Banking Banking

Perspectives on Perspectives on

the Financial the Financial

Crisis: A View from Crisis: A View from Crisis: A View from Crisis: A View from

AfricaAfricaKeith JefferisKeith Jefferis

Egyptian Banking Institute – 3rd Annual Banking

Conference

Cairo, November 22-23, 2009

Impact of the Global Crisis on Impact of the Global Crisis on

Banks in AfricaBanks in Africa

�� Banks in Africa are affected, of course, but not in the same way Banks in Africa are affected, of course, but not in the same way as banks in developed countriesas banks in developed countries

�� Depends on level of financial development and integration with Depends on level of financial development and integration with global financial marketsglobal financial marketsglobal financial marketsglobal financial markets

�� Direct impacts: Direct impacts: �� BBank ank balance balance sheetssheets

�� Vulnerable financial Vulnerable financial institutionsinstitutions & systems& systems

�� Indirect impacts:Indirect impacts:�� Arising Arising from broader economicfrom broader economic developmentsdevelopments

�� Changes in international supervisory standardsChanges in international supervisory standards

Direct impact of the crisis has Direct impact of the crisis has

been quite limitedbeen quite limited

�� Financial institutions & systemsFinancial institutions & systems�� Little Little evidence ofevidence of institutional or systemic vulnerabilityinstitutional or systemic vulnerability

�� Little need Little need for central bank or government interventionsfor central bank or government interventions (rescue (rescue packages, liquidity support, bank recapitalisation or packages, liquidity support, bank recapitalisation or nationalisation)nationalisation)nationalisation)nationalisation)

�� Limited contagion from developed country problemsLimited contagion from developed country problems

�� Main exception: Nigeria Main exception: Nigeria –– vulnerability to oil sector and stock vulnerability to oil sector and stock market lendingmarket lending

�� Why is this?Why is this?�� Nature of balance Nature of balance sheetssheets

�� Supervision Supervision and capitaland capital

�� Resilience resulting from macroeconomic & financial reformsResilience resulting from macroeconomic & financial reforms

Balance sheets are low riskBalance sheets are low risk

Lending Mostly deposit-funded

Limited use of wholesale funding

Low leverage

Liquidity HighLiquidity High

Moderate loan-to-deposit ratios

Risk Limited exposure to high risk/exotic assets

Limited off balance-sheet operations

International links Limited reliance on foreign funding

Limited integration with int. capital markets

In some cases, assisted by exchange controls

Very liquid banksVery liquid banks

60%70%80%90%

Liquid assets as % of total assets, 2007

0%10%20%30%40%50%60%

S A

fric

a

Sw

azi

lan

d

Nig

eri

a

Ke

ny

a

Bu

run

di

Gh

an

a

Za

mb

ia

Nig

er

Eth

iop

ia

Cô

te d

'Ivo

ire

An

go

la

Ma

uri

tiu

s

Ch

ad

Ta

nza

nia

Bo

tsw

an

a

Ga

bo

n

Rw

an

da

Mo

z'b

iqu

e

Lib

eri

a

Co

ng

o, R

ep

.

Co

ng

o, D

R

Source: IMF SSA REO Oct 2009

Supervision & capitalSupervision & capital

�� Quality of supervision has been improving in SSAQuality of supervision has been improving in SSA

�� FSAPsFSAPs --> financial sector development programmes> financial sector development programmes

�� International standards: Basel core principlesInternational standards: Basel core principles

�� Investment in skills & infrastructureInvestment in skills & infrastructure�� Investment in skills & infrastructureInvestment in skills & infrastructure

�� Banks are well capitalisedBanks are well capitalised

�� Generally highly profitableGenerally highly profitable

�� CARsCARs often above international minimumoften above international minimum

Robust Capital AdequacyRobust Capital Adequacy

20

25

30

Regulatory Capital/Risk-weighted assets, 2007

0

5

10

15

Ma

liC

. d'Iv

oir

eR

wa

nd

aC

. Ve

rde

Ca

me

roo

nC

on

go

, DR

S A

fric

aN

ige

rB

urk

. Fa

soM

au

riti

us

Bu

run

di

Se

ne

ga

lG

uin

ea

Le

soth

oM

'ga

sca

rM

oz'

biq

ue

Eri

tre

aS

ey

che

lles

CA

RN

am

ibia

Gh

an

aC

on

go

, Re

p.

