Domestic Debt Exchange: Potential financial sector impacts and mitigating safeguards

Domestic Debt Exchange: Potential financial sector impacts and mitigating safeguards

• Ernest Addison, Governor of Bank of Ghana

A. Background

ON December 5, 2022, the Government of Ghana launched Ghana’s Domestic Debt Exchange programme, an invitation for the voluntary exchange of approximately GHS137 billion of the domestic notes and bonds of the Republic, including E.S.L.A. and Daakye bonds, for a package of New Bonds to be issued by the Republic.

The Exchange excludes Treasury Bills in totality, and notes and bonds held by individuals (natural per­sons).

B. Potential Impacts on Debt Exchange on Financial Sector

Stress tests have been conduct­ed by the relevant financial sector regulators to estimate the potential impact of the Debt Exchange for banks, specialised deposit-taking in­stitutions (SDIs), insurance firms, as­set managers, collective investment schemes, pension fund trustees, and regulated pension schemes, that could result from their participation in the debt exchange.

C. Regulatory Tools to Mitigate Financial Stability Risks from the Debt Operation

To help manage the potential impacts of the Debt Exchange on the financial sector, financial sector reg­ulators will deploy all regulatory and supervisory tools to mitigate risks to financial stability. Regulators will assess impacts on a regular basis, and quickly address evolving risks in order to safeguard financial stability.

To support and encourage full par­ticipation of financial institutions in the voluntary debt exchange:

 Regulatory Forbearance on Liquidity and Solvency

Financial sector regulators will tem­porarily reduce regulatory capital and li­quidity requirements for regulated firms and schemes that voluntarily participate in the debt operation. Regulators will also suspend or delay any new rules that will have an adverse impact on liquidity or solvency. Each regulator will commu­nicate more specific reliefs to its regu­lated firms/schemes in due course.

 Ghana Financial Stability Fund (GFSF)

The GFSF is being established with a target size of GHC 15 billion to be provided by the Government of Ghana and its development partners.

The Fund will provide liquidity to financial institutions that participate fully in the Debt Exchange. All finan­cial institutions (banks, SDIs, pen­sion schemes, collective investment schemes, fund managers, broker/ dealers and insurance firms) that fully participate in the Debt Exchange can access the GFSF for augmented liquid­ity support, with effect from the date of completion of the Debt Exchange.

The Fund will be managed by the Bank of Ghana under unique opera­tional guidelines being developed by the Financial Stability Council.

The Financial Stability Council will provide ongoing advice and oversight for the use of the GFSF.

 Accounting Treatment

Regulators are already in dis­cussions with external auditors of financial institutions and will provide guidance to ensure a standardized approach to the accounting treatment applied to the Debt Exchange.

D. Conclusion

In keeping with its mandate, the Financial Stability Council will con­tinue to closely monitor the impacts of the Debt Exchange on financial in­stitutions and on the financial system as a whole, as well as the effective­ness of the measures outlined above. These measures will be reviewed con­tinuously and recalibrated as needed to ensure maximum effectiveness to safeguard the stability of our financial system and the protection of depos­its, pensions, policy holders’ funds, and investor funds/assets.

The information above was issued by the Financial Stability Council on Wednesday, December 7, 2022. The Financial Stability Council was estab­lished in December 2018 by Executive Instrument, to “identify and evalu­ate the threats, vulnerabilities, and risks to the stability of the financial sector”.

The Council is chaired by the Governor of the Bank of Ghana, and has members from the Bank of Ghana (Deputy Governor), Ministry of Fi­nance (Deputy Minister), Securities and Exchange Commission (Director General), National Insurance Com­mission (Commissioner), National Pensions Regulatory Authority (Chief Executive Officer), and Ghana Deposit Protection Corporation (Chief Execu­tive Officer).

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