## PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT ## Source details **Canonical URL:** [PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_121814.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_121814.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_121814.pdf.json) --- ### Overview and recent expansion - Seven major PABs have a presence in at least ten African countries. - Headquarters distribution of the seven major PABs: three in Morocco, two in Togo, one in Nigeria, and one in South Africa. - Additional banks (primarily from Kenya, Nigeria, and South Africa) have operations in at least five countries. - PABs have a systemic presence in around 36 countries. - PABs now are much more important in Africa than long-established European and American banks. - Between 2006 and 2010, the number of subsidiaries of the seven largest PABs almost doubled from less than 50 to almost 90 operations. - Ecobank operates in 33 SSA countries. - Standard Bank is the largest group based on the size of its balance sheet. - Around 40–60 percent of the subsidiaries of Attijariwafa, BOA, Ecobank, and Standard Bank are systemically important in their host countries based on deposit shares. - UBA operates in 19 African countries and these account for about 20 percent of the group’s balance sheet. ### Modes of expansion and corporate structures - Primary expansion mode: subsidiaries through acquisition of existing banks; only a few used greenfield investments. - Subsidiarization aims to minimize contagion given relatively high banking risks. - Major PABs generally have complex and in some cases opaque holding structures, with ultimate holdings, sub-holdings, and cross-holdings. - Banking is the dominant activity; groups also include insurance, microfinance, investment activities, securities dealing, leasing, IT, and real estate. - Examples of shareholder concentrations and cross-holdings: - Attijariwafa major shareholder: SNI Group. - BMCE major shareholders: FinanceCom Group and BFCM-Holding. - ETI major shareholders (as of October 2014): Nedbank (20 percent), Qatar National Bank (16.9 percent), South African Government Employees Pension Fund (13.9 percent), International Finance Corporation (14.5 percent). - Centralized group functions commonly include risk sharing frameworks, internal audit control, common IT platforms, and centralized treasury (example: Ecobank’s treasury centralized in Paris). ### Opportunities and benefits - PAB growth reflects increasing economic integration in Africa. - Benefits include: - Improved competition and financial innovation. - Support for financial inclusion. - Greater economies of scale. - Filling the gap left by European banks; PABs are becoming lead arrangers of syndicated loans. - Trade linkages: - Kenya: share of trade with SSA is around 35 percent. - Nigeria: exports to SSA recovered from a low of eight percent in 2011. - Moroccan exports to WAMZ and WAEMU have increased strongly in recent years. - New syndicated and large bilateral loans for infrastructure in SSA rose over 2006–13 with African lenders growing as a component of total lending. ### Macroeconomic backdrop and systemic risk channels - SSA average growth rose from 2½ percent in 1980–94 to about five percent during 2008–13. - Two-thirds of SSA countries have enjoyed ten or more years of uninterrupted growth; a quarter have grown without interruption for 20 years. - Real GDP per capita doubled in the median SSA country. - External sensitivity: - A one percentage point growth slowdown in the rest of the world leads to an estimated half percentage point slowdown in SSA. - A 100 basis point increase in the spread of 3-months LIBOR vs. U.S. Treasury bills reduces growth in SSA countries by an estimated half percentage point. - Main macro risks: slowing global trade; sustained lower commodity prices; tightening monetary policy in advanced countries. - Contagion channels from PABs: - parent to subsidiary and subsidiary to parent; - across subsidiaries of the same group; - reputational risk and depositor runs triggered by macro disequilibria in home countries; - interconnectedness via intra-group deposits and syndicated loans. - Mitigants: subsidiarization and ring-fencing provide some protection but do not eliminate contagion. ### Financial soundness, data gaps, and vulnerabilities - Consolidated-level trends (2007–13): - Ecobank, BMCE, and Attijariwafa expanded assets strongly since 2007. - For other PABs assets grew less than ten percent or declined. - Foreign banking groups’ African operations often represent less than five percent of total assets. - Subsidiary-level trends: - Pan-African groups’ subsidiaries generally show strong asset and loan growth; almost all Ecobank subsidiaries show very high asset growth. - For foreign banks, subsidiary asset growth is smaller and heterogeneous; almost half of Barclays’ subsidiaries have seen decreasing assets. - Key indicators and observations: - Pan-African groups have higher ROA and lower loan-to-deposit ratios than four foreign banking groups analyzed. - Foreign groups generally have loan-deposit ratios exceeding 100 percent (except Standard Chartered). - Pan-African groups generally show loan-deposit ratios well below 100 percent (exception: Attijariwafa increased above 100 percent in recent years). - Ecobank’s capital ratio has been on a downward trend; Ecobank’s NPL ratio has exhibited large swings since 2008. - Data limitations: - Capital ratios and NPLs at subsidiary level: large data gaps. - Full indicator sets over the entire period available only for a small number of systemically important subsidiaries. - Erratic capital and NPL movements may indicate data quality problems. - Observed subsidiary vulnerabilities: low profitability (and losses), high and rising NPLs, falling or volatile capital ratios, sometimes concurrent with high credit growth. ### Supervisory, governance, and disclosure challenges - Supervisory capacity constrained and under-resourced in most of Africa. - Key weaknesses: - Licensing and ownership structure transparency issues. - Differences in accounting and data standards; lack of single accounting standard impedes assessment. - Consolidated bank supervision incomplete in some home jurisdictions. - Home-host cooperation and information sharing not systematic. - Conduct-of-business oversight emerging only recently in many countries. - Governance concerns: - Fitness and propriety of owners/shareholders (including bank holding companies) not always fully assessed. - Opaque ownership structures hamper supervisors’ view of ultimate ownership. - Disclosure in Africa is less extensive than elsewhere. - ETI case highlighted governance and disclosure shortcomings; reforms at ETI in mid-2014 addressed some issues. - Compliance with Basel Core Principles (BCP): - Only 50 percent of African countries are compliant or largely compliant with the home-host relationships principle compared to almost 75 percent in the rest of the world. - Out of 16 African countries assessed, only Mozambique, South Africa, WAEMU, and Zambia were compliant. ### Consolidated supervision, supervisory colleges, and cooperation - Consolidated supervision: - South Africa and Morocco conduct supervision on a consolidated basis; Nigeria recently commenced consolidated supervision. - WAEMU: bank holdings in principle subject to supervision but prudential regulations to make it effective are not in place. - Consolidated supervision should include centralized group services and reporting, and cover prudential norms at consolidated and solo levels. - Supervisory colleges and joint inspections: - Several joint inspections and supervisory colleges have been established for some PABs; others are planned. - Recommendation: supervisory colleges need to be established for all PABs and meet at least once a year at the senior supervisory level. - College design: consider a two-tier structure (core and universal membership) for effectiveness and inclusion. - Enhance ongoing engagement between college meetings via teleconferences, videoconference, emails; circulate agendas and materials in advance; record and follow up action points. - Information sharing: - MOUs that ensure full exchange of information are needed between all homes and hosts. - Home supervisors rely heavily on offsite supervision; increase in onsite/joint inspections recommended. ### Resolution, crisis management, and ring-fencing - Cross-border resolution: - Very limited work to establish crisis management and resolution frameworks for PABs. - Most African countries need enhanced national resolution frameworks. - Without a resolution mechanism, supervision alone may have limited effectiveness. - Recommendations for resolution frameworks: - Enact legislation aligned with the FSB Key Attributes, including special resolution regimes, transfer and bridge bank powers. - Establish Crisis Management Groups (CMGs) for regionally and domestically systemic cross-border banks. - Require recovery and resolution plans for regionally and domestically systemic PABs; plans to be updated annually. - Resolution plans should be led by the home supervisor with active host engagement. - Host authorities may prepare their own subsidiary-level resolution plans. - Ring-fencing: - Host authorities may take discretionary ring-fencing action (e.g., restricting intra-group transfers) if home authorities do not act in the host’s interest, subject to prior notification and consultation. - Excessive ring-fencing can restrict capital mobility and destabilize a stressed PAB; consultations and transparency are emphasized. - Deposit insurance and financing resolution: - Majority of African countries lack deposit insurance schemes. - Effective resolution requires financing arrangements such as ex ante deposit insurance funds. - Design challenges include coverage range across branches/subsidiaries abroad and creditor hierarchy recognition across borders. - Recommended depositor preference not to discriminate by location or nationality; deposit insurance should align with IADI/BCBS Core Principles. ### Strategic oversight proposal (PABSOC) and regional issues - Proposal: establish a PAB Supervisory Oversight Committee (PABSOC) comprising home regulators/supervisors and central banks of major PABs—BCEAO, Kenya, Morocco, Nigeria, and South Africa—with representation of the Association of African Central Banks. - PABSOC objectives: drive cooperative and harmonization agenda; coordinate on emerging problems; integrate global best practices; provide assistance to lagging regulators/supervisors. - Regional currency unions and institutions: - WAEMU: regional monetary and supervisory authority (BC) with national licensing and resolution roles; national responsibility for resolution while supervision is regional complicates handling bank problems. - EAC, SADC, WAMZ examples show varying degrees of supervisory cooperation and remaining resolution challenges. - Recommendation: regional groupings that are homes or hosts of major PABs should examine scope for a single resolution mechanism. ### Key recommendations (grouped with provided priority flags) - Regulatory and Supervisory Harmonization (Priority: H) - Ensure full regulation and supervision of bank holding companies. - Implement consolidated and risk-based supervision. - Accelerate adoption of International Financial Reporting Standards (IFRS) in all countries that are home or hosts to major PABs. - Enhance data availability, for example, on banks’ cross-border exposures. - Harmonize and align key prudential norms with international standards (for example, concentration limits). - Consider subjecting PABs with regional systemic importance to Basel III domestic systemically important bank (D-SIB) requirements. - Governance (Priority: H) - Ensure fit-and-proper criteria are applied to Boards and management of banks and bank holdings at licensing and periodically thereafter. - Cross-border collaboration (Priorities: H, M) - Ensure MOUs feature full exchange of information between home and host authorities for all major PABs. (H) - Broaden range of joint inspections to include all major PABs. (H) - Introduce supervisory colleges for all PABs; ensure each college meets at least once a year. (H) - Enhance colleges with a two-tier structure of core and universal membership. (M) - Clarify respective responsibilities in event of liquidity or solvency difficulties; run joint simulation exercises. (H) - Financial stability (Priority: M) - Use macro and micro stress tests and other techniques to ensure national systems remain sound under cross-border contagion; share national financial stability findings. - Resolution and safety net (Priorities: H) - Ensure adequate legal frameworks and special resolution regimes conforming with FSB Key Attributes. (H) - Extend cooperation to cover resolution of PABs, establish CMGs for systemically important ones and require recovery and resolution plans. (H) - Strategic oversight (Priorities: H, M) - Intensify coordination between CBN and the Banking Commission (BC). (H) - Establish PABSOC of home regulators and central banks of major PABs with the chair of the Association of African Bank Supervisors. (M) - Regional integration (Priority: M) - Regional bodies (e.g., BCEAO, EAC) to review structures to improve regional financial oversight, safety nets and resolution mechanisms. ### Surveillance, technical assistance, and capacity building - IMF role: - IMF prepared to continue assistance in areas of responsibility and liaise with other providers for comprehensive programs. - IMF regional technical assistance delivered via AFRITACs and the African Training Institute (ATI) in Mauritius. - Examples of IMF TA outcomes: AFE assisted CBK to organize an East African supervisory college; TA helped CBK develop structured approaches to assess host authorities. - Priority TA actions: - Upgrade supervisory capacity country-by-country. - Strengthen financial stability monitoring to capture cross-border exposures and subsidiary-level vulnerabilities. - Support governance and institutional arrangements needed for deeper regional integration or bodies like PABSOC. - Use staff exchanges, peer learning, joint inspections, and supervisory college participation to build capacity. - Urgency: comprehensive supervisory capacity enhancement program is urgent and could have substantial payoff. ### Data definitions, thresholds, and analytical inputs used - Data sources: Annual reports, Bankscope, and bank websites. - Consolidation codes: - C1, C2, U1 (Bankscope definitions) and C, U (Annual Report definitions) as provided in source. - Data availability groups: - Group 1: Consolidated data and data for all subsidiaries available in Bankscope. - Group 2: Consolidated data and data for the majority of subsidiaries available in Bankscope or annual report. - Group 3: Consolidated data and data for some subsidiaries available in Bankscope or annual report. - Group 4: No consolidated data and data for some subsidiaries available in Bankscope or annual report. - Systemic subsidiary/branch definition used: - Deposits larger than 10 percent of banking system deposits OR assets larger than 7 percent of GDP. - Data vintage focal years: 2013 and where unavailable 2012. - Financial soundness indicators emphasized: - Loan-Deposit Ratio - ROA - Total Capital Ratio - NPL Ratio - Asset growth and Loan growth for 2007–2012/13 ### Country- and bank-level observations (selected) - Kenya: - 11 Kenyan banks operating in the EAC Member States and South Sudan through 288 branches. - Cross-border subsidiaries account for around ten percent of group assets and 4.4 percent of group profits (for specific Kenyan bank example). - CBK hosted supervisory colleges for KCB, Equity Bank, and Diamond Trust Bank; planned three more colleges by end-2014. - Morocco: - BAM supervises on a consolidated basis; requires three-year expansion strategies; prior authorization for new international expansion. - Morocco has an African Committee with BAM and the three largest banks; a code of conduct signed to avoid over-competition. - Nigeria: - Post-2004 consolidation and post-GFC reforms: CBN strengthened regulatory framework, initiated consolidated supervision, and requires MOUs as precondition for expansion. - 38 MOUs initiated and 15 signed (CBN framework data). - UBA operates in 19 countries (about 20 percent of group balance sheet). - South Africa: - Four largest banks account for approximately 75 percent of deposits in 2013. - South African banks’ African operations are about six percent of group assets on average. - SARB required pan-African expansion strategies, recovery and resolution plans, and stress-tests; formed supervisory college for Standard Bank in 2013. - WAEMU: - Banking still mainly domestic; cross-border flows about 1.6 percent of total lending in 2012. - WAEMU: BC supervises banks and MFIs above CFAF2 billion; prefunded deposit insurance scheme being implemented; bank holding companies not formally regulated though supervised by BC under a 1991 decision. ### Stress-testing and FSAP findings (selected excerpts) - Ghana (2011 FSAP Update): - Ten banks with asset share of 41 percent have concentrations where a single-obligor default would breach capital adequacy. - Two banks (16 percent market share) would become insolvent in that single-obligor default scenario. - Liquidity vulnerabilities concentrated in two banks dependent on public sector deposits. - Nigeria (2012 FSAP): - Most banks could withstand extreme shocks due to high capitalization and low NPLs; some individual institutions vulnerable; one insolvent before stress tests. - Contagion through interbank market is generally small. - South Africa (2014 FSAP Update): - Banks display capital resilience but face liquidity shortfalls and difficulty meeting Basel liquidity coverage and net stable funding ratios. - WAEMU (2007 FSAP & 2013 update): - High exposure to public sector; about one third of bank credit to public enterprises. - Banking systems vulnerable to large exposures and sectoral concentration; banks hold over 70 percent of public debt issued by WAEMU sovereigns. ### Actionable supervisory sequencing and priority metrics - Use systemic-importance thresholds for prioritization: - Deposits threshold: 10 percent of banking system deposits. - Assets threshold: 7 percent of GDP. - Sequence supervisory outreach and capacity-building using data-driven identification of systemically important subsidiaries/branches. - Target stress-testing, resolution planning, and cross-border contingency arrangements to systemically important entities per thresholds. - Improve consolidated reporting and data-sharing consistent with consolidation code definitions (C1, C2, U1, C, U) to reduce Group 1–4 data gaps. *Source: EXECUTIVE SUMMARY and selected sections from PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT (International Monetary Fund).