguese and English, using AI tools to expedite translation. - Make highlights and summaries more message-driven (shift from data description to analysis). - Evolve Bulletins into thematic updates throughout the year in collaboration with the Economics and Statistics Department. - Monthly data releases via the website or portal, unified design and bilingual visual summaries to improve accessibility and impact. - 41. Leverage flagship publications via multiple channels and develop specific communication plans for major policy actions and products: - Interdepartmental collaboration for message formation, determination, and dissemination. - Over time, enhance outreach via media training, off‑record meetings, media appearances, two-way dialogues with market participants, targeting local media, universities, schools, and businesses. - Use advanced techniques such as tiering of messages, audience segmentation, sentiment analysis, and insights from social and behavioral sciences; convene an internal working group to develop and implement these tools. - Gather feedback via surveys or after outreach events (example: “European Central Bank Listens” initiatives). *IMF Technical Assistance Report | 19–24* ### 42. Current communication initiatives are limited to in-house expertise and flagship ### 42. Current communication initiatives are limited to in-house expertise and flagship publications ### Communication practices and shortcomings - The Communication Office in BCV primarily interacts with the Board and lacks collaboration with other departments to provide expertise on the latest media or communication practice. - Publications are released without presentations, press conferences, or outreach events, resulting in minimal public awareness of the systemic risk assessment. - Current communication is single layered and misses the opportunity to utilize multiple channels. - Publications often lack an accompanying communication plan at the time of publication. ### Recommendations on communication (paragraphs 43–46) - The macroprudential policy strategy should: - Include specifics relevant to Cabo Verde, clearly linking objectives, risks, and tools. - Feature hyperlinks to existing data and systemic risk monitoring approaches. - Be presented as a webpage with an optional PDF download. - Develop an overarching communication strategy for the whole central bank: - Consult with communication experts to create a modern strategy aligned with best practices. - Ensure the communication strategy complements policy strategy documents and ensures consistency in the policy framework, objectives, tools, and their communication. - Prepare a communication plan simultaneously with publications: - Launch products with accompanying summaries, blogs, press conferences, and outreach. - Shift from data release and description to narrative: - Release data on a fixed schedule via the website or a data portal. - Focus publications on assessment and analysis, with periodic risk assessments centered on recent indicator readings. - Publish ex post evaluations of macroprudential measures to demonstrate effectiveness and enhance policy credibility. - Ensure publications are timely, forward-looking, and consistent in messaging and design. - Embrace modern interactive communication practices over time: - Display documents as text directly on the website with an option to download PDFs for better search functionality and regular updates. - Layer publications to include simple summaries, opinion blogs, detailed analyses, and visual cues. - Enhance media appearances and outreach efforts alongside flagship publications. ### Main vulnerabilities in the financial system (summary of findings) - Structure and concentration: - Banking sector assets at 127 percent of GDP. - Private non-bank financial intermediary assets at 5 percent of GDP. - Eight commercial banks operate in the market. - The two largest institutions account for approximately 30 percent of banking system assets each. - Remaining banks account for between 5 and 12 percent each. - Three banks, accounting for approximately 25 percent of the market, are wholly owned subsidiaries of foreign banks. - BCV restricts offshore activities and requires all banks operating in Cape Verde to be licensed by the BCV. - Cyclical vulnerabilities and credit dynamics: - Credit growth during 2024 was averaging 7 percent annually up to Q3. - Credit-to-GDP ratio averaged 52 percent in the five years prior to the COVID-19 pandemic and has averaged 53 percent since 2023. - Standard credit gap measures and an alternative approach point to a large negative gap, indicating relatively subdued credit dynamics. - Discrepancies exist across data sources for credit growth to specific sectors. - Lending terms and household exposure: - Two largest banks indicate lending policies allowing LTVs ranging from 70–80 percent depending on borrower type. - DSTIs between 35 and 50 percent. - Tourism accounts for 18 percent of total credit to the economy. - Households account for 45 percent of total credit to the economy. - Structural vulnerabilities, exposures, and interconnectedness: - Overall exposure to the sovereign exceeds 22 percent of total exposures (central and local government debt and PSEs). - Significant lending to private sector with government guarantees is considered notable. - Common exposures to significant corporations in transport, telecommunications, and utilities, and general exposure to real estate. - Interconnectedness through INPS shareholding in several banks (majority in one of the largest