Ga

bo

nT

an

zan

iaA

vera

ge

Ma

law

iK

en

ya

Bo

tsw

an

aZ

am

bia

Eth

iop

iaN

ige

ria

Sw

azi

lan

dA

ng

ola

Zim

ba

bw

eL

ibe

ria

Source: IMF SSA REO Apr 2009

Indirect Impacts Indirect Impacts –– more important more important

in longer termin longer term

�� Global risk environmentGlobal risk environment

�� Trade flows & growthTrade flows & growth

�� RemittancesRemittances�� RemittancesRemittances

�� Exchange ratesExchange rates

�� Credit slowdownCredit slowdown

�� Supervisory changesSupervisory changes

Global risk environmentGlobal risk environment

�� Volatility in price/appetite for riskVolatility in price/appetite for risk

�� Volatility in shortVolatility in short--term capital flows for term capital flows for EMsEMs

�� Higher equilibrium price for risk when dust settlesHigher equilibrium price for risk when dust settles�� Higher equilibrium price for risk when dust settlesHigher equilibrium price for risk when dust settles

�� Tightened risk assessment criteria in global banking groupsTightened risk assessment criteria in global banking groups

�� Restricted access to capital (esp. credit lines to domestic banks Restricted access to capital (esp. credit lines to domestic banks from international banks) from international banks)

�� African debt & equity markets adversely affected by sellAfrican debt & equity markets adversely affected by sell--offs by offs by international investorsinternational investors

South Africa EMBI+ spreadSouth Africa EMBI+ spread

Total financial flows to Africa … Total financial flows to Africa …

volatile but recoveringvolatile but recovering

Annual flowsAnnual flows

25,000

30,000

35,000

Quarterly flowsQuarterly flows

2,500

3,000

3,500

0

5,000

10,000

15,000

20,000

25,000

2004 2005 2006 2007 2008

0

500

1,000

1,500

2,000

2,500

Q308 Q408 Q109 Q209

Slowdown in trade flows & Slowdown in trade flows &

economic growtheconomic growth

�� Most African economies highly exportMost African economies highly export--dependentdependent

�� Export sectors badly hit due to weak demand/prices (esp. commodities)Export sectors badly hit due to weak demand/prices (esp. commodities)

�� Trade finance less accessible (more expensive, shorter tenors)Trade finance less accessible (more expensive, shorter tenors)

�� Banking vulnerability from sectoral loan concentrationBanking vulnerability from sectoral loan concentration

�� Weakened household sector Weakened household sector --> credit risk> credit risk

�� Rising arrears and deteriorating quality of collateralRising arrears and deteriorating quality of collateral

�� Larger current account deficits and constrained access to capital markets Larger current account deficits and constrained access to capital markets leads to exchange rate volatility, adding to uncertainty and balance sheet leads to exchange rate volatility, adding to uncertainty and balance sheet risksrisks

RemittancesRemittances

�� Major contributor to FX earnings and household income in Major contributor to FX earnings and household income in

many African countriesmany African countries

�� Vulnerable to economic slowdown in developed countriesVulnerable to economic slowdown in developed countries

�� Reinforces balance of payments weakness and household Reinforces balance of payments weakness and household

balance sheet problems balance sheet problems

�� Banks handle most remittance payouts Banks handle most remittance payouts –– source of fee incomesource of fee income

�� Latest estimates suggest modest decline in remittances to Latest estimates suggest modest decline in remittances to

Africa Africa –– around 6% in 2009 around 6% in 2009

Tighter credit conditions restrict Tighter credit conditions restrict

business opportunitiesbusiness opportunities

�� Reduced risk appetite and higher regulatory cost of riskReduced risk appetite and higher regulatory cost of risk

