Chapter 10. Financial Interconnectedness in the Caribbean: Challenges for Financial Stability

Krishna Srinivasan, Inci Otker, Uma Ramakrishnan, and Trevor Alleyne
Published Date:
November 2017
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Elie Canetti, Kimberly Beaton, Qiaoe Chen, Fabio Di Vittorio, Udi Rosenhand and Kalin Tintchev 


The global financial crisis of 2008–09 and, in the Caribbean, the crisis stemming from the collapse of Trinidad and Tobago–based CL Financial Group in 2009, raised awareness of risks to financial stability from financial interconnectedness. Even though interconnectedness can promote international risk sharing, competition, and efficiency (Claessens and others 2010), it can also spread adverse shocks in unexpected directions, and sometimes in an unexpectedly virulent manner (Kaminsky and Reinhart 2000). For instance, when CL Financial Group, which had assets of US$16 billion at the end of 2007 (about 30 percent of the Caribbean’s regional GDP), collapsed, the adverse impact spilled over to all the Caribbean Community and Common Market (CARICOM) member states except Jamaica and Haiti, with claims on CL Financial as high as 17 percent of GDP in the Eastern Caribbean Currency Union (ECCU).1

Against this backdrop, the IMF launched the Caribbean Regional Financial Project (CRFP) in 2013 to gain a better understanding of financial interconnectedness in the region to determine the level of resilience of the regional financial system to financial and macroeconomic shocks (Box 10.1). Central to achieving these aims was the collection of unique data on financial exposures among banks, insurers, and sovereigns in the Caribbean, which facilitated the mapping of financial interconnections and simulations to assess financial spillovers. This chapter lays out the key findings of the CRFP exercise, including a granular assessment of the vulnerabilities in the financial system based on network simulations and policies that could help improve both national and regional financial regulation and supervision.

Box 10.1.The Caribbean Regional Financial Project

As part of a regional effort to strengthen financial stability following the CL Financial crisis, central bank governors in Caribbean Community (CARICOM) requested IMF assistance to develop a better understanding of the interconnections within the Caribbean financial system as one element of the region’s broad effort to strengthen regional financial surveillance. An agreement between CARICOM governors and the IMF in May 2013 launched the Caribbean Regional Financial Project (CRFP) with the following objectives:

  • To identify factors creating financial stability risks due to interconnections involving ownership, common funding, and exposures to regional sovereigns and firms
  • To assess the resilience of the regional financial system to key macroeconomic shocks
  • To strengthen the current policies and practices of the financial stability framework, including regional supervision and crisis management and resolution

To achieve these objectives, data on the exposures of jurisdictions’ bank and insurance sectors to each other and to Caribbean sovereigns were collected to map financial interconnections and assess the potential for spillovers across the regional financial system. The financial systems examined covered the banking systems of The Bahamas, Barbados, Belize, the Eastern Caribbean Currency Union (ECCU), Guyana, Jamaica, Suriname, and Trinidad and Tobago as well as the insurance sectors of Barbados, Belize, Guyana, Jamaica, Suriname, and Trinidad and Tobago. For ECCU banking systems, aggregate data for the ECCU as a whole were used.

The final results were presented at the CARICOM governors’ meeting in November 2015. The interconnectedness maps were presented in the first Caribbean Regional Financial Stability Report (Caribbean Center for Money and Finance 2016). The results of the network simulations are presented in this chapter.

The first section provides an overview of the Caribbean financial system, followed by a discussion in the second section of financial integration in the region based on a mapping and risk analysis. Based on this analysis, the third section contains a discussion of the priorities for financial regulation and supervision for the Caribbean region.

The Caribbean Financial System: an Overview

The Caribbean financial system has undergone significant development over the past few decades, shaped by the region’s desire to achieve closer financial integration. In 2001, the Revised Treaty of Chaguaramas established the Caribbean Single Market and Economy and required the removal of restrictions on the provision of banking, insurance, and financial services as well as the free movement of capital across national borders.2 Moreover, CARICOM continues to work toward integration of capital markets as an explicit objective of its drive to create a common economic space. Closer financial integration has shaped recent developments in the Caribbean financial system, as evidenced by the fallout from the failure of a large regional insurer, CLICO (part of CL Financial Group), and has presented new challenges with the emergence of large and complex financial institutions.