* ### EXECUTIVE SUMMARY ________________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Overview and recent expansion - There has been a rapid expansion of pan-African banks (PABs) in recent years, with seven major PABs having a presence in at least ten African countries. - Three of these seven are headquartered in Morocco, two in Togo, and one each in Nigeria and South Africa. - Additional banks, primarily from Kenya, Nigeria, and South Africa, have a regional presence with operations in at least five countries. - PABs have a systemic presence in around 36 countries. - Overall, the PABs are now much more important in Africa than the long-established European and American banks. ### Modes of expansion and structure - PABs have expanded mainly through subsidiaries, via the acquisition of existing banks. - Only a few PABs have used greenfield investments to expand across countries. - Subsidiarization reflects regulators’ wish to minimize contagion, particularly given the relatively high risks associated with banking activity in the continent. ### Opportunities and benefits - The growth of PABs offers a number of opportunities and benefits: - Reflects the increase in economic integration within Africa more generally. - Contributes to improve competition. - Supports financial inclusion. - Gives rise to greater economies of scale. - PABs have been filling the recent gap left by European banks and are becoming the lead arrangers of syndicated loans. ### Oversight, governance, and disclosure challenges - Rapid expansion poses oversight challenges that, if unaddressed, may increase systemic risks. - Supervisory capacity is constrained and under-resourced in most of Africa. - PABs raise the importance of: - Transparency and disclosure, - Good governance, - Strong prudential oversight, - A legal and regulatory framework that supports effective and comprehensive supervision and crisis management, particularly in the countries that are homes to major PABs. - Progress is being made in most areas but efforts to strengthen oversight in some cases need to be intensified. - Governance concerns: - Fitness and propriety of owners and shareholders, in particular of bank holding companies, is not always fully assessed. - Ownership structures in some cases are opaque. - Disclosure in Africa is less extensive than elsewhere. - The lack of a single accounting standard across the continent makes assessment of banks’ overall situation difficult. - In many countries conduct-of-business oversight is only now emerging. - Example: The recent case of Ecobank Transnational Incorporated (ETI) was a public wake-up call regarding governance and disclosure. ### Bank holding companies and consolidated supervision - Lack of regulatory oversight of bank holding companies and their supervision on a consolidated basis in some home jurisdictions needs to be addressed urgently. - At least two large PABs operate as subsidiaries of unregulated bank holding companies. - Requiring separately capitalized subsidiaries reduces the extent of possible contagion but does not eliminate it. - Bank subsidiaries may have exposures to their parents or to other bank or nonbank subsidiaries within the same group. - Greater integration has benefits but interconnectedness means that countries are more exposed to spillovers from cross-border shocks. ### Cross-border supervisory cooperation - Cooperation on cross-border supervision has started, but enhanced collaboration is critical. - The Central Bank of Nigeria (CBN) requires a Memorandum of Understanding (MOU) with home regulators before allowing a bank to be established in its jurisdiction. - Quarterly meetings of the West African Monetary Institute (WAMI) include discussions of PAB issues. - Several joint inspections have taken place and supervisory colleges established for a few PABs, and others are planned. - Supervisory colleges need to be established for all PABs and meet at least once a year at the senior supervisory level. - MOUs that ensure full exchange of information are needed between all homes and hosts. ### Resolution and crisis management - Sustained efforts are needed on cross-border resolution. - The global financial crisis (GFC) demonstrated the costs of not having a workable cross-border operational framework in place and the difficulty of constructing one. - Without a resolution mechanism, supervision alone may have limited effectiveness. - Most African countries also need to enhance resolution at the national level. - Some countries have sought to reduce spillover risks through ring-fencing approaches, but this cannot avoid the need for cross-border collaboration. - Ex-ante understandings are needed across jurisdictions as to respective responsibilities in the event of difficulties. ### Regional currency unions and regional institutions - Regional currency unions, such as the WAEMU, face particular challenges on the interface of responsibilities between regional and national authorities. - WAEMU operates as a single regional monetary and supervisory authority, but with a licensing and resolution role for national authorities. - National responsibility for bank resolution, while supervision is conducted at the regional level, can seriously complicate the handling of bank problems. - Given that WAEMU is home to two major PABs and host to many others, developing appropriate arrangements to reconcile regional and national interests is paramount. - Regional groupings that are homes or hosts of major PABs should examine the scope for establishing a single resolution mechanism. ### Strategic oversight proposal - Existing arrangements are either not specifically focused on PAB issues or may include too wide a participation for effective decision making. - Proposal: establish a PAB Supervisory Oversight Committee (PABSOC) comprising the home regulators/supervisors and central banks of the major PABs (BCEAO, Kenya, Morocco, Nigeria and South Africa), with representation of the Association of African Central Banks, to drive the cooperative and harmonization agenda. ### Role of technical assistance - Pursuing the reform agenda expeditiously will require extensive technical assistance. - The IMF is prepared to continue to provide assistance in its areas of responsibility and, if helpful, to liaise with other providers to help ensure a comprehensive program to safeguard financial stability. ### Key recommendations (Table 1: Summary of Key Recommendations) — grouped and priority flags retained where provided Regulatory and Supervisory Harmonization (Priority: H) - Ensure full regulation and supervision of bank holding companies. - Implement consolidated and risk-based supervision. - Accelerate adoption of International Financial Reporting Standards (IFRS) in all countries that are home or hosts to major PABs. - Enhance data availability, for example, on banks’ cross-border exposures. - Harmonize and align key prudential norms with international standards (for example, concentration limits), in all countries that are home or major hosts to major PABs. - Consider subjecting PABs with regional systemic importance to Basel III domestic systemically important bank (D-SIB) requirements. Governance (Priority: H) - Ensure fit-and-proper criteria are applied to Boards and management of banks and bank holdings both at time of licensing and periodically thereafter. Cross-border collaboration (Priorities: H, M) - Ensure MOUs feature full exchange of information between home and host authorities for all major PABs. (H) - Broaden range of joint inspections to include all major PABs. (H) - Introduce supervisory colleges for all PABs. Ensure that each college meets at least once a year. (H) - Enhance the function of supervisory colleges by introducing a two-tier structure of core and universal membership. (M) - Clarify countries’ respective responsibilities in the event of liquidity or solvency difficulties in a PAB. Run joint simulation exercises. (H) Financial stability (Priority: M) - Ensure through macro and micro stress tests and other techniques that national financial systems are sound even in the event of cross-border contagion from PABs. Share national financial stability findings. Resolution and safety net (Priorities: H) - Ensure adequate legal framework, featuring special resolution regimes, are in place to resolve failing banks and bank holdings, in conformity with the Financial Stability Board (FSB) Key Attributes. (H) - Extend cooperation to cover resolution of PABs, establish crisis management groups (CMGs) for systemically important ones and require them to develop recovery and resolution plans. (H) Strategic oversight (Priorities: H, M) - Intensify coordination and collaboration between the CBN and the Banking Commission (BC), as these two agencies are at the forefront of oversight responsibility for several major PABs. (H) - Establish a PABSOC of the home regulators and central banks of the major PABs, i.e., BCEAO, Kenya, Morocco, Nigeria, and South Africa, with the chair of the Association of African Bank Supervisors, in order to: - drive the reform agenda, (M) - coordinate on emerging problems, (M) - integrate into the African financial systems the best practices in financial sector management that are emerging in the global fora, (M) - provide assistance to lagging regulators/supervisors and other authorities, either from within the group, or from outside sources such as the multilateral agencies. (M) Regional integration (Priority: M) - Regional bodies such as the BCEAO and the East Africa Community (EAC) to review their regional structure to improve their ability to provide effective regional financial sector oversight and management capacity in the face of PAB development, for instance as regards safety nets and resolution mechanisms. *Source: EXECUTIVE SUMMARY (Pan-African Banks: Opportunities and Challenges for Cross-Border Oversight).* ### Box 1. Increasing Intra-Regional Trade Linkages in Sub-Saharan Africa ### Box 1. Increasing Intra-Regional Trade Linkages in Sub-Saharan Africa ### Trends in intra-regional trade and drivers - Historically, intra-regional trade in SSA has been low and trade links with Europe, the United States (U.S.), and Asia still outweigh intra-regional trade. - Intra-African trade and financial linkages have been expanding rapidly in recent years and are expected to grow further (IMF, 2012b). - The recent cross-border expansion of Pan-African Banks (PABs) has been partly influenced by increasing trade flows and corporate expansion into new markets in SSA; cross-border banks from Kenya, South Africa, and Nigeria cited following corporate clients abroad as a reason for expansion. - The share of SSA trade in total trade has increased in four PAB home countries since 2008. - Kenya: share of trade with SSA is around 35 percent, with the largest part within the EAC. - Nigeria: exports to SSA recovered from a low of eight percent in 2011 (may be driven mostly by oil prices). - Morocco: the smallest share of trade with SSA among the four countries, but exports to WAMZ and WAEMU countries have increased strongly in recent years. - Sources: IMF, Direction of Trade Statistics. ### Regional exports patterns (selected observations) - Selected PAB home countries’ exports to SSA and to selected economic regions increased over 2008–13 (charts provided in source). - New syndicated and large bilateral loans for infrastructure in SSA rose over 2006–13 with lending by African lenders growing as a component of total lending (chart provided in source). - African banks have become lead arrangers for syndicated loans, filling gaps left by European banks (IMF, 2014b and Figure 3). ### Implications for banking and supervision - Growing pan-African banking groups offer opportunities but pose supervisory challenges: - Potential benefits: improved competition, economies of scale (especially in small host markets), innovation, enhanced financial inclusion, and in some cases lower costs (for example in the EAC). - Diversification benefits for home countries and further growth opportunities for banking groups. - Emerging challenges: supervision gaps, governance issues, cross-border resolution concerns, and uneven implementation of international standards (some countries have implemented Basel II standards whereas others are still in progress). - Well-functioning financial infrastructure (national and cross-border) is important to reap benefits of PAB expansion: - Efficient payment and settlement systems, credit rating agencies, credit information systems (including comparability across countries), dispute resolution, and consumer protection mechanisms are all necessary. - Examples of cross-border payment/settlement integration include the WAEMU currency union, the East African Payments System (launched in 2013), and a recent SADC settlement system for regional transactions (Box 11 referenced in source). ### Box 2 — Benefits of Cross-Border Banking (summary of categories and key points) - Benefits categorized into: competition and efficiency; financial deepening and inclusion; and stability. - Competition and Efficiency - Cross-border banks can increase competition, access to skills and capital, economies of scale, and improve governance structures. - Empirical studies generally find a positive association between foreign bank entry and efficiency/competition (net interest margins, profitability, cost efficiency). - In the EAC, EAC-headquartered banks or their subsidiaries have lower spreads and are more efficient than other private domestic banks or subsidiaries of foreign banks headquartered outside the region (World Bank, 2013). - Financial Deepening and Financial Inclusion - Cross-border banks can foster financial inclusion by introducing expertise and expanding outreach, but may “cherry pick” high-end customers limiting inclusion. - Empirical evidence is mixed and depends on country/region/data; examples include increases in branches and export of innovative business models (e.g., Nigerian banks in the WAMZ; Moroccan and Kenyan banks). - Financial Stability - Cross-border banks can provide diversification benefits if business cycles are not synchronized and can induce higher supervisory standards (IFRS, Basel II/III). - They can also propagate shocks from home countries to host economies; evidence shows cross-border banking