The Bank of Namibia has said it will strengthen prudential tools to limit systemic risk. This would include capping over-inflated assets in the country’s financial system.

This is included in the macroprudential supervision 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 minimizing the impact of disruptions in the provision of key financial services that can have serious consequences for the real economy. .

The framework comes at a time when commercial banks are exposed to the real estate sector through the expansion of residential and commercial properties as in recent years the country has been warned of a possible real estate bubble.

The new Bank of Namibia Act 2020 broadened the BoN’s mandate to include, among other things, oversight of macroprudential policy, oversight of the financial system as a whole, and coordination of activities aimed at preserving financial stability.

As a result, “the role of the central bank has been broadened to include the responsibility of protecting clients from asset price bubbles”.

An asset price bubble occurs when the price of an asset, such as housing, stocks or gold becomes over-inflated.

To ensure the resilience of the national financial system and counter its instability resulting from credit, asset price or liquidity shocks, macroprudential supervision must be strengthened.

Financial stability is defined as the resilience of the national financial system to internal and external shocks, whether economic, financial, political or otherwise.

As it stands, financial stability is threatened by the level of household and business defaults as the NPL (NPL) ratio climbed to N $ 6.7 billion at the end of 2020 .

“Unhealthy credit growth, which ultimately translates into higher default rates, especially by heavily indebted borrowers, has been identified as a key driver of financial crises in many economies,” it says. the framework.

It also highlights the repercussions when the financial services industry is left unchecked.

“Given the high costs of financial crises and the protracted nature of post-crisis recoveries, it is best to take preventative measures to reduce the likelihood and potential impact,” the executive further notes.

The prospective approach will use early warning indicators to identify sources of systemic risk.

This is about reducing excessive growth in credit, asset prices, especially real estate and debt. The bank will use its discretion to decide what excessive growth is.

In the case of credit, a sustained level above the trend would be a starting point, the report points out.

“When it comes to asset prices, different valuation metrics are used to determine whether growth rates are significantly above their historical average,” the bank said.

However, this measure could backfire, as historically assets such as properties have been shown to be inflated – with artificial forces under control given the low volume supplied to the market.

The bank also said it would reduce direct and indirect concentrations of exposures to the same markets, products and institutions.

Concentrations of exposure make a financial system vulnerable to current shocks, either directly through balance sheet effects or indirectly through asset sales and contagion.

Targeted policy interventions address sources of vulnerabilities while minimizing unintended spillovers in other areas.

The performance of periodic financial system assessments to identify and manage systemic risk to financial stability will be carried out by the Macroprudential Supervisory Committee (MOC).

The regulation and supervision of systemically important financial institutions (SIFIs) will be strengthened in an effective and efficient manner.

This involves monitoring SIFIs, their operations and their activities.

The Financial System Stability Committee (FSSC) will play a key role in this oversight by providing periodic reports and assessments on systemic risks to the financial sector, particularly in the areas of banking and non-banking financial sector development, which affect financial stability.

The MOC will use the information from the FSSC to determine if there are changes in systemic risk that justify making macroprudential policy decisions or corrective actions.

Macroprudential tools to be used to mitigate systemic risk include setting thresholds for the ratio of assets, capital and liquidity held by the sector.

The report states that the Board of Directors of the Bank of Namibia has delegated macroprudential decision-making authority to the governor who will be supported by the JI.

This means that if the MOC’s decision-making is by consensus, “the final decision rests with the governor”.

Decisions made by the Governor at MOC meetings on macroprudential regulation are considered final for the entire financial system in accordance with the powers conferred by Chapter 6 of the Bank of Namibia Act.

The bank should work with the Namibia Financial Institutions Supervisory Authority to ensure compliance with macroprudential regulations through existing supervision channels.

Members of the MOC are not personally liable in the exercise of their powers under this committee for any loss or damage caused in respect of any act or omission committed in good faith, unless it it is established that the act or omission was committed in a grossly negligent manner.

Members of the MOC must be independent of any political or other influence in the exercise of their functions.

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