Front Matter Page

IMF Country Report No. 16/332

MOROCCO

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE—CRISIS MANAGEMENT, BANK RESOLUTION, AND FINANCIAL SECTOR SAFETY NETS

October 2016

This Technical Note on Crisis Management, Bank Resolution, and Financial Sector Safety Nets for Morocco was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on September 2016.

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

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2016 International Monetary Fund

Front Matter Page

MOROCCO

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE

CRISIS MANAGEMENT, BANK RESOLUTION, AND FINANCIAL SECTOR SAFETY NETS

September 2016

Prepared By

O. Partsch, W. Bossu, K. Drevina

Legal Department

Contents

• Glossary

• EXECUTIVE SUMMARY

• INSTITUTIONAL FRAMEWORK

  • A. Domestic Arrangements

  • B. Cross-Border Coordination

• EARLY INTERVENTION

• CRISIS MANAGEMENT TOOLS

  • A. Emergency Liquidity Assistance

  • B. Resolution Regime

  • C. Funding of firms in resolution

  • D. Bank Liquidation and Insolvency

• DEPOSIT GUARANTEE SCHEME

• LEGAL PROTECTION

• TABLE

• 1. Recommendations on Crisis Management, Bank Resolution, and Safety Nets

Glossary

Executive Summary¹

This note elaborates on the findings and recommendations made in the Financial Sector Assessment Program (FSAP) for Morocco in the areas of crisis management, bank resolution, and financial sector safety nets. The mission’s findings, undertaken during April 16 to April 30, 2015, are based on a desk review of relevant legal and policy documents, as well as extensive discussions with the Moroccan authorities and private sector representatives.

In order to accompany the expansion of the banking system, the Moroccan authorities have achieved tremendous progresses as regards crisis management, bank resolution, and safety nets. A macroprudential committee composed of BAM, ACAPS, AFM, and MoF has been established to coordinate supervisory actions and manage crisis. Each of the supervisory agencies have various early interventions tools. Sound banking resolution mechanisms have recently been established in the banking law. A financial stability mandate is about to be entrusted to BAM, which shall be formally authorized to take exceptional measures (including the extension of emergency liquidity assistance). The deposit guarantee scheme has also been reshuffled, with the creation of two separate compartments, one for participative banks² and another one for conventional banks.

All these mechanisms have been untested so far in a rather stable financial and economic environment. Morocco has not experienced any banking crisis, so the above-described mechanisms could not be tested.

The review of the legal framework for crisis management, bank resolution, and safety nets shows that there is room for improvement, in particular as regards early intervention mechanisms and bank resolution. Early interventions tools available to BAM should be fine-tuned, with a strengthened link between the qualitative triggers (in the banking law) and the quantitative triggers (in the manual of treatment of bank difficulties). Loss absorbance mechanisms, explicit powers to address impediments to firm’s resolvability (including ring-fencing measures at the level of bank groups) and synchronized mechanisms of early intervention at sectorial group levels should also be established. Transparency should be achieved in the banking law as regards the objectives of the banking resolution, the triggers for resolution as well as the hierarchy of creditors. Bail-in mechanism need to be established. The law should also clearly appoint one or more banking resolution authority(ies), with a clear mandate, mechanisms for autonomy and accountability as well as appropriate resources. Such banking resolution authority(ies) should enjoy legal protection.

Transparent and effective funding mechanisms for banking resolution should be established. As a result of its double mandate (i.e., depositors’ protection and open bank assistance) and its ability to raise capital on the markets and levy ex post contributions from banks, DIC implicitly plays a key role in funding banking resolution. Absent depositors’ preference and credible preferential treatment of DIC’s claims (including in case of open bank assistance), DIC’s financial resources are weak, thereby threatening the discharge of its mandate of depositors’ protection. As a way forward, DIC should hence no more provide open bank assistance. As a matter of principle, the responsibility of the government for solvency support — which is currently referenced in the convention on the management of financial crisis signed in 2012 between MoF, BAM, and the predecessor of ACAPS as well as in the BAM’s “manual of resolution of failure of banks of systemic importance” - should also be formalized. Inserting in the law a provision on a government guarantee extended to BAM, when the liquidity support in the context of emergency liquidity assistance degenerates into solvency support should be a first step in this direction. Another step could be the entering of a formal arrangement between the government, BAM and possibly DIC for crisis management purposes, instead of merely documenting the government obligations in the BAM’s “manual of resolution of failure of banks of systemic importance” or the convention on the management of financial crisis signed in 2012 between MoF, BAM, and the predecessor of ACAPS.

