DER N°1/2020

 December 2020

Abstract

Financial stability is one of the major concerns of the Monetary Authorities of the West African Monetary Union (WAMU). Its preservation requires the implementation of an effective macroprudential policy. In this regard, the toolkit of the Central Bank of West African States (BCEAO) is made up of the financial soundness indicators (FSI) recommended by the International Monetary Fund (IMF), annual stress tests and the system applicable to Systemically Important Banking Institutions (SIBIs). The purpose of this study is to expand this toolkit by designing a network model to measure and monitor interconnections within the WAMU banking system and by developing a systemic risk and contagion index. The analysis covered all the banks in the Union and spanned the period 2007-2019. The simulations carried out made it possible to identify institutions with a high risk of contagion in the event of shocks and those that are highly vulnerable due to their high dependence on others. The results also revealed contagion phenomena that could go beyond national borders. However, the risk of contagion is generally low in the zone. These results contribute to the improvement of the SIB identification methodology and, consequently, to the strengthening of the supervisory framework for these institutions. The results have led to the formulation of macroprudential policy recommendations. 

Keywords : Network analysis, financial stability, systemic and contagion risk, macroprudential policy, index

JEL Classification JEL : C45, G21, G33