COBAC Regulation R-2018/03 on the Identification and Supervision of Systemically Important Institutions in CEMAC

CENTRAL AFRICAN BANKING COMMISSION COBAC Regulation R-2018/03 on the Identification and Supervision of Systemically Important Institutions in the Central African Economic and Monetary Community (CEMAC)

The Central African Banking Commission, Having regard to the Convention of 16 October 1990 establishing a Central African Banking Commission and its Annex; Having regard to the Convention of 17 January 1992 on the harmonization of banking regulation in the States of Central Africa and its Annex; Having regard to Regulation No. 02/14/CEMAC/UMAC/COBAC/CM of 25 April 2014 on the treatment of credit institutions in difficulty in CEMAC; Having regard to Regulation No. 01/IS/CEMAC/UMAC/COBAC of 27 March 2015 on the supervision of financial holdings and cross-border surveillance; Having regard to Regulation No. 01/17/CEMAC/UMAC/COBAC of 27 September 2017 on the conditions for exercising and controlling microfinance activities in CEMAC; Having regard to COBAC Regulation R-2003/03 on the accounting and prudential treatment of securities transactions carried out by credit institutions; Having regard to COBAC Regulation R-2016/03 on the net own funds of credit institutions; Having regard to COBAC Regulation R-2016/04 on internal control in credit institutions and financial holdings; Having regard to the OHADA Uniform Act relating to commercial company law and economic interest grouping; Meeting on 16 January 2018 in Libreville; DECIDES:

Article 1 - For the purposes of this Regulation, the following definitions apply:

• systemically important institutions: institutions as defined in Article 1 of Regulation No. 02/14/CEMAC/UMAC/COBAC/C;
• subject institutions: institutions subject to the supervision of COBAC.

Article 2 - This Regulation sets out the identification criteria and supervision procedures for systemically important institutions in CEMAC. The identification and supervision of systemically important institutions in CEMAC aim to:

• reduce the risks posed by the difficulties of these institutions to the stability of the banking and financial system;
• ensure the continuity of their operations, in accordance with existing regulations.

Article 3 - The Banking Commission is responsible for identifying systemically important institutions in the CEMAC zone each year on a standalone, consolidated, or combined basis, as applicable. Title I: Identification Chapter 1: Criteria for Identifying Systemically Important Institutions

Article 4 - Systemically important institutions are identified based on, among other criteria, size, interdependence of their activities, absence of direct substitutes or financial infrastructure for their service provision, sub-regional, regional, or global activities, and complexity.

Article 5 - Size measures the importance of an institution's activity within CEMAC's banking and financial system. For the purposes of this Regulation, institution size refers to total assets, as reflected in their reporting submitted to the COBAC General Secretariat. The COBAC General Secretariat assesses off-balance sheet items that may be taken into account.

Article 6 - Interdependence reflects the degree of integration of institutions within the banking and financial system. It results from links between an institution and other institutions, due to assets and liabilities held on them and vice versa. For the purposes of this Regulation, institutional interdependence is analyzed through the volume of interbank assets and liabilities.

Article 7 - The absence of direct substitutes or financial infrastructure for institutions' services is expressed through the monopoly or exclusive provision of one or more banking services by a credit institution, or exclusivity in holding or managing infrastructure necessary for providing financial services deemed essential by COBAC. This criterion concerns, in particular, assets under custody, payment flows passing through payment systems, and principal transactions on financial markets.

Article 8 - Activity complexity arises from the significance of assets or liabilities whose realization requires establishing valuation, counterparty identification, hedging, accounting, monitoring, and control procedures, whose implementation presents proven difficulties. For the purposes of this Regulation, complexity is assessed based on various balance sheet and off-balance sheet items, as well as through analysis of the subject institution's activities, particularly assets related to market activities and forward foreign exchange transactions.

Article 9 - Cross-border activities concern transactions conducted with foreign entities. For the purposes of this Regulation, cross-border activities are assessed based on the relative volume of transactions conducted with non-resident counterparties.

Chapter 2: Determination of Systemic Importance Article 10 - To determine the systemic importance of subject institutions, weights will be applied to each identification indicator of systemic importance. Each institution is assigned a score for each criterion and indicator, taking into account their relative weight in the banking system. 3 The obtained scores are then weighted and accumulated to obtain the final score.

Article 11 - Systemic importance is established based on the distribution of obtained scores. To this end, three levels of systemic importance are determined: high systemic importance, medium systemic importance, and low systemic importance.

Article 12 - The Banking Commission finalizes the list of systemically important institutions once a year, indicating for each institution its level of systemic importance. The COBAC General Secretariat notifies this decision to the concerned institutions and the monetary authorities of CEMAC States, with copies sent to the Bank of Central African States (BEAC) and the Central African Financial Stability Committee. The decision establishing the list of systemically important institutions is published. When a subsidiary of a foreign banking group is classified as systemically important in CEMAC, the COBAC General Secretariat informs the banking supervisor of the home country or jurisdiction where the group's headquarters is located about the systemic nature of this subsidiary, as well as the additional requirements to which it will be subject.

Article 13 - An Instruction from the President of COBAC sets: the composition of the various identification criteria for systemically important institutions, the weights, as well as the score calculation procedures; the thresholds defining the different levels of systemic importance.

Title II: Supervision Chapter 2: PARTICULAR REQUIREMENTS FOR SYSTEMICALLY IMPORTANT INSTITUTIONS Article 14 - Systemically important institutions maintain an additional buffer of common equity tier 1 (basic own funds) intended to reduce the probability of their failure and increase their ability to absorb losses to ensure operational continuity.

