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THE Bank of Namibia said it will enhance prudential tools to limit systemic risk. This would include capping overinflated assets in the country’s financial system.
This is included in the Macro-prudential Oversight and Financial Stability Framework released by the central bank at the end of April.
Macroprudential policy refers to the use of prudential tools to limit system-wide financial risk, thereby minimising the incidence of disruptions in the provision of key financial services that can have serious consequences for the real economy.
The framework comes at a time commercial banks are exposed to the property sector through the extension of residential and commercial properties as in recent years the country has been warned of a possible housing bubble.
The new Bank of Namibia Act 2020 expanded the BoN’s mandate to include among others, macro-prudential policy oversight overseeing the financial system as a whole and coordinating activities to safeguard financial stability.
As a result, “the role of the central bank was expanded to include the responsibility to protect customers against asset price bubbles”.
An asset price bubble occurs when the price of an asset, such as housing, stocks, or gold becomes overinflated.
To ensure the resilience of the domestic financial system and counter its instability arising from credit, asset price, or liquidity shocks, macro-prudential oversight needs to be heightened.
Financial stability is defined as the resilience of the domestic financial system to internal and external shocks, be it economic, financial, political, or otherwise.
As it stands, financial stability is threatened by the level of defaults by households and businesses as the non-performing loan ratio (NPL) ballooned to N$6,7 billion at the end of 2020.
“Unhealthy credit growth, which ultimately presents as higher rates of default, particularly by highly leveraged borrowers, has been identified as a key driver of financial crises in many economies,” reads the framework.
It also highlights the repercussions when the financial services sector is not kept in check.
“Given the high costs of financial crises and the protracted nature of post-crisis recoveries, it is preferable to take preventive measures to reduce the probability and potential impact,” the framework further notes.
The forward-looking approach will use early warning indicators to identify sources of systemic risk.
This involves reducing excessive growth in credit, asset prices, particularly real estate and leverage. The bank will use its discretion to decide what is excessive growth.
In the case of credit, a sustained level above the trend would be a starting point, the report highlighted.
“With regard to asset prices, different valuation metrics are used to assess whether growth rates are significantly above their historic average,” the bank said.
However, this measurement could backfire as historically, assets such as properties have been highlighted to be inflated – with artificial forces in control given the low volume supplied to the market.
The bank also said it will reduce direct and indirect concentrations of exposures to the same markets, products, and institutions.
Exposure concentrations make a financial system vulnerable to common shocks, either directly through balance sheet effects or indirectly through asset fire sales and contagion.
Targeted policy interventions address the sources of vulnerabilities while minimising unintended spill-over effects to other areas.
Carrying out periodic assessments of the financial system in order to identify and manage systemic risk to financial stability will be done by the macro-prudential oversight committee (MOC).
Regulation and supervision of systemically important financial institutions (SIFIs) effectively and efficiently will be enhanced.
This is through monitoring of the SIFIs, their operations, and their activities.
The Financial System Stability Committee (FSSC) will be instrumental in this oversight through the provision of periodic reports and assessments on systemic risks to the financial sector, particularly in the areas of development in the banking and non-banking financial sector, that have a bearing on financial stability.
The MOC will use the FSSC information to ascertain if there are any changes in systemic risk that warrant taking macro-prudential policy decisions or corrective measures.
Macro-prudential tools to be used to mitigate systemic risk include setting thresholds for the ratio of assets, capital and liquidity held by the industry.
The report indicated that the Bank of Namibia board has delegated the macro-prudential decision-making power to the governor who will be supported by the MOC.
This means that while the MOC decision-making is by consensus, “the final decision lies with the governor”.
Decisions made by the governor at the MOC meetings on macro-prudential regulation are considered final for the entire financial system as per the powers vested through Chapter 6 of the Bank of Namibia Act.
The bank must collaborate with the Namibia Financial Institutions Supervisory Authority to ensure compliance with macro-prudential regulations through the existing supervision channels.
The MOC members are not personally liable in exercising their power under this committee for any loss or damage caused in respect of an act or omission done in good faith unless it is established that the act or omission was committed in a grossly negligent manner.
MOC members shall be independent of any political or other influence in the performance of their duties.
Report source: The Namibian
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