Barbados financial system demonstrating resilience according to Central Bank report

BRIDGETOWN, Barbados, Monday March 9, 2015, CMC – The Central Bank of Barbados (CBB) says the island’s financial system continued to demonstrate resilience in spite of challenging economic conditions.

In its 2014 Financial Stability Report released here, the CBB said that over the course of the 12 months ending September 2014, most deposit-taking entities including banks, trust companies and finance houses as well as insurance firms faced low demand for major financial products by the private sector. “Consequently, growth was weak and in some instances, entities recorded a contraction on their balance sheets,” the CBB said, noting that for the banks, loan growth was driven by one particular loan to Government, as well as mortgage lending in the personal sector.

“However, this increased exposure to Government was offset by a reduction in the banking systems’ holdings of Government securities, both longer dated debentures and short-term treasury bills. In addition, while several of the larger hotel loans that had proven problematic were resolved, this improvement was more than offset by a notable expansion in loan losses associated with the personal sector.

“Consequently, bank profitability was down by nearly one-quarter as banks made allowances for losses on a larger proportion of their loan portfolio. Weak profitability also spurred some banks to focus on restructuring in order to meet profitability goals, a strategy which has also been replicated in several of the Canadian parent banks.”

The CBB said that like banks, the deposit-taking finance houses and trust companies also struggled to generate growth; while isolated firms recorded some success, loans were marginally lower than a year ago.

“Furthermore, loss provisions were higher than a year earlier although non-performing loans (NPLs)showed an improvement over the period. In contrast, credit unions registered significantly higher lending to their membership, even as their client base continued to be impacted by rising unemployment and a sluggish domestic economy.

“However, the portfolio of non-performing loans held by the credit unions continued to climb, especially those categorized in the most severe “default” category. The Financial Service Commission (FSC) has estimated that the insurance sector’s assets fell by two percent in 2014.”

The insurance entities also reduced their holding of Barbados’ government-issued domestic debt up to the end of September 2014.

The CBB said the financial stability indicators and stress tests performed for the financial system strongly suggest that the system remains stable and able to withstand a wide variety of severe economic shocks.

“This may be attributed to the simplicity of the business models employed, strong parent companies, the accumulation of robust capital buffers and – in the case of the insurance industry – the presence of substantial reinsurance assets.

“This approach of focusing on simple banking models and traditional insurance products is currently being promoted by international regulators who have argued that the resilience of international banks needs to be increased by reducing the risk associated with wholesale funding and proprietary trading.”

The CBB said linkages in the financial system also have the potential to be a major source of systemic vulnerability, particularly through intercompany exposures, and these potential contagion effects were also considered. In addition to contagion risk, liquidity risks as well as insurance-related risk were also carefully examined in the report.

The Central bank said that following the publication of the International Monetary Fund (IMF) Financial Sector Assessment Programme in February 2014, policy makers have continued their efforts to improve the management of the sector, in terms of revisions to guidelines by both the Central Bank and the Financial Services Commission.

It said among the areas addressed were internal capital adequacy assessment, the standardized approach to credit risk, and the measurement of operational risk.

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