Prudential Framework for Credit Institutions and Financial Companies of the West African Monetary Union

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Avenue Abdoulaye FADIGA BP 3108 – Dakar - Senegal Tel. (221) 33 839 05 00 / Fax. (221) 33 823 93 35 www.bceao.int PRUDENTIAL FRAMEWORK APPLICABLE TO CREDIT INSTITUTIONS AND FINANCIAL COMPANIES OF THE WEST AFRICAN MONETARY UNION

2 LIST OF ABBREVIATIONS APR Risk-Weighted Assets (RWA) ARC Credit Risk Mitigation (CRM) AT1 Additional Tier 1 ("Tier one" or Core Capital) BAD African Development Bank BAsD Asian Development Bank BCE European Central Bank BCEAO Central Bank of West African States BDC Caribbean Development Bank BDCE Council of Europe Development Bank BERD European Bank for Reconstruction and Development (EBRD) BEI European Investment Bank (EIB) BIC Credit Information Bureau BID Inter-American Development Bank BIRD International Bank for Reconstruction and Development (IBRD) BIsD Islamic Development Bank BMD Multilateral Development Bank BNI Nordic Investment Bank BOAD West African Development Bank BRI Bank for International Settlements (BIS) BRVM Regional Stock Market of Securities Values CEDEAO West African Economic Community (ECOWAS) CET1 Common Equity Tier 1 (Core Hard Capital) CIMA Interafrican Conference on Insurance Markets CR Replacement Cost (RC) CREPMF Regional Council for Public Savings and Financial Markets CSD Debt Service Coverage (DSC) CTT Temporary Transfer of Securities / Repo DBRS Dominion Bond Rating Service, Rating Agency ERC Credit Risk Equivalent (CRE) FCEC Credit Conversion Factor (CCF) FCFA CFA Franc FEE Emission Facilities for Notes FEI European Investment Fund (EIF) FI Investment Fund FMI International Monetary Fund (IMF) FPB Core Capital (Tier 1) FPC Supplementary Capital (Tier 2) FPE Effective Capital FPR Revolving Firm Commitment Facilities IDA Deferred Tax Asset (DTA) IDP Deferred Tax Liability (DTL) OCDE Organisation for Economic Co-operation and Development (OECD) OCE Export Credit Agency (ECA) OEEC External Credit Evaluation Agency OFT Securities Financing Transactions (SFTs) OHADA Organisation for the Harmonisation of Business Law in Africa ONU United Nations (UN) OPCVM Collective Investment Scheme in Securities Funds (UCITS/ICAVs) PIEAFP Internal Capital Adequacy Assessment Process (ICAAP) PCB UMOA Banking Accounting Plan PME / PMI Small and Medium-sized Enterprise / Small and Medium-sized Industry PV Loan-to-Value Ratio (LTV) S&P Standard & Poor’s, Rating Agency SAGETIL - UMOA Automated Securities and Liquidity Management System of WAEMU SFD Decentralized Financial System (DFS) SFI International Finance Corporation (IFC) SGI Management and Intermediation Company TARC Credit Risk Mitigation Technique (CRM) T1 Tier 1 or Core Capital T2 Tier 2 or Supplementary Capital UA African Union (AU) UE European Union (EU) UEMOA West African Economic and Monetary Union (WAEMU) UMOA West African Monetary Union Prudential Framework applicable to credit institutions and financial companies of the UMOA

3 FEI European Investment Fund (EIF) FI Investment Fund FMI International Monetary Fund (IMF) FPB Core Capital (Tier 1) FPC Supplementary Capital (Tier 2) FPE Effective Capital FPR Revolving Firm Commitment Facilities IDA Deferred Tax Asset (DTA) IDP Deferred Tax Liability (DTL) OCDE Organisation for Economic Co-operation and Development (OECD) OCE Export Credit Agency (ECA) OEEC External Credit Evaluation Agency OFT Securities Financing Transactions (SFTs) OHADA Organisation for the Harmonisation of Business Law in Africa ONU United Nations (UN) OPCVM Collective Investment Scheme in Securities Funds (UCITS/ICAVs) PIEAFP Internal Capital Adequacy Assessment Process (ICAAP) PCB UMOA Banking Accounting Plan PME / PMI Small and Medium-sized Enterprise / Small and Medium-sized Industry PV Loan-to-Value Ratio (LTV) S&P Standard & Poor’s, Rating Agency SAGETIL - UMOA Automated Securities and Liquidity Management System of WAEMU SFD Decentralized Financial System (DFS) SFI International Finance Corporation (IFC) SGI Management and Intermediation Company TARC Credit Risk Mitigation Technique (CRM) T1 Tier 1 or Core Capital T2 Tier 2 or Supplementary Capital UA African Union (AU) UE European Union (EU) UEMOA West African Economic and Monetary Union (WAEMU) UMOA West African Monetary Union Prudential Framework applicable to credit institutions and financial companies of the UMOA