banks) and majority shareholding of another bank by a domestic insurance company. - Funding and deposit concentration: - Approximately 17 percent of total demand deposits and 21 percent of term deposits sourced from INPS (2022 data). - Deposits account for almost 90 percent of total liabilities. - Demand deposits account for approximately 55 percent of the deposit base. - Term deposits of between 6 to 12 months are common; Cape Verdean emigrants account for 50 percent of the volume of term deposits. - High tendency to roll-over term deposits; penalties for early withdrawal are not punitive. - Profitability, capital, and asset quality: - Current capital adequacy ratios are 22 percent, above the required minimum of 12 percent. - Interest margin to gross income exceeds 82 percent. - Return on Equity (ROE) after interest and tax exceeding 11 percent. - NPL ratio has declined to 7 percent, with heterogeneous experience across banks. - Provision coverage has been declining faster than non-performing loans. - D-SIB framework and buffers: - Two largest banks identified as Class 3 (most systemically important); two mid-size banks allocated Class 1. - Additional buffers effective in May 2025: 2 percent for Class 3 banks and 1 percent for Class 1 banks. ### Macroprudential policy posture and tools (paragraphs 54 and surrounding) - A proactive macroprudential policy approach is reasonable to ensure resilience to macro-financial vulnerabilities, including exposure to external shocks. - Given the peg, the central bank’s ability to counter domestic shocks using interest rate and liquidity tools is limited, increasing the need for macroprudential tools to generate resilience. ### Systemic risk monitoring and data gaps (paragraphs 55–61) - Organizing framework: - Use intermediate objectives of macroprudential policy to organize systemic risk assessment: - a. Increasing the resilience of the financial system to aggregate shocks; - b. Contain the build-up of macro-financial vulnerabilities over time; - c. Control structural vulnerabilities within the financial system. - Current data sources and limitations: - Data mostly sourced from regulatory balance sheet and income statement returns, monetary statistics, and loan officer surveys—primarily “stock” variables and backward looking. - Need to increase focus on “flow” variables and sectoral detail, including maturities (original and residual), LTV, LTI, and DSTI. - Enhancing CRC and BCV internal data platform: - Make the “new” CRC system fully operational and enable appropriate access to granular borrower-level detail for macroprudential, microprudential, and research staff, subject to data protection safeguards (e.g., anonymization or pseudo-anonymization). - Use CRC to gather information systematically on credit conditions (LTV, DSTI), interest rates, household and business financial conditions, and collateral values (e.g., real estate prices). - Ensure data quality and validation with aggregate data and enforce minimum standards on data quality. - Store enhanced CRC and prudential/monetary data in an appropriate data platform (e.g., SQL data lake or data warehouse) to enable analysis. - Labor and real estate market data gaps: - Lack of frequent and reliable labor and real estate market data complicates systemic risk assessment. - Explore alternative data sources: sentiment surveys, INPS data, quarterly Continuous Multi-Purpose Survey from INE. - Consider supporting INE to use administrative data or, as a short-term solution, source and scrape asking prices and property characteristics from property sales websites to monitor asking price changes over time. - A hedonic house price index based on administrative data would substantially benefit systemic risk assessment. - Advanced analytical techniques: - As data availability improves, consider aggregate financial conditions or stress measures, “gap”-type measures similar to the credit-to-GDP gap, and Growth-at-Risk models. - A reasonable financial stress index is ready to be estimated; further development of a financial conditions index is recommended. - Embed advances in real estate price data in index construction and consider including such indices in a Growth-at-Risk approach. - Linking assessments to resilience: - Link systemic risk assessments with financial sector resilience (e.g., capital levels) to enhance clarity and impact of macroprudential policy. - Annual stress tests should be informed by a coherent risk narrative; current stress test scenarios (baseline, adverse, severe) have sectoral default rates not anchored in macroeconomic assumptions or a coherent risk narrative. - Annual publications could be complemented by a Bulletin or thematic formats. *IMF Technical Assistance Report — Chapter: 42. Current communication initiatives are limited to in-house expertise and flagship publications* ### 62. Another exercise that could prove beneficial for an interconnected system like Cabo Verde ### 62. Another exercise that could prove beneficial for an interconnected system like Cabo Verde ### Contagion analysis and systemwide liquidity stress testing - Cabo Verde's financial system is structurally small with a limited base of corporate borrowers, resulting in a high degree of interconnectedness. - Contagion analysis uses network technology to estimate the systemic importance of financial and non-financial institutions and to highlight how the failure of a systemically important entity can lead to significant solvency and liquidity losses for the banking system. - Losses depend on the initial capital and