Caribbean financial sectors are large relative to the size of their economies and are dominated by banks (Figure 10.1; Annex 10.1). Commercial banks account for the largest share of financial system assets, and The Bahamas and Barbados have significant offshore banking sectors.3 The nonbank financial sector is also prominent in some of the larger economies in the region. In Jamaica, securities firms have assets under management of about 30 percent of GDP, while insurance companies are sizable in Barbados, Trinidad and Tobago, and, to a lesser extent, Jamaica and The Bahamas. Financial conglomerates have an important presence in the region: many nonbank financial institutions are subsidiaries or affiliates of commercial banks. The Caribbean also has one of the highest credit union penetration ratios (measured as the ratio of membership to total population) in the world, at about five times the world average, although these institutions represent only about 6 percent of total financial system assets.4

Figure 10.1.Financial Sector Assets

(Percent of GDP)

Sources: Country authorities (latest available); and IMF staff estimates.

Note: ECCU = Eastern Caribbean Currency Union. Data labels in figure use International Organization for Standardization (ISO) country codes.

Foreign banks, notably from Canada, play an important role in the region’s banking system (Figure 10.2). Some 60 percent of the region’s total banking system assets are held by foreign banks.5 These banks are primarily Canadian owned, with three Canadian banking groups accounting for about 45 percent of the region’s total banking system assets.6 Close business and financial links between Trinidad and Tobago and the broader Caribbean have also encouraged the cross-border expansion of Republic Bank, its largest indigenous bank, while First Citizens Bank of Trinidad and Tobago and the Eastern Caribbean Financial Holding Company (ECFH) in St. Lucia also have cross-border exposures within the Caribbean.7,8 These banks are also interconnected: Republic Bank holds close to a 20 percent ownership stake in ECFH. Barbados, as the regional headquarters for the Canadian banks operating in the eastern Caribbean, and Trinidad and Tobago, site of the largest Caribbean bank with cross-border exposures, have emerged as banking hubs for the region.9

Figure 10.2.Foreign-Owned Banks’ Market Shares

(Percent of banking assets, 2014)

Sources: Bankscope; banks’ annual reports; country authorities; and IMF staff estimates.

Note: Data labels in figure use International Organization for Standardization (ISO) country codes.

Regional financial conglomerates dominate the Caribbean insurance sector. Sagicor Financial Corporation, headquartered in Bermuda since 2016 (but a Barbadian conglomerate when the analysis for this chapter was conducted), has the largest insurance network in the region, with subsidiaries in eight Caribbean countries.10 As of the end of 2016, Sagicor had US$6.5 billion in assets. Guardian Group, headquartered in Trinidad and Tobago, is the second-largest insurer in the region with operations in nine Caribbean countries.11 As of the end of 2016, it had US$3.6 billion in assets. Following the collapse of CL Financial, the Caribbean insurance industry has become highly concentrated in these two financial conglomerates, with their combined assets equivalent to some two-thirds of the insurance sector’s total assets in the region.12

Regional financial conglomerates are also active in offering additional investment products. The region’s nonbank non-insurer financial institutions are primarily concentrated in Jamaica, where securities firms have flourished in recent years, and in Trinidad and Tobago, where mutual funds manage assets in excess of bank deposits. Assets under management of Jamaican securities firms comprised about 30 percent of Jamaican GDP in 2016, of which some 55 percent were government bonds. The growth is mainly based on the repo business—short-term borrowing from households through hold-in-custody repurchase arrangements to fund investments in long-term government bonds. Securities dealers thus have significant exposure to government risk. The nature of dealers’ profitability, generated by the interest differential between short- and long-term rates, also makes the sector vulnerable to interest rate and rollover risk.13 The Jamaican authorities are undertaking regulatory reforms to address risks in this sector. In Trinidad and Tobago, the rapid growth of the collective investment scheme industry has been driven by attractive returns relative to bank deposits. Many of these nonbank financial intermediaries, particularly the region’s largest mutual funds, are affiliated with banks.

Caribbean capital markets remain in the early stages of development. Although stock exchanges exist throughout most of the region, the number of listed companies and market capitalization of most exchanges remain limited, and most markets are fairly illiquid. Similarly, bond markets are underdeveloped and dominated by government securities, with limited corporate issuance and secondary market activity.