The development of resolution tools for market infrastructures, insurance and financial institutions would require further adaptations. At this stage, the resolution tools have been designed in the banking sector, which represents the biggest part of the financial services in Morocco. The development of similar instruments for other institutions (including insurance, financial market infrastructures, and financial market institutions) would require further adaptation of early intervention mechanisms and resolution tools, to ensure a consistent approach among all relevant regulatory agencies for cross-sectorial groups.

This note is structured as follows. Chapter I summarizes the existing institutional framework and coordination arrangements for crisis management — domestically and on a cross-border basis. Chapter II discusses aspects related to crisis preparedness, whereas Chapter III covers early intervention as the “first line of defense” against emerging crises. The toolkit for crisis management — comprising crisis containment measures, emergency liquidity assistance, the resolution regime and arrangements for bank liquidation — is discussed in Chapter IV. Chapter V comments on the Deposit Guarantee Scheme. Finally, observations on the legal protection can be found in Chapter VI.

Table 1.

Recommendations on Crisis Management, Bank Resolution, and Safety Nets

^1/Short-term indicates within 18 months; medium-term indicates within 18 months to 3 years.

Table 1.

Recommendations on Crisis Management, Bank Resolution, and Safety Nets

Recommendations		Priority 1/	Institution
Institutional framework:
	− Appoint one or more resolution authority/ies and adapt its/their governance accordingly,	MT	BAM/MOF
	− Clarify the roles of the other regulatory agencies in crisis management,	ST	MOF
	− Address the shortcomings which undermine CCSRS’s ability and willingness to act	ST	BAM/MOF
	− Expand CCSRS’s role for crisis preparedness in normal time.	MT	BAM/MOF
Cross-border coordination
	− with growing bank expansion in Africa, the authorities should strengthen resolution arrangements with host countries for Moroccan banks subsidiaries, especially in Africa	MT	BAM
Early intervention
	− Authorize AMF to request to halt the breach of the law governing financial markets, without the need to involve the court.	MT	BAM/MOF
		MT	BAM
		MT	BAM/MOF
	− Synchronize the early intervention mechanisms at the level of a cross-sectorial group
	− Introduce explicit powers to improve to firm’s resolvability (including change to business practices, positioning capital and liquidity in the appropriate levels in the group and segregate critical functions in legally and operational independent entities shielded from group’s problems)	MT	BAM
	− Adopt loss absorbance mechanisms for banks in addition to the contribution of fresh capital by shareholders with a stake of more than 5 percent	MT	BAM
	− Strengthen and disclose the link between the qualitative triggers and the quantitative triggers in the manual in the form of guideline	MT	BAM
Financial support
	− Separate BAM’s ELA function clearly from government solvency support	ST	BAM/MOF
	− Boost BAM’s balance sheet by strengthening its recapitalization process; review the profit distribution mechanism	MT	BAM/MOF
Resolution framework
	− Specify the objectives of banking resolution in the legal framework, in particular “the least-cost principle”	ST	BAM/MOF
	− Disclose the triggers for the resolution powers	ST	BAM/MOF
	− Organize the temporary stay of set-off, close-out netting, suspension and termination of agreements		BAM/MOF
	− Apply the forced sale mechanisms to all shares (not only those of the decision-making and controlling bodies)	ST	BAM/MOF
	− Formalize the hierarchy of creditors’ claims in the context of banking resolution and introduce bail-in powers in accordance with this hierarchy	ST	BAM/MOF
	− Make BAM (and any other authority acting as such) the bank resolution authority/ies explicitly and limit its/their legal liabilities in discharging this mandate	MT	BAM/MOF
Funding of firms
	− Review DIC’s mandate	ST	BAM/MOF
	− Formalize government’s responsibility for solvency support	ST	MOF
Bank liquidation
	− Create bridges between liquidation and resolution mechanisms	ST	BAM/MOF
	− Review the enforcement of preferential creditors’ entitlements	ST	BAM/MOF
Deposit guarantee scheme
	− Remove any type of open bank assistance via the deposit guarantee fund (DIC), of which the primary mandate must be exclusively depositors’ protection	ST	BAM/MOF
	− Clarify the circumstances triggering the indemnification by DIC of the depositors consistently with the rest of the banking act.	ST	BAM/MOF
	− Strengthen depositor protection by granting DIC a higher priority over uninsured depositors and general creditors
	− DIC to support the use of “P&A” as a resolution tool	MT	BAM/MOF
Legal protection
	− As a minimum, limit the liability of BAM’s bodies and staff (as well as any other authority acting as resolution authority) as well as the provisional administrator in the context of banking resolution	MT	BAM/MOF
		MT	BAM/MOF
	− Consider a more general clause of limitation of liability to BAM, ACAPS and AMF acting their capacity as regulatory agencies

^1/Short-term indicates within 18 months; medium-term indicates within 18 months to 3 years.

