COMMON MARKET FOR EASTERN · Web viewcoring M ethodology of SHIELDS R ating The following were the salient points which were presented under this topic; Intuitively, assignment of

Distr. LIMITED CS/CMI/VWMICAFFS/36/2013 August 2013 Original: ENGLISH

COMMON MARKET FOR EASTERNAND SOUTHERN AFRICA

Workshop on Validation of the Manual for Implementing theCOMESA Assessment Framework for Financial System Stability

17-19 August 2013 Nairobi, Kenya

REPORT ON WORKSHOP FOR VALIDATION OF THE MANUAL FOR IMPLEMENTING THE COMESA FRAMEWORK FOR FINANCIAL SYSTEM STABILITY

2013 (IZ-mkc)

CS/CMI/VWMICAFFS/36/2013P a g e | 1

A. INTRODUCTION

1. The COMESA Committee of Central Bank Governors in their 18 th Meeting which was held in Kigali, Rwanda in December 2012, assigned COMESA Monetary Institute (CMI) to prepare a Manual for the Implementation of the COMESA Framework for Assessing Financial System Stability. The purpose of the Manual is to provide practical step by step outline of how to implement the Framework. In view of the decision, CMI prepared the following two manuals:

i) A Hand Book for Assessing Financial System Stability based on SHIELD Rating; and

ii) Manual for Foreward Looking Financial stability Reports and Stress Testing.

2. CMI, also organised a workshop for validating the above mentioned manuals from 17-19 August 2013 in Nairobi, Kenya

B. ATTENDANCE, ADOPTION OF THE AGENDA ITEMS AND ORGANISATION OF WORK

Attendance

3. The workshop was attended by delegates from Central Banks of Burundi, Congo(D.R.), Egypt, Kenya, Madagascar, Malawi, Rwanda, Sudan, Swaziland, Uganda and Zambia. The list of participants is contained in Annex II of this report.

Adoption of the Agenda and Organisation of work

4. The workshop adopted the following agenda items:

1. Calling of the Meeting to Order by the Chairman;

2. Adoption of the Agenda and Organisation of Work;

3. Sharing Country Experiences in the Implementation of the COMESA Framework for Assessing Financial System Stability:

4. Validation of the Manual of COMESA Framework for Assessing Financial Stability;

5. Validation of a Manual for Foreward Looking Financial Stability Reports and Stress Testing;

6 Presentation by ATI on the Use of political and Commercial Risk Insurance as a Risk Mitigation Tool for Banks and its Potential Impact on the Capital Allocation Rule

7 Any other Business; and

8. Closure of the Workshop


5. The workshop agreed on the following hours of work:

Morning: 9.00-12.30 hrs.Afternoon: 14.00-17.00hrs.

A. ACCOUNT OF PROCEEDINGS

Sharing Country Experiences in Assessment of Financial System Stability ( Agenda item no. 3)

6. The delegates from member countries reported on the status of implementations of the COMESA Assessment Framework for Financial System stability as contained below in table 1. The report focused on the following:

a. Establishment of a Financial Stability Unit; b. Establishment of a Financial Stability Committee & Terms of Reference; c. Development of in-country Strategic Implementation and Action Plans; d. Production of forward looking Financial Stability Reports incorporating,

among other issues, Financial Stability Assessments and SHIELDS ratings.

7. The workshop noted the following from member countries reports:

i) Most COMESA member states have set up Financial Stability Units. ii) The member states are at various stages of setting up the Financial

Stability Committees. iii) Member countries are still working toward the conduct of SHIELDS ratings

of financial stability once the requisite institutional and logistical arrangements have been finalised.

iv) The financial stability assessments and macroprudential supervision are new concepts, which have gained increased attention following the global financial crisis. As such, there are still a number of challenges in respect of resources and skills endowment.

STATUS OF IMPLEMENTATION OF THE COMESA FINANCIAL STABILITY ASSESSMENT FRAMEWORK BY COMESA MEMBER COUNTRIES

No. Task Activity Completion Date

Status of Implementation by member countries

1. Financial Stability Unit

Establish Financial Stability Unit

31 January 2012 Burundi, DRC, Egypt, Kenya, Mauritius, Rwanda, Sudan, Madagascar, Malawi, Swaziland (WIP), Zimbabwe, Uganda

2. Financial Stability Committee

Establish a multi-disciplinary Financial Stability Committee

31 March 2012 Egypt, Kenya, Mauritius, Malawi, Rwanda, Sudan, Uganda, Madagascar (WIP),Swaziland (WIP) Zimbabwe, DRC (WIP),Burundi


3. Strategic Plan Develop in-country Strategic Implementation Plan covering institutional structures and chosen methodologies and/or modalities for: Information gathering; Data analysis; Interpretation of the

results; Policy

recommendations; and

Policy implementation.

31 March 2012 Burundi, Egypt, Kenya, Mauritius, Malawi Rwanda, Uganda, Swaziland (WIP), Sudan (WIP), DRC (WIP), Madagascar, Zimbabwe(WIP)

4. Action Plan Develop in-country Action Plan for Implementation of COMESA Framework covering: conduct of consultative

meetings and/or meetings with other stakeholders;

establishment of technical subcommittee where necessary;

issuance of customized guidance on on-going surveillance, diagnostic assessment, and policy actions;

production of Financial Stability Reports;

Review of legislation where necessary; and

Roll-out of the Framework.

