1. Financial Stability Challenges in Egypt Financial Stability: New Challenges for African Central Banks

2. Egyptian Financial Stability Framework Egyptian financial system is largely dominated by the banking sector, which is regulated and supervised by the Central Bank of Egypt (CBE), The objective of CBE as defined by its law focuses on realizing price stability and banking system soundness, leading to financial stability, Egyptian Financial Supervisory Authority (EFSA) is responsible for the supervision of non-bank financial markets and instruments, Co-ordination takes place between CBE and EFSA to ensure financial system stability. CBE Deputy Governor for Financial Stability is a board member in EFSA and the Chairman of the EFSA is a member of the CBE Board of Directors. Regular meetings are conducted to discuss diagnostic assessment, policy recommendations. 2

3. Banking Sector and Supervision Reform Robust banking sector was found to be necessary to achieve financial stability and economic growth, creating the need for developing restructuring reform in 2004, The reform program encompassed a number of pillars such as; privatization and consolidation of the banking sector, financial and organizational restructuring of banks with focus on state-owned banks, and upgrading the Banking Supervision departments. Moreover, the banking sector shifted from a compliance to a risk-based supervisory regime, followed by the implementation of corporate governance rules and Basel most recent standards. Establishment of the Macro-Prudential and Regulation departments in 2006 in coordination with four European Central Banks under Technical Support Protocol signed with ECB. Thanks to the reform program launched in 2004, the banking sector proved to be resilient and managed to withstand successfully two real life stress tests: – Global financial crisis of (2008-2009), – Jan 2011 and June 2013 revolutions. 3

4. 4 In EGP Billions Banking Sector Key Performance Indicators (to be continued if approved) FYE 2004 FYE 2010 FYE 2011 FYE 2012 FYE 2013 FYE 2014 Sep 2015 Number of banks5439 38 Number of branches1,7942,5392,5942,6192,6663,7182,768 Net worth32808394107123140 Assets5941,1811,2151,3011,5051,8302,261 Net Profits3119121623 CAR12.2%16.3%15.9%14.9%13.7%13.9%13.2% Tier 1 %9.2%12.7%13.3%12.9%11.8% 11.3% ROA0.5%1%0.7%1% 1.3 % ROE8.7%14.3%10.5%13.9%14.5%18.9% Offsite Supervision - September 2014

5. Institutional set-up for Banking Stability CBE ultimate concern is the functioning of the financial system by ensuring the soundness of single financial institutions and the banking sector at large, Micro and Macro-Prudential are governed under single supervisory authority namely Banking Supervision, aiming at preserving financial stability with distinct approaches to measuring risks, Coordination between Micro-Prudential analysis of individual banks and Macro-Prudential continued assessment of banking sector systemic risks, leads to recommending pre-emptive action measures. 5

6. Banking Supervision Unit Organization Chart 6 BANKING SUPERVISION ON-SITE SUPERVISION LICENSING DEPARTMENT MACRO PRUDENTIAL OFF-SITE SUPERVISION REGULATION UNIT CREDIT REGISTRY BASEL UNIT

7. Micro-Prudential versus Macro-Prudential Supervision The Macro-Prudential objective is to build a broad and deep understanding of the banking sector by: – Determining and assessing the impact of global & domestic economic and financial developments on the banking sector; – Analyzing structural trends & vulnerabilities through quantifying, and assessing the effects of the build-up of systemic risks, The Micro-Prudential focuses on individual institutions and considers the financial condition and risks of each institution, including: – Continuously monitoring different types and developments of risks facing individual banks, – Strong monitoring and follow-up on rectification of identified risks in a timely manner. 7

8. 8 Several tools are regularly used to assess financial stability risks: – Assessment of structural trends & vulnerabilities of global & domestic economic and financial indicators, – Banking sector Financial Soundness Indicators’ analysis, – Stress Testing: in which scenarios are based on economic studies of the most important developments: Credit Risk Approach Liquidity Foreign currency Interest rate All the stress tests reveal resilience of the banking sector due to its adequate capitalization and high profitability which resulted from the above mentioned reform. Macro-Prudential Analytical Tools

9. 9 ‒FSR with forward looking outlook (three main sections; global and domestic macroeconomic developments analysis, banking sector structure and trends, study of financial infrastructure). – Different ad-hoc tasks to assess the impact of domestic & global economic and financial shocks on the soundness of the domestic banking sector: Impact of decline in oil prices on BOP and budget deficit, Impact of global economic recession on Suez Canal revenues, Macro-Prudential Analytical Tools (Cont’d)

10. 10 – Work in cooperation with the EU, World Bank, IMF to add to our toolkit new quantitative tools, necessary for better assessment of the risks: Macro-stress test quantify the impact of economic shocks on the banking sector using econometric tools, Early Warning System, Systematically important banks, Counter-cyclical capital buffer in the framework of Basel III, Macro-Prudential Analytical Tools in Process

11. Measures to face Financial Stability Challenges 1. Political Instability:  Approval of new constitution,  Presidential elections in June 2014,  Parliamentary elections in October 2015, 2. Foreign Exchange :  Regulating issuance of letters of credit for importers of non-essential items,  Require foreign manufacturers of non-essential items to register in person with Egyptian authorities if they wish to ship their goods to Egypt,  Lifting the limits of cash deposits and withdrawals for companies importing necessity goods, and for individuals,  Devaluation of domestic currency and intervention in the market with regular auctions, 3. Asset Quality:  Initiative to support tourism sector and to limit NPLs, 4. Fiscal Deficit:  Reduce subsidies and increase revenues via tax and custom reform, 11

12. Measures to face Financial Stability Challenges (Cont’d) 5. Financial Inclusion:  Mortgage finance initiative to low and middle income individuals,  MSMEs definition and encouraging banks to finance SME, 6. Credit Concentration Risk:  Reducing single obligor borrower and related parties as a percentage of capital base,  Setting debt burden ratio of retail portfolio, 7. Coordination between financial stability, monetary and fiscal policies  Coordinating Council to realize macro-economic balance and financial stability, 12

13. Thank You 13