mitigates local shocks but can transmit global shocks (Popov and Udell, 2012; de Haas and Lelyveld, 2014; Kalemli-Ozcan, Papaioannou and Perri, 2013). - Note: This box is adapted from chapter 2 of Beck and others (2014). ### Box 3 — Financial sector supervisory standards: key observations - Countries in SSA operate at varying stages of implementation of international standards: - A number of countries have moved to IFRS accounting standards. - Implementation of Basel II standards has only been completed in a handful of countries. - Depositor insurance is missing in the majority of countries. - Summary highlights (selected country-level examples from the table in the source): - Angola: Accounting Standard = National; Capital Adequacy Standard = No Basel II yet; BCPs = <50%; Deposit Insurance = No Dep. Ins.; Asset Classification = < 90 days. - Kenya: Accounting Standard = IFRS; Capital Adequacy Standard = Parts of Basel II/III; BCPs = 50-80%; Deposit Insurance = Implemented; Asset Classification = 90 days. - Morocco: Accounting Standard = IFRS; Capital Adequacy Standard = Parts of Basel III; BCPs = >80%; Deposit Insurance = Implemented; Asset Classification = 90 days. - Nigeria: Accounting Standard = IFRS; Capital Adequacy Standard = Basel II in progress; BCPs = 50-80%; Deposit Insurance = Implemented; Asset Classification = 90 days. - South Africa: Accounting Standard = IFRS; Capital Adequacy Standard = Basel III; BCPs = >80%; Deposit Insurance = No Dep. Ins.; Asset Classification = 90 days. - WAEMU: Accounting Standard = IFRS Plan; Capital Adequacy Standard = No Basel II yet; BCPs = 50-80%; Deposit Insurance = No Dep. Ins.; Asset Classification = > 90 days. - Zimbabwe: Accounting Standard = IFRS; Capital Adequacy Standard = Basel II in progress; BCPs = N/A; Deposit Insurance = Implemented; Asset Classification = 91 days. - Notes: - BCPs column shows percentage of compliant or largely compliant Basel Core Principles based on FSAP assessments during 2007–12. - Asset classification column indicates the threshold of 'number of days in arrears' after which loans are classified as nonperforming loans. - Sources: IFRS.org (jurisdiction profiles, April 2014); PwC "IFRS adoption by country" (April 2013); Financial Stability Institute Survey on Basel II, 2.5 and III implementation (July 2014); Standards and Codes Database; Demirgüç-Kunt, Kane and Laeven (2014); World Bank Survey on Bank Regulation 2012; IMF FSAP and TA reports; IMF country teams. ### Box 4 — IMF Technical Assistance (TA) on banking supervision and regulation to SSA - The IMF has been increasing TA activities in banking supervision and regulation (including cross-border and consolidated supervision and strengthening legal frameworks) throughout SSA. - IMF Regional Technical Assistance Centers (RTACs) are instrumental: out of nine RTACs globally, five are based in various parts of SSA: - Central AFRITAC (AFC) based in Gabon. - West AFRITAC (AFW) based in Cote D’Ivoire. - East AFRITAC (AFE) based in Tanzania. - South AFRITAC (AFS) based in Mauritius. - WEST AFRITAC 2 (AFW2) based in Ghana. - The IMF recently opened an African Training Institute (ATI) in Mauritius to build capacity of African authorities on banking regulation and supervision. - AFRITACs have organized seminars and workshops on consolidated and cross-border supervision and delivered hands-on TA on practical application of consolidated supervision. - Examples of TA outcomes: - AFE assisted the Central Bank of Kenya (CBK) in organizing a first East African supervisory college for a cross-border bank and continued establishment of such colleges for other Kenyan banking groups. - TA helped CBK develop a structured approach to assess regulatory and supervisory frameworks of host authorities of Kenyan banks’ subsidiaries. - TA activity trends (charts in source): - TA to SSA on Banking Supervision and Regulation is shown in Full-Time Employees (FTEs) for FY13, FY14, FY15 (Completed and Planned). - TA by IMF TACs on Banking Supervision and Regulation is shown for AF C, AF W, AF E, AF S, AF W2 across FY13–FY15 (FTEs). - Source for charts: MCM Technical Assistance Tracking System. ### Risks, past failures, and IMF exercise purpose - Past pan-African and cross-border banking failures in Africa include International Bank of West Africa and Meridien (1990s), and Bank of Credit and Commerce International; SSA countries suffered significant losses and setbacks to financial integration. - The Global Financial Crisis highlighted difficulties in managing and resolving cross-border institutions even in advanced economies. - The IMF exercise aims to: - Take stock of developments, identify regulatory, supervisory and resolution gaps, and determine how the Fund can help authorities address these challenges. - Focus on countries and regions with a high presence of PABs to better understand PAB activities and vulnerabilities. - Assess how supervisors monitor PABs’ business plans and governance; the coverage of consolidated supervision and extent of cross-border collaboration; and crisis preparedness (modalities of liquidity backstopping and bank resolution). - Involve missions meeting home and host regulatory and supervisory authorities and main cross-border banking groups to assess business plans and risk mitigation strategies. *Source: Box 1. Increasing Intra-Regional Trade Linkages in Sub-Saharan Africa — PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT (International Monetary Fund).* ### 18. Unprecedented growth in SSA provided the backdrop for the expansion of PABs. The ### 18. Unprecedented growth in SSA provided the backdrop for the expansion of PABs. The ### Macroeconomic backdrop and growth performance - SSA average growth rate rose from 2½ percent in 1980–94 to about five percent during 2008–13. - SSA has become the second fastest growing region after emerging Asia. - Two-thirds of the countries in SSA have enjoyed ten or more years of uninterrupted growth; a quarter have grown without interruption for 20 years. - Real GDP per capita doubled in the median SSA country and slightly more in the average country. ### External spillovers and sensitivity to global conditions - A one percentage point growth slowdown in the rest of the world leads to an estimated half percentage point slowdown in SSA (Drummond and Ramirez, 2009). - A 100 basis point increase in the spread of 3-months LIBOR vs. U.S. Treasury bills reduces growth in SSA countries by an estimated half percentage point. - The global financial crisis’ negative impact on SSA was partially offset by lower global interest rates. ### Key macroeconomic risks and implications for financial stability - Main risk factors that could give rise to financial stress in SSA: - slowing of global trade; - sustained lower commodity prices; - financial impact of the tightening of monetary policy in advanced countries. - Materialization of these risks would adversely impact economic activity and external and fiscal balances in SSA with attendant impact on: - bank profitability; - rising non-performing loans. - Banks in some countries have significant direct and indirect exposures to the sovereign (Appendix V). ### Procyclicality and real–financial sector interactions - The financial sector is inherently pro-cyclical and generally amplifies the business cycle via changes in the value of assets and leverage (Canuto and Gosh, 2013). - Mechanisms during booms: - bank capital reinforced by increased bank profitability or capital gains from rising asset prices; - increased demand for assets raises their prices, further fueling credit expansion. - Build-up of vulnerabilities during upturns: - increasing liquidity, maturity, and foreign exchange mismatches; - concentration of exposures to particular asset types (e.g., real estate). - Mechanisms during downturns: - declining collateral values weaken financial institutions’ balance sheets; - insufficient capital to absorb losses; - credit reduction and depositor confidence effects on banking liquidity; - even small shocks can trigger system-wide problems. ### Expansion of Pan-African Banks (PABs) and contagion risks - Expansion of PABs has increased the risk of contagion and raises concerns about financial stability in the region. - Network of systemically important banks created by expansion; financial health might not be known due to—in some cases—nascent consolidated supervision. - Contagion channels: - parent to subsidiary and subsidiary to parent; - across subsidiaries of the same group. - Examples of contagion drivers: - deficiencies in governance or perceptions of mismanagement at the group level; - reputational risks from large macroeconomic disequilibria in the home country leading to bank runs on subsidiaries; - interconnectedness through placement of deposits between parent and subsidiaries; - subsidiaries large relative to the group can transmit host-country problems to parents; - cross-border syndicated loans connecting subsidiaries leading to potential spillovers. - Data limitations: - amounts of syndicated loans and intra-group interconnections often not available, allowing risks to build up undetected. - Mitigants: - subsidiarization and ring-fencing provide some protection as subsidiaries are in principle separate entities and separately capitalized, potentially allowing them to continue operations in case of problems elsewhere in the group. ### Stress testing and cross-border contagion analysis - Cross-border contagion analysis has largely not featured in FSAP stress tests conducted so far. - Reasons include: - major expansion of pan-African banking groups is relatively recent and not an important issue at the time of many FSAPs; - for many PABs the size of cross-border subsidiaries is still quite low compared to overall assets, limiting immediate impact on home countries; - lack of data on cross-border transactions or intra-group exposures makes quantification of cross-border contagion impacts impossible even when analyzed. ### Systemic importance and geographic footprint of PABs (introductory pointers to Section II) - The report identifies and describes the increasing number of banking institutions headquartered in SSA with cross-border subsidiaries and branches, including North African banks with significant presence in SSA and banking groups headquartered outside Africa for comparison. - While the number of PABs is increasing, the phenomenon is dominated by seven banking groups in terms of geographical dispersion: - Ecobank operates in 33 SSA countries. - Standard Bank is the largest group based on the size of its balance sheet. - Around 40–60 percent of the subsidiaries of Attijariwafa, BOA, Ecobank, and Standard Bank are systemically important in their host countries based on deposit shares. - UBA has a widespread presence, but its subsidiaries mostly play a small role in their host countries’ banking systems due to its relatively recent expansion. - Smaller African banking groups concentrate operations in sub-regions, typically operating in three to nine countries, with examples: - Nigerian banks (Guaranty Trust Bank (GTBank), Skye Bank, Zenith Bank) focusing on Anglophone West African countries and starting to expand to francophone West Africa or the EAC; - Kenyan banks operating in the EAC (Burundi, Rwanda, Tanzania, and Uganda) and recently expanding into South Sudan. - Foreign banks with significant presence in SSA include Standard Chartered (U.K.), Barclays (U.K.), and Société Génerale (France), each with operations in at least nine countries; more than one third of these operations are systemically important in their respective host countries. - The massive expansion of pan-African banking groups occurred since the mid-2000s: - Between 2006 and 2010, the number of subsidiaries of the seven largest PABs almost doubled from less than 50 to almost 90 operations. - Ecobank added 15 subsidiaries between 2006 and 2010. - UBA added 17 operations since 2006. - Moroccan banks built presence in francophone Africa mainly through acquisitions (examples: GBCP bought Banque Atlantique in 2012; BMCE became major shareholder in BOA in 2010). - Attijariwafa bought Credit Agricole’s African operations in 2008. *Italic: International Monetary Fund, "PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT", excerpt sections 18–27 and introductory text of Section II.* ### 36. The major PABs generally have complex and in some cases opaque holding structures ### 36. The major PABs generally have complex and in some cases opaque holding structures ### Ownership, corporate structure, and scope of activities - Major PABs operate with an ultimate holding at the top and several sub-holdings below, including complex cross-holdings across different subsidiaries. - The financial holdings in some cases are not regulated and only sparsely supervised. - Banking is the dominant financial activity of the groups. - Other activities across groups include: - Insurance (e.g., BMCE/BOA or Standard Bank) - Microfinance through own operations or joint ventures (e.g., Ecobank or GBCP) - Investment activities and securities dealing - Leasing - Non-financial activities (e.g., information technology (IT) or real estate companies) - Increasing linkages—including cross-border linkages—exist between banks and non-banks of the same groups. - Shareholding concentration and examples: - For ETI and Standard Bank the major shareholders have at most a quarter of shares each and include shareholders from across SSA as well as international shareholders (e.g., the International Finance Corporation (ETI) and the Industrial and Commercial Bank of China (Standard Bank)). - South Africa’s Nedbank has acquired a 20 percent shareholding in ETI. - Qatar National Bank is a major shareholder in ETI since September 2014. - Attijariwafa’s major shareholder is SNI Group (controlled by the royal family of Morocco). - BMCE’s major shareholders are FinanceCom Group and BFCM-Holding. - Oragroup and Nedbank are majority owned by investment companies ECP and Old Mutual, respectively. - Structure of cross-border operations: - Major PABs conduct cross-border operations mostly as subsidiaries (separate legal entities with their own banking license) but with centralized business lines. - In the WAEMU region two banks operate branches within other WAEMU countries out of a subsidiary in one WAEMU country and requirements for these branches are based on a different formula than for subsidiaries. - Group-level common frameworks cover functions such as risk sharing or internal audit controlling; centralized services include common IT platforms and centralized treasury (example: Ecobank’s treasury centralized in Paris). - Personnel rotations and centralized training are used to disseminate group knowledge. ### Example: BOA Group (Box 5) and complex cross-holdings - The BOA Group exemplifies complexity: subsidiaries in each country have very complex shareholding structures and subsidiaries and group sub-holdings are interlinked through cross-holdings. - Cross-holdings make it difficult for supervisors to have a consolidated view and assess risks. ### Intra-group integration, centralized services, and associated risks (Box 6) - Functions typically centralized at group level include IT infrastructure and IT services or treasury operations. - Benefits: - Economies of scale and lower costs. - Risks and supervisory concerns: - Operational risks from centralized IT (sensitive information kept offshore; possible unauthorized access; information potentially not accessible when necessary). - Resolution risks if subsidiary functionality depends heavily on parent or group-wide services. - Fees for centralized services could be used to circumvent restrictions on dividend or capital transfers between subsidiaries and parent banks. - Supervisory responses: - Supervisors audit and check centralized systems carefully, including backup locations. - Some supervisors request banks to keep information and IT infrastructure within the country. - Supervisors scrutinize transfer prices closely, including with the help of consultants, and put bans on fees that cannot be explained by value added. ### Balance sheet expansion and asset growth (2007–13) - Consolidated-level findings: - Three major PABs (Ecobank, BMCE, and Attijariwafa) expanded their assets strongly since 2007. - Only one foreign banking group (Standard Chartered) had strong asset growth. - For the remaining banks, assets grew less than ten percent during 2007–13, or even declined. - For big foreign banking groups the African operations play a small role in the global group (share of less than five percent of total