Financial Integration in the Caribbean: Mapping and Risk Analysis

The interconnections in the Caribbean financial system have the potential to transmit financial and economic shocks throughout the region. This section examines cross-border exposures across the region’s financial sectors and with the global financial system, drawing on the June 2013 data set collected for the CRFP. Network maps are used to provide a visual representation of these exposures, while the resilience of the regional financial system to financial and economic shocks and the potential for cross-country spillovers are assessed with network simulations. The analysis is conducted for both banks and insurers, consistent with the CRFP data set (see Box 10.2).

Direct Exposures

The Caribbean financial sector is highly interconnected, both within the region and with global institutions and markets. The data collected for the CRFP showed that Caribbean banks’ cross-border claims in aggregate (including their exposures to sovereigns, banks, and insurers) were large, representing, on average, 12 percent of total assets (Figure 10.3).

Caribbean banks reported significant claims on global banks, mostly in the form of deposits, likely because of the dominant presence of Canadian banking groups (Figure 10.4). Banks’ cross-border claims within the Caribbean were less important.14 The exception was Barbados, which had significant deposits in ECCU banks, reflecting that country’s importance as a banking hub for the ECCU. Banks’ cross-border claims on sovereigns represented a relatively small share of total assets and were primarily concentrated in the larger sovereigns of the region, although Barbadian banks were also heavily exposed to ECCU sovereigns (Figure 10.5). Only Trinidad and Tobago had significant claims on global sovereigns, with about 4 percent of their reported assets held in the form of claims on the United States.15 Banks’ reported cross-border claims on insurers were negligible, well under 1 percent of their total assets in all cases.

Figure 10.3.Banks’ Claims on Sovereigns, Banks, and Insurers

(Percent of total assets)

Sources: Country authorities; and IMF staff calculations.

Note: ECCU = Eastern Caribbean Currency Union. Excludes claims on nonfinancial private sector. Data labels in figure use International Organization for Standardization (ISO) country codes.

Figure 10.4.Banks’ Claims on Banks

(Percent of total assets)

Sources: Country authorities; and IMF staff calculations.

Note: ECCU = Eastern Caribbean Currency Union. Data labels in figure use International Organization for Standardization (ISO) country codes.

Figure 10.5.Banks’ Claims on Sovereigns

(Percent of total assets)

Sources: Country authorities; and IMF staff calculations.

Note: ECCU = Eastern Caribbean Currency Union. Excludes claims on nonfinancial private sector. Data labels in figure use International Organization for Standardization (ISO) country codes.

Box 10.2.The Caribbean Regional Financial Project Data Template

Designing the Caribbean Regional Financial Project data template required addressing issues regarding the level of aggregation, the perimeter of coverage, “data crossings,” and the risk concept to be used.

Level of Aggregation. The ideal level of aggregation is institution to institution. Given nonlinearities in financial contagion episodes (for example, because of feedback effects), financial stresses, particularly in highly connected individual institutions, may lead to broad financial crises even when (in aggregate) a financial sector may appear sound. In addition, stress tests on aggregate data require implausibly large shocks to make an entire financial sector insolvent. Finally, the greater granularity of individual institution data allows for a more accurate tracing of potential contagion paths, thereby serving as a more specific guide to where financial supervisors should require buffers or erect firewalls. Nonetheless, concerns that legal obstacles to information sharing could not be quickly overcome led to the decision to collect data at the aggregate sectoral level in this pilot project. Considering this decision, participants were instructed that exposures should be classified by the country of incorporation of the entity on which the exposure exists (if known). Thus, exposures to a branch or office of a financial institution should be classified under the country of the incorporated parent.

Perimeter of Coverage. The perimeter of coverage required two separate decisions. The first decision was from which institutions would data be collected; the second was on which institutions and sectors would data be collected (since, for example, one could gather information on connections between banks and securities firms by collecting data just from banks). Because complete exposure data can only be collected from the institutions to be surveyed, those institutions (in aggregate form) would end up forming the “nodes” of the network, in effect, the units of analysis. However, from those nodes, one could then collect information on exposures vis-à-vis other sectors. In the end, cost-benefit considerations dictated surveying only banks and insurance companies. In selected jurisdictions, some nonbank financial institutions (in Jamaica, for example) or credit unions (for instance, in the Eastern Caribbean Currency Union) could conceivably be of systemic importance, at least within that jurisdiction, but the cost of comprehensive data collection from the large number of such institutions suggested that the benefits of perhaps uncovering systemically connected institutions were unlikely to be worth the undertaking. Thus, data were collected only from banks and insurers, but among the information collected were their exposures to credit unions, to other nonbank financial institutions, to sovereigns, and to central banks. To construct economic stress tests, data were also collected on exposures to economic sectors including tourism, oil and energy, construction, real estate (residential and commercial), households, and offshore banks.

