CS/CMI/FSDSSC/VIII/5
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CS/CMI/FSDSSC/VIII/5
August, 2013
Original: ENGLISH
COMMON MARKET FOR EASTERN
AND SOUTHERN AFRICA
Eighth Meeting of the Financial System
Development and Stability Sub-Committee
24 August, 2013
Nairobi, Kenya
REPORT OF
THE EIGHTH MEETING OF THE COMESA FINANCIAL SYSTEM DEVELOPMENT
AND STABILITY SUB-COMMITTEE
2013 (IZ/mkc/mk)
A. INTRODUCTION
1. The Eighteenth Meeting of the COMESA Committee of Governors of Central Banks which was held in Kigali, Rwanda in December 2012 instructed the COMESA Monetary Institute to undertake the following activities in 2013:
a) Workshops on the following:
i) Macro Stress Testing for Financial Stability Analysis; and
ii) Macro-Econometric Modeling for Assessing Financial Stability
b) Preparation of a Manual for Implementing the COMESA Assessment Framework for Financial System Stability.
2. Based on the above decisions, the Institute organized three workshops from 12-23 August, 2013 in Nairobi, Kenya.
3. The core objectives of the workshops are:
i) Build capacity of member countries to enable them to implement the COMESA Framework for Assessing Financial System Stability; and
ii) Contribute to knowledge sharing and networking between member States on issues related to financial system stability.
4. More specifically, the workshops provided the following:
i) Discussion on current stress testing frameworks in use for financial stability assessment in COMESA member states and provided guidance on its use in the context of a forward looking financial stability analysis;
ii) A structured, comprehensive, and conceptually sound analytical framework for the assessment and measurement of systemic stability overtime and across nations; and
iii) Reviewed the Draft Manual for implementing the COMESA Framework for Assessing Financial System Stability.
5. The workshops were attended by experts from member countries Central Banks Research and Bank Supervision Departments whose duties involve the assessment of the financial system stability.
6. The reports of the workshops were submitted to the Eighth Meeting of the COMESA Financial System Development and Stability Sub-Committee which was held on 24 August, 2013 in Nairobi, Kenya.
B. ATTENDANCE, OPENING OF THE MEETING, ELECTION OF THE BUREAU, ADOPTION OF THE AGENDA AND ORGANISATION OF WORK
Attendance
7. The meeting was attended by delegates from Burundi, D R Congo, Egypt, Kenya, Madagascar, Malawi, Rwanda, Sudan, Swaziland, Uganda and Zambia.
Opening of the Meeting
8. The Chairman welcomed the delegates and called the meeting to order.
Election of the Bureau
9. The following central banks were elected as members of the Bureau for the Sub-Committee for 2014.
i. Reserve Bank of Malawi: Chair
ii. Bank of Zambia: Rapporteur
Adoption of the Agenda and Organisation of Work (Agenda item 2)
10. The meeting adopted the following agenda:
1. Opening of the meeting
2. Adoption of the Agenda and Organisation of Work
3. Consideration of the Report on the following
a) Country Report on Implementation of the COMESA Assessment Framework for Financial System Stability
b) Workshops on:
i) Macro-Econometric Modeling for Assessing Financial System Stability;
ii) Validation of Manual for Implementation of the COMESA Framework for Assessing Financial System Stability; and
iii) Macro stress testing.
4. Proposal by African Trade Insurance Agency (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
5. Work Plan for the COMESA Financial System Development and Stability Sub-Committee for the year 2014
6. Any Other Business
7. Adoption of the Report and Closure of the Meeting
Consideration of the Report on the following:
a) Country Reports on Implementation of the COMESA Assessment Framework for Financial System Stability (Agenda item 3(a))
11. The meeting noted that 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 and 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.
