FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY Challenges for Resolution of Banks in Sub-Saharan Africa © 2019 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff and external authors of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. 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Photo Credits: World Bank/IFC photo libraries, and Shuttlestock.com FINANCE, FINANCE, COMPETITIVENESS COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT INSIGHT | FINANCIAL | FINANCIAL STABILITY INCLUSION, & INTEGRITY INFRASTRUCTURE & ACCESS TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS III ACKNOWLEDGMENTS V EXECUTIVE SUMMARY VII I. INTRODUCTION1 1 II. CONTEXT 3 III. KEY ATTRIBUTES 5 IV. SCOPE AND AUTHORITY 7 V. POWERS AND TOOLS 9 VI. FUNDING 13 VII. LEGAL SAFEGUARDS 15 VIII. ACCESS TO INFORMATION 17 IX. CROSS-BORDER COOPERATION 19 X. RECOVERY AND RESOLUTION PLANNING – RESOLVABILITY ASSESSMENT 21 XI. NOW WHAT TO DO? 23 REFERENCES 25 CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA I SECTION TITLE II FINANCE, FINANCE, FINANCE, COMPETITIVENESS COMPETITIVENESS COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT & INNOVATION INSIGHT | FINANCIAL | FINANCIAL INSIGHT INCLUSION, | LONG-TERM STABILITY INFRASTRUCTURE & INTEGRITY FINANCE & ACCESS ABBREVIATIONS AND ACRONYMS AACB Association of African Central Banks D-SIBs domestic systemically important banks EAC East African Community FSB Financial Stability Board G20 Group of Twenty G-SIBs global systemically important banks IADI International Association of Deposit Insurers KAs Key Attributes of Effective Resolution Regimes for Financial Institutions PABs Pan-African Banks RRPs Recovery and Resolution Plans SADC Southern African Development Community SIBs systematically important banks SIFIs systemically important financial institutions TLAC total loss absorbing capacity WAEMU West African Economic and Monetary Union CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA III ACRONYMS AND ABBREVIATIONS IV FINANCE, FINANCE, COMPETITIVENESS COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT INSIGHT | FINANCIAL | FINANCIAL STABILITY INCLUSION, & INTEGRITY INFRASTRUCTURE & ACCESS ACKNOWLEDGMENTS T his paper was written by Jan Barend Jansen, a Lead Financial Sector Specialist in the Finance, Competitiveness & Innovation Global Practice at the World Bank Group. The paper is based on a presentation that the author gave at a conference on “Finance in Africa: Banks, Debt, and Development” at St. Antony’s College, Oxford, on April 25, 2018, organized by the Political Economy of Financial Markets programme (PEFM Oxford). The author thanks Julian Casal and Erik Feyen A special thanks goes to Nancy Morrison for for providing comments on a previous version of editing this publication and Aichin Lim Jones for this paper. design and production services. CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA V ACRONYMS AND ABBREVIATIONS VI FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY EXECUTIVE SUMMARY W hile the recent global financial crisis has affected many developed countries, it has had less impact in Africa. Nevertheless, the lessons learned from this crisis are relevant for African countries, especially because banking groups with a head office in Africa have grown rapidly and these groups are systemically present in many of their African host countries. As macroeconomic conditions have deteriorated in many Sub-Saharan African countries in the last two years, the question arises whether the regulatory framework for the financial systems of these countries is strong enough to face a serious financial crisis in the future. The recent global financial crisis was the reason for cases it is best to establish only the basic elements the G-20 to strengthen the global regulatory and of the Key Attributes in the financial frameworks supervisory framework for financial institutions, of the Sub-Saharan African countries. in particular for systemically important financial • Establish an independent resolution authority institutions (SIFIs). As part of this effort, a new with sufficient powers, tools, equipment, and standard for the effective resolution of SIFIs has qualified personnel. If the resolution authority is been established to address the moral hazard of situated within a central bank, strong fire walls these institutions and to protect the stability of the must be guaranteed between the resolution financial system. This new standard, defined in the department and other departments. so-called Key Attributes of Effective Resolution Regimes for Financial Institutions (the Key • Strengthening the quality and scope of the Attributes, KAs), is relevant not only for SIFIs but operational data systems. also offers useful guidance for resolving smaller banks in less developed countries. • Holding enough funding for resolution purposes, including a financial backstop offered by the This paper highlights the 12 essential characteristics government. of effective resolution regimes for financial institutions, as provided by the Key Attributes. • Gather sufficient willingness to act quickly, if These features should be integrated in the national necessary, to protect depositors, preserve value in resolution frameworks for financial institutions the financial sector, and reduce public costs. and tailored to the local circumstances and legal Sub-Saharan African countries would do well to traditions. For each feature, the paper maps the weave these functions into their banks’ resolution challenges for introducing them in resolution regimes before the next economic downturn. This regimes for banks in the Sub-Saharan African is particularly important for countries where one region. Some of the major challenges are: or more of the Pan-African Banks (PABs) have • Tailoring the Key Attributes to the local their home base. The paper concludes with a list of jurisdictions, taking into account the complexity actions that Sub-Saharan African countries can take and importance of their financial sectors. In most to strengthen their bank resolution frameworks. CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA VII SECTION TITLE VIII FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY I. INTRODUCTION I n many Sub-Saharan African countries, macroeconomic conditions have deteriorated over the last two years. Often such developments create fiscal challenges for countries and profitability issues for their financial institutions, which potentially gives rise to a vicious feedback loop. At the same time, banking groups with their headquarters in Africa, so-called Pan-African Banks (PABs), have expanded rapidly. These banking groups often have a systemic presence in their African host countries. Against this backdrop, the question arises whether the regulatory and oversight systems of the Sub-Saharan Africa countries are well equipped to weather a financial crisis when it comes to Africa. This requires strong legal and supervisory regimes, and well-equipped supervisors. But even then, banks will from time to time fail. Thus, there is a need for strong insolvency frameworks designed for banks, in particular for those that are systemic.1 A new standard has been established in the frameworks for banks in less developed countries. aftermath of the recent global financial crisis Importantly, however, the implementation of the for effectively resolving financial institutions as KAs must take into account the complexity of the part of a package of policy measures to address financial sector and the systemic importance of the moral hazard risks posed by systemically their financial institutions; thus, not all KAs might important financial institutions (SIFIs).2,3 The be relevant for these countries, or should only be Key Attributes (KAs) are a nonbinding set of implemented proportionally.4 principles that form the new international standard Economies and financial sectors in Africa for strengthening the resolution regimes for banks have their own characteristics. So, in designing and other financial institutions. Many of these insolvency frameworks for Sub-Saharan African principles not only provide good guidance for countries, it is important to understand the resolving global systemically important financial specific challenges for resolution of banks in institutions, but also for resolving smaller these countries and how best to overcome them. financial institutions. Therefore, the KAs also This chapter maps these challenges, guided by the provide useful guidance for designing insolvency principles laid down in the KAs. 1 General insolvency frameworks for commercial firms have proven to be ineffective for dealing with failing banks, especially during financial crises. 