Data Crossings. Every datum in a financial context is inherently multidimensional. Connected with any specific exposure is a currency of denomination, a maturity, a nationality and sector of the counterparty, and the type of instrument (for example, bond, equity, loan, deposit). To be sure, richer experiments can be conducted on data the more multidimensional they are. For instance, one could model currency shocks, or shocks to risk appetite, that affect the demand for equities or equities and bonds, but not deposits. However, the more data “crossings” that are collected, the exponentially more costly it is to collect. For instance, a five-way crossing with x categories in each (for example, x currencies or x maturity buckets) would require x5 separate data entries per node. Accordingly, it was decided to confine data crossings, for the most part, to sector and country. Maturity information was collected only on holdings of government maturities (short term of less than one year versus maturities of greater than one year). In addition, for exposures to economic sectors, it proved difficult for banks and insurers to identify the nationality of the exposure, so in the end, most sectoral exposure data (except to governments) were collected on a global rather than a country- or region-specific basis.

Risk Transfers. In principle, one can try to collect data on a “final risk” basis. This concept takes into account that an exposure on a balance sheet may have been transferred elsewhere via collateral, reinsurance, or some form of hedge, whether via a third-party guarantee or derivative. There are conceptual and practical problems in collecting data on a final risk basis, including that the risk transfer may be contingent (for derivative hedges, although derivatives markets are virtually nonexistent in the Caribbean) and that valuing collateral can be challenging, especially for collateral such as real estate that had become fairly illiquid in many Caribbean jurisdictions. Hence, only data on government guarantees were collected.

Caribbean banks’ credit portfolios were concentrated in real estate and household loans. Residential and commercial real estate loans accounted for, on average, about 40 percent of total credit, and loans to households for 25 percent. Lending for tourism and construction stood at 20 percent of total loans. In several banking systems, holdings of government bonds (including domestic sovereign bonds) exceeded 100 percent of their capital. Caribbean sovereign exposure as a percentage of bank capital was especially large in Barbados, Jamaica, and the ECCU.

Banks were generally well capitalized, with most banking systems in the region having had risk-weighted capital adequacy ratios in excess of 15 percent (see Table 10.1); nonperforming loans were elevated, averaging 18 percent of total loans in the ECCU, and ranging between 12 percent and 16 percent in The Bahamas, Barbados, and Belize at the end of 2013.16

