The Central Bank of Bahamas published a report that analyzes the key financial sector developments and assesses the underlying risks to financial stability in the domestic economy. The report highlights that the domestic financial sector remained stable during 2019, with the central bank heightening its overall approach to supervision, employing risk-based supervision, and widening focus on non-bank entities. Going forward, the central bank will focus on closing of any gaps identified in the risk and compliance systems of supervised financial institutions and on sustaining its efforts in the monitoring of bank liquidity, to mitigate the potential impact of any increase in credit demand on external reserves. Furthermore, to improve information quality, reporting infrastructure is being tested with banks and is expected to transition to live data in 2021.
The report highlights that, since March 2020, the system has faced substantial operational and financial challenges arising from the COVID-19 pandemic. The exposed credit risks are estimated to be within manageable limits, either systemically or because of more than adequate loss-absorbing buffers of lending institutions. In managing COVID-19 credit exposures, domestic banks and credit unions moved quickly to introduce loan payment deferral schemes to assist borrowers whose debt-servicing capacity was adversely impacted. As deferments unwind, the impact on nonperforming loans and capital are expected to become more pronounced. In the near-term, stress test results indicated that systemic risk of depletion of liquidity is negligible. Over the medium-term, it remains important to sustain the strategy of measured reductions in the Central Bank’s holdings of Government securities, through sales in the secondary market, to absorb significant portions of the surplus liquidity. Support for restrained holdings of Government debt has been enhanced, given the passage of the revised Central Bank Act, which places comprehensive limits on the Bank’s financing to the Government, as well as the Public Debt Management Bill, which support the prudent management of the public debt.
The report informs that Bahamas is now positioned to strengthen the information quality on which lending decisions are executed. During 2020, the operator began testing of the reporting infrastructure with banks, with the intention of transitioning to live data during the first half of 2021. The central bank will sustain efforts to upgrade the risk-based supervisory framework (Basel III) for banks and trust companies. These measures entail an emphasis on increased buffers, among other risks, over the course of the business cycle for domestically systemically important banks (D-SIBs) and maturity mismatches. The central bank, along with other regulators and domestic stakeholders, remained steadfast with regard to the ongoing strengthening of the National Financial Crisis Management framework. The proposals advanced would serve to reduce vulnerabilities around the speed and statutory precision at which responses to crises, if they arise, can be effected. As the core objective is to ensure strong alignment of Bahamas’ framework with recommended best international practices, the central bank identified various amendments that are needed in the different legal frameworks, including resolution processes, under the deposit insurance scheme. These initiatives will serve to further enhance and strengthen the supervisory regime in place to ensure the continued stability of the financial sector.
Keywords: Americas, Bahamas, Banking, Financial Stability Report, Credit Risk, Regulatory Capital, D-SIBs, Basel, Crisis Management Framework, Reporting, Central Bank of Bahamas
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