2 In October 2011, the Financial Stability Board (FSB) adopted the Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes, KA) at its Plenary meeting. At the Cannes Summit of November 2011, the Key Attributes were endorsed by the G20 Leaders as a new international standard for resolution regimes. In October 2014, they were supple- mented with new Annexes containing, among others, sector-specific guidance for insurers and financial market infrastruc- tures. See http://www.fsb.org/. 3 According to the KA, a bank is systemically significant (or critical) if its failure could lead to a disruption of services critical for the functioning of the financial system or real economy. A distinction can be made between those financial institutions that are considered to be systemic for the global economy (global systematically important banks, G-SIFIs) and those financial institutions that are considered to be systemic for domestic economies (domestic systematically important banks, D-SIFIs). A subcategory of the SIFIs is the systemically important banks (SIBs) category, divided in globally systematically important banks (G-SIBs) and domestically systematically important banks (D-SIBs). 4 World Bank (forthcoming). CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 1 SECTION TITLE 2 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY II. CONTEXT M any Sub-Saharan African countries enjoyed a decade or more of uninterrupted growth since the beginning of the century, albeit from a relatively low base. Real GDP per capita doubled in the median Sub-Saharan African country and increased slightly more in the average Sub-Saharan African country.5 However, economic circumstances have deteriorated considerably since 2016. Among other reasons, this has been due to lower commodity prices and the tightening of monetary policies in developed countries, especially higher interest rates in the United States, which led to higher borrowing costs for Sub-Saharan African countries, and an increase of public debt in foreign currency. Public debt (foreign or domestically held) has risen considerably in countries like Côte d’Ivoire, Ghana, Kenya, Senegal, and Mozambique. In addition, the risk profile of the banking sector has weakened; nonperforming loans have started to increase in several countries, such as Angola, Republic of Congo, Ghana, Kenya, and Nigeria. Some of these countries (such as Angola and Nigeria) have a large share of their bank lending in foreign currencies. In addition, in many Sub-Saharan African countries the exposures of the financial sector to the sovereign are increasing, directly to government or indirectly through supply chains that depend on the State. Many sovereigns are building up their arrears or financing large parts of their expenditures via issuance of government securities, thereby crowding out private sector funding (as in The Gambia). Surveys of the World Bank have indicated that correspondent banking relationships have also come under pressure in smaller countries in Africa.6 The result has been a diminished supply of US dollars, with a large share of bank lending in foreign exchange in some countries (including Angola and Nigeria), and a slowdown in international trade operations in countries like Angola, Guinea, and Liberia, further weakening their financial systems.7 The recent increase in foreign exchange− denominated government debt also increases foreign exchange risk, which could result in balance of payments difficulties for some countries and corresponding financial stability implications (for example, in Angola and Mozambique). All by all, recent deterioration in the macroeconomic environment represents the main financial stability risks in Sub-Saharan Africa. This has already led to bank failures in some Sub-Saharan African countries, such as Angola, the Democratic Republic of Congo, Ghana, Kenya, Mozambique, and Uganda. In other countries, the impact may have been delayed (as exposures are rolled over, or temporary liquidity support is provided), but those policy choices will only magnify the potential impact, if and when a crisis hits. Large banking groups have emerged since that have subsidiaries (rarely branches) across the mid-2000s in many Sub-Saharan African many borders with a significant presence in countries mainly via the acquisition of existing many of the host countries. While there are many banks, resulting in Pan-African Banks (PABs) African banking groups, seven of them dominate 5 IMF (2015, 17). 6 World Bank (2015a, 2015b). 7 IMF (2016, 15). CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 3 the field. Three have headquarters in Morocco, The Sub-Saharan African countries are in two in Togo, one in Nigeria, and one in South different stages of implementing international Africa.8 In addition to these systemic PABs, there supervision standards; some have implemented are some smaller African banking groups with a Basel II standards, while others are still sub-regional presence. Major PABs have complex preparing to introduce them. There are holding structures overseeing many different supervisory weaknesses concerning consolidated financial and real sector activities. Some of the supervision, home-host relationships, capacity, financial holdings are unregulated.9 The emergence and enforcement of the laws and regulations of these PABs has a number of benefits, such as in many Sub-Saharan African countries. The improved competition, strengthened inclusion, and quality of financial reporting varies, and different economies of scale, but they also pose supervisory accounting standards are used by countries, challenges, and they may increase systemic and which further complicates supervision of the Pan- cross-border contagion risks. African Banks. Also, many Sub-Saharan African countries have not yet introduced depositor The heterogeneity of the Sub-Saharan African protection schemes. Some parts of Africa have countries is large. Some countries have relatively established regional institutions to cooperate on large banking sectors (South Africa, Nigeria, monetary, banking, and capital market issues: the and Angola are the largest), while others have Association of African Central Banks (AACB), micro financial systems (Lesotho, Seychelles, the East Africa Community (EAC), the Southern Swaziland, and São Tomé and Principe are among African Development Community (SADC), and the smallest). Most countries fall in the middle, the West African Economic and Monetary Union but even then, it can be difficult to speak of the (WAEMU). region as a whole, given that there are different monetary arrangements and endogenous factors. 8 Attijariwafa Bank, Groupe Banque Centrale Populaire, and Banque Marocaine du Commerce Exterieur (BMCE) in Morocco; Ecobank and Oragroup in Togo; Standard Bank in South Africa; and United Bank for Africa in Nigeria. 9 IMF (2015, 28). II. CONTEXT 4 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY III. KEY ATTRIBUTES B efore the recent global financial crisis, most countries around the world had only a few tools at their disposal for resolving banks, often a combination of supervisory forbearance, “voluntary” mergers with other financial institutions, and nationalization. Only as a very last resort were authorities able and willing to liquidate banks. The available instruments (blanket guarantees, recapitalization, asset management companies) depended in most cases on large public support measures.10 As a result, authorities ended up with high public costs yet were not able to resolve SIFIs. If anything, the global financial crisis showed • A well-established framework for financial that the regulatory frameworks for resolving stability, surveillance, and policy formulation SIFIs were inadequate in most countries, • An effective system of supervision, regulation, very costly for the taxpayers, and could easily and oversight of banks lead to fiscal crises with serious consequences for the real economies. One part of the policy • Effective protection schemes for depositors and measures that the international community—the other protected clients or customers Group of Twenty (G20), the Financial Stability Board (FSB), and the Basel Committee of Bank • A robust accounting, auditing, and disclosure Supervisors—initiated after the crisis were the regime Key Attributes, targeted at SIFIs and setting out • A well-developed legal framework and judicial the mandates, powers, and tools that national system. authorities must have to deal with financial institutions whose failure could have a systemic The Key Attributes emphasize 12 essential impact. The Key Attributes are intended to provide features of an effective resolution regime. national authorities the ability to efficiently These features should be integrated in the national resolve those institutions at least cost for the State. resolution frameworks for financial institutions Although targeted at SIFIs, the Key Attributes also and tailored to the local circumstances and legal provide very useful guidance for smaller financial traditions. There is not a one-size-fits-all approach. institutions. The implementation of these essential features in Sub-Saharan Africa comes with its own challenges. For resolution regimes to be most effective, a Although the Key Attributes are designed for all number of preconditions must be in place. If kind of SIFIs, covering banks, insurers, financial these preconditions are not fully implemented, market infrastructures, and possibly other kind of or are only partly in place, the effectiveness of a SIFIs, the discussion that follows focuses on Sub- resolution regime can be seriously hampered. In this Saharan African banks only. regard, the following preconditions are important:11 10 These measures included Emergency Liquidity Assistance provided by central banks to ailing banks, turned into unrecov- erable solvency support. 