31 March 2012 Kenya, Mauritius, Rwanda, Sudan (WIP), Uganda, Swaziland (WIP), DRC (WIP), Malawi (WIP), Madagascar (WIP), Zimbabwe(WIP), Burundi (WIP), Egypt (WIP)

5. Financial Stability Assessment

Implement Financial Stability Assessment Framework incorporating: Financial Stability

Report (FSR) in Prescribed Format;

Financial Stability Assessment Matrix;

GLYOR five-tier coding system;

Financial Soundness Indicators (FSIs);

Macro-prudential analysis;

Stress testing; Household Sector

Survey Results; and SHIELDS Rating

System

September 2011 Kenya, Mauritius, Swaziland (WIP), Sudan (WIP), DRC (WIP), Malawi (WIP), Rwanda (WIP), Madagascar (WIP), Zimbabwe (WIP), Uganda, Egypt (WIP), Burundi (WIP)


6. Financial Stability Assessment Reports

Electronic submission of Financial Stability Assessment Reports to the Secretariat for posting onto the COMESA website

October 2011 Kenya, Mauritius, Rwanda (WIP), Uganda, Swaziland (WIP), Sudan (WIP), DRC (WIP), Malawi (WIP), Madagascar (WIP), Zimbabwe (WIP)

Burundi (WIP)Egypt (WIP)

7. Financial Soundness Indicators

Electronic submission of Financial Soundness Indicators (FSIs) to the Secretariat for posting onto the COMESA website

60 days after end of each quarter with effect from December 2010

Burundi (WIP), Egypt (WIP), Kenya, Mauritius(WIP), Malawi (WIP), Rwanda, Uganda, Zimbabwe (WIP), Swaziland (WIP), Sudan, DRC (WIP), Madagascar (WIP)

8. Monitor compliance with the 25 Basel Core Principles for Effective Banking Supervision

Member countries conduct self-evaluations

March 2011 Burundi, Egypt, Kenya, Mauritius, Malawi Rwanda, Sudan, Uganda, Zimbabwe, Swaziland (WIP), DRC, Madagascar (WIP),

*WIP – Work in Progress

Validation of the Manual of COMESA Framework for Assessing

Financial Stability ( agenda item 4)

8. Mr. Gift Chirozva made a presentation under this agenda item. In his presentation he highlighted the following:i) SHIELDS rating;ii) Theoretical and empirical justifications of SHIELDS rating; iii) The rating and scoring methodology of SHIELDS rating;iv) Quantitative and qualitative approaches to assess systemic stability; and v) How to undertake overall SHIELD rating

SHIELD rating9. Under this topic he highlighted the following:

a) The proposed handbook provides guidance on how financial stability practitioners might determine the individual components of as well as the overall SHIELDS on the basis of a five tier GLYOR risk coding system notwithstanding the peculiarities of individual country circumstances.

b) SHIELDS is an acronym for Solvency Conditions; Home Economic Conditions; Institutional Quality; Earnings Conditions; Liquidity Conditions; Default Conditions; and Systemic Loss, factors which characterise the state of stability in a given jurisdiction as informed by developments in global macrofinancial conditions and event risk, the local financial system, and the domestic economy.

c) At a conceptual level, the COMESA Framework for Financial Stability Assessment is composed of three mutually reinforcing building blocks / pillars namely: (a) on-


going macro and micro surveillance; (b) diagnostic financial stability assessment; and (c) policy options.

d) The SHIELDS rating system thus facilitates the integration of various quantitative and qualitative financial stability analysis into a standard framework, results of which are amenable to comparison over time with a given country and across nations.

e) The COMESA Framework for Assessing Financial Stability Assessments provides for systematic monitoring of the individual parts of the financial system (institutions, markets, and infrastructure); components of the real economy (households, firms, & public sector); global macro-financial developments; and event risk (e.g. catastrophes).

f) Whereas, there might be temptation to collapse some SHIELDS components into an assessment of banking sector it should be noted that systemic risk goes beyond the confines of the banking sector, hence SHIELDS treatment of factors such as liquidity and default conditions goes beyond the safety and soundness analysis of banks.

Theoretical And Empirical Justifications of the SHIELDS Rating System:

10. He highlighted the following under this topic:

a) In Goodhart, Sunirand, &Tsomoscos (2004, 2005, 2006) and Tsomocos (2003) and Aspachs et al (2006)’s two factor model suggests overall Financial Stability can be summarised by probability of default (PD) of both banks and economic agents and bank profitability.

b) Episodes of financial instability are characterised by a combination of high probabilities of default and low bank profitability

c) Blancher et al ’s (2013, p7) tool kit of systemic risk monitoring points out systemic risk can be aggregated at different levels including individual that institutions and markets, transmission channels, and the whole financial system and the economy. In addition they also single out:

i) credit risk (a key source of risk in most financial institutions) as assessed by probabilities of default and loss given default;

ii) liquidity risk as denoted by liquidity ratios, market liquidity & financial institution’s funding conditions

iii) and market risk being sensitivity to volatilities in interest rate, exchange rate, or asset price shocks as well as latent vulnerabilities.