liquidity positions of banks and the magnitude and nature of their interconnections. - Joint solvency-liquidity contagion impact: - Assumes the failure of an entity with the maximum capacity to cause contagion losses. - Solvency contagion impact: - Examines shocks to lenders if each entity fails, focusing on the top borrowers. - Systemic liquidity stress test: - Assesses vulnerabilities to systemic liquidity stress due to economy-wide liquidity shocks and their transmission to various economic sectors through direct financial linkages. - The IMF started work on systemwide liquidity stress tests primarily in emerging markets around 2020 in Technical Assistance and Financial Sector Assessment Programs, including Chile, India, Indonesia, Mexico, the Philippines, Turkey, UAE, Uganda, but also in Luxembourg and the US. ### Growth-at-Risk framework suggestion - A systematic approach to using the Growth-at-Risk framework enables informed judgment on the level, changes, and drivers of systemic risk over time and provides a forward-looking perspective over policy-relevant horizons. - Given the limited time series available for Cabo Verde, complementing the estimation approach with multi-country panel data and fixed effects panel quantile regressions is appropriate. - Including estimates of cyclical conditions and financial market stress conditions in the basic quantile regression will facilitate a meaningful discussion of the key drivers of systemic risk and its severity. - The methodology paper and code referenced: Prasad et al. IMF Working Paper 2019. ### Scenario calibration for sectoral default rates - In the adverse scenario, sectoral default rates are set at one standard deviation above the historical average. - In the severe scenario, sectoral default rates are set at one standard deviation above the historical maximum default rates. ### Macroprudential framework: Broad-based measures - Current capital regime and observations: - Minimum capital requirement is set at 12 percent, which is 4 percentage points higher than Basel standards. - At present, all banks surpass this threshold. - Definition of capital adheres to Basel II standards, while the risk-weighted asset calculation follows Basel I standards. - Since the entire 12 percent is under the Capital Adequacy Ratio (CAR), banks do not have a releasable buffer. - There is no CCB or CCyB in place. - Policy considerations: - Consider converting 2.5 percent of the current CAR to a standard CCB and introducing a CCyB framework. - Introducing a CCyB framework, potentially with a non-zero neutral rate, offers benefits in building releasable buffers as insurance against future stresses. - The CCyB is the only releasable capital buffer in the Basel framework and can help prevent sharp credit contractions during financial stress. - International guidance cited: Basel Committee publications from 2010 and 2017 on CCyB operation and implementation practices. - Positive neutral CCyB (PnCCyB) rationale: - Structural vulnerabilities from Cabo Verde being a small, open economy with exposure concentrations and interconnectedness point to benefits of a positive neutral rate in normal times. - The presence of the peg limits the use of conventional monetary policy tools, potentially arguing for a higher neutral rate. - Challenges with timely hard data on broader macro-financial vulnerabilities and bank risk appetite would encourage a cautious approach and a comparatively higher positive neutral rate. - Timing and build-up: - Current favorable macrofinancial conditions with bank profits signal a good time to start building buffers. - BCV has issued ad-hoc guidance to restrict dividend distributions; establishing the PNCCyB explicitly will offer a more predictable framework. - If authorities plan to introduce the PnCCyB, banks should be given advance notice; the build-up process could take about a year for a modest target or longer to reach more ambitious levels. - Calibration approaches: - Methodologies include analyses of historical losses, stress test models, assessments of buffer releases during the pandemic, and expert judgement. - Examples: Ireland and Lithuania set PNCCyB at 1.5 percent and 1 percent respectively (stress tests and expert judgement), Netherlands set theirs at 2 percent based on historical losses. - BCV could conduct stress tests with scenarios that reflect typical business cycles to determine necessary buffers. - Capital and risk-weights interaction: - Capital adequacy level and risk weights are closely connected; increasing capital requirements can induce portfolio shifts toward zero risk-weight assets. - Adopting Basel III standards on risk weights will be beneficial. - Given high sovereign exposure, a carefully calibrated leverage ratio could serve as a backstop and complement risk-weighted capital measures, taking care to avoid it becoming the binding constraint. ### Sectoral measures - Data and contagion risk: - Sectoral risks are not of immediate concern, but improved data is necessary. - Linking macroeconomic scenarios to employment risk, firm performance, and contagion analysis requires better borrower-level information. - Small market size increases the risk of common exposure—many banks may share the same top corporate borrowers. - Suggested exercise: simulate a major corporation declaring bankruptcy and defaulting on all its loans across several banks to test system-wide responses. - Borrower-based measures: - Introducing an LTV limit can start to ensure household resilience. - BCV notes information on banks’ policies and