11 See FSB (2016). CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 5 SECTION TITLE 6 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY IV. SCOPE AND AUTHORITY Key Attributes T he Key Attributes have been designed to help countries establish effective resolution frameworks for SIFIs and more particularly for SIBs. Therefore, it is important that a resolution framework clearly indicates which banks are systemically important. The Key Attributes (KA 1.1) declare that a resolution regime should extend to holding companies, nonregulated entities that are significant to the business of the group (such as treasury services, and risk management and valuation), and branches of foreign banks. Many of the powers, tools, and legal safeguards management; regulations to prevent conflicts of are also useful for resolving smaller banks, but interest; and sound reporting requirements. The not all of them. For instance, the establishment of resolution authority should also have adequate a bridge bank or the requirement to draft resolution human and budgetary resources to operate plans are only useful for systemic banks. Thus, the independently. However, the Key Attributes determination that a bank is systemic has important themselves are silent with respect to the preferred implications from a supervisory perspective institutional set-up of the resolution authority (including extra capital requirements and greater and whether it should be a stand-alone institution scrutiny), but also for its treatment in resolution. or be part of an existing financial authority. The explanatory notes acknowledge that the resolution An administrative authority should be authority may be part of an institution in charge of established in charge of exercising the resolution other functions (but operationally separated), such powers and utilizing the tools provided under as a supervisor or a deposit insurer.12 the resolution regime for resolving banks. Such a resolution authority should aim to pursue financial stability, ensure continuity of critical Challenges for Sub-Saharan Africa financial services, avoid unnecessary destruction Although none of the Sub-Saharan African of value, and minimize costs of resolution for countries have a G-SIB headquartered in their all stakeholders, while considering the potential jurisdiction, several of them are home to a Pan- impact of resolution actions on financial stability African Bank. A PAB has a systemic presence in other jurisdictions. in its own jurisdiction, but also in many In pursuing its objectives and functions, the jurisdictions of the region via subsidiaries. resolution authority should be operationally Further, smaller African banking groups have a independent. The Key Attributes lay down some systemic presence in some Sub-Saharan African safeguards in this respect by requiring a sound countries. The failure of a D-SIB always threatens accountability framework with adequate checks the financial stability of the jurisdiction in dispute, and balances, such as on independent decision while the failure of a smaller bank in most cases making; proper appointment and dismissal does not. Therefore, it is essential for resolution procedures for the head of the resolution authority, frameworks in Africa to determine which banks members of the governing body, and senior are systemically important for a country and which See the explanatory notes under (d) for KA 2. 12 CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 7 are not. A resolution framework should enable the For many Sub-Saharan African countries, it resolution authority to make such a determination makes perfectly sense to establish the resolution ex ante or at the time of intervention. Thus, authority in an existing financial authority, the resolution framework should provide the such as the central bank or supervisory authorities enough flexibility to determine that a authority.13 This has several advantages, such as bank is systemic at the time of failing, even though being able, right from the start, to profit from the not considered to be systemic in advance. The rise independence of such an institution, safeguarded of Pan-African Banks has amplified the need in in many Sub-Saharan African countries by laws Africa to establish resolution frameworks for and regulations. An efficient resolution regime systemic banks that are able to efficiently resolve must have a resolution authority that is shielded these institutions at least cost for the State. from political and industry influences. This will be a challenge in Africa (as in many other parts of the The Key Attributes provide a powerful world), where in the past vested interests formed resolution framework, not only for systemic an obstacle for resolving failing banks, resulting banks, but also for medium and small domestic in zombie banks at the expense of State coffers. banks in Sub-Saharan African jurisdictions. Implementation of the Key Attributes in Africa will In an environment of scarce resources, it is also strengthen the overall resolution regimes for banks advantageous for the resolution authority to by introducing new concepts in addition to the lean upon the reputation, financial resources, liquidation option, such as a powerful independent expertise, and information technology (IT) resolution authority, a pallet of resolution tools, systems of the central bank. However, to legal safeguards for shareholders and creditors of manage conflicts of interest, strong fire walls banks, funding arrangements for resolution, access must be put in place between the supervision and to data, cross-border cooperation, and recovery resolution functions of central banks, including and resolution plans. These concepts can be used separate reporting lines up to the highest level. in many circumstances and for many banks and At the same time, regulators should realize that will help resolve banks in a more efficient manner. the capacity of many supervisors and central However, the implementation of the Key Attributes banks in Sub-Saharan African countries is tight should be tailored to the local jurisdictions and be or inadequate. Therefore, adding a new task to implemented taking into account the complexity an existing authority should be accompanied and importance of the financial sector of Sub- by extra resources. To prepare for taking on the Saharan African countries. In other words, they task of resolution authority, central banks should should be implemented proportionally in Sub- also improve their IT systems to gather relevant Saharan Africa. To find the right balance in data, train their staff, and strengthen cross-border implementing the Key Attributes in Sub-Saharan cooperation. Africa is a challenge and not straightforward. In principle, the resolution authority could also be vested in a deposit insurance fund, but these funds are still lacking in many 13 Sub-Saharan African countries; see Section VI on funding issues. IV. SCOPE AND AUTHORITY 8 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY V. POWERS AND TOOLS Key Attributes F inancial authorities should have a variety of powers and tools to protect the stability of the financial system and the interests of all stakeholders involved. Interventions in ailing banks should start at the stage of supervision, ranging from warnings to more intrusive measures, such as orders to end business lines and implement recovery plans, that, in worst case scenarios, could cross over to interventions by the resolution authority at the resolution