assets), so consolidated group developments may be misleading. - Subsidiary-level findings: - Pan-African groups show strong asset expansion across most subsidiaries; almost all subsidiaries of Ecobank show very high asset growth. - Standard Bank and BMCE have many subsidiaries with strong growth, although asset growth seems smaller in economies where subsidiaries have higher deposit share. - For subsidiaries of foreign banking groups, asset growth has been smaller and more heterogeneous; almost half of Barclays’ subsidiaries have seen decreasing assets. - Loan growth: - Pattern of loan growth similar to asset growth: subsidiaries of pan-African groups expanded loan books more strongly than foreign banking groups. - All pan-African banking groups had strong expansion of loan books from 2007 to 2013 across most subsidiaries. - For foreign banks expansion was more subdued and for many subsidiaries the loan book declined. ### Financial soundness, data gaps, and emerging vulnerabilities - Indicators analyzed include loan-to-deposit ratios, return on average assets (ROA), the total capital ratio, and non-performing loans (NPLs) for consolidated groups and subsidiaries over 2007–13. - Consolidated comparisons: - The four PABs analyzed have higher profitability (ROA) and lower loan-to-deposit ratios than the four foreign banking groups. - Foreign banking groups generally have loan-deposit ratios exceeding 100 percent (except Standard Chartered). - Pan-African banking groups exhibit loan-deposit ratios well below 100 percent (exception: Attijariwafa’s loan-deposit ratio increased in recent years to above 100 percent). - Capital ratios and asset quality have not deteriorated markedly overall, but: - Ecobank’s capital ratio has been on a downward trend. - Ecobank’s NPL ratio has exhibited large swings since 2008. - Data limitations: - ROAs and loan-deposit ratios are generally available for almost all subsidiaries. - Capital ratios and NPLs have large data gaps at the subsidiary level; capital ratio data for subsidiaries is available for a large number only for Standard Bank and Barclays. - Full indicator sets over the entire period are available only for a small number of systemically important subsidiaries. - Erratic data movements in capital and NPL ratios may indicate problems with underlying data. - Observed vulnerabilities: - Some subsidiaries exhibit: low profitability (and even losses), high and rising NPLs, and falling or very variable capital ratios. - Some of these subsidiaries also experienced high credit growth over the last five years, suggesting credit expansion at the expense of asset quality. - For Ecobank, this pattern is largely observed in smaller and relatively newly established subsidiaries. - For Barclays, several subsidiaries have low profitability and high NPLs (credit growth subdued). - Loan-to-deposit ratios are generally below 100 percent, indicating subsidiaries are financed through local deposits rather than heavy parent funding—contrasting with pre-crisis Eastern and Central Europe experience. ### Supervisory challenges and policy implications - Rapid expansion of PABs creates supervisory challenges given key weaknesses in the supervisory framework. Major supervisory challenges identified: - (i) Licensing and ownership structure - (ii) Differences in accounting and data standards - (iii) Consolidated bank supervision - (iv) Home-host issues including cross-border coordination and information sharing - Compliance with Basel Core Principles (BCP): - Compliance varies among African countries and is generally lower than in the rest of the world. - Compliance particularly weak regarding the home-host relationships principle: - Only 50 percent of African countries are compliant or largely compliant with this principle compared to almost 75 percent in the rest of the world. - Out of the 16 African countries where an assessment has been undertaken only Mozambique, South Africa, WAEMU, and Zambia were compliant. - Broader supervisory weaknesses in SSA include: - Supervisory capacity undermined by understaffing, lack of expertise and a growing gap between resources and mandate (including expansion to cover micro finance). - Prudential regulation and enforcement sometimes less demanding than international standards; enforcement is weak; progress slow in harmonizing regulatory standards and practices. - Licensing and ownership structure specific issues: - Licensing of new banks and cross-border operations does not always follow a structured, transparent approach. - Some authorities permit only subsidiaries and limit branches; others have no clear stance. - Complicated cross-border structures make effective supervision and resolution challenging for home and host supervisors, particularly where bank-holding companies are not properly regulated or supervised. - Supervisory recommendations and considerations: - Supervisors should weigh costs and benefits associated with PABs’ cross-border structures (subsidiaries vs branches), considering implications for competencies required and resolution complexity. - Supervisors should understand PAB corporate structures and, if necessary, hold them to a higher standard if the structure impedes effective supervision. - Complex structures impede consolidated supervision, undermine detection of risks, and complicate resolution if responsibilities cannot be clarified. - Deficiencies can be exacerbated by complicated ownership structures, especially where suitability of major shareholders cannot be properly assessed or risk exposures are hidden within parts of the group. *Source: Excerpt from IMF chapter "PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT" (selected sections).* ### 54. Financial reports and disclosures of PABs are based on different sets of accounting ### _121814 - 54. Financial reports and disclosures of PABs are based on different sets of accounting ### Accounting standards and disclosures - Financial reports and disclosures of PABs are based on different sets of accounting standards, which complicate comparative analysis across banks and may not contribute to transparent disclosures. - Many African jurisdictions apply IFRS for financial statement reporting, while other countries are still lagging behind (Box 3, Figure 9). - Even if plans for moving to IFRS exist, progress has been slow. - Recommendation: - Plans to implement IFRS should be accelerated where local accounting standards do not form a basis for fair and accurate measurement and transparent reporting. ### Box 7 — Subsidiaries versus Branches (summary) - Cross-border banking groups generate a trade-off between efficiency (scale and diversification) and financial stability concerns (cross-border contagion). - No single organizational model is unambiguously preferable given diversity of business lines and stages of financial development. - Decentralized model — Subsidiaries: - May be preferred by global retail banks that serve local clients and rely on local deposits. - Favored when well-developed local financial markets facilitate local funding or when branch criteria are stricter. - Host authorities may prefer subsidiaries to shield affiliates from parent problems and to facilitate local oversight. - Neither parent nor affiliates have a legal obligation to support troubled affiliates, though reputational factors may induce support. - Centralized model — Branches: - May be preferred by banks with significant wholesale operations for global liquidity and credit risk management and lower funding costs. - Home authorities may prefer branches to keep control over group capital and liquidity. - Host supervisors in underdeveloped financial systems may prefer full service branches to provide credit based on parent strength. - Group can redeploy surplus resources to affiliates, potentially limiting impact of idiosyncratic shocks. - Overall: - One size does not fit all. - Differences between models are increasingly smaller; degrees of centralization vary and regulation for branches has increased (for example requiring separate capitalization). - Attribution: This box is based on Fiechter and others (2011). ### Box 8 — Overview of Governance Best Practices in Commercial Banks (summary) - Good governance frameworks and practices are key for financial soundness and stability and are elements of regulators’ work in accordance with the 2012 BCPs, the 2013 Code of the International Organization of Securities Commissions, and other standards. - ETI group experience highlights risks from very large boards with few members with banking experience and weak fit-and-proper standards; reforms at ETI in mid-2014 addressed these shortcomings. - Ownership (BCP 5): - Transparent ownership with limited complex cross-ownership enhances transparency. - Supervisors need a clear view of ultimate ownership. - Parent holding companies need to be regulated as banks. - Boards (BCP 5, 14, 26): - Majority of independent, non-executive members. - Core of members with sound background in banking and financial services. - All board members should pass fit-and-proper tests, including no unresolved defaults on past debts. - Internal audit should report to a Board committee of independent members. - Board members have individual responsibility for oversight. - Boards of subsidiaries should be clearly mandated and held responsible for oversight of subsidiary operations and soundness. - Management (BCP 15): - Top management qualified and experienced in banking. - Management subject to fit-and-proper tests; key managers should not have unresolved defaults on past debts. - Appropriate internal risk management and assessment frameworks in place. - Accounting and IT systems (BCP 5, 22, 25–28): - High quality, secure, and reliable accounting and IT systems. - Accounting framework should comply with IFRS standards. - Accounts audited by reputable audit firms in conformity with international or national accounting standards and published; auditors should be periodically changed to ensure objectivity. ### Consolidated supervision (paragraphs 55–56) - Finding: - Consolidated supervision is a major deficiency in some home countries of pan-African banking groups. - Some countries (e.g., South Africa and Morocco) conduct supervision on a consolidated basis; others are slowly implementing it. Nigeria has recently commenced conducting consolidated supervision. - In the WAEMU region, bank holdings are in principle subject to supervision according to existing law, but prudential regulations to make it effective are not in place. - Consolidated supervision encompasses reporting, regulation (prudential norms and limits applied at consolidated and solo basis) and supervisory techniques. - Importance: - Essential regardless of organizational form (subsidiaries or branches). - Example: Morocco has a formally articulated supervision policy for home banks with operations abroad; the Moroccan central bank quarterly monitors key prudential indicators, including solvency, provisioning, and profitability. - Implementation benefits: - Allows thorough understanding and analysis of group operations, capitalization, and parent–subsidiary interactions. - Important where PABs expand into jurisdictions with weak supervision frameworks. - Should include supervision of centralized group services to prevent circumvention of restrictions. - Helps hedge supervisory gaps caused by deficiencies in cooperation and information sharing among supervisors. ### Home–host issues and supervisory cooperation (paragraphs 57–63) - Finding: - Rapid growth of PABs highlights importance of enhancing supervisory coordination and information sharing. - Authorities have started strengthening working relations, joint activities, formal cooperation agreements, and first supervisory colleges, but more effort is needed. - Current weaknesses: - Arrangements not optimally exploited: flow of information not systematic and regular; roles and responsibilities not fully accounted for. - Number and frequency of joint inspections/activities have been limited so far. - Four likely reasons for limited interaction: 1. Some supervisors still struggle with effective oversight over domestic operations; cross-border issues may exceed capacity or mandates. 2. Expansion is recent and needs time to become more structured. 3. Cross-border subsidiaries remain limited in size relative to group materiality; home supervisors may not prioritize them. 4. Effective cross-border supervision is a complicated skill; supervisors may be wary of untested arrangements, especially crisis management and resolution. - Offsite vs onsite: - Home authorities rely heavily on offsite supervision with limited onsite inspection; this may not reveal true subsidiary positions given data quality problems. - Recommendation: enhance onsite frameworks, including increased joint inspections. - Supervisory colleges: - Of the seven major PABs, three groups had a supervisory college recently and for three groups colleges are planned to be held by the end of the year. The CBK has organized supervisory colleges for most of its PABs. - Colleges were organized as general colleges including all host supervisors; first meetings were productive for relationships, understanding group strategy, and sharing subsidiary assessments. - Challenges: time to organize, issues to discuss, and decision-making capacity of attending supervisory staff. - Recommendation: - Treat colleges as ongoing relationships, active between meetings via teleconferences, videoconference, or emails. - Supplement colleges with bilateral forms of information sharing and cooperation. - College structure evolution: - Once mature, consider a core college (few supervisors of key host countries) plus a universal college (wider representation), balancing effectiveness and involvement. - Home supervisor responsible for structure, considering nature, scale, complexity of group and needs of relevant supervisors. - College structure should be periodically reviewed and membership criteria transparently communicated. - Host supervisors not included should be engaged via other methods (e.g., bilateral arrangements). - Functional enhancements for colleges: - Circulate meeting agendas and materials well in advance. - Record meeting summaries, recommendations and action points, and follow up. - Ensure seniority, knowledge, and decision-making powers of representatives match topics’ importance. ### Cross-Border Crisis Management and Resolution (paragraphs 64–67) - Finding: - Very limited work has been done on establishing crisis management and resolution frameworks for PABs, despite progress in cross-border supervision. - Even in countries with better supervisory frameworks, crisis preparedness and resolution planning for cross-border banks has not been tackled. - In some countries and regional monetary unions, bank resolution poses challenges because resolution powers are unclear and spread across regional and national bodies with possibly conflicting objectives. - In many/most countries, bank resolution is conducted via regular company insolvency law, which typically fails to deliver prompt and effective resolution in systemic cases, potentially undermining public confidence. - Recommendations: - Ensure national resolution frameworks provide adequate powers and sufficient legal and operational capacity. - Enact legislation aligned with the FSB’s Key Attributes of Effective Resolution Regimes, providing a range of resolution tools (including transfer and bridge bank powers) applicable at an early juncture. - Where powers are allocated between national or regional authorities, establish cooperation and clear lines of responsibility and accountability. - Establish Crisis Management Groups (CMGs) for regionally and domestically systemic cross-border banks; CMGs should include supervisors and may include central banks, ministries of finance, or deposit insurance corporations. - Require regionally and domestically systemic cross-border banks to develop recovery and resolution plans: - Recovery plans: contingency plans demonstrating ability to maintain operations during stress; all banks should prepare comprehensive financial contingency plans, updated annually, respecting proportionality criteria. - Resolution plans: led by home supervisor with active engagement of relevant host supervisors; national and regional supervisors should require resolution plans from systemic banks, which may need legal reforms to give supervisors power to require changes to group structures to improve resolvability. - Resolution plans should be revised and updated annually. - Host resolution authorities may prepare their own resolution plans for subsidiaries in their jurisdictions. - Note: The GFC demonstrated high costs of lacking a workable cross-border operational framework and the difficulty of constructing one. *Source: Excerpt from "PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT" (IMF PDF chapter).