IMF published its staff report under the 2019 Article IV consultation with the Kingdom of the Netherlands—Aruba. IMF Directors highlighted that banks in the area remain sound and liquid under a solid supervisory and regulatory framework. Financial sector oversight has been progressing. Over the years, the Central Bank of Aruba (CBA) has shifted to a risk-based approach to supervision, from a compliance-oriented one, thus allocating supervisory resources to institutions with the highest risk profiles.
The staff report highlights that banks enjoy healthy profits and interest rate margins remain sizable, which reflect, in part, weak competition among banks. The capital adequacy ratio (CAR) of 32% is double the regulatory minimum and stress tests by CBA reveal high capital resilience to severe shocks. Banks have liquidity buffers that largely surpass the regulatory requirements, continued to see declining non-performing loans (NPLs), and set loan-to-value ratios on mortgages at safe levels. While a high CAR mitigates financial-sector risks, it could indicate anemic demand or lack of viable business project; this is reinforced by the fact that banks are flushed with excess liquidity and credit growth is relatively modest. Discussions with the authorities and stakeholders suggest that high CAR partly a result of a lack of bankable projects outside the tourism sector and also relates to the CBA's large exposures rule, which requires banks to maintain high capital buffers in case of large exposures to a single debtor or connected group of debtors. The upcoming results from the financial inclusion survey could shed more light on possible issues and policy solutions.
Related Link: Staff Report
Keywords: Europe, Netherlands, Aruba, Banking, NPLs, CAR, Financial Stability, Stress Testing, Capital Buffers, Article IV, IMF
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