stage. The resolution authority should have a broad gamut of intervention powers at its disposal to achieve its objectives of preserving financial stability and protecting depositors, while minimizing value destruction and overall costs of resolution. The resolution authority should be able to use these powers in a flexible manner, separately or in combination with other resolution tools, and tailored to the situation at hand. Many of the resolution tools can be applied to smaller and larger institutions and in countries at all stages of economic development. Arguably, the most fundamental principle laid KA 3.2 contains a long list of resolution powers, down by the Key Attributes is KA 3.1, which but it is important to realize that withdrawal of determines that resolution should be initiated the license and liquidation of a failing bank is when a firm is no longer viable or likely to be no the preferred option for smaller and medium longer viable and has no reasonable prospect banks that are non-systemic (KA 3.2 xii). of becoming so. The prime task of resolution Resolution actions should be taken only if there authorities is to initiate early interventions. History are systemic reasons (broader financial stability has shown that in many cases authorities act too concerns) or that resolution of a failing bank is late and too slowly, thereby destroying whatever the least cost solution; and still some parts of the value is left in the ailing firm. KA 3.1 firmly failing bank will end in liquidation. states that interventions should start before a firm Some of the resolution powers and tools can is balance-sheet insolvent (when a firm’s total be applied in all jurisdictions and are useful liabilities outweigh its total assets) and before all powers for resolving SIBs and for liquidating equity has been fully wiped out, triggered by clear smaller, non-systemic banks, while other and transparent criteria of nonviability, which are powers and tools are targeted only at resolving based on quantitative and qualitative factors. Most G-SIBs/D-SIBs (see Box 1).14, 15 importantly, a clear process should be in place to transfer the decision-making authority from the supervisor to the resolution authority. World Bank (forthcoming). 14 There is a last resort resolution power to put a failing financial institution under temporary public ownership in case the 15 stability of the financial system is at risk. This tool is not mentioned in KA 3 on Resolution Powers, but curiously enough is included in KA 6 on Funding. This power to temporary nationalize financial institutions can be applied by all jurisdictions. CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 9 Box 1: Common Resolution Powers and Powers and Tools Targeted Only to G-SIBs/D-SIBs In addition to the power to liquidate a bank, the following “common resolution powers” can be applied to small and larger banks: • Remove and replace the senior management and directors and recover monies from responsible persons (KA 3.2 i). This power is both a supervisory power and a resolution power. • Appoint an administrator to take control of and manage the affected firm (KA 3.2 ii). This power is also both a supervisory power as a resolution power; • Operate and resolve the financial firm, including powers to terminate contracts, continue or assign contracts, purchase or sell assets, write down debt, and take any other action necessary to restructure or wind down the firm’s operations (KA 3.2 iii). • Override rights of shareholders of the firm in resolution (KA 3.2 v). • Transfer or sell assets and liabilities, legal rights and obligations (KA 3.2 vi and KA 3.3). This tool, also called the Purchase (of assets) and Assumption (of liabilities) tool, is one of the most efficient and (cost) effective resolution tools. Some of the powers and tools are targeted only to G-SIBs/D-SIBs: • Ensure continuity of essential services and functions by requiring other companies in the same group to continue to provide such essential services (KA 3.2 iv). • Establish a temporary bridge institution, owned by government, to take over and continue operating certain critical functions and viable operations of a failed firm (KA 3.2 vii). • Establish a separate asset management vehicle (KA 3.2 viii). • Carry out bail-in within resolution as a means to achieve or help achieve continuity of essential functions (KA 3.2 ix, KA 3.5, and KA 3.6). • Temporarily stay the exercise of early termination rights that may otherwise be triggered upon entry of a firm into resolution or in connection with the use of resolution powers (KA 3.2 x and KA 4). • Impose a moratorium with suspension of payments to unsecured creditors and customers and a stay on creditor actions to attach assets or otherwise collect money or property from the firm, while protecting the enforcement of eligible netting and collateral agreements (KA 3.2 xi). Challenges for Sub-Saharan Africa it is important to take stock of the integration of the financial markets. Countries where banks are For Sub-Saharan African countries that are integrated with other financial institutions, such as considering introducing a resolution regime for insurance companies, resulting in financial groups banks, it is essential that in advance a thorough or holding companies, require a more sophisticated assessment of the financial sector be undertaken resolution framework than countries without such to determine which resolution powers and tools financial groups. Lastly, countries that are home would be appropriate for the country. Apart from to banks with subsidiaries and branches abroad, or deciding which banks are systemic and which are countries with many subsidiaries and branches of not, this should entail reviewing banks’ business foreign banks, must put more emphasis on the cross- plans, products, and balance sheets to determine the border aspects of resolution, including cooperation portfolios of their assets and liabilities. In addition, and information exchange with foreign authorities. V. POWERS AND TOOLS 10 Such an assessment should not be a static, but class. Thus, it should be used only when a SIB is a dynamic assessment taking into account new failing, or if a crisis hits the broader financial sector developments in the financial markets. The and same class assets of several failing smaller financial markets in many Sub-Saharan African banks might best be brought together in the asset countries are undergoing rapid changes, such as management vehicle. However, history has shown the growth of Pan-African Banks, but also the that asset management vehicles often have been development of new financial banking and payment used to store nonperforming assets (at book-value), services that are competing with traditional banks resulting in high costs for the State. Smaller Sub- and are often blurring the boundaries between Saharan African countries are advised to establish traditional financial sectors. asset management vehicles only on ad hoc basis, when needed, and not to make them part of the Sub-Saharan African countries are well advised standard resolution toolbox. to introduce all the common resolution powers. This, by itself, is not an easy exercise. The new Some other resolution powers are not suitable for powers should be integrated in the domestic legal Sub-Saharan African countries even if they have framework, which might be a challenge given SIBs operating in their jurisdictions because the intrusive character of some of the powers (the their financial markets are less developed. power to override shareholder rights). The powers The bail-in tool16 requires that there are sufficient should also be woven into the existing regime liabilities on the balance sheet of a failing G-SIB/D- for supervision of banks and the existing bank SIB to be bailed in. In many Sub-Saharan African liquidation framework. A clear separation between countries, the liability side of the balance sheet of supervision, resolution, and liquidation should be their banks consists mainly of small depositors and/ spelled out in law. It is highly recommended that or small retailers. Bailing in those depositors would most tools should not be used for different purposes; only enlarge a financial crisis by eroding trust in the the tool should be a supervision tool or a resolution financial system. In addition, the financial markets tool, clearly indicating the character of intervention of these countries are not sufficiently developed by the authorities, thereby reducing legal uncertainty. for banks to issue bail-in-able debt securities— as banks can do in highly developed financial As discussed, some of the tools are relevant markets to raise enough total loss absorbing only for