12. The meeting also noted the following from member countries reports:
a) Most COMESA member states have set up Financial Stability Units;
b) The member states are at various stages of setting up the Financial Stability Committees;
c) Member countries are still working toward the conduct of SHIELDS ratings of financial stability once the requisite institutional and logistical arrangements have been finalised; and
d) The financial stability assessments and macro-prudential 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 Member StatesNo. / Task / Activity / Completion Date / Status of Implementation
Implemented / Work In Progress
1 / Financial Stability Unit / Establish Financial Stability Unit / 31 January 2012 / Burundi, DRC, Egypt, Kenya, Mauritius, Rwanda, Sudan, Madagascar, Malawi, Zimbabwe, Uganda, Zambia / Swaziland
2 / Financial Stability Committee / Establish a multi-disciplinary Financial Stability Committee / 31 March 2012 / Egypt, Kenya, Mauritius, Malawi, Rwanda, Sudan, Uganda, Zimbabwe / Madagascar, Swaziland, DRC, Zambia, 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;
• Policy Implementation. / 31 March 2012 / Egypt, Kenya, Mauritius, Rwanda, Uganda, Madagascar, / Zimbabwe, Swaziland, DRC, Sudan, Malawi, Zambia, Burundi
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;
• Review of legislation where necessary;
• Roll-out of the Framework. / 31 March 2012 / Kenya, Mauritius, Rwanda, Uganda, Egypt / Sudan, Swaziland, DRC, Malawi, Madagascar, Zimbabwe, Burundi, Zambia
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;
• SHIELDS Rating System. / 30 September 2011 / Kenya, Mauritius, Uganda, Rwanda, / Swaziland, Sudan, DRC, Malawi, Madagascar , Zimbabwe, Burundi, Egypt, Zambia
6 / Financial Stability Assessment Reports / Electronic submission of Financial Stability Assessment Reports to the Secretariat for posting onto the COMESA website / 31 October 2011 / Kenya, Mauritius, Uganda, Rwanda, / Burundi, Egypt, Swaziland, Sudan, DRC, Malawi, Madagascar , Zimbabwe, Zambia
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 / Kenya, Rwanda, Uganda, Sudan, Egypt, Burundi / Mauritius, Malawi, Zimbabwe, Swaziland, DRC, Zambia, Madagascar
8 / Monitor compliance with the 25 Basel Core Principles for Effective Banking Supervision / Member countries conduct self-evaluations / 31 March 2011 / Burundi, Egypt, Kenya, Mauritius, Malawi, Rwanda, Sudan, Uganda, Zimbabwe, DRC / Swaziland, Madagascar, Zambia
Workshop on Macro-Econometric Modeling for Assessing Financial System Stability (Agenda item 3(b)(i))
13. The following were discussed under this agenda item:
i) Overview of the COMESA Financial System Stability Assessment Framework
14. The meeting noted the following salient points on the issues discussed under this topic by the workshop:
a) Most COMESA member countries produce financial stability reports lacking in overall financial stability assessment, forward looking outlook and granularity, thereby rendering comparison of financial stability assessment over time within a given country and /or across nations, a daunting task;
b) While there is a proliferation of research in systemic risk and financial stability assessments, the concepts are still evolving; hence there is always room for improvement and learning from each other’s experiences;
c) According to COMESA definition, financial stability means a range of conditions in which the financial system, comprising of financial institutions, financial markets, and financial infrastructure:
i) fulfills its key economic functions and roles with no significant failures, cascading defaults, or adverse systemic impact, current or potential, on the real and/or financial sectors;
ii) is resilient to endogenous and exogenous shocks (current or potential);
iii) facilitates effective assessment, pricing and management of risks;
iv) promotes confidence in, and collective constituents stability of, the financial system even in periods of profound structural change;
d) The COMESA Financial Stability Assessment Framework provides for systematic monitoring of the individual parts of the financial system (institutions, markets, and infrastructure); components of the real economy (households, firms, and public sector); global macro financial developments; and event risk (e.g. catastrophes);
e) The framework provides a structured, comprehensive and conceptually sound analytical framework for the assessment and measurement of systemic stability over time and across nations, via the SHIELDS rating system; and
f) The SHIELDS rating system 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. The construction of the SHIELDS rating system can accommodate any theoretical and empirical advances, judgemental and professional insights as part of the overall assessment of financial system stability.