current LTV practices would be easiest to obtain. - Initial LTV can be relatively loose to avoid disrupting credit flow; cross-country experiences show LTV limits in the range of 70 to 90 percent. - As data improve, recalibrate LTV with differentiation across mortgage types; complement LTV with stressed DSTI when more borrower income data are available. - Sectoral Systemic Risk Buffer (SRB): - A sectoral SRB could address structural vulnerabilities in specific segments once the broader capital framework is in place and sectoral risks are better identified. - A sectoral SRB could be designed to be releasable but Cabo Verde’s context may make an appropriately calibrated broad-based buffer more suitable at this stage. - Sectoral SRB may be more appropriate once D-SIB and CCyB frameworks are established and after assessing impacts of full Basel III adoption. ### Liquidity measures - Current liquidity tools and metrics: - Minimum ratio of 20 percent liquid assets to total liabilities. - Liquid assets also monitored as a share of total assets and short-term liabilities. - Liquid assets include cash holdings, gold, reserves at BCV, deposits in other financial institutions, Cabo Verde treasury bonds, other fixed-income securities, interbank operations, account receivables, and other BCV assets. - As banks adopt Basel III, BCV should establish a definition of HQLA with appropriate discounts for certain assets, such as corporate bonds. - Liquidity Coverage Ratio (LCR) recommendation: - BCV should adopt an LCR requiring banks to hold enough HQLA to cover potential cash outflows over a 30-day stress period. - Numerator should align with the standard definition of HQLA; denominator should realistically reflect expected net cash outflows over a 30-day stress period (expected cash inflows subtracted from expected cash outflows). - Given high concentration of funding in a small market and fast cash withdrawals due to technology, banks must differentiate between demand and term deposits, assuming rapid outflows of demand deposits. - Managing concentration and large deposits: - Consider a holistic strategy to reduce concentration risks from large deposits, including those placed by INPS. - Supervisors can issue guidance for penalties on early withdrawal of term deposits proportional to withdrawal size. - Consider imposing higher run-off rates on lumpy deposits above a given share in total deposits in the LCR calculation. - Such LCR design would incentivize banks to negotiate longer maturity deposits with large depositors and could be discussed with stakeholders (e.g., NFSC). - BCV liquidity management and ELA: - In 2022, BCV introduced a short-term lending instrument (Overdraft Credit Line) banks can access on their own initiative; it shares some characteristics with a Lender of Last Resort but does not fully meet ELA requirements. - BCV should enhance its liquidity toolkit, strengthen monetary policy operations (such as standing lending facilities), and establish a clear ELA framework to provide temporary liquidity support in exceptional circumstances against adequate collateral. - Interaction of monetary and macroprudential tools: - Liquidity-based instruments can interact and complement monetary policy; easing monetary conditions can contribute to macro-financial vulnerabilities. - Unremunerated reserve requirements (URRs) can serve both monetary implementation and macroprudential purposes, but domestic currency URRs are generally best considered as monetary policy implementation tools. - Maintaining the peg to the euro can be achieved through policy rate changes and adjustments to the reserve requirement. - If required reserves are not included in HQLA, relaxing URRs would also relax the LCR. - Changes in monetary policy, including interest rates and URRs, influence domestic credit expansion and must be considered for financial stability. - Individual banks facing deposit withdrawals may obtain interbank liquidity but risks exist (e.g., capital outflows given open capital account); BCV should ensure more conservative liquidity management across banks. - Inclusion of RR in HQLA: - Practices vary: some jurisdictions (e.g., Canada) fully include RR, others (e.g., Iceland) partially include them, while the Euro Area and India exclude them. - Eligibility of RR as HQLA depends on accessibility during stress, maintenance period length, and penalties for non-compliance. - Misclassification risks: distort market dynamics, inflate demand for alternative HQLA, affect credit intermediation, or undermine the LCR by increasing reliance on central bank discretion to release RR. ### Next steps and technical assistance priorities - Authorities are encouraged to sustain momentum to complete the macroprudential framework. - Key actions: improve data collection and management (quality and quantity) and timely implement mission recommendations including introduction of standard tools. - Future TA mission considerations (aligned with 2022 FSSR recommendations): - (i) refining and calibrating certain macroprudential tools such as the PNCCyB and the LTV using multiple techniques, - (ii) expanding the systemic risk dashboard for better risk monitoring, - (iii) financial crisis management plan and procedures at the BCV, - (iv) risk management approach regarding reserve management, - (v) improved solvency and liquidity stress testing. - Adoption of Basel III standards should proceed according to the multi-year plan. *IMF Technical Assistance Report* --- _Source: https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026023.pdf_