Table 10.1.Economic Scenario Results: Domestic Impact(Percent; postshock CARs below 8 percent are bolded)
BarbadosBelizeECCUGuyanaJamaicaSurinameThe BahamasTrinidad and Tobago
Initial CAR118.723.510.528.915.411.931.328.0
Postshock CARs
Shocks to Total Credit Portfolio
Loss rate of 2.5 percent of total loans16.
Loss rate of 5 percent of total loans13.719.23.525.811.18.126.624.4
Sovereign Shock
5 percent haircut15.822.
10 percent haircut13.020.77.923.
20 percent haircut7.317.95.318.03.010.425.315.5
30 percent haircut1.615.12.712.5−3.19.622.39.2
Tourism Shock
Loss rate of 5 percent of total loans18.123.29.728.915.111.731.228.0
Loss rate of 10 percent of total loans17.522.98.928.814.711.631.027.9
Loss rate of 15 percent of total loans16.922.58.128.714.411.530.827.9
Construction Shock
Loss rate of 5 percent of total loans18.321.89.928.715.111.331.327.8
Loss rate of 10 percent of total loans17.920.09.228.414.810.831.227.5
Loss rate of 15 percent of total loans17.518.38.628.214.410.231.127.2
Real Estate Shock
Loss rate of 5 percent of total loans16.622.87.426.814.110.529.127.0
Loss rate of 10 percent of total loans14.522.14.324.712.89.126.925.9
Loss rate of 15 percent of total loans12.421.41.222.511.57.724.624.8
Household Lending Shock
Loss rate of 5 percent of total loans16.922.28.628.313.711.129.327.9
Loss rate of 10 percent of total loans15.120.96.727.711.910.327.227.7
Loss rate of 15 percent of total loans13.219.64.827.010.29.525.127.5
Energy Sector Shock
Loss rate of 5 percent of total loans18.623.410.428.915.311.831.327.9
Loss rate of 10 percent of total loans18.623.410.428.915.211.731.327.7
Loss rate of 15 percent of total loans18.623.310.328.915.111.731.327.6
Simultaneous Shocks
Tourism and Construction Shocks
Loss rate of 5 percent of total loans17.721.49.128.614.811.231.127.7
Loss rate of 10 percent of total loans16.719.47.628.314.110.530.827.4
Loss rate of 15 percent of total loans15.717.
Tourism and Sovereign Shocks
Loss rate of 5 percent of total loans15.221.88.426.112.011.429.624.9
Loss rate of 10 percent of total loans11.820.16.323.38.610.928.021.7
Loss rate of 15 percent of total loans8.318.
Tourism, Construction, and Sovereign Shocks
Loss rate of 5 percent of total loans14.920.07.825.911.710.829.624.6
Loss rate of 10 percent of total loans11.
Loss rate of 15 percent of total loans7.213.12.319.74.28.726.117.7
Sources: National authorities; and IMF staff estimates.Note: CAR = capital adequacy ratio; ECCU = Eastern Caribbean Currency Union.

Risk-weighted CAR.

Sources: National authorities; and IMF staff estimates.Note: CAR = capital adequacy ratio; ECCU = Eastern Caribbean Currency Union.

Risk-weighted CAR.

Caribbean insurers appeared more interconnected than banks; their cross-border claims were considerably larger as a share of their total assets than were those of banks. However, given the smaller relative size of the insurance sector, insurers’ cross-border claims are smaller relative to the size of the economy (at only 5 percent of GDP) than those of banks. Given the presence of regional insurance conglomerates in Barbados and Trinidad and Tobago, cross-border claims of insurers in those countries represented a greater share of both economic activity and insurers’ assets than for other countries, and these claims, including both equity and deposit claims, were primarily concentrated within the Caribbean. Insurers in Barbados, Jamaica, and Trinidad and Tobago had significant exposure to other Caribbean sovereigns and, to a lesser extent, global sovereigns. By contrast, insurers’ cross-border claims on banks were negligible except in Barbados where they constituted about 5 percent of total assets. Insurers had significant cross-border claims on global insurers, primarily concentrated in Europe, presumably representing claims on reinsurers. Intra-Caribbean cross-border claims for insurers are small (except for Barbadian insurers). All Caribbean insurance sectors reported capitalization ratios well above 20 percent of total assets.

Network Maps

Indirect exposures magnify the interconnectedness in the Caribbean financial system. By also including indirect exposures, network analysis provides a more complete picture of interconnectedness than direct exposures alone. For instance, banking system A may be directly exposed to banking systems B and C. However, banking system A may also be indirectly exposed to banking system C through banking system B’s claims on banking system C. The value added of network analysis is that it considers all direct and indirect exposures.

Network maps provide a vivid visual description of the interconnections in the Caribbean financial system. A directional circular network of the Caribbean financial system (Figure 10.6) shows that financial connections were concentrated among only a subset of jurisdictions. Banks generally appear more highly interconnected than insurers, with the most significant connections being with their own sovereigns. In Figure 10.6, the thickness of the lines reflects the aggregate size of the exposures, which, since they are in nominal terms, will be larger for larger banking and insurance sectors. Banking systems in several countries stand out as fairly interconnected, while in some others, such as Belize, Haiti, and Suriname, they appear to have relatively few and small connections to the rest of the regional financial system. Within insurance, Barbados and Trinidad and Tobago stand out as the jurisdictions with the most interconnectedness, reflecting the presence of the regionally important insurers in those jurisdictions. Finally, among sovereigns, Barbados, Trinidad and Tobago, and the ECCU appear to be the sovereigns on which the most other nodes have claims, although claims on the Jamaican sovereign (from the Jamaican bank and insurance sectors) appear quantitatively large (as do the claims of Bahamian, Barbadian, and Trinidadian banks on their respective sovereigns).17

Figure 10.6.Cross-Sectoral Connections in the Caribbean Financial Sector: Circular Network View

Sources: Country authorities; and IMF staff calculations.