G-SIBs/D-SIBs and therefore are not capacity (TLAC).17 The power to stay the exercise relevant for Sub-Saharan African countries that of early termination rights is appropriate only in lack such institutions. For instance, the power to those jurisdictions where financial contracts (such ensure essential services and functions is relevant as derivatives contracts) are commonly used, and only if a systemically important institution must be therefore less adequate and necessary for Sub- resolved as a going-concern. Also, a bridge bank Saharan African countries. In the same vein, it is should be established only if such a temporary better not to use a moratorium with a suspension institution is necessary “to bridge time” to find a of payments in jurisdictions where trust in the viable solution for a failing SIB. Smaller banks financial markets is already low, as it often tends to should be liquidated, while their valuable assets worsen this trust and might lead to a run on banks, might be transferred to other banks. An asset and smaller banks can better directly be liquidated, management vehicle is a useful tool to deal with a once they are failing. large amount of nonperforming assets of the same 16 A bail-in tool provides the power to write down equity and unsecured creditor claims of the bank in resolution and to convert unsecured claims into equity or other instruments of ownership in the bank in resolution, a parent company, or a newly established entity or bridge institution. 17 The Financial Stability Board (FSB) published requirements regarding total loss absorbing capacity on November 9, 2015, which were adopted at the G20 summit in Turkey. TLAC requires G-SIBs to develop their ability to cope with large losses without burdening taxpayers. These banks are required to have a certain amount of loss absorbing securities outstanding, which together make up the bank’s TLAC. FINANCING SOLUTIONS FOR MICRO, SMALL AND MEDIUM ENTERPRISES IN BANGLADESH 11 Triggers for entering the resolution stage of the past in resolving failing banks in a timely an ailing bank should be clearly defined. The and efficient manner. What often is missing is legal frameworks of many Sub-Saharan African a willingness to act in sensitive cases, leading to countries have very general and broad criteria to unnecessary forbearance, loss of value in banks, initiate early supervisory intervention or liquidation and high public costs. The introduction of best of a bank (such as “the condition of the institution is international practices in resolution of banks should unsound”), without any additional specific criteria be accompanied by a change in culture and attitude for liquidation. Therefore, when drafting a regime of the supervision and resolution authorities. for resolution of banks, the law should include very specific and mandatory triggers for initiating It should also be well understood that the final resolution that force resolution authorities to take foundation stone of building a sound resolution early action. process is the availability of well-educated and well-trained staff. Some of the new resolution Most importantly, the introduction of adequate powers are technical sophisticated (such as legal resolution powers is a necessary step to valuation of assets in the case of bail-in; and stay improve the resolution regime of banks in all and action on exercising early termination rights Sub-Saharan African countries, but it will not of financial contracts) and require that resolution be sufficient to overcome the lack of action authorities are able to attract and retain (costly) many of their authorities have exhibited in topnotch financial experts. V. POWERS AND TOOLS 12 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY VI. FUNDING Key Attributes T he funding of resolution actions must be well regulated to protect the taxpayer by minimizing public financial support (KA 6). The funding of resolving a failing bank should in the first instance be borne by the bank, its unsecured and uninsured creditors,18 and, if necessary, by other parts of the banking sector. Credible funding arrangements for resolution should be reimbursed by privately funded deposit may consist of a privately funded resolution insurance schemes, the number of deposit insurance fund, a privately funded deposit insurance schemes in Africa still lags behind those in other scheme, or a combination of these funds, parts of the world. At the end of 2018, less than while temporary public funding arrangements half of African countries had an official funding should be in place to provide liquidity or arrangement in place for paying insured depositors solvency support, if needed, to ascertain orderly out Specifically, only 25 of the 55 African countries resolution, combined with arrangements to had an explicit deposit insurance scheme—one recover any public losses from the financial that is established by statute and typically insures industry. To minimize the risk of moral hazard, deposits up to a statutory coverage limit—according such temporary public support should be provided to the International Association of Deposit Insurers only if it is necessary to foster the stability of the (IADI).21 So, this means that in most African financial system and permits a resolution option countries, resources must come from the State, or that is best able to achieve an orderly resolution ex post from the remaining banks.22 In addition, of one or more failing banks, while all private in many African countries with an explicit deposit resources19 of funding have been exhausted.20 insurance scheme, the deposit insurance funds have not reached their minimum target size. This means Challenges for Sub-Saharan Africa that the failure of a medium sized bank will result in a funding gap. In principle, such a funding gap The lack of funding for resolving failing banks could be financed by the deposit insurance scheme is often a major challenge in Sub-Saharan through borrowing in the domestic market,23 or the African countries. The lack of resources is caused State could temporary shoulder a full payout to by several factors. First, while secured depositors the insured depositors.24 However, these financing 18 Losses are allocated to shareholders and unsecured/uninsured creditors in accordance with the hierarchy of claims and they should carry the losses provided that they are no worse off than in liquidation. See Section VII on legal safeguards. 19 Otherwise, private resources of funding would not achieve the statutory objectives of the resolution regime (see essential criteria ii for KA 6.2). 20 The Key Attributes recognize that there might be cases where reliance on nationalization or public ownership is the only viable option for continuing critical functions and that therefore some countries might incorporate this as a last resort option in their resolution framework (KA 6.5). 21 See http://www.iadi.org. This reflects the number of African countries with an explicit deposit insurance scheme as indi- cated on the IADI’s website as of December 10, 2018. . 22 Fortunately, triggered by the most recent global financial crisis, the number of explicit deposit insurance schemes is rap- idly rising in Africa. According to IADI, 10 African countries are currently developing a deposit insurance protection scheme. 23 If the statutes of the deposit insurance scheme provide for this. 24 Temporary sources of funding must ex post be recovered from the financial system participants, according to KA 6.2. CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 13 options are not available in many Sub-Saharan less developed financial markets and the lack African countries. For the above-mentioned of more sophisticated financial products and reasons, many deposit schemes in Africa are not instruments. The resolution of a D-SIB should, able to contribute to the resolution of a SIB. according to the Key Attributes, in the first instance be borne by its shareholders and its unsecured and In many Sub-Saharan African countries, fiscal uninsured creditors, such as bond holders. However, resources are insufficient to set up temporary the issuance of bonds in many Sub-Saharan African public funding arrangements to provide financial markets is very limited. Often government solvency support, if needed. Therefore, even bonds are the only bonds that are traded at those if the resolution authority has all the statutory markets. For this reason, the bail-in resolution tool powers and tools, the swift resolution of a failing is not a realistic option for the funding of a D-SIB systemically important bank will be held back by in many Sub-Saharan African countries. the lack of sufficient temporary public resources. This is a major obstacle in Africa for carrying The withdrawal by global banks of correspondent out swift, efficient, and least-cost resolutions of banking relationships with Sub-Saharan African D-SIBs. This lack of a sufficient fiscal back-up countries might complicate the resolution of a undermines trust in the financial system and will Pan-African Bank. International financial flows hamper the resolution of a systemic bank, but when are important for the economic growth and financial the preconditions are in place (including effective stability of the Sub-Saharan African countries. The lack supervision), Sub-Saharan African countries could of correspondent banking relationships has resulted in establish a privately funded scheme combining a concentration of cross-border flows, which may pose deposit protection and resolution frameworks, ex financial stability risks.25 More specifically, it might ante to be funded by the financial industry. increase liquidity stress in foreign denominations and thereby accelerate the resolution of a failing bank and/ The private funding of a D-SIB in many Sub- or complicate its resolution. Saharan African countries is limited because of IMF (2016, 15). 