* ### 68. While cooperation and information sharing on cross-border banks’ resolution plans ### _121814 - 68. While cooperation and information sharing on cross-border banks’ resolution plans ### Cross-border cooperation and discretionary host actions - Cooperation and information sharing on cross-border banks’ resolution plans and crisis management are fundamental. - Supervisory or national resolution authorities should have resolution powers with respect to the local structures of cross-border banks and should use these powers in coordination with home authorities. - Where the home supervisory authority is not acting in the interest of the host jurisdiction and its financial stability, the host authority may take discretionary action, such as ex-post ring-fencing measures restricting intra-group transfers, but subject to prior notification and consultation with the home authorities. - Ring-fencing may be a rational response where the cross-border parent will not support the host entity and host authorities wish to ensure local assets are not up-streamed to the parent to the detriment of local depositors and creditors. ### Ring-fencing versus capital mobility - Excessive ring-fencing could present an unhelpful restriction on capital mobility and could destabilize a PAB facing stress. - Case example: In 2012, in the face of large increase in capital requirements mostly directed at non-local banks in some other countries, the CBN issued directives forbidding Nigerian banks from re-capitalizing subsidiaries abroad. Subsequent consultations led to modification of the directives to allow for capitalization based on commercial needs on a non-discriminatory basis. - Consultations and transparency are emphasized to remove uncertainty and enhance the safety of the PAB both in the home and host country. ### Deposit insurance, creditor hierarchy, and financing of resolution - Only some African countries have deposit insurance schemes, posing a challenge for resolving PABs. - Effective bank resolution requires effective financing arrangements, for example an ex ante deposit insurance fund that can be used to back a transfer of retail depositors to another bank in a resolution. - Design challenges: - Coverage range: whether the deposit insurance scheme includes banks and their activity within the jurisdiction only, or also branches and/or subsidiaries overseas. - Creditor hierarchy: how to treat different types of claims that may exist across borders. - Recommended approaches: - Depositor preference which does not discriminate by location or nationality of depositor. - Deposit insurance schemes with coverage provided by the jurisdiction—home or host—that collects the premiums for an ex ante fund. - Use of deposit insurance funds should conform with the revised International Association of Deposit Insurers/BCBS Core Principles for Effective Deposit Insurance Systems and should not be diverted to support ailing banks to keep them open or for any other government support. - These issues are especially relevant in African countries planning to establish deposit insurance schemes. ### Crisis Management Groups (CMGs) and Resolution Plans (Box 9) - CMGs could play a pivotal role in developing cooperation on planning and crisis resolution stages and may include: - the roles and responsibilities of the authorities in the pre-crisis stage as well as during the crisis; - information sharing process and details before and during the crisis; - information sharing and consultation procedures among home and host supervisory authorities in case of adverse developments at the level of the parent bank and/or its affiliates; - joint work and regular consultations to assess the robustness of a cross-border bank resolution plan and strategy; - procedures for protection of confidential or sensitive information. - Resolution plans should provide a roadmap for an orderly wind-down of troubled systemic banks and, given their nature, should be prepared with considerable supervisory input. Resolution plans should include, inter alia: - detailed information regarding the bank’s various business lines to substantive legal entities along with a breakdown of its corporate organization; - a complete explanation of the ownership structure, along with a full accounting of the assets, liabilities, and contractual obligations of the company; - an explanation of where critical functions—such as information technology or treasury functions—are conducted and how subsidiaries will operate in resolution if these functions are housed in entities in other jurisdictions; - data on credit and other exposures, major sources of funding, capital situation, and cash flows, along with identification of foreign countries in which it operates. ### Lessons from the Global Financial Crisis (Box 10) - The GFC showed that absent effective cooperation and planning, resolution tools tend to be last-minute ad hoc interventions involving public support. - Two illustrative cases from 2008: - Fortis Group: required government interventions by both home and host authorities. - Lehman Brothers group: 2985 legal entities operating in more than 50 countries; the holding company and several major subsidiaries filed for bankruptcy protection. - Key lessons for effective cross-border bank resolution: - (i) orderly resolution plans; - (ii) understanding by regulators of the cross-border banking group structure, interdependencies, and implications for going and gone concern purposes; - (iii) understanding of insolvency regimes in different home/host jurisdictions since these would usually govern resolution of components of a cross-border banking group. - The Vienna Initiative and Vienna 2.0 reflected lessons to enhance bank resolution and supervisory practices and to promote coordination between home and host countries. ### Roles of regional institutions and examples - WAEMU: - Supervision is shared between regional and national authorities with the BC at the center. - Banks and MFIs with more than CFAF2 billion in deposits or loans are supervised by the BC; smaller MFIs by national authorities. - A Financial Stability Committee is responsible for macro-prudential supervision at the regional level. - Bank licenses are issued by the national Minister of Finance after a binding opinion by the BC; licenses are revoked by the national MOF upon decision of the BC, with the domestic MOF having the right to appeal at the WAEMU Council of Ministers. - A prefunded deposit insurance scheme is being implemented. - Bank holding companies are not formally regulated but are supervised by the BC on the basis of a WAEMU council minister’s decision of 1991 on ETI. - Resolution and allocation of responsibilities are problematic given shared supervision and licensing; issues include lender of last resort role, fiscal authority responsibility, and lender of last resort in foreign currency requiring potential swap arrangements. - EAC: - Cross-border cooperation is part of broader EAC agenda on bank regulation and supervision; Article 85 of the EAC Treaty envisages development and integration of financial markets as prelude to the East African Monetary Union. - Monetary union protocol was signed on November 30, 2013. - Institutional steps: Monetary Affairs Committee (MAC) formed in 1997 to speed up regional supervisory cooperation and multilateral MOU signed in 2008 to accelerate cooperation in banks’ consolidated supervision. The MOU has facilitated joint on-site examinations and training but does not address crisis management issues. - SADC: - Collaboration on financial infrastructure and regulatory coordination has advanced, guided by the Protocol on Finance and Investment (FIP). - Two regional institutions coordinate cross-border regulatory cooperation: Committee on Central Bank Governors and the SADC Subcommittee on Banking Supervisors. - Progress in harmonizing regulatory standards has been hampered by different stages of development and differing legislative and institutional models. - SIRESS (SADC Integrated Regional Electronic Settlement System) introduced in July 2013 to settle regional transactions on a gross basis and in real-time; initial participants included the four rand Common Monetary Area countries. As of end-March 2014, 22 financial institutions from within the CMA participated, including four central banks. Additional countries joined in 2014, bringing the number of SADC countries in the system up to ten and the number of participants on SIRESS increased to 62. - WAMZ: - Plans for a monetary union accompanied by efforts to enhance supervisory cooperation and harmonize supervisory processes. - College of Supervisors of the West African Monetary Zone (CSWAMZ) formed in 2010 to enhance supervisory cooperation, harmonize processes, build capacity, deepen information sharing, and strengthen financial stability. - CSWAMZ activities: joint examinations of banks with cross-border subsidiaries; publication of an annual Financial Stability Report; harmonization of supervision through regular peer reviews; building cooperation with other central banks through MOUs. Plans for bank resolution are being developed, with the CBN acting as chair. ### Authorities’ views - Authorities viewed the initiative as timely and important amid increasing African economic integration. - Authorities noted PABs support competition, foster financial innovation, and support market development while posing regulatory and supervisory challenges. - Feedback: - Strong support for the study’s findings and recommendations, with recognition that progress was already being made in several areas, in part due to recent FSAPs. - Actions taken include upgrading national regulatory frameworks (e.g., closing gaps on bank holding companies’ regulation, raising accounting standards), creating cross-border supervisory colleges, signing MOUs, and exchanging information. - Emphasis on completing financial infrastructure and promoting financial inclusion. Noted gaps: deposit insurance, credit rating agencies and credit information systems, dispute resolution mechanisms, efficient payments and settlements systems, and consumer protection mechanisms are not in place in all SSA countries. - Concern over uneven supervisory capacity and the importance of harmonization of standards. - Example: BAM requested BMCE to develop a strategy for simplifying the structure of BOA; the strategy includes a roadmap for gradually removing indirect holdings with the first unwinding of indirect holdings already occurred. *PAN-AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT, INTERNATIONAL MONETARY FUND* ### 80. On supervisory colleges, the authorities drew attention to the progress being made ### On supervisory colleges, the authorities drew attention to the progress being made ### Supervisory colleges and cross-border supervision - Authorities noted progress and peer-to-peer learning via new cross-border supervisory colleges and in joint supervision missions. - For supervisory colleges, it was critical that the most senior decision making officials participate. - PABs are not large globally, and none are classified as G-SIBs, so they are not captured by the specific Basel III requirements for higher loss absorbency requirements or the FSB Key Attributes. - Several financial institutions are regionally systemic; some authorities suggested considering applying the SIFIs framework to them (for instance as regards the leverage ratio). - Need for more emphasis on stress testing, in particular on top-down macro models (with a cross-border component). - Need to examine ring-fencing practices introduced by national authorities. ### Resolution and crisis management - One of the biggest needs is further progress on resolution; existing MOUs on cross-border banks discuss only supervisory issues and are silent on crisis management and resolution. - It is not advisable to wait until a crisis occurs to get a resolution framework in place; agreements are needed that clearly delineate home-host responsibilities in crises. - Without a resolution mechanism, supervision alone may have limited effectiveness. - Resolving a holding company with operations in many countries would likely be challenging and would benefit from early agreement on fiscal burden-sharing and backstopping as well as agreements on creditor hierarchies. - National fiscal authorities will likely have domestic interests in mind unless there is a robust pre-commitment to a cost-sharing formula for any public support for a cross-border bank. - Ring-fencing does not obviate the need for collaboration. - For PABs, the buffers beyond core capital that can be bailed in are at the moment much lower, which may increase fiscal implications. ### Key findings on PAB systemic importance and spillovers - The PABs are playing a key role in driving financial innovation and development in Africa, driving financial integration, inclusion, and spurring innovation and competition. - PABs are filling a void left by the withdrawal and declining role of more traditional players and serving large unmet needs for financial services on the continent. - PABS are systemically important in a number of countries and pose new regulatory and supervisory challenges that, if left unaddressed, could raise systemic risks. - Urgent gaps include the lack of formal regulatory oversight of bank holding companies in the WEAMU and their supervision on a consolidated basis. - Consolidated supervision and cross-border cooperation are key to getting a full picture of the bank. - The spread of PABs likely increases the strength of spillovers across African countries; greater asymmetry in economic size between home and host increases the risk that an overall strategy will not take the host country into account. - Little attention has been paid to preparing for the eventuality of needing to resolve a PAB, with the recent exception of work in the WAMZ. ### Recommendations (A. Recommendations) - Licensing: - Country or regional authorities must ensure that banks permitted to operate are sound, have good governance, and have business models that will aid the financial development of the country. - A pre-condition should be a bilateral MOU that should encompass, among other matters, the establishment of intensive collaboration and comprehensive information sharing with home country supervisors, and assurance from those supervisors as to the soundness and strength of the bank. - Governance and Ownership Structure: - Supervisors should ensure ultimate beneficiaries are known and review fit-and-proper oversight of bank management, taking urgent action if deficiencies are uncovered. - Supervisors should examine cross-border intra-bank transactions and coordinate closely across jurisdictions. - Data and transparency: - National authorities need to identify data requirements and ensure adequate and timely exchange, both upstream and downstream. - If adequate provision of appropriate data cannot be ensured at the licensing stage or reporting is obstructed subsequently, home supervisors should take appropriate corrective actions. - Appropriate sharing of information between supervisors and authorities responsible for macroprudential and financial stability aspects and the central bank at the national level is vital. - Consolidated supervision: - Implementation of consolidated supervision for all PABs, in particular for the major PABs, needs to be a high priority and plans for implementing it need to be accelerated. - Consolidated supervision by the home authorities should cover centralized group services to prevent circumvention of restrictions (e.g., on capital transfer or dividends). - Harmonization: - Lagging countries should intensify efforts to harmonize prudential regimes with international standards and prioritize legal reforms enabling effective supervision and crisis management. - A phased introduction of Basel II/III standards in lagging countries is recommended as part of comprehensive reforms. - Adoption of IFRS accounting standards should be accelerated. - Joint inspections: - Information about a PAB can be maximized through joint inspections, with the home country participating in inspections in host locations. - In some cases bespoke supervision may be established (i.e., a single supervisory team in multiple supervisory