Discussion
15. Following the presentation, the meeting noted the following:
a) The adoption of the scoring and rating methodologies proposed in the draft handbook will facilitate implementation of the COMESA Financial Stability Assessment Framework in identifying, analyzing, measuring , mitigating, monitoring and reporting financial stability issues, risks and vulnerabilities; and
b) Regarding quality assurance issues related to the assignment of SHIELDS ratings, it was noted that the involvement of a Financial Stability Committee by whatever name it might be called, would be necessary to ensure buy-in, transparency and accountability. It was further noted that there is no one best solution regarding the institutional architecture.
Recommendations
16. The meeting recommended the following:
a) Need for in-country workshops and practical missions, to ensure that a wide spectrum of stakeholders are adequately exposed to the framework and rating methodologies; and
b) The COMESA Monetary Institute (CMI) should conduct in 2014 hands on training on SHIELDS ratings based on a fully-fledged case study and develop a stylised sample solution.
ii) Role, Applicability and Approaches to Macro-Econometric Modelling for Assessing Financial System Stability
17. The meeting noted that the following key issues were highlighted under this topic:
a) In practice, financial stability is a complex phenomenon dependable on iterative interactions of many risks and feedback effects from financial stability to the real economy. As a result some academics and practitioners concur that there will never be one best model for all purposes, hence the need for a suite of models;
b) The use of macro econometric models is subject to on-going debate among prominent economists, since the global financial crisis. Notwithstanding the multidimensional and multifaceted nature of financial stability, there are also calls for fewer as opposed to multiple tools for financial stability assessment. A full array of tools and measurements clouds rather than enhance policy analysis (Hansen (2012);
c) Despite the debates, macro-econometric modelling helps to inform understanding of the empirical state of systemic risk measurement and can play the following important roles:
i) Provide a macro-econometric based criterion to evaluate the success of alternatives of systemic risk measures. The methodologies also facilitate evaluation of the validity of many proposed systemic risk measures, identification of leading, lagging, and coincident indicators;
ii) Assessment of the real economic activity effects of financial stability;
iii) Provide a rigorous approach that aggregates information about financial sector stress and challenges to the real sector activity using multivariate methodologies/approaches;
iv) Provides an Early warning system (EWS) from a large cross section of “risk predictor” variables that contain information regarding the variable of interest;
v) Helps inform interpretation of systemic risk measurements;
vi) Usage of macro-econometric evaluation helps identify commonalities, eliminates redundant tools, leaving a smaller few representative indicators. Empirical analysis suggests that quantile regression methodologies used in CoVaR (Adrian and Brunnermeier 2011); GDP-at-risk (De Nicolo and Lucchetta 2011) have comparatively higher information content regarding systemic stability than other approaches;
d) The meeting also noted that the workshop considered the role and applicability of various approaches to macroeconomic modelling, ranging from those that are high in theoretical coherence to those high in data coherence on the Pagan model classification spectrum; and
e) The meeting further noted that models used for financial stability purposes should take into account certain characteristics that distinguish them from the classical economic models, including contagion, default, heterogeneity and missing markets.
Macro-Econometric Modelling for Assessing Financial System Stability (Agenda item 3(b)(i))
Introduction to Econometrics of Macrofinancial Modelling
18. The meeting noted that under this topic, the following were discussed and the participants carried out practical exercises.
a) Basics of Ordinary Least (OLS) Square regressions;
b) OLS assumptions and parameter estimation;
c) Formulating and testing hypothesis;
d) Loading data to Eviews;
e) Data transformation and manipulation; and
f) Running basic regressions.
Characterising financial cycles and business cycles, and configuring countercyclical capital buffer rules
19. The meeting noted the following key points under this topic.
a) Implications of violations of classical linear regression (CLR) assumptions;
b) Parameter estimates needed to meet the Gauss Markov theorem assumptions for them to be best linear unbiased estimator of the true population regression function;
c) Estimated parameters need to satisfy the desirable properties of efficiency, consistency and unbiasedness;