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Fabio Di Vittorio, Delong Li, and Hanlei Yun

real GDP growth rates represent a good proxy for the realized loan returns. 12 Besides the 13 original loan sectors in Table 3 , ECCU banks also lend to households (in personal loans). We redistribute personal loans into the 12 final economic sectors proportionally using the share of sectoral GDP in total GDP as the weight. The implicit assumption is that households’ ability to pay back depends on their income coming from these 12 sectors. 13 Multinational banks have been combined to a consolidated account. 14 Scenarios include no control, only

International Monetary Fund

to the tourism, consumer durables, and construction sectors, private sector credit grew by 20 percent in 2007. By end-2008 credit growth had halved, in the context of tighter lending terms and conditions established by ECCU banks (particularly foreign-owned banks) and sluggish credit demand. As broad money growth decelerated amid the economic slowdown, both foreign and local banks relied on drawdowns of their net foreign assets to finance domestic credit provision. In particular, from September 2008 local banks picked up their pace of drawdown significantly, while

Fabio Di Vittorio, Delong Li, Hanlei Yun, and Mr. Trevor Serge Coleridge Alleyne

equity ratio act as reduced-form proxies for the bank and the regulators’ expected NPLs. After controlling for these two variables, the coefficient of concentration risk remains significant, indicating that ECCU banks can still improve risk management through loan-portfolio diversification. On the contrary, the deposit ratio is not very significant in explaining the NPL ratio. This result is not surprising given that deposits represent the main type of liabilities for the ECCU banks. Therefore, deposit ratio could be highly (but negatively) correlated with the equity

Fabio Di Vittorio, Delong Li, and Hanlei Yun
The paper focuses on the impact of diversification on bank performance and how consolidation through mergers and acquisitions (M&A) affects the banking sector’s stability in the Eastern Caribbean Currency Union (ECCU). The paper finds that a lower level of loan portfolio diversification explains higher non-performing loans and earnings volatility of indigenous banks, as compared to foreign competitors in the ECCU. We then simulate bank mergers both within and across ECCU countries by combining individual banks’ balance sheets. The simulation shows that a typical indigenous bank could better diversify against its idiosyncratic risk by merging with other banks across the border. In addition, we point out that M&A, leading to a more asymmetric banking sector, may increase systemic risk.
International Monetary Fund. Western Hemisphere Dept.

diligence costs and fees charged by correspondent banks have increased, but only partly passed onto customers, thereby reducing already low profitability. Moreover, clients considered risky, including money business services, were denied CBR services. Trade finance has been restricted in some countries and check clearing, particularly Eurocheque services, was discontinued in some cases due to increased transaction costs. ECCU Banks: Number of Foreign Nostro CBR Accounts (Number; selected surveyed banks) 1 Sources: IMF Survey of Caribbean Banks and

International Monetary Fund. Western Hemisphere Dept.

projects (large hotel projects are under consideration in Antigua and Barbuda, Grenada, and St. Vincent and the Grenadines) could significantly boost economic growth beyond current estimates. Box 1. ECCU: Risk Assessment Matrix (RAM) 1 Nature/Source of Main Risks Relative Likelihood Expected Impact Recommended Policy Response Persistent banking sector weaknesses . ECCU banks continue to report low profitability, limited capitalization, and high levels of NPLs. High Medium Require banks to increase capital

International Monetary Fund
This Selected Issues paper on the Eastern Caribbean Currency Union (ECCU) underlies key features of business cycles. To obtain new measures of classical and growth cycles, simple rules were applied to date turning points in the classical business cycle, and a recently developed frequency domain filter was used to estimate the growth cycle. At the regional level, the ECCU countries are facing two shocks, i.e., the depreciation of the U.S. dollar and the depreciation of the Dominican Republic’s peso. The countries of the ECCU have experienced modest erosion in their price and nonprice competitiveness.
Mr. Balazs Csonto, Mr. Alejandro D Guerson, Ms. Alla Myrvoda, and Emefa Sewordor
This paper applies network analysis to assess the extent of systemic vulnerabilities in the ECCU banking system. It includes two sets of illustrative stress tests. First, solvency and liquidity shocks to each individual bank and the impact on other banks in the network through their biltareal net asset exposures. Second, country and region-wide tail shocks to GDP affecting capital and liquidity of all banks in the shocked jurisdictions, followed by the rippling effects through the regional network. The results identify systemic institutions that merit hightened attention by the regulator, as determined by the degree of connectivity with the rest of the system, and the extent to which they are vulnerable to the failure of other banks.
International Monetary Fund. Western Hemisphere Dept.

digital currency that bears interest and can be used for a relatively large amount of transactions and be allowed to hold a sizable amount for saving purposes could attract many users, due to its convenience, speed, and cheapness. This approach could, however, expose banks to funding risk, since ECCU banks rely heavily on deposit funding (over 90 percent of total liabilities) and pay only negligible interest on demand deposits (about 0–0.1 percent). Absent deposit insurance, a central bank digital currency would directly compete with bank deposits (see Box 2 ). There

Fabio Di Vittorio, Delong Li, and Hanlei Yun