Note: Color of node (circle) represents the type of sector (bank, insurer, or sovereign) with the country of domicile identified by its International Organization for Standardization (ISO) country code. The area of each node represents the size of its total balance sheet (assets plus liabilities, except for sovereigns, for which the size is based on the reported claims of banks and insurers on each sovereign). Each line represents the balance sheet connection between two nodes, with the width reflective of the size of the connection (in nominal terms) and the direction indicating whether the connection is based on a claim (asset) or liability. The node from which the arrow emanates has a claim on the node to which the arrow points. In some cases, the size of the connection is too small for the directionality to be observed. Claims of sovereigns on banks and insurers are not included because they were not collected in the Caribbean Regional Financial Project data set.

The Trinidadian and Barbadian financial systems appear to be at the center of the Caribbean financial system. The map of the regional financial system using a centrality view (Figure 10.7) clearly indicates that some sectors are central to the Caribbean financial system, whereas others appear peripheral. The physical placement of each node on the network map (Figure 10.7) indicates its degree of interconnectivity and centrality to the system.18 Both the banking and insurance sectors of Barbados and Trinidad appear at the center of the system. The key sovereign connections are with Barbados, Jamaica, Trinidad and Tobago, and the ECCU, with the Bahamian sovereign appearing somewhat less central. The financial systems of Belize, Haiti, and Suriname are on the periphery, with Guyana in between, having few significant connections with insurers or the sovereign, but some significant interconnectedness of the Guyanese banking system. The map also reveals that bank-insurer and insurer-sovereign links are quantitatively important for Barbados, Jamaica, and Trinidad and Tobago. Overall, the network visualization is consistent with the structure of the regional financial system discussed in the previous section.

Figure 10.7.Cross-Sectoral Connections in the Caribbean Financial Sector: Centrality View

Sources: Country authorities; and IMF staff calculations.

Note: The color of the node (circle) represents the type of sector (bank, insurer, or sovereign) with the country of domicile identified by its International Organization for Standardization (ISO) country code. The placement of each node on the network map indicates its degree of interconnectivity and centrality to the system, with node position determined by the number of links it is attached to. Nodes with more links are placed toward the center. The area of each node represents the size of its total balance sheet (assets plus liabilities, except for sovereigns, for which the size is based on reported claims of banks and insurers on each sovereign). Each line represents the balance sheet connection between two nodes, with the width reflective of the size of the connection. Direction is indicated by following the connection in a clockwise direction (that is, following a node to the node to which it is connected in a clockwise direction indicates the claim is from the originating node to the destination node) and the direction indicating whether the connection is based on a claim (asset) or liability. Claims of sovereigns on banks and insurers are not included because they were not collected in the Caribbean Regional Financial Project data set.

Systemic Spillover Analysis

This section examines two broad types of shocks and assesses how the nature of interconnectedness found in the data can lead to spillovers through balance sheet connections. First, the analysis looks at shocks of a financial origin, ignoring the underlying economic cause of the shock to a particular financial sector. The exercise assumes that the capital of one national financial system at a time becomes significantly impaired, then traces the resultant impact on the broader regional financial system.19 Shocks to specific economic sectors at a Caribbean-wide level are then modeled, pursuant to the same methodology for assessing spillovers.

Financial Shocks


The CRFP’s simulations of spillovers aimed to gauge financial systems’ (banks and insurers) systemic importance within the Caribbean financial system as transmitters and recipients of spillovers. The systemic importance of each country’s banking and insurance sector was assessed based on its potential to trigger regional systemic spillovers.20 A financial system’s vulnerability to spillovers was defined as the frequency of inward spillovers received in the simulations. Both a financial system’s systemic importance and its vulnerability to spillovers are a function of its interconnectedness. Financial systems’ vulnerability to spillovers is also a function of its initial capital buffers.