The Rating & Scoring Methodology of SHIELDS Rating

11. The following were the salient points which were presented under this topic;

a) Intuitively, assignment of ratings calls for the adoption of a rating methodology. SHIELDS anticipates the multiple sources and causes of financial stress and hence rely on a wide spectrum of quantitative and qualitative evaluation factors. It provides a systematic framework, instrument, or single tool that summarises the degree of financial stability of the system into a common yardstick amenable to comparison over time and across nations. SHIELDS, like CAMELS, is usable in countries at various stages of regulatory sophistication.


b) A rating methodology should ideally identify relevant risk factors that would be monitored, tracked and analysed against set benchmarks. In SHIELDS, the benchmarks are calibrated on the GLYOR scale, which is an ordinal scale.

c) It was noted that there are two dimensions, which need to be considered regarding the choice of the benchmarks, namely choice of the indicator and the applicable threshold. Regarding the choice of indicator for financial stability, it was noted that the literature recommends that policymakers should have a wide range of indicators at their disposal rather than relying on one single indicator, bearing in mind that each indicator has its own purpose, merits and limitations. Turning to indicator thresholds, it was noted these could be derived from historical levels that signalled systemic stress in the past, or determined on the basis of best practices benchmarks set by international standards setting institutions as well as statistical methodologies. Determination of benchmarks should be established up front to facilitate easy interpretation of the results.

d) The SHIELDS framework employs the following benchmarks:

i) Absolute benchmarks, e.g. CAR; EU Surveillance Framework; The Weighted CAMEL Framework.

ii) Z-scores: Deviations from the mean normalised by the standard deviation;

iii) Quintile Scale is based on quintiles and involves determination of a relevant range, and the scoring between the best ("1") and worst ("5") are based on a sliding scale;

iv) Percentiles i.e. transform the variables in percentiles, using their sample cumulative distribution function; and

v) Signal Extraction Method whereby the thresholds are set at parameters which minimises the noise to signal ratio of the early warning indicator.

e) He drew the attention of participants to benchmarks that have been proposed by a number of authorities including:

i) The new EU Macroeconomic Imbalances Monitoring Procedure;

ii) USAID & Partners for Financial Stability;

iii) The Weighted CAMELS Framework;

iv) Lindgren, Garcia &Saal (1996);

v) Demirguc-Kunt and Detragiache (1998a);

vi) Laeven & Valencia Data Set 2012;

vii) Reinhart & Rogoff (2009);

viii) Kaminsky & Reinhart (1999) Signal Extraction Model

f) He explained that there are a number of other useful indicators that have been suggested in the literature including Financial Soundness Indicators (FSI) and several other indicators proposed in IMF working papers.


Quantitative Techniques to Assess Systemic Stability – Selected Examples12. Under this topic he explained that there are several quantitative techniques used to

assess systemic stability, each of them presenting both advantages and limitations, examples of which are:

a) Stress-tests techniques which allow for the identification of potential shocks and estimate the financial system resistance, but not a comparative portrait of the level of stability over time and across nations;

b) Aggregate Financial Stability Index (AFSI), which facilitate comparisons over time and across nations;

c) Market Based Methods including Distance to Default, Merton Models, Contingent Claim Analysis, whose applicability in developing nations are often limited by data availability;

d) He informed the workshop that regarding the early warning systems, the Signal Extraction Approach developed by Kamisky and Reinhart (1999), is noted in the literature to be the most popular and involves the following steps:

i. identifying historical crisis episodes,

ii. selecting leading indicators as predictors of crisis episodes,

iii. setting threshold values of the selected leading indicators,

iv. constructing composite leading indicators, and

v. watching for red signals and responding appropriately.

e) Construction of an aggregate financial stability index (AFSI) represents, beside the early warning systems and the stress tests, one of the popular quantitative methods for measuring the stability of a financial system. In order to construct this, the following steps need to be followed:

i. selection of individual indicators,

ii. selection of the method for normalization of the indicators and identification of a weighting method (which relies on the retained criteria and on the established weights, features of the system & data availability), and

iii. aggregation of individual values into the composite (or partial) index.

f) Validation of the econometric relation between the AFSI and a group of macroeconomic variable provides the possibility to perform a forecasting exercise in order to assess the future stability.

Qualitative Approaches to Stability: Example of Expert Opinion Index13. Under this topic he explained the following:


a. Operationalization of this technique involves development of a comprehensive questionnaire covering all the relevant evaluation factors. The questionnaire is administered to experts in the field of systemic risk who are required to rate each attribute on a scale of “1” being the best, and “5” being the worst.

b. As expected, for the results of this approach to be valid, the requisite sampling caveats such as the size of the sample, sampling methodologies and so on should be statistically valid. The results of this approach are aggregated into a financial stability index.

c. A brief illustrative extract is as follows:

Financial Stability Assessment QuestionnaireSolvency Conditions 1 2 3 4 5a. Insufficient regulatory capital 0 0 0 0 0b. Counterparty exposures 0 0 0 0 0c. Investment in illiquid asset portfolios 0 0 0 0 0d. Over-reliance on leverage 0 0 0 0 0e. Lack of countercyclical capital cushions 0 0 0 0 0f. Reliance on ST financing / liquidity risk 0 0 0 0 0Health of the Economy 1 2 3 4 5a. Unemployment 0 0 0 0 0b. Current account deficit 0 0 0 0 0c. Change in Consumer Price Index (CPI) 0 0 0 0 0d. GDP growth 0 0 0 0 0e. Ratio of consumer credit to personal income 0 0 0 0 0f. Personal income growth 0 0 0 0 0g. Housing prices 0 0 0 0 0h. Consumer confidence 0 0 0 0 0i. Stock Market Equity values 0 0 0 0 0

Institutional Qualitya. Regulatory uncertainty/implementation 0 0 0 0 0

b. Global sovereign risk—“debt crisis” 0 0 0 0 0c. Insufficient risk management practices 0 0 0 0 0

Overall SHIELDS Rating 14. Under this topic Mr. Chirozva highlighted the following:

a) Each component of SHIELDS is assessed / rated using various metrics & qualitative considerations. A similar approach is used in the CAMELS system. Each component rating may be assigned a rating on a scale of “1” to “5” with “1” being the best possible and “5” the worst. A composite financial stability rating (systemic stability) is derived from the seven component ratings.

b) The SHIELDS framework for assessing and maintaining financial stability has inbuilt flexibility in that it does not rely on any particular algebraic formulations, but pragmatic characterisation of the fundamental properties of financial stability. Quantitative models used should inform the policymaker rather than being automatic determinants of the ultimate decision.


