FORECASTING THE DISRUPTIVE EFFECT OF COVID19 ON FINANCIAL STABILITY IN THE WAMZ USING A FAN CHART PROBABILITY TECHNIQUE

FORECASTING THE
DISRUPTIVE EFFECT OF COVID19
ON FINANCIAL STABILITY IN
THE WAMZ USING A FAN CHART
PROBABILITY TECHNIQUE
Angela UJUNWA
Department of Banking and Finance
University of Nigeria, Nsukka
angela.ujunwa@unn.edu.ng
&
Chinwe OLELEWE
Department of Banking and Finance
University of Nigeria, Nsukka
chinwe.olelewe@unn.edu.ng
ABSTRACT
The outbreak of the novel coronavirus
towards the end of 2019 and the policy
measures put in place to contain the spread
and save lives, has heightened the
vulnerabilities of economies and financial
systems across the globe, including the
banking sector of the West African Monetary
Zone (WAMZ), comprising of The Gambia,
Ghana. Guinea, Liberia, Nigeria, and Sierra
Leone. The banking sector is currently caught
in a web of striking a delicate balance
between
mitigating
the
adverse
macroeconomic and financial shocks caused
by the pandemic and preserving financial
system stability. However, contrary to the
2007/2008 global financial crisis, which
emanated from the sub-prime lending
debacle in the United States (US), the current
economic crisis which is health-led, met
banks relatively stronger. The financial
Accounting and Finance Research Association
reforms implemented post global financial
crisis, especially the introduction of Basel III
risk-based capital requirements and the
macro prudential orientation to supervision
have improved the balance sheets of banks.
Hence, banks have not deleveraged and
continue to provide critical financial services,
including the maintenance of credit flow.
Available data from the Bank of International
Settlement (BIS) comparing average credit
growth for the GFC and Covid-19 period in
the US and Euro Area, shows that unlike the
GFC period where credit fell by about 1.0
percent and over 2 percent, it increased by
over 3.0 percent and about 1.0 percent
under Covid-19 conditions, respectively. The
WAMZ is no exception as the banking sector
remain relatively safe and sound. For
instance, in addition to commencing
implementation of the Basel II/III capital
framework in Ghana and Nigeria, Ghana
recently concluded its banking sector clean-
up exercise and recapitalisation programme,
which saw the revocation of the licenses of
nine (9) insolvent banks. In Nigeria, banks
proactively grew their income surplus in
anticipation of the regulator’s planned
upward revision to banks’ minimum capital
requirement. Similarly, in 2019, the Bank of
Sierra Leone increased paid-up capital for
banks and passed a new banking legislation
for the industry. To this end, banks are
viewed by policy makers as a potent force to
reckon with in solving the current crisis,
rather than contributors to the problem
(Borio 2020). Thus, in addition to palliative
measures introduced by governments and
international development agencies, central
banks and banking regulators the world over,
instead of tightening policy stance, have
implemented very accommodative measures
to promote credit flow to the real sector as
well as support borrowers adversely affected
by the pandemic.Book of Abstract
Generally, global regulatory authorities in
line with the flexibility embedded in their
regulatory and supervisory frameworks had
implemented some pandemic-led prudential
measures such as easing of capital and
liquidity buffers. For instance, most
jurisdictions have encouraged banks to draw
down on capital conservation buffers and
the counter-cyclical capital buffers, and by
implication
restricted
discretionary
distributions (such as dividend, share
buybacks etc.). In most jurisdictions,
government guarantee programmes for
loans, loan payment moratoria and ease in
asset classifications and provisioning norms
have been introduced, prompting the April
20, 2020 press release on measures to
reflect the impact of Covid-19 by the Basel
Committee on Banking supervision, which
provided technical clarification on the
implication of these measures on regulatory
capital requirements. In the WAMZ, Central
banks have deployed support measures such
as accommodative monetary policy,
stimulus packages, regulatory forbearance,
and credit guarantees, to mitigate the acute
liquidity challenges and support borrowers
affected by the pandemic.
While these responses to preserving the
stability of the financial sector are consistent
with theory, central banks and prudential
authorities need to be wary of their resulting
moral hazards and high social cost to the
national purse. Bank supervisors are
therefore, expected to strike a balance in
terms of responding to the pandemic and
promoting the stability of the financial sector
because the coronavirus pandemic has not
traversed a full course or cycle coupled with
the uncertainty surrounding its nature and
eventual extinction, knowing the extent of its
impact on the banking system is quite
daunting. For the WAMZ banking sector, the
shock is expected to impact the quality of
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assets, credit flows, liquidity, profitability,
and solvency. Central banks in the Zone have
activated their business continuity plan to
ensure undisrupted operations, allowing
some staff to work from home. The
pandemic containment measures have thus
disrupted onsite examination calendars of
WAMZ central banks, due to staff working
remotely. Central banks have thus enhanced
their off-site surveillance, monitoring
timeous submission of prudential returns.
Also, virtual meetings and interviews are
currently being employed to engage and seek
clarifications from banks on existing and
emerging supervisory concerns. The use of
these virtual platforms and online remote
working platforms, including customers
usage of digital banking channels has
heightened data privacy and cybersecurity
risks. In this paper, we undertake a
probability forecast of some important
financial soundness indicators of the
expected channels of impact of the pandemic
on the banking sectors of Member States of
the WAMZ. The objective is to use the fan
chart to forecast the future behaviour of
these key financial stability indicators and
apprise banking supervisors of possible
regulatory response to ensure the stability of
the WAMZ banking sector.
Financial system encompasses the absence
of system –wide incidents which is about
resilience of financial system to stress. A
stable financial system is capable of
efficiently allocating resources, assessing
and managing financial risks, maintaining
employment levels, and eliminating
relative price movements of real or
financial assets that will affect monetary
stability or employment levels. The
financial system will absorb the shocks
primarily
through
self-corrective
mechanisms, preventing adverse events
from having a disruptive effect on the
financial systems. Financial stability is
paramount for economic growth, as mostBook of Abstract
transactions in the real economy are made
through the financial system. The true
value of financial stability is exhibited in its
absence, that is the periods of financial
instability. High instability can lead to bank
runs, hyperinflation, stock market crash
and reduce confidence in the financial and
economic system. Firm (institutional) level
stability measures and systemic stability
level measures are the main measures of
financial stability this study intends to
undertake.

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