agencies). - Supervisory colleges: - Home authorities should establish supervisory colleges for all systemic PABs, which should meet at a senior level at least once a year. - Colleges should be organized to ensure focused discussion of core risks and issues; supervisors’ representation should be enhanced to warrant better implementation of college decisions and recommendations. - A two tiered structure with core and universal branches should be considered for large and geographically widespread groups. - Resolution preparation: - Authorities need clear understandings across jurisdictions of respective responsibilities in the event of difficulties, in keeping with the FSB Key Attributes, including convergence on creditor hierarchies and mechanisms for recognizing and enforcing resolution measures across jurisdictions. - Authorities should review legal frameworks to ensure powers to intervene and force resolution when a bank is no longer viable (i.e., special resolution regimes). - Consider strategies to minimize public sector costs, including establishing pre-funded depositor protection. - Recovery and resolution plans should be established, at least for systemically important PABs. - Each PAB should have a CMG which should meet periodically to exchange information about the bank and how it could be resolved, including clarifying financial responsibilities. - Each PAB should be required to provide a “living will.” - Finance ministries should be included in discussions given the likely fiscal implications of a bank failure. - Regional integration: - A common currency together with free movement of capital may be hard to square without a common supervisor and resolution mechanism. - Both the EAC and the WAEMU may consider moving toward common frameworks (WAEMU has a common supervisor but no special resolution mechanism). - Enhancement of intra-regional cooperation across regulatory and supervisory issues is recommended; finance ministries need to be brought on board. - Pan-African financial stability (PABSOC): - Consider setting up a PABSOC comprising the regulators/supervisors and central banks from Kenya, Morocco, Nigeria, South Africa and WAEMU as initial members, to drive the cooperative and harmonization agenda, with others joining as and when they acquire a presence of a major PAB or a significant presence of PABs as a home country. - Regional groupings should periodically review national stress test exercises and conduct multi-regional exercises for the PABs. - Home supervisors and the PABSOC could consider subjecting PABs with domestic or regional systemic importance to D-SIB requirements and consider the regional dimension in applying these requirements. - Competition / financial inclusion / consumer protection: - Code-of-conduct issues should be on the authorities’ agenda, with cross-border collaboration encouraged. - Consultation at the national level between supervisors and authorities responsible for financial stability and the central bank is important. - BAM has established a committee in which the three Moroccan PABs discuss best practices for the African expansion. ### Surveillance and Technical Assistance - The emergence of PABs has implications for financial stability of individual African nations, regional groups, and Africa as a whole. - Country authorities and national supervisors need to assess vulnerabilities at the national level and those arising through financial sector linkages and spillovers. - Policy responses need to take the regional dimension into account and avoid purely nationally-oriented policies. - With PABs operating beyond existing monetary unions and formal regional integration areas, a first best solution of common supervision and a common back-stopping mechanism is unlikely to emerge in the short run. - Existing regional bodies will need to adapt to better oversee PAB activities and improve coordination among regional and national supervisors; these structures should be used to assess the need for better coordination of financial back-stopping and resolution of PABs. - IMF surveillance implications: - National Article IV consultations will discuss PAB developments in individual home and host countries. - The integrated surveillance decision provides a basis for bilateral surveillance to focus on spillover issues covering regional implications of PAB activities. - National FSAPs would include focus on specific issues related to PABs. - Regional surveillance exercises (such as for the WAEMU) are likely to put special emphasis on these banks. - Consideration should be given to deepening macro-financial stability analysis through a regional/thematic FSAP focusing on the PABs. - Capacity building: - Strengthening oversight capacity is a priority; PAB home and host authorities have mutual interest in raising oversight capacity quickly. - Home authorities are likely to lead, including by including host country supervisors in training and through joint inspections and college meetings. - Staff exchanges and peer learning initiatives with supervisors from jurisdictions facing similar challenges could be initiated. - Some PABs have shareholders from countries with relatively advanced financial regulation and supervision, which can provide implicit or explicit support for national supervisors’ upgrading efforts. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_121814.pdf* ### 90. Beyond this, the IMF, as well as other multilaterals and national providers of technical ### Beyond this, the IMF, as well as other multilaterals and national providers of technical assistance, can prioritize their activities to provide a comprehensive program to enhance supervisory capacity to handle the PABs. ### Urgency and overarching recommendation - A comprehensive program to enhance supervisory capacity to handle the PABs is urgent, "in view of the financial stability and developmental challenges posed by the PABs, and could have substantial payoff." - Program scope should include: - Formulating and prioritizing country specific recommendations for enhancing and upgrading supervisory capacity based on each countries’ or regions’ individual circumstances. - Advice on developing financial stability monitoring. - Advice on governance and institutional implications if regional integration is to be deepened, and if new bodies such as the PABSOC are established. ### Data sources, coverage, and definitions - Sources cited: "Annual reports, Bankscope, and bank websites." - Data availability is categorized by group: - Group 1: Consolidated data and data for all subsidiaries available in Bankscope. - Group 2: Consolidated data and data for the majority of subsidiaries available in Bankscope or annual report. - Group 3: Consolidated data and data for some subsidiaries available in Bankscope or annual report. - Group 4: No consolidated data and data for some subsidiaries available in Bankscope or annual report. - Consolidation code definitions (as provided): - C1 - From Bankscope: statement of a mother bank integrating the statements of its controlled subsidiaries or branches with no unconsolidated companion. - C2 - From Bankscope: statement of a mother bank integrating the statements of its controlled subsidiaries or branches with an unconsolidated companion. - U1 - From Bankscope: statement not integrating the statements of the possible controlled subsidiaries or branches of the concerned bank with no consolidated companion. - C - From the Annual Report: consolidated statements integrating its controlled subsidiaries and/or branches. - U - From the Annual Report: unconsolidated statements excluding any subsidiaries or branches. - Systemic subsidiary/branch definition used across tables: - "Subsidiaries/branches are defined as systemically important if deposits are larger than 10 percent of banking system deposits or if assets are larger than 7 percent of GDP." ### Data vintage and geographic/temporal notes - Deposits data is "as of 2013 if available or of 2012." - GDP data is "as of 2013." - Bankscope data may be outdated in some cases; italicized numbers in tables indicate data is from Spring 2012 REO or from Bankscope for 2011 or older. - Tables and figures provided in the source include: - Table 2. Selected PABs: Main Information, 2013 (Millions of U.S. dollars) - Table 3. Selected PABs, Share of Deposits by Country, 2013 (Percent) - Table 4. Selected PABs: Assets in Percent of GDP by Country, 2013 (Percent) - Table 5. Selected Foreign Banks with SSA Presence: Share of Deposits by Country, 2013 (Percent) - Table 6. Selected Foreign Banks with SSA Presence: Assets in Percent of GDP by Country, 2013 (Percent) - Table 7. Selected PABs and Foreign Banks: Asset and Loan Growth, 2007–2012/13 - Table 8. Selected PABs and Foreign Banks: Consolidated Financial Soundness Indicators, 2007–13 (Percent) - Table 9. Selected PABs and Foreign Banks: Subsidiaries’ Financial Indicators, 2007–13 (Percent) - Figures 10–11: Maps of Share of Deposits and Maps of Assets in Percent of GDP by Country, 2013 - Sources for maps and figures: "Annual Reports, Bankscope, Bankers Almanac, and IMF staff calculations." ### Key quantitative thresholds and metrics emphasized for supervisory focus - Systemic-importance thresholds used for oversight prioritization: - Deposits threshold: "10 percent of banking system deposits." - Assets threshold: "7 percent of GDP." - Data vintage focal years used across analyses: "2013" and where unavailable "2012." - Financial soundness and performance indicators tracked across banks and subsidiaries in the tables: - Loan-Deposit Ratio - ROA - Total Capital Ratio - NPL Ratio - Asset growth and Loan growth for 2007–2012/13 ### Policy and capacity-building implications (priorities for IMF and partners) - Prioritize technical assistance to: - Upgrade and tailor supervisory capacity country-by-country based on individual circumstances. - Strengthen financial stability monitoring systems to capture cross-border exposures and subsidiary-level vulnerabilities. - Address governance and institutional arrangements required if regional integration deepens or new regional bodies (for example, PABSOC) are established. - Use data-driven identification of systemically important subsidiaries/branches based on the explicit thresholds (deposits ≥ 10 percent of system deposits; assets ≥ 7 percent of GDP) to: - Sequence supervisory outreach and capacity-building interventions. - Target stress-testing, resolution planning, and cross-border contingency arrangements. - Improve consolidated reporting and data-sharing practices consistent with the consolidation code definitions (C1, C2, U1, C, U) to reduce data gaps (Groups 1–4) and enhance cross-border oversight. ### Observations on data limitations relevant for policy - Data availability limitations are explicitly noted across many banks (Group 1–4 classification) and some country/subsidiary cells are marked "n.a." or "x" where data is not available. - Bankscope data "may be outdated in some cases," and some table entries rely on Spring 2012 REO or older Bankscope data, limiting comparability for 2013-focused analysis. - The tables highlight heterogeneity across banks and subsidiaries in key indicators (loan-deposit ratios, ROA, capital ratios, NPLs), underscoring the need for tailored supervisory diagnostics. *Source: Excerpt from PAN‑AFRICAN BANKS: OPPORTUNITIES AND CHALLENGES FOR CROSS-BORDER OVERSIGHT (tables, notes, and accompanying text as provided).* ### Appendix I. Pan-African Banks’ Home Countries ### Appendix I. Pan-African Banks’ Home Countries ### Kenya - Kenyan banking sector is more developed and capitalized than in other EAC countries, creating a competitive advantage for regional expansion. - Expansion drivers: - Following clients abroad. - Exporting innovative business models (example: Equity Bank, Kenya Commercial Bank (KCB) introducing agency banking). - Cross-border footprint: - Currently eleven Kenyan banks operating in the EAC Member States and South Sudan. - Operating through 288 branches. - First expansion into the EAC began in the late 1990’s when KCB began operations in Tanzania. - Effects of expansion: - EAC FSAP (World Bank, 2013) found EAC banks expanding regionally have lower spreads and are more efficient than other private domestic banks. - Subsidiaries of Kenyan banks have lower spreads and overheads compared to subsidiaries of foreign banks from outside the EAC. - High profitability in home markets provides a buffer against early losses in subsidiaries. - Cross-border supervisory cooperation: - The CBK has hosted three supervisory colleges for KCB, Equity Bank, and Diamond Trust Bank. - CBK plans to host three additional supervisory colleges by the end of 2014. - CBK has entered into MOUs with other banking regulators where Kenyan banks are present to guide working relationships and ensure exchange of supervisory information. ### Morocco - Moroccan banking sector is among the most developed and stable on the continent and is home to some major African cross-border banks. - Expansion characteristics: - International and African expansion of its three largest banks is relatively recent. - Moroccan banks export a business model focused on development of SMEs and high supervision standards imposed by the Moroccan central bank—BAM. - BAM provides technical assistance to some host supervisors. - Geostrategic and market drivers: - Morocco’s position at the cross-roads of Europe, Africa, and the Arab world favored international links and development. - Early international expansion was centered in Guinea, Mali and the Central African Republic. - Recent expansion was driven by small impact from the GFC, challenging situations in neighboring Arab countries, and limited domestic growth prospects—leading to expansion mainly into francophone West and Central African countries. - Two-phase expansion process: - Expansion phase: mainly acquiring existing banks to increase presence. - Consolidation phase: digesting expansion, aligning systems and procedures, minimizing risks. - BAM’s role and policies: - BAM guides and supervises international expansion to make Morocco an international hub while ensuring risk control. - Banks must share three-year expansion strategies with BAM. - Any new international expansion requires BAM’s prior authorization. - BAM approves expansions based on two main criteria: risk-control-oriented culture and good governance. - BAM considers country risks and individual banking group performance risks before approval. - BAM is constructing a risk matrix including indicators on size of parent/subsidiary, contribution to the parent bank, profitability, asset quality, and market share in the host country. - BAM favors steadier rather than rapid expansion and incentivizes acquiring a majority stake in foreign banks to allow parental control and key nominations. - MOUs and legal framework: - BAM does not require a bilateral MOU before opening a subsidiary but tries to have a MOU signed once the subsidiary is opened. - MOU provisions typically cover prudential supervision, sharing of information, conduct of inspections, and training and capacity building. - MOUs do not include banking resolution provisions (would require MOFs involvement). - Morocco is enacting a new central bank statute and new banking legislation to strengthen BAM’s supervisory powers. - Coordination among banks: - Morocco has an African Committee consisting of BAM and the three largest banks to coordinate expansion and prevent fierce international competition. - The Committee meets twice a year at the highest level and undertakes quarterly meetings at the technical level. - A code of conduct has been signed by the three banks to prevent over-competition and avoid presence in countries deemed too risky. - Supervision practices: - BAM undertakes consolidated supervision of banking groups. - BAM set up a first supervisory college meeting for Attijariwafa and plans similar meetings for the other two large banks. - BAM conducts regular conference calls with other supervisors and joint inspections of subsidiaries. ### Nigeria - Historical expansion: - Cross-border expansion started in 2002 and increased after the 2004 banking sector consolidation following the increase in minimum capital requirements from N2 billion (US$17 million) to N25 billion (US$210 million). - By the end of 2008, more than half of the 20 domestically owned Nigerian banks remaining had subsidiaries in at least one other African country (compared to only two in 2002). - UBA had subsidiaries in 18 African countries. - Impact of the GFC and risk management: - Expansion was temporarily