1. Macroprudential Policy Framework: An Overview Prepared for COMESA Monetary Institute 2 nd September 2015

2. Overview 1.Introduction 2.Policy Framework 3.Governance and Mandate 4.Conclusion 9/2/2015 Macroprudential Policy Framework 2

3. Introduction  An institutional basis for macroprudential policy implementation requires the development of a macroprudential policy framework, which can be adopted by the COMESA member countries.  This presentation draws from studies that are underway internationally, addresses two issues;  A draft summary of key principles for a macroprudential policy framework for the COMESA member countries.  Governance and Institutional Arrangements. 9/2/2015 Macroprudential Policy Framework 3

4. Policy Strategy Recent work by the IMF (2011), BoE (2011) and Houben, Van der Molen and Wierts (2012) has produced defining elements of a simple framework from a policy perspective; a)The overall/final objective (limiting systemic or system-wide financial risk): Clear mandate and focus on macro risks (both time varying and cross sectional). b)Identify the key risks/triggers (intermediate objectives) and transmission channels to the banking sector – Through forward looking analysis, design a dashboard of key indicators for each risk and stress testing. c)Map and monitor indicators (with limits or thresholds) to each risk trigger that will guide whether risk is rising and guide when instruments should be deployed. d)Have a robust Policy toolkit/instruments; at least one instrument for each key risk so as to link risks to specific actions. 9/2/2015 Macroprudential Policy Framework 4

5. Policy Strategy e) The governance and institutional mandate: (i) Mandate for macroprudential policy powers (Central Bank?) (ii) Policy Committee (instruments, standards) (iii) Unit in Central Bank to handle financial stability analysis. (iv) Good Policy Coordination: Interaction between MP and Monetary policy; Interaction between macroprudential authority and Ministry of Finance. (Forum for financial sector regulators?). (v) Accountability and Financial stability reporting: Provide public assessments of systemic risk on a regular basis by publishing a Financial Stability Report regularly. (vi) Regional harmonization: Consistent and harmonized policies at regional level to reduce arbitrage and spill over effects. Information sharing. 9/2/2015 Macroprudential Policy Framework 5

6. Instruments and Indicators 6

7. Key risks in the Region Type of riskKey risksPossible Indicators Time varying risk Resilience against excessive leverage/credit  Credit to GDP gap  Sectoral growth of credit  Corporate debt service and profitability Resilience against excessive asset price growth from real estate  Loan to Value Ratio.  Real estate price indices.  Bank Lending for Mortgages Funding/Liquidity risk  Whole sale funding ratio  Lending spreads/margins, bid-ask spreads  LCR and NSFR.  Index of systemic liquidity Capital Flows  Maturity profile of offshore exposures  Assets of offshore inst. Cross sectional risk Resilience of market structure  Interlinkage of interbank borrowing  Common credit exposures  Concentration of lending  Complex financial instruments and derivatives.  Risks from DSIBS and Cross Border Banks. Table 1: Intermediate Objectives and Indicators 7

8. Instruments/Tools – Presumptive Table 3: BoU Intermediate Objectives and Tools Dimension of risk Key RisksToolkit/Instruments Time varying risk Resilience against excessive credit growth  Basel III Capital buffers, Leverage ratio.  Sectoral provisioning requirements Resilience against excessive asset price growth from real estate  Loan to value ratio Funding and Liquidity risk  LCR and NSFR  Funding limits for wholesale funding Capital flows  Ratio of Reserves to offshore exposures with less than 6 months maturity. (100%). Cross sectional risk Resilience of market structure  Enhanced disclosure requirements.  Capital requirements for DSIBs and Cross border banks.  Payment systems oversight tools 8

9. Transmission Channels To ensure effectiveness, there is need to understand the transmission channels between instruments and objectives, with the objective of  Reducing leakages for example between the banking sector and the shadow banking sector.  Thus critical to monitor indicators of non bank financial institutions.  Enhance effectiveness. 9/2/2015 Macroprudential Policy Framework 9

10. Transmission - LTV 10 Source: Bank of England/BIS

11. Risk Assessment and Governance Arrangements Table 3: Governance and Risk Assessment Arrangements Approved FrameworkEgyptKenyaSudanSwazilandMalawiMadagascarUgandaZambiaZimbabwe Central Bank to take the lead and have macroprudential policy powers Yes Establish Unit in Central Bank for financial stability Yes Forum of financial sector regulators Yes Publish FSR Yes Dashboard of forward looking Indicators Yes 11

12. Possible tools for Implementation Toolkit/InstrumentsEgyptKenyaSudanSwazilandMalawiMadagascarUgandaZambiaZimbabwe Time Varying Risk Basel III Capital Conservation Buffer Yes Countercyclical buffer Additional Capital for DSIBs Yes Increase Tier 1 capital Liquidity Coverage Ratio Yes Net Stable Funding Ratio (NSFR) Leverage Ratio Cross sectional risk Identify DSIBSYes Table 4: Macroprudential Instruments 12

13. Questions and Emerging Issues a) At national level ;  Priority should be on enhancing capacity for risk assessment and stress testing?  Close data gaps, understand national risk riggers, dashboard of forward looking risk indicators (nominal, composite, heat maps), macro stress testing.  Start work on macroprudential policy tools ?  Ensure international best practice on governance and institutional arrangements? 9/2/2015 Macroprudential Policy Framework 13

14. Questions and Emerging Issues c) Regional level  Implement the COMESA harmonized risk assessment and policy framework;  Dashboard of indicators, stress testing, policy tools and governance arrangements approved by COMESA.  Each country to have at least one instrument for the regional risk triggers identified at regional level.  There is a gap regarding coordination of policy and regional level.  Is financial stability included as a key objective of the CMI. 9/2/2015 Macroprudential Policy Framework 14

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