Article 15 - The additional capital conservation buffer provided in the preceding article is set at:

• 2.5% of net risk-weighted assets when the institution has high systemic importance;
• 1.5% of net risk-weighted assets when the institution has medium systemic importance;
• 1% of net risk-weighted assets when the institution has low systemic importance. The additional requirement provided in this article increases the basic capital conservation buffer and supplementary buffer set forth in Articles 25 and 28 of COBAC Regulation R-2016/03 on the net own funds of credit institutions. The profit distribution restriction thresholds provided in Article 26 of said Regulation are increased accordingly.

Article 16 - The Banking Commission may increase the additional buffer provided for systemically important institutions, without exceeding 3.5%, in order to reduce the impact of their potential failure on the financial system. This situation is considered when the Banking Commission estimates that the increase in their size and exposure volume within a difficult macroeconomic and financial context may pose a threat to the stability of the financial system.

Article 17 - The Banking Commission may set a liquidity ratio for systemically important institutions that is 50% higher than the standard established by COBAC Regulation R-93/06 on credit institution liquidity. When the situation requires, particularly during periods of high stress or abundant liquidity, this threshold may be lowered or increased by the Banking Commission to account for the overall liquidity level in CEMAC.

Article 18 - Systemically important institutions are subject to specific communication and reporting requirements, following a frequency and format determined by the COBAC Secretary General based on the institution's situation. They communicate, in particular, information relating to:

• the risk assessment system that analyzes the levels and controls performed on these risks;
• the process for assessing capital adequacy;
• the process for assessing liquidity level adequacy; 4
• the methodology for quantifying capital and liquidity, which evaluates the institution's capital and liquidity needs based on risk assessment results;
• asset/liability management;
• operational, credit, and market risk;
• the degree of compliance with existing regulations.

Chapter 3: EMERGENCY RECOVERY PLAN Article 19 - Systemically important institutions develop an emergency recovery plan that can be implemented immediately and ensures that in case of persistent violation of prudential standards relating to solvency and liquidity, operational continuity is guaranteed without establishing a special restructuring procedure defined by CEMAC Regulation 02/14/CEMAC/UMAC/COBAC/CM on the treatment of credit institutions in difficulty. The plan includes all measures enabling the institution to restore its regulatory compliance and guarantee operational continuity in the very short term, within a period not exceeding three months.

Article 20 - The institution must indicate, in particular, the following in this plan:

• the recovery strategy in case of failure, as well as potential obstacles to implementing this plan and the proposed solutions;
• measures provided by shareholders to recapitalize the institution and quickly rebuild its own funds;
• the strategy to be implemented to benefit as soon as possible from new funding sources;
• organizational reforms envisaged to quickly control identified risks;
• tools enabling the anticipation or facilitation of rapid asset or business line divestment;
• new human and technical resources to be deployed, as well as their operational readiness;
• details of the implementation of the indicated emergency financing plan;
• liquidation measures in case of plan failure. The emergency recovery plan is adopted by the deliberative body for a period of 12 months. It is updated at least once a year.

Article 21 - The emergency recovery plan is submitted for approval to the Banking Commission's General Secretariat, no later than 1 March each year. The Banking Commission's General Secretariat may request that specific measures be integrated into the emergency plan, including modification of the organizational structure, temporary suspension of certain activities, or non-distribution of dividends. The Banking Commission's General Secretariat has a one-month period to rule on the plan. In case of rejection, the institution submits a new plan within one month.

Article 22 - In case of regulatory infringement, the COBAC Secretary General requests that the institution implement the emergency recovery plan without delay, particularly regarding elements related to the observed infringement. When an institution is called upon to implement its emergency recovery plan, it submits a detailed implementation report to the COBAC General Secretariat monthly.

Article 23 - In case of serious and persistent difficulties, or in case of failure of the emergency recovery plan, the COBAC Secretary General informs the monetary authority of the severity of the institution's situation, the failure to implement the emergency recovery plan, and requests that it trigger the special restructuring procedure.

Title III: Final Provisions Article 24 - The rules established in this Regulation apply to the institution three (3) months after notification of the decision provided for in Article 12.

Article 25 - In case of non-compliance with the provisions of this Regulation by subject institutions, the Banking Commission may take preventive and disciplinary measures provided for in the aforementioned Regulation No. 02/14/CEMAC/UMAC/COBAC/CM.

Article 26 - This Regulation repeals all prior provisions contrary to it, particularly Article 29 of COBAC Regulation R-2016/03 on the net own funds of credit institutions.

Article 27 - This Regulation enters into force as of April 2018. However, the provisions of Article 14 apply as of 1 January 2021.

Article 28 - The COBAC Secretary General is responsible for implementing this Regulation and notifying it to the national monetary authorities, the National Directorates of the Bank of Central African States, the professional associations of credit institutions, and the professional associations of microfinance institutions of the Central African Economic and Monetary Community. Thus decided and made in Libreville, on 16 January 2018, in the presence of: Mr. ABBAS MAHAMAT TOLLI, President; Ms. TOMBIDAM Denise Ingrid and Ms. EKO EKO née YECKE ENDALE Berthe, Mr. Louis ALEKA-RYBERT, BECHIR DAYE, Jean-Paul CAILLOT, Pascal FOURCAUT, Silvestre MANSIELE BIKENE, Armel Fridelin MBOULOUKOUE, Salomon Francis MEKE, Régis MOUKOUTOU and Mr. Chérubin YERADA, members. For the Banking Commission, MAT TOLLI