Featured Product

    IMF Publishes Reports Assessing Financial System Stability in Bahamas

    July 01, 2019

    IMF published a report on results of the Financial System Stability Assessment (FSSA) of Bahamas. IMF also published its staff report under the 2019 Article IV consultation, along with two technical notes and a report on the detailed assessment of observance (DAO) of Basel core principles for effective banking supervision (BCPs) under the Financial Sector Assessment Program (FSAP). One technical note covers assessment related to financial stability and stress testing while the other note is focused on financial inclusion, retail payment, and small and medium enterprises (SME) finance.

    The FSSA report highlights that Bahamas appears to be resilient to the current threats to its financial stability, but action is needed to safeguard against potential weaknesses. The banking sector dominates the financial system and has focused on residential mortgages and consumer loans during a long period of economic stagnation. High aggregate capital and liquidity ratios serve as strong buffers against systemic shocks, but some individual banks have large amounts of problem assets that leave them vulnerable. The system-wide capital adequacy ratio (CAR) stood at 32%, well above the 17% regulatory target. The aggregate level is raised by a large foreign bank with over 50% of CAR. Despite capital levels being well above the regulatory minima, commercial banks with large nonperforming loan (NPL) stocks are potentially weak under severe stress conditions. The NPL ratio remains high at 9%, after peaking at 15.3% in 2013. The situation varies significantly across banks, with three institutions owning 61% of all NPLs. The large stock of restructured loans is at an increased risk of falling back into the nonperforming status.

    Credit risk dominates the interest rate risk in a largely floating rate environment. Under the rising interest rates, debt-servicing capacity will fall, potentially boosting NPLs and lowering earnings. Top-down stress test scenarios were developed using local risks and vulnerabilities to assess solvency, liquidity, and contagion risks at the domestic banks and the two largest credit unions, which cover about 97% of all credit institution assets. Solvency stress tests suggest that the overall banking system is resilient to a range of adverse scenarios, but weaknesses widen under severe stress. The banking system shows resilience to market risk, while liquidity tests reveal a shortfall in one bank. Central Bank of The Bahamas (CBOB) has updated its capital regime and is now largely in line with the key aspects of Basel II standards. The required regulatory capital ratios are super-equivalent to Basel. Credit, operational, and market risks are now all captured in capital requirements and CBOB issued guidelines on Internal Capital Adequacy Assessment Process (ICAAP) in 2016 to address risks that not well-captured by the regulatory regime. 

    The report recommends that systemic risk oversight should be strengthened to address potential buildup of vulnerabilities. The authorities should consider implementing a macro-prudential capital buffer for banks. CBOB should consider introducing a macro-prudential capital buffer above a core common equity tier 1 requirement. CBOB is moving to a Basel III-compliant capital standard. The FSAP recommends a fixed macro-prudential capital buffer instead of a dynamic countercyclical capital buffer (CCyB). A CCyB designed to counter time-varying systemic risks would be difficult to implement, given the complex analytical and data requirements associated with its calibration. A static capital buffer (beyond the international minima) would require less timely data and analytical effort and would be relaxed only in the event of a significant shock. The overall banking supervision is effective, but CBOB needs to improve practices in some macro-critical areas. Given the key importance of NPLs, supervisors should continue strengthening industry practices on credit risk management, assessment of problem assets, loan-loss provisioning, and internal assessments of capital adequacy. The legislative reform of crisis management, resolution, and safety net needs to be completed, as the recent recapitalizations of a majority state-owned bank highlight the critical need to improve recovery and resolution procedures.

     

    Related Links

    Keywords: Americas, Bahamas, Banking, Insurance, FSSA, Article IV, FSAP, Technical Notes, Basel III, Systemic Risk, Stress Testing, Credit Risk, Macro-Prudential Policy, BCPS, Central Bank of Bahamas, IMF

    Featured Experts
    Related Articles
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    EC to Defer Application of SFDR Standards Till July 2022

    The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.

    July 23, 2021 WebPage Regulatory News
    News

    BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance

    The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.

    July 22, 2021 WebPage Regulatory News
    News

    EBA Seeks Views on Proportionality Assessment Methodology

    The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.

    July 22, 2021 WebPage Regulatory News
    News

    US Agencies Propose Changes to Call Reports and Instructions

    Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.

    July 22, 2021 WebPage Regulatory News
    News

    PRA Finalizes Rulebook Definition of Higher Paid Material Risk-Taker

    The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.

    July 21, 2021 WebPage Regulatory News
    News

    EBA Examines Asset Encumbrance in Banking Sector

    The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.

    July 21, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7291