Strengthening Bank Resolution and Crisis Management in Zimbabwe
Project Development Objective (PDO)
This project aims to strengthen the capacity for bank resolution, to improve crisis preparedness and management, and to increase resilience of the deposit insurance mechanism in Zimbabwe.
Background
Between 2011 and 2013, macroeconomic pressures and unsound lending practices in Zimbabwe led to a sharp deterioration in asset quality and to a three-fold increase in nonperforming loans. Zimbabwe is at heightened risk of bank runs because of low liquidity and lack of confidence in the banking sector. Despite Zimbabwe’s dollarized system and the presence of a few well-capitalized banks (particularly foreign owned and large), liquidity risk is still high. Because of these risks, it is necessary for the Zimbabwean government to explore and implement a comprehensive plan for addressing bank vulnerabilities; this plan should include recommendations for improving bank-resolution capabilities, which may require legal and regulatory reforms.
Zimbabwe’s Deposit Protection Corporation has also requested advice on establishing an appropriate legal framework and on building the capacity of its staff to manage crises. The size of the insurance fund managed by the Deposit Protection Corporation relative to the potential distress in the system is another issue that needs to be analyzed.
Activities
This technical assistance project includes the following components:
Component 1: Bank resolution
This component involves (a) assessing Zimbabwe’s current banking laws and regulations, including the Banking Act and the Troubled Financial Institutions Act; (b) determining opportunities for harmonization; and (c) recommending legislative amendments that will modernize current banking policies and adapt them to the changing structure of the financial sector. Efforts to upgrade the legal and regulatory frameworks will be matched with commensurate efforts to strengthen bank-resolution capacity.
Component 2: Crisis simulation exercise
This component involves (a) a crisis simulation exercise that employs different resolution methods and (b) a report on areas for improvement in authorities’ responses. The crisis simulation scenario involves the failure of a large bank, which generates sufficient stress to prompt the bank’s resolution and the payout of bank depositors. The simulation will require interaction between the Reserve Bank of Zimbabwe’s governor, board, and banking supervision department, as well as the Deposit Protection Corporation, the Ministry of Finance and Economic Development, and the supervisors of non-bank institutions.
Component 3: Deposit insurance
This component involves reviewing current capabilities and reserves of Zimbabwe’s deposit insurance fund, assessing the insurer’s current pricing system for member contributions, and determining the funding level necessary to protect against contingencies. This component also involves (a) reviewing the viability of measures to ensure adequate staff skills and (b) developing a strategy for providing additional training to Deposit Protection Corporation Staff.
Expected Outcomes
The expected outcomes of the project at each level are as follows:
Financial system level
1. Contributing to financial stability in Zimbabwe
Enabling environment level
1. Strengthening capacity for resolving distressed banks
2. Improving readiness in preparing and handling financial crises
3. Strengthening the deposit insurance system