Banking sector remains robust in the face of extreme loan writedowns in 2021 – BoG Stress Test

Dr. Ernest Addison, BoG Governor

The Bank of Ghana says the resilience of the banking sector has remained robust to extreme loan depreciation in 2021.

This was supported by a strong capital position resulting from increased profitability and Covid-19 relief measures.

Again, the stress test of the loan concentration model further showed that the banking sector was robust to credit concentration shocks

According to the Financial Stability Review 2022, the concentration shock assesses the impact of a failure of a bank’s largest borrower.

The scenario assessed the creditworthiness of banks if their largest borrower defaulted, causing the exposure to shift to the loss category.

The December 2021 test, the Central Bank said, found that if each bank’s largest borrower defaulted simultaneously, the banking sector’s capital adequacy ratio (CAR) would drop from 19.8% to 14, 8%.

This indicates that the sector’s CAR, in the face of credit risk concentration shocks, would still be well above the minimum regulatory capital, due to the strong capital position.

“As part of efforts to strengthen risk management practices and internal controls in the banking industry, the BoG will continue to ensure that banks adhere to exposure limits to contain potential solvency issues that may emerge from the concentration of lending,” he said.

The Central Bank further explained that the stability of the banking sector remains essential to preserve the stability of the financial system in the country.

To assess the resilience of the financial system, he said, various extreme events/shocks were applied to the banking sector which, at end-December 2021, constituted 69.0% of financial sector assets.

“To assess the banking sector’s resilience to shocks, an exercise that subjected banks’ balance sheets and profit and loss accounts to extreme but plausible shocks was conducted,” he added.

The stress tests covered credit, market and liquidity risks. Scenarios were model-based, anchored in historical simulations and relied on expert judgment

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