25 VI. FUNDING 14 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY VII. LEGAL SAFEGUARDS Key Attributes T he Key Attributes contain far-reaching measures that infringe upon third party’s rights, such as the powers to terminate contracts, to override rights of shareholders, and to transfer or sell assets and liabilities of a failing bank (KA 3.2). The overruling of these rights is justified on grounds of public interest: that is, to preserve the stability of the financial system and to contain costs for society (the taxpayers). However, the Key Attributes also contain a to protect financial stability or to maximize the value number of explicit safeguards designed to for the benefit of all creditors.26 protect the governance and economic rights The resolution authority should have the capacity of creditors, counterparties, and shareholders to exercise the resolution powers with the necessary of a failed bank, or to protect an orderly and speed and flexibility, subject to constitutionally prompt resolution by the resolution authority. protected legal remedies and due process (KA 5.4). The Key Attributes try to establish a delicate Where prior court approval is required, the timelines balance between providing the resolution authority required for completing court proceedings should all the necessary tools to ensure prompt corrective be consistent with the Key Attributes and should be resolution, while protecting to the extent possible incorporated into resolution planning. According the essential rights of the parties involved. to KA 5.5, the legal framework should provide that In particular, the Key Attributes specify that “just” compensation is the only remedy that can be obtained compensation should be awarded to creditors from a court or tribunal through judicial review of for any expropriation. KA 5.2 states that creditors measures taken by the resolution authority acting should have a right to compensation if they do not within their powers and in good faith (thus, not staying receive at a minimum what they would have received or reversing the resolution measures). in a liquidation of the firm (“no creditor worse off than in liquidation safeguard”). Another safeguard in Challenges for Sub-Saharan Africa the Key Attributes (KA 5.1) states that the resolution authority is required to exercise resolution powers The introduction of intrusive resolution powers in in a way that respects the applicable hierarchy of Africa requires a balanced protection of the rights creditor claims. Respecting the hierarchy of claims of creditors, counterparties, and shareholders of means, in principle, absorbing losses in the following a failed bank. Authorities must navigate the existing order: equity should absorb losses first; then losses protection of property rights in their country, often should be imposed on subordinated debt, and only anchored in constitutional provisions. The “no then on senior debt holders. A resolution authority, as creditor worse off than in liquidation safeguard” a general principle, should treat creditors of the same necessitates an adequate valuation at the time of class equal (“pari passu principle”), while providing resolution of these rights, as well as a counterfactual flexibility to depart from that principle, if necessary, valuation of these rights in liquidation.27 See the essential criteria for KA 5.2. 26 A precondition for such complicated exercises is that the relevant data and the necessary valuation expertise are quickly 27 available, what is most often not the case in Sub-Saharan African countries. However, resolution authorities could have ex ante contracts set up with (international) accounting firms that can do this valuation on short notice. See Section VIII on access to information. CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 15 The Sub-Saharan African countries should essential that resolution measures be taken swiftly secure a clear hierarchy of claims that will apply and that the measures taken by the resolution in the process of liquidation and resolution authority enjoy a high degree of legal certainty, of banks; this hierarchy should have enough courts in Sub-Saharan African countries must be flexibility to depart from the “pari passu able to use expedited procedures if court approvals principle,” if necessary, to protect financial are necessary for the resolution authority to exercise stability, or to maximize the value for the resolution powers. Courts should not be able to benefit of all creditors. If Sub-Saharan African overrule resolution measures taken in good faith countries already have a hierarchy of claims, it is by the resolution authority but should be able to often for commercial firms (not specifically for award monetary compensation if errors were made. banks), depositors are not ranked first, and the Such limitation of court powers runs against many order in which claims are rewarded is not always legal traditions in Sub-Saharan African countries straightforward. This creates uncertainty for and, in some cases, challenges their constitutional shareholders (investors) and unsecured creditors of provisions. The implementation of these resolution banks alike and is detrimental to economic growth principles requires a clear explanation to the and the stability of the financial system. A tricky judiciary and the regulators of the objectives and legal issue in many countries is to incorporate principles of the resolution, and careful and precise enough flexibility in the legal system to depart drafting to incorporate these principles in local legal from the “pari passu principle” when necessary in frameworks. Central banks could play an active the interest of financial stability or the benefit of all role in engaging with the judiciary and transferring creditors. Often this requires careful drafting to stay knowledge. Also, many courts in the Sub-Saharan within the legal traditions of a country. African countries have limited capacity and judges are not specialized in certain parts of law. Courts While courts play a key role in the process should consider creating specialized divisions of liquidation of banks in most Sub-Saharan that deal with commercial and financial matters, African countries, this role must be more limited including the liquidation and resolution of banks. in the case of resolution of banks. Because it is VII. LEGAL SAFEGUARDS 16 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY VIII. ACCESS TO INFORMATION Key Attributes T o be able to take accurate and swift resolution measures, banks’ management and resolution authorities should have access to all relevant information. This requires that banks have accurate and up-to-date data systems in place. Resolution authorities should have direct access to banks to gather all critical information, if needed. In normal times, such nonpublic information should be available for recovery and resolution planning, while in times of crisis this information should be available to undertake resolution measures. It should be accessible for all domestic authorities that play a role in safeguarding the stability of the financial system (“safety-net players”), such as financial supervisory authorities, central banks, resolution authorities, ministries of finance, and deposit insurance funds. The information exchange between the domestic safety-net players should be embedded in broader cooperation agreements to formalize the work procedures and the division of responsibilities among them.28 If a