Accordingly, qualitative analysis, based on informed judgement, still plays an important role in financial stability.

c) A practical exercise was based on the Weighted CAMELS Rating Framework.

d) Prospective users of the draft handbook should bear in mind that it is intended as a general reference and is not intended to replace the need for professional judgement and advice relevant to the particular circumstances.

Discussions15. In the discussions that followed the presentation, the delegates appreciated the

amount of work done to date. However, they observed that the Manual does not contain practical and clear step-by-step examples on how the SHIELD ratings will be determined.

16. It was therefore agreed that Mr. Chirozva would revise the Manual to make it short on background materials and specially the definitions, and put more emphasis on the descriptions of the scoring and rating methodologies in order to provide practical guidance that is easy to follow.

17. Regarding the call to have step-by-step guidance similar to EVIES Manual, Mr. Chirozva advised that it may be erroneous to have such expectations, as in prudential matters the most important issues are how to exercise judgement in the decision making process. He said that economic policy matters cannot be reduced to a tick-box type of a manual. He also pointed out that prudential risk management guidelines do not follow a “click “ and “tick” approach but provide parameters or rules regarding how the decisions should be made.

Recommendations18. The workshop made the following recommendations:

a. Mr. Chirozva should revise the SHIELDS rating section of the Manual by providing numerical examples. He should elaborate the steps that should be followed to assign the ratings and undertaking of the SHIELD Rating System Assessment.

b. The revised manual will be validated via electronic means, following circulation to Central Banks by CMI.

c. Member countries are encouraged to expedite implementation of the COMESA Framework for Financial Stability Assessment, as well as customise the in-country benchmarks.

Validation of a Manual for Forward Looking Financial Stability Reports and Stress Testing ( Agenda item v)

19. Dr Charles Abuka made presentations under this agenda item. In his presentations he elaborated on the following:

I. Forward looking Financial stability reportII. Micro stress testing for COMESA CountriesIII. Macro stress testing for COMESA Countries

I. FORWARD-LOOKING FINANCIAL STABILITY REPORTS


20. Under this topic he highlighted the following

a) The recent global economic and financial crisis has demonstrated the need to strengthen cooperation among countries to improve regulatory requirements for the financial system. Under the COMESA framework, the financial stability mandate is being strengthened. COMESA member states have made a decision to improve at each country level the understanding of issues related to stress testing, financial stability analysis and reporting.

b) The manual focused on existing financial stability mandates, functions and stability assessment in individual COMESA member countries. Particular attention was paid to forward looking financial stability analysis, stress testing and reporting. In the area of financial stability analysis and reports, COMESA countries have resolved to improve the effectiveness of their financial stability frameworks, especially the publication of forward looking financial stability reports. In addition, they are making efforts to provide clear terms of reference for staff working on financial stability assessment.

c) Most Financial Stability Reports that are currently published in COMESA countries focus on the description of past developments and are not sufficiently forward looking. It is however, desirable that the reports should include forward looking statements about risks and vulnerabilities. In order to do this, the tools used in the production of Financial Stability Reports should include stress testing and other forward looking techniques.

d) The following are the recommended areas of improvement for Financial Stability Reports:

(i) The objectives of the Financial Stability Reports should be clarified. This means that the aim of the Reports should be clearly indicated most specifically at the beginning of the report. At the very least the objective should be to identify and analyse risks to the financial system.

(ii) The coverage of key systemic risks should be improved. Financial Stability Reports should consistently cover the key systemic risk factors. The discussions in the Financial Stability Reports should be based on the projected trends of financial indicators and results of sensitivity or scenario stress testing. The coverage of risks should be comprehensive to include detailed analysis of risks specific to the domestic financial system. It is important that an analysis of systemic non-bank financial institutions should be included and the discussion of external developments is linked to the domestic financial system.

(iii) It is important to include an analytical but not a descriptive coverage of financial market conditions in the discussion of systemic risks. The discussion should provide a comparison of how financial risks have evolved over time. An analysis of interconnectedness of banks as well as cross-border banking linkages should be covered. It is also necessary to regularly provide an analysis of links between banks and non-bank financial sector. Coverage of domestic systemically important financial institutions (DSIFIs) is useful. Finally, an assessment of credit risks arising from the performance


of corporate and household sectors is important. COMESA member countries also need to report the evolution of sovereign exposures to their domestic banking systems

(iv) The quantitative content of the Reports should be improved. This can be done by ensuring that Financial Stability Reports present forward looking stress testing results on a regular basis. In cases were data permits, it is important to provide granularity on systemic institutions. The underlying assumptions employed in the quantitative assessments should be provided as well as a description of the methodology used for the stress tests.

(v) More discussion of macro-prudential policies is required. Macro-prudential policy is better formulated in institutional frameworks that have Financial Stability Committees1. Financial Stability Reports should focus on macro-prudential measures, with a discussion of policy measures closely tied to the risks and vulnerabilities.

(vi) Financial Stability Reports should point out existing data gaps. Reports should raise any concerns regarding data gaps. This is with regard to data availability or completeness in analysis. In future, the region could benefit from the standardization of Financial Stability Reports publication. This is in respect to dates of release, period of coverage and, regularity of the Reports.