4 LIST OF TABLES Table 1: Minimum capital conservation standards................................................................39 Table 2: Sovereign exposure weighting grid.........................................................43 Table 3: Consensus weighting grid established by ECAs ........................................43 Table 4: Weighting grid for exposures on public bodies .........................44 Table 5: Weighting grid for exposures on MDBs........................................45 Table 6: Weighting grids for exposures > 3 months on financial institutions....46 Table 7: Weighting grids for exposures ≤3 months on financial institutions.......46 Table 8: Weighting grid for exposures on enterprises.......................................47 Table 9: Credit conversion factors ..........................................................54 Table 10: Correspondence of ratings from recognized ECEAs in WAEMU.....................55 Table 11: Weighting grid for exposures on short-term facilities....................57 Table 12: Factors for increasing potential future exposures.................................59 Table 13: Regulatory haircuts applicable in the standardized approach..............................71 Table 14: Minimum holding periods applicable to instruments.............................72 Table 15: Distribution of business lines according to the standardized approach..................................82 Table 16: Specific risk categories and weightings ..............................................93 Table 17: Maturity-based method (maturity buckets and weightings)......95 Table 18: Horizontal non-compensations..........................................................................97 Table 19: Treatment of interest rate derivative instruments ........................................100 Table 20: Treatment of equity derivative instruments.................................102 Table 21: Simplified approach: capital requirements..............................................107 Table 22: Transitional provisions regarding minimum capital requirements. .120 Table 23: Transitional provisions regarding core capital...........................121 Table 24: Transitional provisions regarding supplementary capital ............121 Table 25: Transitional provisions regarding risk division standard................122 Table 26: Transitional provisions regarding capital conservation..............122 Prudential Framework applicable to credit institutions and financial companies of the UMOA

5 TABLE OF CONTENTS LIST OF ABBREVIATIONS........................................................................................................2 LIST OF TABLES................................................................................................................4 PREAMBLE................................................................................................................................7 TITLE I: GENERAL PROVISIONS......................................................................9 Chapter 1: Scope of Application.......................................................................................9 Chapter 2: Prudential Consolidation .....................................................................................12 TITLE II: DEFINITION OF CAPITAL......................................................................15 Chapter 1: Components of capital.................................................................15 Chapter 2: Capital on an individual or standalone basis......................................................16 Chapter 3: Capital on a consolidated basis........................................................................31 TITLE III: MINIMUM CAPITAL REQUIREMENTS..................................................37 TITLE IV: CAPITAL REQUIREMENTS FOR CREDIT RISK...........41 Chapter 1: Standardized approach for credit risk ......................................................41 Chapter 2: Counterparty risk treatment......................................................................58 Chapter 3: Credit risk mitigation...............................................................................61 TITLE V: CAPITAL REQUIREMENTS FOR OPERATIONAL RISK...80 TITLE VI: CAPITAL REQUIREMENTS FOR MARKET RISKE.........84 Chapter 1: Scope and coverage of capital requirements.................................84 Chapter 2: Standardized approach for market risk ........................................................92 TITLE VII: RISK DIVISION......................................................................................110 TITLE VIII: LEVERAGE RATIO................................................................................................114 TITLE IX: REGULATION APPLICABLE TO TRANSACTIONS ......................................117 TITLE X: TRANSITIONAL PROVISIONS (Pillar 1).............................................................120 TITLE XI: PRUDENTIAL SUPERVISION PROCESS (Pillar 2)...........................123 Chapter 1: General provisions...............................................................................123 Chapter 2: Overall capital adequacy assessment.........................................125 TITLE XII: PUBLICATION INFORMATION REQUIREMENTS (Pillar 3)..............132 Chapter 1: General provisions...............................................................................132 Chapter 2: Financial communication requirements..............................................................135 TITLE XIII: MINIMUM LIQUIDITY REQUIREMENTS....................................138 ANNEXES.................................................................................................................................141 Annex 1: Capital: example of the application of deductions related to thresholds .......141 Annex 2: Capital: example of calculation for the treatment of minority interests..........143 Annex 3: List of stock indices recognized by zone and country...................................148 Annex 4: Distribution between business lines...........................................................................149 Prudential Framework applicable to credit institutions and financial companies of the UMOA