failing bank has cross-border operations, legal frameworks must also enable the exchange of information with all relevant foreign safety-net players.29 Accurate data systems are especially necessary subsidiaries, limiting the analysis of the soundness for making proper mandatory valuations of a of the bank— particularly the analysis of capital failing bank’s assets and liabilities, including its and nonperforming loan ratios.30 Therefore, the off-balance sheet items. Best international practice implementation of a new resolution framework in is that the supervisor, or the resolution authority, Sub-Saharan African countries must go hand in will instruct an independent institution (such as hand with a serious investment in data systems. In a recognized auditing firm) to undertake such a addition, the staff of banks and that of supervision valuation when a bank is nearing the conditions and resolution authorities need to get adequate (triggers) for entering in resolution. training to be able to use the new systems. The introduction of a sound bank resolution Challenges for Sub-Saharan Africa regime requires not only a dedicated effort Given that an efficient bank resolution regime is by the authorities to set it up, but sufficient fully dependent on the accuracy and accessibility financial resources, which are often scarce in of relevant bank data, data systems in many fiscally stressed Sub-Saharan African countries. Sub-Saharan African countries need to be Investments in new IT-systems and the hiring of IT strengthened. Weak data systems are due to many expertise are expensive. Moreover, the upgrading factors, such as outdated reporting and information of the accounting and auditing practices, and the systems, a lack of adequate internal risk control and training of staff, requires support from international compliance frameworks, and weak accounting and experts. In addition, valuations, to be done in the auditing configurations. For instance, important context of resolution, require specialized skills that data gaps exist for Pan-African Banks at the level of are expensive. 28 Such agreements often take the form of one or more Memoranda of Understanding (MOUs). 29 See Section IX on cross-border cooperation. 30 See IMF (2015, 33). CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 17 The information exchange among all safety-net realm. In addition, there are often operational players in Sub-Saharan African countries needs to obstacles that prohibit the timely and accurate be strengthened. In many of these countries, the exchange of information. Even more hurdles exchange of information between all stakeholders exist in many Sub-Saharan African countries for is ad hoc and voluntary, or the legal system exchanging information with foreign supervisors, prohibits an appropriate exchange of sensitive foreign resolution authorities, and other foreign and granular nonpublic bank information with safety-net players. domestic institutions outside the supervisory VIII. ACCESS TO INFORMATION 18 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY IX. CROSS-BORDER COOPERATION Key Attributes R esolution authorities should aim for cross-border cooperation and coordination, and legal frameworks must accommodate it (KA 7). Where there is a significant cross- border influence in the financial sector, cooperation between home and host authorities is essential. For effective resolution, a resolution authority should be able to cooperate with foreign resolution authorities, as well as with foreign supervisors and/or deposit insurance agencies. The resolution authority should have the power to negotiate and to enter into information exchange and cooperation agreements with foreign authorities. Strong cooperation can develop only if authorities are explicitly allowed to exchange relevant information with their international counterparts to enable cross-border resolution planning and execution. Given that the data to be exchanged often contain market-sensitive information, a high degree of confidentiality should be ensured at all times. The resolution authority should have resolution resolution procedures for their SIBs to preserve the powers over both subsidiaries and branches of stability of their own financial system, especially foreign banks to support resolution measures of when critical parts of a SIB are outside their own foreign home authorities or, in exceptional cases, jurisdiction. Host authorities have a keen interest to take measures on its own initiative to preserve in close cooperation of resolution procedures with the stability of its financial system (KA 7.3). the home authorities when a subsidiary of a PAB The Key Attributes also provide that a resolution is systemically important in their jurisdiction.31 In authority should be able to support foreign some parts of Africa, supervisory colleges have resolution authorities in their resolution actions or been established for PABs. In practice, however, give effect to foreign resolution actions (KA 7.5). these arrangements are not yet very effective and The legal basis for this should be provided in law, trail behind the establishment of many cross-border including an enabling clause to conclude bilateral subsidiaries,32 and resolution agreements between or multilateral Memoranda of Understanding. home and host authorities do not exist or exist at Moreover, national laws should not discriminate only a very elementary level. This might jeopardize against creditors on the basis of their nationality, a quick and efficient resolution of a failing PAB, the location of the claim, and the like (KA 7.4). thereby threatening the financial stability of its own and many host jurisdictions. Challenges for Sub-Saharan Africa There is an asymmetric balance of power The rapid emergence of Pan-African Banks between the four Sub-Saharan African countries across Africa underlines the need for strong that are home to a systemic Pan-African Bank cross-border resolution agreements between (Morocco, Nigeria, South Africa, and Togo) home and host authorities. The home authorities and the authorities of countries that host the of PABs have an interest in securing sound PAB’s subsidiaries. Home authorities have better See FSB (2015). 31 See IMF (2015, 42). 32 CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 19 and more information about the soundness of and legal traditions, which present additional a systemic PAB, as well as a firmer grip on its obstacles for strengthening cooperation between senior management. Therefore, home authorities the resolution authorities of these countries. might at first instance have less incentive to For instance, financial reports and disclosures conclude cooperation and information exchange of Pan-African Banks are based on different sets agreements with host authorities, particularly if of accounting standards because not all African the subsidiaries in those countries are relatively jurisdictions apply International Financial small compared to the group’s balance sheet Reporting Standards.33 Discrepancies in legal and no critical parts of the Pan-African Bank are authority, accounting, auditing, and confidentiality vested in host jurisdictions. This asymmetry might regimes must be overcome—if necessary, with hinder the concluding of cooperation agreements support from international experts. Regional in Africa, resulting in a suboptimal resolution institutions (AACB, EAC, SADC, WAEMU) aim framework for Africa as a whole. to overcome some of these differences. In the area of bank resolution, however, the arrangement of the There are many differences between Sub- regional institutions might create extra challenges, Saharan African countries concerning their given that resolution powers are not always clear political system, organization of government, and spread across regional and national bodies.34 See IMF (2015, 38). 33 See IMF (2015, 44). 