halted by the global financial crisis in 2008–09. - Expansion picked up after stabilization following intervention in the banking sector and strengthening of risk management and supervisory frameworks by the CBN. - Poor initial risk frameworks and the financial crisis strained some banks, resulting in failures (example: Oceanic Bank, which had expanded to seven countries before the crisis). - Expansion drivers: - Increased availability of capital. - Opportunities in financing trade between Nigeria and other countries. - Leveraging of success, experience and technology platforms. - Initial concentration in neighboring countries and WAMZ (examples: Ghana, Sierra Leone, Liberia), before moving into East Africa and francophone countries (examples: Côte d’Ivoire, Burkina Faso, Democratic Republic of Congo). - Successful reforms in host countries and a conducive macroeconomic environment in Nigeria aided expansion. - Contributions to host markets: - Nigerian banks ranked 1–15 in the African Business Survey (African Business magazine, December 2008) among the most capitalized businesses in Africa. - Contributed to foreign direct investment in host countries and to raising capital outside host countries. - Contributed to increase in bank branches in host countries and account for a significant share of banking sector assets. - Examples of branch growth contributions: - Ghana: Nigerian banks contributed 20 percent to the increase of branches (from 595 to 640 during 2007 and 2008). - Sierra Leone: 26 percent of branch growth attributable to Nigerian banks. - The Gambia: 35 percent of branch growth attributable to Nigerian banks. - Branches increasingly located outside capital cities, contributing to financial access nationwide. - Regulatory and supervisory response: - Nigeria and host countries need deeper cooperation to ensure financial stability and sustain financial sector development. - CBN actions post-crisis: - Strengthened regulatory framework and started implementation of consolidated supervision and a framework for cross-border supervision. - Framework includes as a precondition for expansion the existence of a MOU with the host country. - 38 MOUs have been initiated and 15 signed so far. - A supervisory college for UBA has been established. - WAMZ college of supervisors used to strengthen information sharing within the zone. - CBN provides capacity building for host supervisors through the WAMZ mechanism. - Joint home-host on-site bank examinations of Nigerian banks’ subsidiaries provided practical experience sharing. ### South Africa - Sector characteristics: - South African banking sector is well-developed; biggest banks are sound and well-capitalized. - One of the most sophisticated banking sectors on the continent with a diverse array of products and instruments. - Push and pull factors for expansion: - Push: market saturation and sluggish domestic growth. - Pull: higher growth prospects in the rest of Africa and increased pan-African trade concentrating in the Southern African region and manufactured goods sector. - After the GCF, SABGs refocused expansion strategies to the African subcontinent (example: Standard Bank). - Major banks and footprint: - The banking system is dominated by four universal banks and an investment bank: Standard Bank, First Rand, Nedbank and Absa (now part of BAGL), and Investec. - The four largest banks account for approximately 75 percent of deposits in 2013. - South African banks have operations in 17 other sub-Saharan African countries with a Representative Office or Investment Bank Branch in another six countries. - These operations comprise about six percent of assets of the group total on average; this figure is expected to grow. - Expansion strategies by bank: - Standard Bank expanded steadily, notably after acquiring ANZ Grindlays Bank in 1993, primarily through acquisitions. - Nedbank expanded more after the GFC and leverages relationship with Ecobank to support customers within the Ecobank footprint. - FirstRand is the most active SABG expanding in the region recently. - SARB oversight and requirements: - SARB required banks to submit pan-African expansion strategies, recovery and resolution plans, and to conduct stress-tests (capital adequacy and common scenario stress-tests). - SARB asked banks to make recovery plans on a group basis and to include specific plans for significant subsidiaries, indicating: - which subsidiaries are material to the group; - which subsidiaries are systemically important in the host country. - Scope remains to further strengthen SARB’s crisis management and bank resolution framework. - Cross-border cooperation and capacity building: - SARB has begun cross-border cooperation and information sharing, with maturity and depth differing among counterparts (strong relationship with the U.K.; relatively new and limited relationships with some African countries). - SARB recognizes the difficulties of operating across multiple regulatory frameworks and limited capacity of some host supervisors. - South Africa is the only African country in the BCBS and requires its banks including all subsidiaries to comply with Basel III, while other jurisdictions may use different Basel standards. - SARB holds training workshops and has conducted or is planning joint onsite inspections with host supervisors (examples: AML supervision for Standard Bank operations in Nigeria and Kenya). - Supervisory colleges and next steps: - In 2013 SARB formed a supervisory college for Standard Bank and plans to form colleges for the other big banking groups. - The 2013 Standard Bank meeting was two days: day one for Standard Bank to present strategy and risks; remaining time for regulators’ discussion. - SARB noted the supervisory college enhances dialogue and background risk assessment but is cumbersome to organize. - SARB’s next steps include adding crisis management to the agenda of supervisory colleges in 2015 and forming a second college for BAGL. ### WAEMU - Banking activities and cross-border flows: - Banking in the WAEMU is still mainly conducted within national borders. - Cross-border flows to households or corporations are largely in the form of syndicated loans involving a sister bank in the client’s country. - Côte d’Ivoire and Senegal were net recipients of these flows in the recent period; most other countries were net exporters. - These flows were relatively small, at about 1.6 percent of total lending in 2012 (IMF, 2013a). - Main cross-border financial flows involve bank purchases of government paper. - Emergence of pan-African banking groups: - The WAEMU region is both host and home to some PABs. - Moroccan banks have expanded into the WAEMU region in recent years. - Togo is home to two major pan-African banking groups. - European banks remain engaged in the region while pan-African banking groups have expanded. *International Monetary Fund — Appendix I. Pan-African Banks’ Home Countries* ### Appendix II. Selected Pan-African Banks ### Appendix II. Selected Pan-African Banks ### Kenya - Equity Bank - Founded in 1984 as Equity Building Society; transformed into microfinance and became a commercial bank in the 1990’s. - Focus: SMEs and innovative delivery channels such as mobile banking. - Cross-border expansion: started in Uganda (acquisition of Uganda Microfinance Limited), then South Sudan, Rwanda, and Tanzania (establishing subsidiaries). - Drivers of expansion: trade, EAC integration, and diversification; primary focus on SMEs. - Cross-border subsidiaries account for around ten percent of group assets and 4.4 percent of group profits. - Kenya Commercial Bank (KCB) - Considered the largest and oldest East African bank; only Kenyan bank with subsidiaries in all EAC countries and South Sudan. - Listed in the Dar es Salaam Stock Exchange (Tanzania), Uganda Securities Exchange, and Rwanda Over the Counter Market. - Began cross-border operations in 1997 (subsidiary in Tanzania); expansion completed in 2012 with a subsidiary in Burundi. - Expansion strategy: establishing new subsidiaries (rather than acquisitions); headquarters in Kenya runs primary functions (risk management, IT, HR). - Cross-border network and financials: - 59 branches in EAC and South Sudan. - Assets: US$970 million (20 percent of group assets). - Loans: US$361 million (14 percent of group loans). - Deposits: US$795 million (22 percent of group deposits). - Cross-border subsidiaries’ profit contribution: around US$27 million (16 percent of group profits). - Loans to deposits ratio: 45 percent for cross-border subsidiaries versus 84 percent for Kenyan operations. ### Morocco - Attijariwafa Bank - Established in 2004 by a merger; headquartered in Morocco. - Expanded since 2005 in northern and western Africa; present only in French-speaking African countries. - International subsidiaries account for 24 percent of the bank's total branch network. - Overseas operations represent 24 percent of revenues and 17.6 percent of loans. - Subsidiaries include specialized finance companies (leasing, factoring, money transfer services, real estate, asset management, securities brokerage) and insurance activities expanding abroad. - Major shareholders: SNI Group (47 percent), MAMDA-MCMA Group (eight percent), Wafa Assurance (seven percent), Santander group (five percent). - BMCE and BOA - BMCE Bank: Morocco’s second largest bank and main shareholder in BOA Group with a 73 percent stake. - Major BMCE shareholders: FinanceCom Group (38.76 percent), BFCM-Holding of CIC Group (26.21 percent), CDG Group (8.46 percent), MAMDA/MCMA (5.14 percent). - BMCE stakes in other banks: La Congolaise de Banque (25 percent) and Banque de Developpement du Mali (27.38 percent). - Bank of Africa (BOA) origin: first operation established in 1982 in Mali; African Financial Holding (now Bank of Africa Group incorporated in Luxembourg) created to promote private banks and be principal shareholder, providing technical and management support. - BOA activities: banking, leasing and real estate financing, brokerage and investment companies, insurance activities. - Ownership structure in BOA banks: BOA Group, BOA sub-holdings, or other BOA banks are majority shareholders in individual BOA banks with national shareholders or international institutions as remainder. - Groupe Banque Centrale Populaire (GBCP) - Popular Credit of Morocco integrates since 2010 the Popular Central Bank and ten Regional People's banks; supervised by the Management Committee of the Popular Credit of Morocco. - GBCP is a credit institution and central banking institution of the Regional People's banks; quoted on the stock exchange since 2004. - Roles: coordinate financial policy, refinance Regional People's banks, manage their cash surpluses, and provide services of common interest. - Government stakes total 11 percent. - Regional People's banks (BPR) organized as cooperatives with variable capital, conduct full banking operations in territorial districts. - Strategic partnership (2012) with Atlantic Financial Group (AFG) to develop banking activities in seven WAEMU countries. - GBCP acquired strategic, financial and operational management of subsidiaries under the name Atlantic Bank, run by Atlantic Business International (ABI), whose shareholders are GBCP and AFG. - Atlantic Bank network established progressively at the end of the 1980s; AFG holding created in 2005 controls Atlantic Bank Group. ### Nigeria - Guaranty Trust Bank (GTBank) - Incorporated in 1990 as a limited liability company. - Began expanding beyond Nigeria in 2002 via acquisitions and greenfield start-ups. - Present in nine countries including subsidiaries in both Anglo- and Francophone West Africa and East Africa. - Foreign operations represent 8.7 percent share of assets in sub-Saharan Africa relative to Nigerian operations. - Activities: retail banking, loans and advances, equipment leasing, corporate finance, money market activities, foreign exchange operations. - Wholly or majority owns foreign subsidiaries; wholly owns Staff Investment Trust of Nigeria and Guaranty Trust Bank Finance BV (Netherlands) used to raise funds internationally. - Largest shareholder: Stanbic Nominees Nigeria Limited (22.33 percent); GTBank Global Depositary Receipts (GDRs) hold 11.50 percent. - United Bank for Africa (UBA) - Began as British French Bank Limited (BFB) in 1948; incorporated as UBA in 1961. - Listed on the Nigerian Stock Exchange in 1970 (first Nigerian bank IPO). - Merged in 2005 with Continental Trust Bank and Standard Trust Bank; acquired Trade Bank in 2006. - Began international expansion in 2007 with UBA Cameroon; rapid expansion 2008–2011 to 19 new countries. - Currently operates in 19 African countries, which account for about 20 percent of the group’s balance sheet. - Restructured to a “Monoline Commercial Banking Model” following Nigerian banking law changes to provide corporate, commercial, consumer, international banking, trade services, cash management, and treasury services. - Majority owner of various subsidiaries and wholly owns UBA Retail Financial Services Limited and non-bank subsidiaries (UBA Pensions Custodian Limited, UBA FX Mart Limited, UBA Capital Europe Limited, UBA Capital Holding Mauritius). - Shareholding structure: largest shareholder has 7.53 percent (UBA Staff Investment Trust Scheme); other shareholders include Stanbic Nominees Nigeria Limited/C002 (6.68 percent), Consolidated Trust Funds (4.70 percent), Stanbic Nominees Nigeria Limited/C001 (4.23 percent), Hiers Holdings Limited (4.10 percent). ### South Africa - Nedbank - Originated in 1888 in Amsterdam; underwent name and structural changes, holding company became Nedbank Group Limited in 2005. - Began expanding beyond South Africa in 1997–1998 with acquisitions in Lesotho, Swaziland, and Malawi. - Increased stakes in Commercial Bank of Namibia and MBCA Bank Limited (Zimbabwe) in 2002 and 2009, respectively; latest expansion a 36.4 percent acquisition in Banco Unico. - Since 2008 alliance with Togo-based ETI; as of October 2014 Nedbank is largest shareholder of ETI with a 20 percent stake and presence on ETI board. - Foreign operations are relatively small: less than 3 percent share of assets, deposits, and loans compared to South African operations. - 2013 strategic portfolio tilt seeks growth in transactional banking, deposits, investment banking, insurance and asset management; selective origination in others. - Ownership of subsidiaries structured under Nedbank Limited, BOE Investment Holdings Limited, Nedgroup Investments Holdings 101 Limited, and Foreign Nedbank Group Subsidiaries. - Largest shareholder: Old Mutual Life Assurance Company (SA) Ltd (52.13 percent); other >5 percent shareholders: Nedbank Group Treasury Shares (9.90 percent), Public Investment Corporation of South Africa (7.27 percent). - Standard Bank Group (SBG) - Established in 1862; largest African banking group by assets and earnings; holding company based in Johannesburg. - Major subsidiaries: Standard Bank of South Africa; Stanbic Africa Holdings, U.K.; Liberty Holdings; international segment (Standard International Holdings, Standard Bank Group International, Standard Bank Offshore Group). - Major shareholders: Industrial and Commercial Bank of China (25 percent), Public Investment Corporation (15 percent), Tutuwa participants (six percent). - Shareholder regional distribution: Africa 54 percent, China 20 percent, U.S. 14 percent. ### Togo - Ecobank (Ecobank Transnational Incorporated — ETI) - Set up in 1985 with financial help of ECOWAS and technical skills from Citibank (Citibank ran Ecobank for first four years). - ETI is parent company of Ecobank group incorporated in Togo with status and privileges of a non-residential regional financial institution. - Group expansion: at least one new SSA country every year since 1997; particularly active in the second half of the 2000s. - Specialized subsidiaries include microfinance (own operations or joint ventures), securities firms, and leasing. - Major shareholders as of October 2014: Nedbank (20 percent), Qatar National Bank (QNB) (16.9 percent), South African Government Employees Pension Fund (13.9 percent), International Finance Corporation (14.5 percent, direct (5.2 percent) and indirect (9.3 percent) ownership), Ghanaian Social Security and National Insurance Trust (4 percent). - Alliance with Nedbank since 2008 strengthened by Nedbank becoming largest shareholder of ETI in October 2014. - Oragroup - Predecessor Financial Group (Financial BC Genève) created in 1985; opened first operation in Benin as Financial Bank Benin in 1988. - Early activities: banking, microfinance, leasing; expansion