Recommendations for Forward Looking FSRs for COMESA Countries21. The workshop made the following recommendations:

(i) Financial Stability Reports should discuss the risks, transmission channels, impact, and measures available to mitigate the risks. Ideally the Reports should be forward looking. This means they should discuss what might happen in the future rather than describe historical developments. Financial Stability Reports should be based on the use of scenarios as an organizing principle for both the main text and the macro stress tests.

(ii) The priority in all Financial Stability Reports should be to provide the senior management of central banks with candid and analytically supported assessment of vulnerabilities and risks that could threaten financial stability in a systemic way in the country. It is important to agree on a small set of scenarios to use to illustrate the important underlying financial vulnerabilities and sources of financial risk to the economy of each member state. The proposed new, risk focused and forward looking Financial Stability Report should be organized in four or five Chapters and Appendices as shown in the Table 2 below:

Table 1: Suggested Outline for Forward Looking Financial Stability ReportsChapter/Appendix Proposed Areas of CoverageChapter 1 Overview And Executive Summary: a two-to-three Page Summary

Focused on Briefly Identifying the Main Threats to Systemic Stability and Measures to Prevent them or Mitigate the Consequences.

Chapter 2 Economic And Financial Conditions: (Domestic and External) Vulnerabilities To The Outlook

Chapter 3 Main Risk Scenarios (e.g. Stability Implications of External Demand Shocks or Liquidity Problems on the Banking System): Future Prospects, Risks and Stress Tests).

1 In the COMESA region Burundi, Egypt, Eretria, Kenya, Mauritius, Malawi, Rwanda, Sudan, Uganda, Madagascar, Swaziland and Zimbabwe have Financial Stability Committees.


Chapter 4 Conclusions and Policy Recommendations: This should be recommendations for preventing systemic problems or dealing with them if prevention fails. This section may also review developments in macro-prudential policy since the last report.

Appendix I: Special Topic

This should delve more deeply but concisely into important existing vulnerabilities and sources of risks or policy challenges

Appendix II: Statistical Tables

Financial Soundness Indicators And Consolidated Balance Sheet of the Banking Sector.

II. MICRO STRESS TESTING FOR COMESA COUNTRIES

22. Under this topic he highlighted the following:a) The micro stress testing should complement existing analytical tools within the

COMESA member countries. The exercise should be aimed at assessing the resilience of commercial banks to adverse developments and contributes to the overall assessment of systemic risk. However, it should be noted that the framework is initially of limited form, consisting mainly of sensitivity tests and does not include macro-scenario analysis. The risks that should be assessed include credit risk, liquidity risk, interest rate risk and foreign exchange risk.

b) The stress-testing framework initiates the process of broadening existing analytical processes to include other types of risks. In addition, it begins the process of moving from single factor sensitivity analysis towards macro-scenario analyses. All the while, users should recognise that this move requires a greater understanding of the inter-linkages in the financial system and spill-over effects between the markets, institutions and sub-sectors of the financial system.

c) The stress tests should be applied to bank level data as at the end of each reporting period. Depending on the structure of a country’s financial system, the shocks envisaged are relatively straightforward. However, as financial systems get more sophisticated and the types of exposure change, the underlying framework will have to be modified. Some of the improvements will relate to estimating econometrically some of the relationships that are initially assumed.

d) The purposes and perspectives of Micro Stress Testing Exercise in the COMESA Region include the following:

(i) To organize a stress testing exercise in COMESA member countries, a number of questions have to be answered: Who is responsible for stress tests? How are the scenarios designed and chosen? How are the assumptions or variables to be stressed examined and chosen? What data is available? How frequently should stress tests be performed? What aggregation/granularity level is selected? How are the results presented? What actions do supervisory agencies/central banks take? Are results published or not?

(ii) Country level working groups on stress testing, consisting of representatives of all departments and regulatory institutions, may be established with the following primary tasks: development of methodology, scenarios and aggregation of results. The working group should have representation from their supervisory and financial stability departments. The Group’s mandate may include preparation


of a proposal to the heads of central banks on timing, scope and objectives of the stress testing exercise, scenarios, share information, discuss results and prepare a final report.

(iii) In order to proceed properly in the stress testing work each COMESA central bank should address these organizational issues.Each country should: (i) have its own stress testing model for micro stress testing; (ii) familiarize itself with the models and risk management practice of commercial banks; (iii) run stress testing exercise at home and (iv) have precise and monitor constantly data about banks’ cross-border exposures

(iv) In the short term, each central bank needs to start conducting stress-testing exercises on a regular basis and include them in a general macro-prudential framework. Central banks need to enhance cooperation of all parties involved in the financial stability work: these include the banking supervision, economics, research, financial stability units and other financial system regulators. They should involve all parties in the design of stress testing scenarios and analysis of results, both for the top-down and bottom-up approaches. It is important that bottom-up and top-down stress test results are developed and analyzed together to check the consistency and robustness of the results. This would help establish a better understanding of the stress tests themselves and the implications of the results. Such cooperation would also help pool resources from all parties to develop stress-testing methodology.

(v) Conduct liquidity stress tests on a monthly basis and credit stress tests on a semi-annual basis. Credit risk does not tend to change as quickly as liquidity risk. Therefore, conducting credit risk stress testing on a monthly or quarterly basis, as is currently the practice in some countries, would not add much value. Instead, it absorbs resources that could be used in the analyzing and developing more sophisticated and integrated stress-testing framework.