6 Annex 5: Market risk: capital requirements by financial instrument......150 Annex 6: Interest rate risk: example of capital requirement calculation.....151 Annex 7: Foreign exchange risk: example of capital requirement calculation .............156 Prudential Framework applicable to credit institutions and financial companies of the UMOA

7 PREAMBLE Over the past two decades, the banking landscape of the West African Monetary Union (WAEMU/UMOA) has undergone profound changes, notably marked by the diversification of credit institutions' activities and the emergence of cross-border banking groups installed within the Union. These changes have generated new risks that must be detected, identified, and managed in light of international best practices regarding capital adequacy. In this context, the Central Bank of West African States (BCEAO) has proposed to the Union Authorities, pursuant to Article 42 of its Statutes annexed to the WAEMU Treaty of January 20, 2007, which form an integral part thereof, the revision of the existing prudential rules applicable to Union credit institutions, based on Basel I provisions. In accordance with Article 34 of the WAEMU Treaty of January 20, 2007 and Article 56 of the uniform law on banking regulation, this framework, adopted by the WAEMU Council of Ministers during its session of June 24, 2016, aims to establish new prudential rules applicable to banks, banking-character financial institutions, and financial companies operating within the Union. This framework is based on Basel II and Basel III rules. It aims to promote the preservation of a solid and resilient banking system, meeting the needs of WAEMU member state economies, with a managed risk profile. This convergence of the prudential framework toward international standards aligns with the continued implementation of guidelines defined by the highest Union Authorities within the institutional reform of WAEMU and BCEAO. The Basel rules have been transposed taking into account the characteristics of the economies and the specificities of the UMOA banking system. The architecture of this framework is based on three complementary pillars: (a) the first pillar (Titles I to X) covers minimum capital requirements based on risks (credit, operational, market), in accordance with Basel III rules. It also addresses prudential standards related to minimum capital requirements, notably risk division and the leverage ratio; (b) the second pillar (Title XI) defines the key principles of prudential supervision and the related intervention framework; (c) the third pillar (Title XII) sets out guiding principles governing market discipline. It aims to strengthen the transparency and communication of institutions vis-à-vis the public regarding their risk exposure. 1 The framework published by the Bank for International Settlements (BIS) in 1988, commonly known as Basel I. 2 The framework published by the Bank for International Settlements (BIS) in June 2006, titled "International Convergence of Capital Measurement and Capital Standards", also known as "Basel II". 3 The framework published by the Bank for International Settlements (BIS) in June 2011, titled "Basel III: A global regulatory framework for more resilient banks and banking systems". Prudential Framework applicable to credit institutions and financial companies of the UMOA

8 The new framework also establishes prudential liquidity requirements (Title XIII). These present the minimum standards applicable to institutions, in accordance with Basel Committee recommendations. Certain provisions of this prudential framework are clarified by BCEAO instructions or UMOA Banking Commission circulars. Prudential Framework applicable to credit institutions and financial companies of the UMOA