The analysis separately and jointly examined solvency and liquidity shocks for both banking and insurance sectors. The methodology, building on Espinosa-Vega and Sole (2010), posits an initial default of a banking or insurance sector and then studies the resulting path of defaults of other banking or insurance sectors based on their interconnections. To be clear, this stylized exercise was done to judge the potential role of each banking system in a potential contagion crisis, and implies nothing about the probability of any individual banking system falling into crisis. Specifically, each national banking or insurance sector is modeled to default, by assumption, on 60 percent of its cross-border borrowing from other banking systems, and to fail to roll over its cross-border lending.21 On the solvency side, banking sectors that end up with capital shortfalls following the initial shock can trigger further rounds of spillovers if they lead to new capital shortfalls. The spillover path continues until no more banking sectors end up with capital shortfalls, at which point the simulation concludes and there are no more spillovers. On the liquidity side, the trigger institution is assumed to withdraw its funding of other institutions, thus forcing those institutions to sell assets at a loss. Those losses accrue to the affected institutions’ capital, thereby possibly setting off further spillovers.

Espinosa-Vega and Sole’s (2010) methodology was adapted for the aggregate country-level bank and insurance sector data included in the CRFP data set. Because it would be unrealistic to assume that the capital of an entire banking or insurance sector would become negative, even in a systemic crisis, a systemic crisis and a systemic financial spillover are modeled as a capital shortfall rather than a total loss of capital. For banks, solvency shocks use the Basel I hurdle rate of capital falling below 8 percent of risk-weighted assets; for insurers, solvency shocks use a hurdle rate of 8 percent of total assets to reflect insurers’ large holdings of zero-risk-weighted government assets.

The use of aggregate data may mask individual problem institutions and it also constrained this analysis of the dynamics of systemic crises because, for instance, the analysis is not able to assess the extent to which an individual institution could have a large, nonlinear impact on the overall financial system. The use of aggregate country-level data also prevented more granular analysis of the sources and paths of contagion. Some additional caveats are in order. The analysis does not capture indirect ownership links, for example, institutions from different Caribbean countries owned by a common foreign entity. In addition, data were not collected directly from nonbank non-insurance financial institutions, so any systemic risks associated with such institutions could only be assumed, not modeled. Critically, the spillover analysis captured only shock propagation through financial links and would miss any purely panic-driven contagion. Finally, there were significant internal and cross-jurisdiction inconsistencies and gaps in countries’ submissions.

Once a financial sector’s capital ratio falls below the assumed 8 percent threshold, subsequent spillovers depend on the capital shortfall of the affected financial system. The exercise assumed that a financial system would incur losses of 20 percent of its cross-border lending to a borrower banking system if the capital adequacy ratio (CAR) of the borrower falls to the 6–8 percent range. The loss rate increases to 40 percent if its CAR drops to 4–6 percent and to 60 percent if its CAR falls below 4 percent. Since these figures are at the system level, the declines in capital can be thought of as mapping to a smaller or larger number of individual financial institution defaults within the system. For liquidity shocks, the analysis assumes that financial systems with CARs of less than 4 percent would fail to roll over cross-border lending. To raise additional funding to offset the shock, borrowers are assumed to liquidate an equivalent amount of assets at a loss rate of 35 percent. These loss rates were determined based on stress-testing practices in Financial Sector Assessment Programs and expert judgment and are considered severe but plausible shocks.

The risk of regional financial spillovers depends on financial systems’ interconnectedness and capital buffers. Financial systems with large debts to multiple countries are more likely to cause spillovers when they experience capital shortfalls. In addition, systems with exposures that are significant relative to capital are more susceptible to spillovers. For banks, the ratio of cross-border lending to the lender’s capital, which helps detect vulnerability to solvency (credit) spillovers, and the ratio of cross-border liabilities to borrower’s capital, which helps detect susceptibility to liquidity (funding) spillovers, provide a preliminary indication of sources of vulnerability and spillovers in the regional financial system. Figure 10.8 shows such lending and funding concentrations in excess of 15 percent of either the lender’s or borrower’s capital. By these measures, Barbados and the ECCU appear most susceptible to solvency and liquidity spillovers.22

Figure 10.8.Large Interbank Lending and Funding Concentrations

Sources: National authorities; and IMF staff estimates.