Recommendations for Micro Stress Testing in the Region23. The workshop made the following recommendations:

(i) There are three broad areas on which central banks of COMESA region should focus for enhancement of their financial stability analysis and assessment: First, expanded and enhanced data collection; data on real estate prices as well as better bank data, including on loan write-offs and cross-border and –sector exposures should be collected. At the same time, given the dynamic analysis required, banking sector data should be routinely checked for consistency over time. Second, each member country needs to improve stress testing approaches and skills. A distinction should be drawn between stress testing for supervisory purposes and for macro-prudential surveillance, with the latter focused on checking the vulnerability of the financial sector to macro shocks, systemic events, and common or interlinkage-resulting exposures. As staff become better trained and familiar with stress testing, banks should be issued with stress testing guidelines. Third, improve macro-prudential analysis and the design of mitigation measures. Greater and more analytical use should be made of financial soundness indicators and a study made of available and


feasible macro-prudential tools for financial stability policy. Individual central banks in the COMESA area must become adept at financial stability assessment.

III. MACRO STRESS TESTING FOR COMESA COUNTRIES

24. The following are the major highlights:

a) Stress-testing as a framework for forward-looking analysis of systemic risks has developed great appeal among central banks across the world. There are two types of macroeconomic stress-testing, namely top-down stress testing and bottom-up stress-testing. The top-down approach applies a uniform macroeconomic scenario or shock to the system and aggregates results obtained from running this scenario through the banks’ individual stress testing models. By contrast, the bottom-up approach assesses changes in the risk associated with the portfolio and business activities of individual banks using a uniform model and then aggregates the results obtained to map systemic risk. The results of bottom up stress tests are often aggregated to draw macro level insights; however the nature of the tests is largely micro and focused on individual banks.

b) Recent IMF-World Bank Financial Sector Assessment Programs (FSAPs) have used a number of stress-testing approaches and scenarios in some COMESA member states. Most COMESA country’s economies are prone to similar exogenous and endogenous shocks - they are dependent on global energy, food prices and agriculture and related trade sectors. Simple banking systems with little cross-border exposure and relatively low variety of products offered to consumers create little risks common in large sophisticated banking systems (securitization, counterparty, market funding etc.) although this is changing as greater financial deepening occurs. As such, FSAPs in COMESA economies so far have used relatively simple and tractable stress testing approaches.

Recommendations to enhance Macro Stress Testing in COMESA Countries25. The workshop made the following recommendations:

(i) Some COMESA countries continue to take substantial steps to move into a full-scale integrated stress-testing framework. Some elements of the integrated framework are already functioning in a few countries, but for many countries in the COMESA region, additional efforts are clearly needed: (a) to formalise the involvement of high level management of the central banks. Senior management needs to be involved in the approval of scenarios as well as the results and in discussions with banks regarding their individual results and capital conservation plans; (b) to gather information and have regular meetings between Financial Stability Units in central banks and primary sources of information, such as the real estate developers, banks and microfinance institutions. These discussions should provide input into stress test scenario formulation; (c) to review the existing stress testing methodologies that are employed in a number countries in the COMESA region because they are unable to identify systemic vulnerabilities in the financial system. In most countries the scenarios have to be carefully re-designed to incorporate so far unobserved feedback effects and multiple sources of risk and linked to risks identified in member countries Financial Stability Reports; (d) management in member state central banks sould define potential list of


macroprudential policy tools which can be applied once stress tests reveal vulnerabilities in the financial system; (e) communication policy needs to be designed in order to inform what goes into the Financial Stability Reports of member state central banks.

(ii) Further areas of improvement include: member states need to develop the capacity to implement Next Generation and other Balance sheet based stress-testing models. It is necessary that scenario design be improved and satellite models be employed to obtain stressed nonperforming loans. Countries need to move to the design and implementation of scenarios based on real estate price shocks. This will require the refining of the database of real estate prices and collection of more information from banks. COMESA member countries need to strengthen their liquidity stress testing and reporting frameworks. This will assist in building joint credit and liquidity stress testing scenarios. Central banks need to ensure that their supervisory Units and Financial Stability Staff work together to introduce new liquidity reporting templates that are based on flow data and refine liquidity stress tests accordingly.

DISCUSSIONS26. The Manual for Forward-Looking Financial Stability Reports and Stress Testing

was well received. However, some delegates recommended that, the manual needs further refinement based on thorough review by member central banks. The final validation will, therefore, be completed after receiving all comments from member central banks via electronics means at the latest by the end of September 2013. The following issues were also raised by the delegates:i) The need to address the matter of transparency of country financial stability

reports. The issue was whether two versions of FSR’s should be produced, one for internal review and discussion, and another publication for the external stakeholders. The committee agreed that this is a country specific issue and will be decided by the different member state jurisdictions based on their own country situations.

ii) The Report should include a disclaimer as well as provide more elaborate examples of financial stability reports and stress testing methodologies from COMESA member countries.

iii) The manual should retain micro stress testing aspects while expounding on macro stress testing. This will allow for variations in levels sophistication of stress tests implemented by member states given differences in the levels of development of the financial sectors in the countries in the region.

Presentation by ATI on the use of Political and Commercial Risk Insurance as a Risk Mitigation Tool for Banks and its Potential Impact on the Capital Allocation Rule ( agenda item 6)

27. The workshop noted that ATI is a multilateral political and commercial risk insurance company, with COMESA member states as main shareholders. It has an A rating from S & P and a base capital of 156 Million USD. It was set up at the initiative of the World Bank and COMESA in 2001 to help to attract investments in its member states by taking the political and commercial risks away from the investors and their banks. ATI also improves the trade with and within member states by insuring the risk of default by buyers and bank borrowers.