to Chad (1992), Gabon (2002), Guinea (2002), Togo (2003). - Emerging Capital Partners (ECP) became minority shareholder in 2008 and sole owner in 2009; restructured Oragroup and divested microfinance business. - Expansion: minority stake in BACIM Bank (Mauritania) in 2009; majority shareholder in Banque Togolaise de Developpement (BTD) in 2012; merger of BTD and Orabank Togo took place in 2013. - Foreign operations generally majority or wholly owned; exception: Orabank Mauritania where Oragroup holds 34.39 percent and ECP holds 62.61 percent. - Oragroup majority owner of Banque Regionale de Solidarite (BRS) Group operating in all 8 WAEMU countries; BRS operations rebranded as Orabank and operated as branches through Orabank Cote d’Ivoire except Benin and Togo operations (in process of merger). - Shareholding (data as of November 2013): ECP 61.43 percent, Proparco 10.17 percent, BIO 5.56 percent, DEG 3.27 percent, BOAD 2.81 percent, Fonds Gabonais d’Investissements Strategiques 2.58 percent; remainder held by other corporations and private shareholders. ### Appendix III / Ecobank Transnational Incorporated (selected points included in Appendix II source) - ETI governance and supervisory concerns - Rapid expansion with poor governance has led to accusations of fraudulent governance, questionable transactions on bad debt and bonus awards, and turbulent top-management transitions affecting group finances. - As a bank holding company registered in Togo, Ecobank group is not formally regulated but supervised by the BC on the basis of a WAEMU council minister’s decision of 1991. - In many jurisdictions where Ecobank operates, legal and regulatory frameworks for consolidated supervision are not in place and supervisory entities lack powers to enforce decisions or obtain necessary information. - Rapid expansion is increasing Ecobank’s systemic importance in cross-border operations; deficient supervision is a major risk to financial stability. - Organization and regional footprint - Ecobank groups operations into six geographical clusters: francophone West Africa, Nigeria, rest of West Africa, Central Africa, East Africa, and Southern Africa. - Nigerian subsidiary represents 40–45 percent of group operations and has posed major governance and operational concerns. - Performance and capital issues (selected metrics and events) - Kenya subsidiary (2014 June quarterly report): could not meet the minimum capital requirement; nonperforming loans currently stand at 8.4 percent. - ETI decided to inject KSH8.8 billion (US$100 million) in its Kenyan business over the next two years to meet the capital requirement and cope with competition; funding source for this capital injection not decided. - Reports of growing nonperforming loans and anemic net profits in Eastern and Southern Africa; strategic decisions required from top management. - Nigerian subsidiary (first half of 2014) improvements: - Total equity increased by two percent compared to June 2013. - Issued a US$200 million note on August 7, 2014. - Profit-after-tax: US$91 million, up 68 percent from the prior year. - Net revenue: US$458 million, up 15 percent compared to 2013. - Rationalization measures: closed ten branches and reduced staff. - Profitability negatively impacted by increased impairment provisions, causing decreases in profit and total equity at end-2013, but both showed some growth in 2014. *International Monetary Fund* ### Appendix Table 1. Ecobank Nigeria: Financial Performance, as of June 2014 ### Appendix Table 1. Ecobank Nigeria: Financial Performance, as of June 2014 ### Financial performance (first half of 2014) - Total assets increased by 12 percent in the first half of 2014. - Net customer loans increased by 34 percent in the first half of 2014. - Deposits showed an 11 percent growth in 2014 so far. - NPLs decreased following write-offs of approximately US$250 million during the second quarter, as per CBN guidelines. - The NPL ratio improved to 2.2 percent from 3.0 percent a year ago. - The loss of deposits feared as a result of bad press did not materialize. ### Key statistics (Millions of U.S. dollars; Percent) — 30-Jun 2014 vs 30-Jun 2013 (YoY) - Net revenue: 458.3 (2014); 399.4 (2013); YoY 15% - Operating expenses: -321.6 (2014); -312.1 (2013); YoY 3% - Impairment losses on financial assets: -51.0 (2014); -30.0 (2013); YoY 70% - Profit before tax: 85.6 (2014); 57.2 (2013); YoY 50% - Profit after tax: 90.9 (2014); 54.1 (2013); YoY 68% - Loans (net): 4,514.0 (2014); 3,367.0 (2013); YoY 34% - Total assets: 9,593.0 (2014); 8,603.0 (2013); YoY 12% - Deposits: 7,057.0 (2014); 6,347.0 (2013); YoY 11% - Total Equity: 2,282.0 (2014); 2,243.0 (2013); YoY 2% - Cost-income ratio: 70.2% (2014); 78.2% (2013) - NPL ratio: 2.2% (2014); 3.0% (2013) - Coverage ratio: 78.2% (2014); 94.1% (2013) - Source: ETI Quarterly Report, June 2014 ### Capital position and regulatory context - Tier 1 capital ratio at end-2013: 13 percent (above CBN minimum requirement of 10 percent for domestic banks). - CBN minimum capital requirements: 10 percent for domestic banks; 15 percent for internationally active banks in Nigeria. - Basel II implemented September 2014 may affect the assessment of capital adequacy. - Ecobank Nigeria designated as a systemically important bank by the CBN; subject to a 1 percent capital surcharge starting in 2015. - Several rating agencies expressed concerns over concentration risk and strategic risk. ### Identified risks and supervisory concerns - Rapid loan growth: accelerating credit expansion raises concerns about reckless lending practice; auditors documented questionable transactions (e.g., margin lending) not properly approved by ETI. - High operating cost: wholesale lending-oriented model drives up cost; net interest margins remain very low due to significant exposure to wholesale lending. - Unstable deposit base: short-term funding dominant; largest depositor holds 11 percent of total deposits; large portion of deposits rely on the oil and petroleum sector, posing liquidity risk in case of oil price shock. - Lack of confidence in management: persistent negative media on governance and uncertain CEO succession (current CEO to retire in 18 months) could cause deposit withdrawals; a three percent loss of deposits occurred in 2013 attributed to poor governance press. - Coverage ratio deterioration: Coverage ratio fell from 94.1% to 78.2% between 30-Jun-2013 and 30-Jun-2014. ### Historical indicators (selected charts described) - Tier 1 capital ratio, 2003–13: values include 12.9, 13.1, 21.7, 19.0, 15.5, 22.3, 21.0, 20.2, 12.5, 15.2, 13.0 (years 2003–2013 respectively). - Loan growth 2005–14 (Total loans in US$ millions shown for selected years): 2005: 1,022; 2006: 1,919; 2007: 3,117; 2008: 3,754; 2009: 4,766; 2010: 5,264; 2011: 7,360; 2012: 9,441; 2013: 11,422; 2014: 12,384. (Chart also shows loan growth rate on RHS.) ### Supervisory and policy implications highlighted - Monitor rapid credit expansion and assess lending standards to avoid reckless bubble lending, particularly margin lending collateralized by shares. - Strengthen capital assessment under Basel II and prepare for the 1 percent systemic surcharge coming in 2015. - Address concentration risk in funding by diversifying deposit sources and reducing dependence on the oil and petroleum sector. - Improve governance and management succession planning to restore depositor and market confidence. - Explore business model adjustments toward mid-market and retail banking segments to lower operating costs and improve net interest margins. - Ensure continued compliance with CBN and SEC Codes of Corporate Governance and reinforce measures to operate in a sound and safe manner. *Source: ETI Quarterly Report, June 2014; ETI Annual Report, 2013 (figures and charts as presented).* ### Appendix V. Summary of FSAP Stress Test Results ### Appendix V. Summary of FSAP Stress Test Results ### Overview - Updated stress tests across multiple jurisdictions indicate improvements in banking system stability in several cases, but persistent underlying vulnerabilities remain, particularly from credit risk, concentration, and macroeconomic shocks. - Key systemic channels of concern include credit concentration, cross-border contagion, macroeconomic shocks (fiscal and commodity price shocks), and liquidity vulnerabilities concentrated in smaller banks or those reliant on public sector deposits. ### Ghana: 2011 FSAP Update - General assessment: - Stability risks have been substantially reduced compared to August 2010, reflecting repayment of government related NPLs, intensified debt recovery efforts, and increased capital to meet new minimum capital requirements. - Improvements appear tenuous: modest increases in lending that shift assets from low to higher risk-weighted categories could cause several banks to fail to comply with capital requirements. - Credit risk and concentration: - At least ten banks with an asset share of 41 percent continue to have concentrations where the default of a single obligor would result in them breaching the capital adequacy ratio. - Two of those banks, with a market share of 16 percent, would become insolvent in that single-obligor default scenario. - Eight banks with a market share of 27 percent would breach capital adequacy requirements if loans currently classified as substandard and doubtful migrate across the transition matrix and 11 percent of current loans become nonperforming. - Cross-border contagion: - Considered an important risk by the industry, but the mission could not quantify the impact due to lack of data on intra-group exposures. - Tests indicated one bank had significant direct exposures to its parent bank. - Bank discussions suggested the collapse of a parent bank could undermine confidence in the subsidiary and trigger deposit runs on banks considered of the same asset class. - Macroeconomic scenarios: - Two scenarios—fiscal deterioration and a shock to cocoa prices—yielded similar magnitude results. - Both scenarios affect interest rates, exchange rates, and NPLs; fiscal deterioration poses the greatest threat given its higher probability. - Liquidity risk: - Less systemic but with pockets of vulnerability: two banks remain highly vulnerable to liquidity risk. - These two banks depend heavily on public sector deposits; withdrawal by the central government and public institutions could see their liquid asset ratio falling below ten percent. - Small banks are more exposed to liquidity risk than big banks, as big banks can tap low-cost deposits through branch networks, while smaller banks rely on public sector and other wholesale deposits. - Some smaller banks use their t-bills as security for corporate deposits; encumbered assets would not be available to meet deposit withdrawals. ### Nigeria: 2012 FSAP - System-wide vulnerabilities: - Financial system recovered since the recent crisis peak but remains vulnerable to global and domestic shocks. - Vulnerabilities stem from high dependence on oil and terrorist activity in northern Nigeria. - A sharp drop in oil prices or disruptions in oil supplies (including from theft) would impact the current account and fiscal positions, limit reserve accumulation, and increase public debt. - Upswing in terrorist activity harms the non-oil sector (particularly agriculture and commerce) and a further deterioration would raise business costs and dampen activity. - Stress-test results: - Most banks could withstand extreme shocks due to high capitalization and currently low NPLs. - A severe increase in overall NPLs would result in undercapitalization of just a few banks. - Some individual institutions appear vulnerable; one is insolvent even before stress tests. - Highest credit risk comes from concentration to single names and group borrowers. - Scenario analysis included economic deterioration in African countries where Nigerian banks’ subsidiaries operate, resulting in increased NPLs and a sharp decline in the local stock market index. - Liquidity and contagion: - Nigerian banks appear resilient to liquidity pressures and interbank contagion. - Liquidity stress tests suggest the system could withstand liquidity pressure and absorb moderate potential losses, although some banks are more vulnerable. - Contagion risk through interbank exposures is generally small; interbank market is capable of withstanding significant adverse liquidity and funding shocks. ### South Africa: 2014 FSAP Update - Capital resilience: - Stress tests confirm banks’ capital resiliency to severe shocks; banks likely to withstand large losses even in severely adverse scenarios due to a high initial capital buffer. - Liquidity vulnerability: - Banks face liquidity shortfalls despite adequate capital positions. - Some banks have difficulty meeting Basel’s liquidity coverage ratio without support from the SARB in the form of a committed liquidity facility. - Banks face greater challenges meeting the net stable funding ratio. - Household sector: - Household debt may be a source of vulnerability. ### WAEMU: 2007 FSAP - Exposure to public sector and compliance: - Banks remain highly vulnerable to sectoral shocks; large exposure to the public sector and uneven, low compliance with prudential norms. - About one third of bank credit extended to public enterprises of central governments. - Weak fiscal management and high reliance on external aid leave banks vulnerable to fiscal fluctuations; dwindling aid has spawned public sector arrears that increase private sector repayment difficulties. - Economic concentration and agricultural risks: - Lack of economic diversification is a key risk; economies dominated by cash crops concentrate lending on a small number of borrowers/sectors. - Crop loans pose major risks when lending is poorly structured or price pass-through mechanisms and shock-absorption mechanisms are absent. - Stress-test findings: - Low resilience of the banking sector to shocks; predominance of credit risk and vulnerability to sectoral shocks reflecting poor asset quality and lack of diversification. - A downturn in the energy sector or deterioration of key enterprises would have a direct, albeit contained effect. - Foreign banks, with larger CARs, appear stronger; public banks are particularly vulnerable. - Large exposures and sovereign risk: - Banking systems vulnerable to large exposures, but direct effect of erosion of central government finances on bank solvency would be relatively small due to low provisioning on sovereign risks. - Noncompliance with limits on large exposures is a vulnerability; some systems would be severely affected by default of the largest borrower. - Liquidity: - Banking sectors appear resilient to liquidity pressures due to abundance of liquidity. - Withdrawal of all central government demand deposits and half of its time deposits would have a modest overall effect but significant impact on banks highly dependent on such deposits—local and public banks are most vulnerable. ### WAEMU: 2013 Update from Pilot Financial Sector Surveillance - Overall system: - On average, the banking system is liquid and well capitalized, but situation varies substantially across banks and countries. - Stress tests showed high vulnerability to sectoral concentration. - Concentration and asset quality: - Lack of economic diversification and a large informal sector lead banks to concentrate lending on few sectors and corporations. - In the WAEMU, the 50 largest companies account for 1/3 of total bank credit. - Weak asset quality reflected in large NPL ratios (even after provisioning); local accounting rules take longer to write-off NPLs, and some NPLs may be old and reflect difficulties in exercising guarantees through the judicial system. - Data on NPL flows were not available to assess recent trends. - Interest rate and liquidity risk: - Interest rate risk and liquidity risk are limited due to mostly short-term assets and large liquidity buffers. - Data limitations and sovereign exposure: - Lack of recent and comprehensive data limits use of stress tests for crisis prevention. - Data gaps prevented assessment of banks’ exposure to WAEMU sovereigns, but exposure is clearly increasing. - WAEMU banks hold over 70 percent of public debt issued by WAEMU sovereigns; cross-border holdings can be large. - In Côte d’Ivoire in late 2010, more than half of the debt was held by residents of other WAEMU countries, generally banks; a default could have created a systemic bank crisis in the region. *Source: Appendix V. Summary of FSAP Stress Test Results (excerpts).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_121814.pdf_