Botswana: Financial Sector Assessment Program-Technical Note on Assessment of Systemic Risks and Vulnerabilities for Banks

© 2024 International Monetary Fund IMF Country Report No. 24/63 BOTSWANA FINANCIAL SECTOR ASSESSMENT PROGRAM TECHNICAL NOTE ON SYSTEMIC RISKS AND VULNERABILITIES FOR BANKS This paper on Botswana was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on January 18, 2024. Copies of this report are available to the public from International Monetary Fund • Publication Services PO Box 92780 • Washington, D.C. 20090 Telephone: (202) 623-7430 • Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org International Monetary Fund Washington, D.C. March 2024 BOTSWANA FINANCIAL SECTOR ASSESSMENT PROGRAM TECHNICAL NOTE ASSESSMENT OF SYSTEMIC RISKS AND VULNERABILITIES FOR BANKS Prepared By Monetary and Capital Markets Department This Technical Note was prepared by IMF staff in the context of the Financial Sector Assessment Program in Botswana. It contains technical analysis and detailed information underpinning the FSAP’s findings and recommendations. Further information on the FSAP can be found at http://www.imf.org/external/np/fsap/fssa.aspx January 18, 2024 BOTSWANA 2 INTERNATIONAL MONETARY FUND CONTENTS Glossary __________________________________________________________________________________________ 4 EXECUTIVE SUMMARY __________________________________________________________________________ 5 BACKGROUND __________________________________________________________________________________ 9 A. Financial Sector Landscape ____________________________________________________________________ 9 B. Banking Sector Risk and Vulnerabilities ______________________________________________________ 12 C. Scope of Stress Tests and Risk Analysis ______________________________________________________ 18 TOP-DOWN BANK SOLVENCY STRESS TEST __________________________________________________ 19 A. Overview _____________________________________________________________________________________ 19 B. Scenarios _____________________________________________________________________________________ 19 C. Models and Methodologies to Balance Sheet and Income Projections _______________________ 21 D. Stress Test Results ___________________________________________________________________________ 23 E. Single Factor Sensitivity Analysis _____________________________________________________________ 25 F. Policy Recommendations _____________________________________________________________________ 28 TOP-DOWN BANK LIQUIDITY STRESS TEST __________________________________________________ 29 A. Overview _____________________________________________________________________________________ 29 B. Methodology _________________________________________________________________________________ 29 C. Stress Test Result _____________________________________________________________________________ 32 D. LCR Sensitivity Analysis ______________________________________________________________________ 33 E. Policy Recommendations _____________________________________________________________________ 34 INTERCONNECTEDNESS AND CONTAGION ANALYSIS ______________________________________ 35 A. Interconnectedness __________________________________________________________________________ 35 B. Contagion Risks ______________________________________________________________________________ 36 C. Policy Recommendations ____________________________________________________________________ 38 BOXES 1. Trends in Household Indebtedness ___________________________________________________________ 14 2. Hurdle Rates __________________________________________________________________________________ 23 3. Macroprudential Policy Tools _________________________________________________________________ 27 4. Status of LCR and NSFR for Commercial Banks _______________________________________________ 35 BOTSWANA INTERNATIONAL MONETARY FUND 3 FIGURES 1. Financial Sector Structure _____________________________________________________________________ 10 2. Macrofinancial Context________________________________________________________________________ 11 3. Broad Credit Conditions _______________________________________________________________________ 12 4. Banking System Asset Decomposition and Credit Risk Profile _________________________________ 13 5. NPLs in the Banking System ___________________________________________________________________ 16 6. Maturity Structure of Assets and Liabilities in the Banking Book ______________________________ 17 7. Bank Deposits by Maturity and Holder ________________________________________________________ 18 8. Macro Scenarios ______________________________________________________________________________ 20 9. Solvency Stress Test Results ___________________________________________________________________ 2