28. The workshop also noted the following requests from ATI:

That the central banks allow banks to substantially reduce the capital that they have to allocate to transactions in so far these transactions are insured by ATI. The Basel framework would allow a relief of 80% for a security given by an “S&P A” rated company

That the central banks allow banks to increase their single obligor limit proportionally to the amount of that exposure that is insured by ATI

That the central banks allow ATI to participate in the activity of the credit bureaus, so that it is more effective at assessing the credit risk on private obligors.

29. The workshop further noted that in view of the above, Governors decided that the

proposal should be studied by the Financial System Development and Stability Sub-Committee prior to its submission to Governors for their consideration.

Discussions

30. Following the presentation, a large number of questions were raised. The most relevant, together with the answer provided are, include:

Q: How can the proposed reduction in capital allocation be adjusted in case of downgrade of ATI?

A: It would be logical that the central banks introduce a general rule, not only for ATI but also for other multilaterals, that links the capital relief to one or more objective criteria, e.g. their credit rating

Q: How does ATI price its products?

A: ATI has different pricing mechanisms but essentially the premium will depend on the assessment that ATI makes of the risk linked to an insured transaction.

Q: why should ATI participate in the credit bureaus?

A:The mission of ATI is to facilitate trade. By insuring the risk of non payment, the suppliers can provide better credit conditions to their clients and pledge or discount invoices with the banks at better conditions. The buyers benefit from longer credit periods and avoid the costs related to LC’s and prepayment.

Q: How do you see ATI access to the credit bureaus?

A: ATI could participate in the same way as a bank does, by reporting to the Credit Bureau on the transactions that it is insuring and by retrieving information when it has to assess new transactions

Q: How does ATI mitigate and spread its risks?

A: ATI is limiting its exposure per transaction, per sector, per country and it also limits the exposure it has on the reinsurance companies to whom it cedes its excess of exposure.


Q: How is ATI regulated?

A: ATI is exempt from local regulation, although it keeps regular contact with the regulators. In practice ATI is regulated by the World Bank, that has to approve all significant changes in the operational rules and guidelines. The World Bank also receives the operational reports and attends the board meetings.

The workshop participants also made the following comments on the presentation:

(i) The adoption of this proposal may enhance the ability of and encourages the commercial banks in COMESA countries to extend credit and credit facilities to trade activities within and between the African countries which may contribute positively on economic growth and financial stability

(ii) There may be need to reconcile the Basel II issue on the applicable risk weights as those assigned to an obligator may be different to that of risk mitigant

Recommendation

31. The workshop recommended the need for COMESA Secretariat to officially communicate the proposal to all COMESA Member Central Banks. The Central Banks would then analyse ATI’s proposal and its implication to their existing regulatory and supervisory regimes.

Any Other Business

32. No issues were raised under this agenda item.

Closure of the workshop

33. The Chairman thanked the resource people for their useful contribution in the preparation of the manuals and he expressed his confidence that the Manual will greatly assist for enhanced implementation of the COMESA Framework for Assessing Financial System Stability

LIST OF PARTICIPANTS/LISTE DES PARTICIPANTS

BURUNDI


1. Mr. Paulin Ndayisenga, Economiste, Banque de la République du Burundi ; B.P. 705, Bujumbura, Tel. +257 22 20 4151, Fax. +257 22 223 128, E-mail: [email protected]; [email protected]

2. Ms. Francine Nduwayo, Economiste, Banque de la République du Burundi ; B.P. 705, Bujumbura, Tel. +257 22 20 4151, Fax. +257 22 223 128, E-mail: [email protected]

3. Balthazar Nganikiye, Bank Supervisor, Banque de la République du Burundi ; B.P. 705, Bujumbura, Tel. +257 22 20 4212, Mobile: +257 795 80542, E-mail: [email protected], [email protected]

4. Prosper Ngendanganya, Banking Supervisory, Banque de la République du Burundi ; B.P. 705, Bujumbura, Tel. +257 788 26176, E-mail : [email protected]

5. Roger Ntwenguye, Supervisour Bancaire, Banque de la République du Burundi ; B.P. 705, Bujumbura, Tel. +257 79 973 645, E-mail : [email protected]

THE DEMOCRATIC REPUBLIC OF CONGO

6. Djamba Tambwe Eluhu, Economic Analyst, Central Bank of Congo; P.O. Box 2697, Kinshasa 1, Tel. +243 81 88 05 152, Fax. +243 81 30 10 959, E-mail: [email protected]; [email protected]

7. Difumba Lumuna Alain, Economiste Analyste Secteur Institution Financiers, Banque Central Du Congo ; P.O. Box 2697, Kinshasa 1, Tel. +243 81772 8019, E-mail : [email protected]

EGYPT

8. Mr. Ahmed Sahloul, Quantitative Risk Analyst, Central Bank of Egypt; 54 El-Gomhoreya Street 11511, Cairo, Tel. +20 16777 1643, E-mail: [email protected]

9. Mr. Ahmed Ramy Ismail Fouda, Central Bank of Egypt; 54 El-Gomhoreya Street 11511, Cairo,Tel. +20 0020100 4559373, E-mail: [email protected]

KENYA

10. Mr. James Muturi Ndung’u, Kenya School of Monetary Studies; P.O. Box 65041-00618, Ruaraka, Kenya, Tel. +254 020 8646000, +254 020 8646120, E-mail: [email protected]