�� Stricter lending criteria (collateral/deposit requirements)Stricter lending criteria (collateral/deposit requirements)

�� Flight to qualityFlight to quality

�� Limited appetite for new businessLimited appetite for new business

�� Wider depositWider deposit--lending marginslending margins

�� Reduced fee income (fx, remittances, arrangement fees)Reduced fee income (fx, remittances, arrangement fees)

�� Need to be innovative in developing/pursuing business opportunitiesNeed to be innovative in developing/pursuing business opportunities

�� Slowdown in credit growth could exacerbate economic difficultiesSlowdown in credit growth could exacerbate economic difficulties

Changing regulatory regime will Changing regulatory regime will

have an impacthave an impact

�� Review of Basel II (Review of Basel II (--> Basel III?)> Basel III?)

�� Increased regulatory capital Increased regulatory capital vsvsriskrisk

�� More complex regulatory More complex regulatory regimes posing challenges for regimes posing challenges for regulatorsregulators

�� Imposes many needs on African Imposes many needs on African banks & regulators:banks & regulators:�� surveillance/early warningsurveillance/early warning�� HH and corporate balance HH and corporate balance

sheets, indebtedness, sheets, indebtedness, vulnerabilitiesvulnerabilitiesregulatorsregulators

�� Countercyclical capital Countercyclical capital requirements requirements �� Problems in Problems in

calibrating/identifying turning calibrating/identifying turning pointspoints

�� MacroprudentialMacroprudential supervisionsupervision�� Stress testsStress tests

vulnerabilitiesvulnerabilities�� high frequency/timely datahigh frequency/timely data�� contingency plans/bank contingency plans/bank

resolution mechanismsresolution mechanisms�� deposit insurance?deposit insurance?�� supervisory cosupervisory co--operationoperation�� mapping of financial sector mapping of financial sector

interlinkagesinterlinkages�� Banks Banks –– improved risk improved risk

management & internal stressmanagement & internal stress--testingtesting

Main risks facing African banking Main risks facing African banking

systems going forwardsystems going forward

�� Delayed impact of financial crisis via economic linkages & slow global recoveryDelayed impact of financial crisis via economic linkages & slow global recovery

�� Export/trade problems Export/trade problems --> banking problems > banking problems --> wider economic impact> wider economic impact

�� Bank credit slowdown Bank credit slowdown -- > wider economic impact> wider economic impact

�� Weak surveillance, limited contingency plans, weak cross border supervision if Weak surveillance, limited contingency plans, weak cross border supervision if conditions to deteriorateconditions to deteriorate

�� Weak risk management within banksWeak risk management within banks

�� Structural changes in global risk parameters making capital Structural changes in global risk parameters making capital –– raising more difficultraising more difficult

�� More complex regulatory regimes making it more difficult to achieve international More complex regulatory regimes making it more difficult to achieve international standardsstandards

Closing RemarksClosing Remarks

�� African banking systems came through global financial crisis African banking systems came through global financial crisis largely unscathed, but longer term impacts may be adverse, largely unscathed, but longer term impacts may be adverse, with uncertain time lags and depth of impactwith uncertain time lags and depth of impact

�� Main concerns emanate from interaction of economic Main concerns emanate from interaction of economic developments and financial conditionsdevelopments and financial conditionsMain concerns emanate from interaction of economic Main concerns emanate from interaction of economic developments and financial conditionsdevelopments and financial conditions

�� Banks will need to be vigilant with regard to risks and respond Banks will need to be vigilant with regard to risks and respond to new supervisory demands, while pursuing new lines of to new supervisory demands, while pursuing new lines of businessbusiness

�� Regulators need to improve surveillance, improve contingency Regulators need to improve surveillance, improve contingency planning and supervisory coplanning and supervisory co--operation, while governments operation, while governments pursue longer term reformspursue longer term reforms

Thank youThank youThank youThank youkeith@econsult.co.bwkeith@econsult.co.bw