The Central Bank of The Bahamas published the financial stability report for 2018. The report provides an overview of key developments in the financial sector and assesses the underlying risks to financial stability. Overall, the domestic banking sector remains in a sound financial state, based on the capital and liquidity levels. However, there is room to accelerate the improvement in credit quality. Banks hold significant excess capital relative to their regulatory requirement, which the central bank advises should be gradually reduced over the medium-term. The credit union sector, meanwhile, would stand to benefit over the medium-term from improved balance sheet ratios and strengthened governance arrangements, both of which the Central Bank of The Bahamas is actively promoting.
The report highlights that the results of the stress tests—which comprised credit, liquidity, and interest rate risks—showed sustained resilience to sudden shocks, as the capital ratios of banks continued to exceed both the international and the more rigorous domestic benchmarks. Indications are that developments in non-bank financial institutions were largely positive in 2018. Credit risk stress tests remained the main tool used to assess resilience of the banking sector. During 2018, the stress scenarios used to assess whether there were any capital shortfalls for credit risk shocks remained unchanged. The forecast non-performing loans (NPLs) have been subject to shocks of 100%, 150%, and 200%, for 2018 through 2020. Capital levels remained well above the target and trigger ratios of 17% and 14%, respectively, at an average capital to risk-weighted assets ratio of 31.3% to 35.6%, thus negating any financial stability concerns.
Interest and Liquidity Shocks Stress test results continued to show that commercial banks are less susceptible to interest rate risk in their banking books, given the infrequent movement in the Bahamian dollar Prime lending rate and the continued robust levels of eligible capital, among other factors. With regard to liquidity risk, stress test results continued to indicate that banks’ risk to near-term depletion of liquidity is negligible, due to the high level of liquidity across the banking system, supported by banks’ continued cautious stance to lending. The report notes that credit unions remained the second largest group of deposit-taking and loan-granting institutions. During the year, the prudential buffers of credit unions remained below those of the banks, with scope for further strengthening. Accordingly, the Central Bank of The Bahamas decided to increase its target for the financial performance of credit unions, with heightened risk-based oversight. An important safety net for the sector is the proposed near to medium-term enrollment of credit unions in the deposit insurance fund.
The domestic financial system remains sound, both in its current assessment and the outlook. For its part, the Central Bank of The Bahamas will continue to pursue policies and reforms aimed at mitigating the potential risks to supervised institutions and strengthening the regulatory environment. Focus will be maintained on the roll-out of the Basel II and III frameworks for banks and trust companies, while strengthening the risk and governance systems of credit unions. Progress has been noted on the capital component of the Basel II regime, with importance being placed on the internal capital adequacy assessment process (ICAAP) of licensees and revisions to the guide on the "Ladder of Supervisory Intervention." 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 overall goal of the central bank is to maintain a sound and compliant financial sector, ensuring that prudent risk management practices are in place and economic growth is sustained.
Keywords: Americas, Bahamas, Banking, Stress Testing, Credit Risk, Liquidity Risk, Interest Rate Risk, NPLs, Financial Stability, Regulatory Capital, ICAAP, Basel II, Basel III, D-SIBs, Central Bank of Bahamas
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