34 IX. CROSS-BORDER COOPERATION 20 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY X. RECOVERY AND RESOLUTION PLANNING – RESOLVABILITY ASSESSMENT Key Attributes T he recent global financial crisis has demonstrated that banks and authorities should prepare well in advance before banks get into problems. They must have plans with options in the event of a bank failure, especially for SIBs. Therefore, the Key Attributes introduce new tools, consisting of a recovery planning tool, a resolution planning tool, and a resolvability assessment tool (Recovery and Resolution Plans, RRPs). According to the Key Attributes (KA 11), banks (senior management) should have detailed Recovery Plans for addressing financial problems without relying on public sources, to be updated at least annually. Such plans should indicate options for a bank to recover from financial distress as a “going concern,” while the bank remains under its management’s control. Recovery plans provide measures to conserve or raise capital and/or liquidity, and measures to restructure the business of the bank to decrease the bank’s risk profile and make it profitable again. Resolution authorities should have Resolution of their financial systems, such home authorities Plans that provide for the resolution of a should undertake thorough RRPs on a regular basis. systemic bank on a “gone concern” basis when One of the challenges is to simplify the set-up of recovery plans have failed, indicating specific systemic PABs to create a clear structure consisting options and actions for resolution.35 In addition, of a few legal entities that are well prepared for home resolution authorities should evaluate the resolution. Many banking groups in Africa have feasibility and credibility of resolution strategies complicated cross-border structures, making (Resolvability Assessments) on a regular basis, effective supervision and resolution a challenge for at least for SIBs (KA 10). While recovery and both home and host authorities.36 This will not be an resolution tools and Resolvability Assessments are easy task and will require the necessary will, effort, intended for G-SIBs, they might well be applied to and expertise from banks and authorities alike. other banks, especially D-SIBs, which could have However, the streamlining of these banks will be in an impact on the jurisdiction’s financial stability in the interest of financial stability—and, by making the event of a D-SIB’s failure. them more transparent and efficient, also in the interest of the businesses themselves. Challenges for Sub-Saharan Africa A major obstacle for authorities to undertake With the rise of Pan-African Banks in Africa, Recovery and Resolution Plans in Africa is there is a clear need to have a well-designed and the lack of reliable granular data. To develop organized regime for Recovery and Resolution adequate Recovery and Resolution Plans, and to Plans, in particular in those jurisdictions that perform sound resolution assessments, banks and are home to a systemic PAB. To secure the stability authorities must possess a clear overview of all 35 As recommended in the Guidance Note issued by the FSB on June 21, 2018 on “Funding Strategy Elements of an Imple- mentable Resolution Plan,” such resolutions plans should also appropriately address the available temporary public fund- ing in resolution, whether from the central bank (in case of emergency liquidity assistance) and/or the government (in case of solvency support). 36 See IMF (2015, 37). CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 21 business activities and the risks associated with Recovery and Resolution Plans are not costless them. Not all supervisors in Africa have those and might require a huge amount of resources data—especially not home supervisors of banks and capacity of banks and authorities. For with many cross-border operations, in the absence G-SIBs/D-SIBs, RRPs should be required and of home-host cooperation agreements on bank be completed for the sake of financial stability. resolution. Supervisors and resolution authorities However, the less complex and interconnected in Africa should give priority to improving their a bank is, the simpler RRPs should be. No RRPs data reporting and IT systems and improving the should be required for small banks. exchange of cross-border data using cooperation agreements.37 See Section VIII on access to information. 37 X. RECOVERY AND RESOLUTION PLANNING – RESOLVABILITY ASSESSMENT 22 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY XI. NOW WHAT TO DO? Key Attributes T he recent deterioration in economic conditions and the rise of regional systemically important banks in Africa make the strengthening of resolution frameworks more urgent. When the opportunity arises, Sub-Saharan African countries should use the insights of the Key Attributes and weave them into their resolution regimes for banks, in tune with the development of their financial sectors and the presence of systemically important banks. While all Sub-Saharan African countries should take a close look at their resolution regimes for banks, Sub-Saharan African countries home to one or more of the Pan-African Banks, should especially investigate whether their resolution frameworks are sufficiently capable of quickly resolving these banks, while shielding taxpayers from losses and protecting critical functions, thereby ensuring the stability of the financial sector. Sub-Saharan African countries that have decided • Assess the national accounting and auditing to strengthen their bank resolution frameworks standards and, if necessary, bring them in line should focus on the following actions: with international standards. • Ensure that the preconditions for effective resolution • Review the best options for ex ante funding by regimes for banks are met, in particular an effective the financial industry of resolution measures. system of regulating and supervising banks. • Strengthen international cooperation, exchange of • Undertake an assessment of the current insolvency supervisory information, and international exchange framework for banks against the Key Attributes of information necessary for preparing Recovery and reform the relevant legal framework (laws and Resolution Plans, as a matter of urgency. The and regulations) taking into account the structure is specifically relevant for the home authorities of and complexity of the financial sector, the Pan-African Banks, but also for host authorities with systemic importance of the banks, and the legal subsidiaries of PABs that have a systemic presence. traditions of the jurisdiction. In addition: • Establish an independent resolution authority • The regional institutions in Africa (AACB, EAC, with sufficient capacity and resources to operate SADC, WAEMU) should play a key role in and with an appropriate governance framework. coordinating and harmonizing legal frameworks and In case the resolution authority will be housed at operational practices in the field of bank resolution the central bank or the financial supervisor, strong (including data systems, accounting and auditing fire walls are required to separate the interests practices, and Recovery and Resolution Plans). of the monetary authority, the supervisor, the payment overseer, and others from the interests • Home supervisors/resolution authorities of Pan- of the resolution authority. African Banks should start preparing Recovery and Resolution Plans and use them, as a matter of • Strengthen the quality and scope of the operational priority, to simplify the organization structures of data systems to enable an effective use of the new these banks.38 resolution powers and tools. For some Pan-African Banks, because of their structure, it is not directly clear who should take the lead, such as in the 38 case of Ecobank. Should the authorities of Togo or Nigeria take the lead? CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 23 In all these steps, a willingness to act quickly, if necessary, is paramount in the interest of protecting depositors, preserving value in the financial sector, and limiting public costs. XI. NOW WHAT TO DO? 24 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY REFERENCES FSB (Financial Stability Board). 2015. “Guidance on Cooperation and Information Sharing with Host Authorities of Jurisdictions Where a G-SIFI Has a Systemic Presence that Are Not Represented on Its CMG.” Financial Stability Board, Basel. ---------. 2016. “Key Attributes Assessment Methodology for the Banking Sector.” October 19. ---------. 2018. “Funding Strategy Elements of an Implementable Resolution Plan.” Guidance Note, June 21. IMF (International Monetary Fund). 2015. “Pan-African Banks: Opportunities and Challenges for Cross- Border Oversight.” Departmental Paper No. 15/04, International Monetary Fund, Washington, DC. ---------. 2016. “The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action.” IMF Staff Discussion Note 16/06, International Monetary Fund, Washington, DC. World Bank. 2015a. “Withdrawal from Correspondent Banking: Where, Why, and What to do About It.” Working Paper 10198, World Bank, Washington, DC. ---------. 2015b. “Report on the G20 Survey on De-Risking Activities in the Remittance Market.” Working Paper 101071, World Bank, Washington, DC. ---------. Forthcoming. “Using the FSB Key Attributes of Effective Resolution Regimes to Design Resolution Frameworks for Non-FSB Members.” World Bank, Washington, DC. CHALLENGES FOR RESOLUTION OF BANKS IN SUB-SAHARAN AFRICA 25