9 TITLE I: GENERAL PROVISIONS Chapter 1: Scope of Application Section I. Definitions

1. For the purposes of this framework, it shall be understood that: (a) Banking-dominant activities: the activities exercised by a banking group when both of the following conditions are met: i. the group's activities are primarily conducted within the financial sector. In this case, the ratio between the total balance sheet of the financial sector entities as a whole and the total balance sheet of the group must exceed 40%; ii. the banking sector carries a higher weight than other financial sector entities. In this case, the ratio between the total balance sheet of the banking sector and the total balance sheet of financial sector entities must be higher than the corresponding ratios for the insurance sector and the financial markets sector; (b) Bank: a credit institution authorized to perform all banking operations as defined by the uniform law on banking regulation; (c) UMOA Banking Commission or Banking Commission: the UMOA supervisory authority; (d) Financial companies: entities established in WAEMU whose main activity, in one or more member states of WAEMU, is to take and manage financial participations and which, either directly or through intermediate companies with the same object, control one or more entities performing financial-character operations, at least one of which is a credit institution. Financial companies are subdivided into two categories, as follows: i. Holding financial company: an unlicensed entity acting as the parent of a banking group; ii. Intermediate holding financial company: an unlicensed entity that holds all participations of a group in its subsidiaries, credit institutions, operating within WAEMU; (e) Banking sector enterprises: the following entities: i. banks and banking-character financial institutions; ii. all other entities subject to the uniform law on banking regulation; iii. financial companies; iv. Decentralized Financial Systems, abbreviated DFS; v. electronic money institutions; vi. enterprises located outside WAEMU that meet, in their jurisdiction, the definitions given in points i) to v) above; vii. auxiliary service companies whose main activity consists of providing services to the entities referred to in points i) to vi), or holding fixed assets allocated to the operation of these entities; (f) Credit institution: a legal entity that habitually performs banking operations as defined by the uniform law on banking regulation. A credit institution is licensed as a bank or banking-character financial institution; (g) Parent credit institution: a credit institution that is not controlled by another credit institution or financial company and holds at least one subsidiary that is another credit institution; (h) Banking-character financial institution: a credit institution authorized to perform the operations for which it is licensed, under the uniform law on banking regulation; (i) Subsidiary: an enterprise controlled by a company that owns more than half of the voting rights, or any enterprise over which a company exercises exclusive control; (j) Group: a set of entities that each have distinct legal personality and whose activity is controlled directly or indirectly by a parent company; (k) Banking group: a group that exercises banking-dominant activities within WAEMU; (l) Parent company: a company that is not a subsidiary of another credit institution or financial company established in WAEMU and holds at least one subsidiary that is a credit institution; (m) Recognized market: a market that: i. guarantees regular trading operations; ii. has rules, established and approved by the competent authorities of the market's home country, which define in particular, the operating conditions of the market, access conditions and listing admission as well as transaction organization provisions; (n) Financial-character operations: all operations carried out by financial sector entities, in accordance with the governing legislative and regulatory texts; (o) Paragraph: each of the provisions of this prudential framework referenced by a number; (p) Financial sector: an economic sector grouping all activities related to the financial domain. It consists of one or more of the following entities: i. banking sector, grouping banking sector enterprises; ii. insurance sector, grouping insurance and reinsurance companies; Prudential Framework applicable to credit institutions and financial companies of the UMOA

10 iii. financial markets sector, grouping Management and Intermediation Companies (SGI), Wealth Management Companies (SP), Collective Investment Schemes in Securities Funds (OPCVM), Investment Advisors (CI) and Business Brokers (AA) and other entities licensed on recognized markets; (q) Branch: an establishment without legal personality, belonging to a legal entity and endowed with a certain degree of management autonomy, which directly performs all or part of the operations of credit institutions; (r) WAEMU or Union: the West African Monetary Union. Section II. Scope of Application of Framework Requirements 2. This framework applies, on a: (a) individual basis, to banks and banking-character financial institutions; (b) sub-consolidated basis, to intermediate holding financial companies; (c) consolidated basis, to parent credit institutions as well as holding financial companies. The situation of branches must be integrated into that of the owning institution. Furthermore, the Banking Commission may require a holding financial company to calculate capital requirements on a sub-consolidated basis. Section III. Compliance with Prudential Standards 3. In case of non-compliance with the standards set forth in this framework, the Banking Commission issues an injunction to the institution to take, within a specified period, all corrective measures necessary to bring it into compliance. The institution is prohibited, during this period, from making any discretionary distributions (dividends, share buybacks, and discretionary remuneration bonuses). 4. For the purposes of this framework, the term "institution" generically refers to all entities referred to in paragraph 2 above. Prudential Framework applicable to credit institutions and financial companies of the UMOA

12 Chapter 2: Prudential Consolidation Section I. Definitions 5. For the purposes of this framework, it shall be understood that: (a) Joint control: the sharing of control of an enterprise operated jointly by a limited number of shareholders. Financial and operational policies are decided jointly by the shareholders, with none possessing the power to impose its decision on the others; (b) Exclusive control: the power to decide an enterprise's financial and operational policies in order to derive benefits. There are three types of exclusive control: legal exclusive control, factual exclusive control, and contractual exclusive control: i. legal exclusive control is exercised by a company that directly or indirectly holds more than half of the voting rights of its subsidiary; ii. factual exclusive control is exercised by a company when both of the following conditions are met: • it appoints, for two consecutive fiscal years, the majority of members of deliberative and executive bodies; • it holds, for two consecutive fiscal years, a voting rights percentage exceeding 40% and no other shareholder holds a larger share; iii. contractual exclusive control is exercised by a company when there exists a contract or statutory clause ensuring it exclusive control of the consolidated enterprise; (c) Financial-character enterprises: the following entities: i. banking sector enterprises; ii. financial markets sector enterprises subject to prudential requirements of the Regional Council for Public Savings and Financial Markets, abbreviated CREPMF; Prudential Framework applicable to credit institutions and financial companies of the UMOA