View Table

Table 1.

Recommendations on Crisis Management, Bank Resolution, and Safety Nets

Recommendations		Priority 1/	Institution
Institutional framework:
	− Appoint one or more resolution authority/ies and adapt its/their governance accordingly,	MT	BAM/MOF
	− Clarify the roles of the other regulatory agencies in crisis management,	ST	MOF
	− Address the shortcomings which undermine CCSRS’s ability and willingness to act	ST	BAM/MOF
	− Expand CCSRS’s role for crisis preparedness in normal time.	MT	BAM/MOF
Cross-border coordination
	− with growing bank expansion in Africa, the authorities should strengthen resolution arrangements with host countries for Moroccan banks subsidiaries, especially in Africa	MT	BAM
Early intervention
	− Authorize AMF to request to halt the breach of the law governing financial markets, without the need to involve the court.	MT	BAM/MOF
		MT	BAM
		MT	BAM/MOF
	− Synchronize the early intervention mechanisms at the level of a cross-sectorial group
	− Introduce explicit powers to improve to firm’s resolvability (including change to business practices, positioning capital and liquidity in the appropriate levels in the group and segregate critical functions in legally and operational independent entities shielded from group’s problems)	MT	BAM
	− Adopt loss absorbance mechanisms for banks in addition to the contribution of fresh capital by shareholders with a stake of more than 5 percent	MT	BAM
	− Strengthen and disclose the link between the qualitative triggers and the quantitative triggers in the manual in the form of guideline	MT	BAM
Financial support
	− Separate BAM’s ELA function clearly from government solvency support	ST	BAM/MOF
	− Boost BAM’s balance sheet by strengthening its recapitalization process; review the profit distribution mechanism	MT	BAM/MOF
Resolution framework
	− Specify the objectives of banking resolution in the legal framework, in particular “the least-cost principle”	ST	BAM/MOF
	− Disclose the triggers for the resolution powers	ST	BAM/MOF
	− Organize the temporary stay of set-off, close-out netting, suspension and termination of agreements		BAM/MOF
	− Apply the forced sale mechanisms to all shares (not only those of the decision-making and controlling bodies)	ST	BAM/MOF
	− Formalize the hierarchy of creditors’ claims in the context of banking resolution and introduce bail-in powers in accordance with this hierarchy	ST	BAM/MOF
	− Make BAM (and any other authority acting as such) the bank resolution authority/ies explicitly and limit its/their legal liabilities in discharging this mandate	MT	BAM/MOF
Funding of firms
	− Review DIC’s mandate	ST	BAM/MOF
	− Formalize government’s responsibility for solvency support	ST	MOF
Bank liquidation
	− Create bridges between liquidation and resolution mechanisms	ST	BAM/MOF
	− Review the enforcement of preferential creditors’ entitlements	ST	BAM/MOF
Deposit guarantee scheme
	− Remove any type of open bank assistance via the deposit guarantee fund (DIC), of which the primary mandate must be exclusively depositors’ protection	ST	BAM/MOF
	− Clarify the circumstances triggering the indemnification by DIC of the depositors consistently with the rest of the banking act.	ST	BAM/MOF
	− Strengthen depositor protection by granting DIC a higher priority over uninsured depositors and general creditors
	− DIC to support the use of “P&A” as a resolution tool	MT	BAM/MOF
Legal protection
	− As a minimum, limit the liability of BAM’s bodies and staff (as well as any other authority acting as resolution authority) as well as the provisional administrator in the context of banking resolution	MT	BAM/MOF
		MT	BAM/MOF
	− Consider a more general clause of limitation of liability to BAM, ACAPS and AMF acting their capacity as regulatory agencies

^1/Short-term indicates within 18 months; medium-term indicates within 18 months to 3 years.