11. Mr. Cappitus J.O. Chironga, Central Bank of Kenya; P.O. Box 60000-0200, Haile Selassie Ave, Nairobi, Tel. +254 020 286 0000, E-mail: [email protected]

12. Mr. Daniel K. A. Tallam, Central Bank of Kenya; P.O. Box 60000-0200, Haile Selassie Ave, Nairobi, Tel. +254 020 286 3216, Fax. +254 020 286 3236, E-mail : [email protected]

MADAGASCAR

13. Mr. Falihery Rajaobelina, Fonde de Pouvoirs, Banque Centrale de Madagascar ; BP 550, Antaninarenina, Antananarivo 101, Tel. +261 20 21751, Fax. +261 20 22 24522, E-mail: [email protected]

mailto:[email protected]
















14. Mr. Tsilavo Haja Ralaindimby, Fonde de Pouvoirs, Banque Centrale de Madagascar ; BP 550, Antaninarenina, Antananarivo 101, Tel. +261 20 21751, Fax. +261 20 22 34532, E-mail: [email protected]

MALAWI

15. Ms. Margaret Kaphinde, Reserve Bank of Malawi; P.O. Box 30063, Lilongwe 3, Tel. +265 770600, Fax. +265 774498, E-mail: [email protected]

16. Angela Mjojo, Principal Economist, Financial Stability, Reserve Bank of Malawi; P.O. Box 30063, Lilongwe 3, Tel. +265 1 770600, Fax. +265 1 770593, E-mail: [email protected]

RWANDA

17. Mr. Phillipe Nsenga, Inspector, National Bank of Rwanda; P.O. Box 531, Kigali, Tel. +250 78 877 7446, E-mail [email protected]

18. Lucia Mugemanyi, Inspector BSD, National Bank of Rwanda; P.O. Box 531, Kigali, Tel. +250 788 567144, E-mail: [email protected]

19. Kelvin Uwayezu, Inspector, National Bank of Rwanda; P.O. Box 531, Kigali, Tel. +250 785 078251, E-mail: [email protected]

20. Alphonse Ndikubwimana, Manager, Financial Stability Analysis, National Bank of Rwanda; P.O. Box 531, Kigali, Tel. +250 788 308963, E-mail: [email protected]

SUDAN

21. Dr. Magdi Alamin Norain Idom, Central Bank of Sudan; P.O. Box 313, Khartoum, Tel. +249 9123 78141, Fax. +249 178 1341, E-mail: [email protected]

22. Ms. Eissa Ahmed Trayou, Central Bank of Sudan; P.O. Box 313, Khartoum, Tel. +249 0912484941-6574, Fax. +249 0183781341, E-mail: [email protected]

23. Mr. Abdel Aziz M. Abdel Rahman, Bank Supervisor, Central Bank of Sudan; P.O. Box 313, Khartoum, Tel. +249 00249187056556, E-mail: [email protected]

24. Ms. Mashair Mohammed Ibrahim Sabir, Central Bank of Sudan; P.O. Box 313, Khartoum, Tel. +249 187 056564, E-mail: [email protected]

25. Mr. Adil Fadl Alla Elsheikh, Central Bank of Sudan; P.O. Box 313, Khartoum, Tel. +249 00249912104702, E-mail: [email protected]

SWAZILAND

26. Wellington Motsa, Manager, Bank Supervision Off-Site Monitoring, Central Bank of Swaziland; P.O. Box 546, Mbabane, Tel. +268 2408 2159, Fax. +268 2404 7219, E-mail: [email protected]

UGANDA

27. Ms. Pamela Kahwa, Senior Banking Officer, Bank of Uganda; P.O. Box 7120, Kampala, Tel. +256 414 258441/4, E-mail: [email protected]

28. Mr. Peter Mugisa, Bank of Uganda; P.O. Box 7120, Kampala, Tel. +256 414 258441, E-mail: [email protected]

















29. Dr. Charles Abuka, Bank of Uganda

ZAMBIA

30. Mr. Peter Zgambo, Executive Assistant, Bank of Zambia; P.O. Box 30080, Lusaka, Tel. +260 211 228 888, Fax. +260 211 237 070, E-mail: [email protected]

31. Ernest Mashinda Chisongo, Senior Economist-Financial Stability, Bank of Zambia; P.O. Box 30080, Lusaka, Tel. +260 211 228 888, Fax. +260 211 221722, E-mail: [email protected]

32. Raphael Kasonde, Senior Bank Examiner, Bank of Zambia; P.O. Box 30080, Lusaka, Tel. +260 977 847 384, +260 211 228 888, Fax. +260 211 225 656, E-mail: [email protected]

ZIMBABWE

33. Mr. Gift Chirozva, Business Operations Director, Reserve Bank of Zimbabwe; 26, Evelyn House 5th Avenue, Harare, Tel. +263 4 250900, Fax. +263 4 707800 / +263 4 706450, E-mail: [email protected], [email protected]

34. Mr. Tinashe, Bvirindi, Senior Bank Examiner, Reserve Bank of Zimbabwe; 80, Samora Machel Avenue, Harare, P.O. Box 1283, Harare, Tel. +263 4 703000, Fax. +263 4 707800 / +263 4 706450, E-mail: [email protected]

COMESA Monetary Institute

35. Mr. Ibrahim A. Zeidy, Director, CMI. P. O Box 65041-00618, Nairobi. E-mail: [email protected]

36. Mr. Zorodzo Chuma, 37. Mrs. Monica Cherwon, Secretary, E-mail: [email protected]









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