Note: Blue arrows indicate deposits, red arrows indicate loans, green arrows indicate equity stakes. Arrows point from lender to borrower. ECCU = Eastern Caribbean Currency Union.


Cross-border bank-induced spillovers. The network simulations confirmed the systemic importance of the banking systems of Barbados, Trinidad and Tobago, and the ECCU within the Caribbean financial system. A systemic banking crisis in Trinidad and Tobago triggers a spillover to the ECCU, which, in turn, triggers a spillover to Barbados (Figure 10.9). Systemic banking crises in the ECCU and Barbados trigger spillovers to each other. The high capital ratio of Trinidad and Tobago’s banking system leaves it in a relatively strong position and able to buffer shocks and also mitigates its importance as a channel through which indirect spillovers could take place.

Figure 10.9.Direct and Indirect Cross-Border Bank Spillovers

Sources: National authorities; and IMF staff estimates.

Note: ECCU = Eastern Caribbean Currency Union.

The solvency channel dominates as a spillover channel. Both the ECCU’s and Barbados’ banking systems are susceptible to solvency spillovers because of their large asset exposures to one another (partly in the form of deposits). Liquidity spillovers affect mainly the ECCU because of its large reliance on Barbados for funding. Isolated solvency and liquidity shocks from Trinidad and Tobago to the ECCU appear insufficient to trigger further rounds of spillovers. However, when such a liquidity shock is combined with a simultaneous solvency shock to the Trinidad and Tobago banking system, the impact on the ECCU’s banking system is sufficiently large to cause a further spillover to Barbados.

Cross-border insurer-induced spillovers. Network analysis suggested that cross-border vulnerabilities due to balance sheet interconnections among insurers and between banks and insurers were limited, despite the dominance of regional conglomerates in the Caribbean insurance sector, because of the relatively strong reported capital ratios of insurers. For example, although a shock to Jamaica’s insurance sector could be expected to propagate to Barbados’ insurance sector via Sagicor’s presence in both countries, Barbados’ insurance sector’s reported capital ratio was strong enough to buffer the simulated shock and remain above 8 percent.

Domestic spillovers between banking and insurance sectors. As might be expected, given significant connections between banks and insurers within most Caribbean countries, there were several countries in which a systemic banking or insurance crisis would be expected to propagate to the other segment of the domestic financial system. Results of the network analysis suggest that systemic banking crises in Belize and Suriname would cause capital shortfalls of their own insurance sectors. In the other direction, a systemic crisis in Suriname’s insurance sector was found to cause a capital shortfall in Suriname’s banking system, likely resulting from ownership linkages between a bank and an insurer.

Economic Shocks


This section simulates a variety of economic shocks to gauge their direct impact on individual Caribbean financial systems as well as the scope for second-round spillovers on other financial sectors through regional financial links. The economic scenarios modeled include shocks to tourism, construction, real estate, households, the energy sector, and sovereigns. The shocks are assumed to be common to all countries in the region since Caribbean economies exhibit co-movement in economic and fiscal performance attributable to, for instance, common exposures to tourism, a narrow set of commodities, or both.

The economic scenarios are modeled in two stages. The first stage simulates the direct impact of each economic sectoral shock (including to sovereigns) on banks, and, given insurance companies’ small exposures to other economic sectors, sovereign shocks only to insurers. The economic shocks are mapped into each banking system’s loans to that particular sector using varying assumptions for sectoral loan loss rates.23 The analysis also examines region-wide shocks on banks’ total loan portfolios. The second stage assesses potential second-round spillovers to other banking and insurance sectors based on the network analysis methodology described above for direct financial spillovers. Given that the investigation models shocks as common to the whole region, it is, of course, possible for an economic shock to affect more than one sector (for instance, a tourism shock could affect multiple tourism-dependent banking sectors simultaneously), so that all the affected systems then act as a common trigger for the second-round impacts.

This additional element of the analysis provides several advantages. First, it links initial triggers to country-specific sectoral exposures and initial capital buffers. Second, by applying common shocks to the whole region, it can identify Caribbean-wide vulnerabilities. Third, the application of several sectoral shocks simultaneously allows the effects of possible interdependencies among sectors to be captured.

Both single- and multisector economic shocks are modeled. As with the financial shocks modeled above, the modeling of economic shocks implies nothing about the likelihood of such shocks materializing.

Single-sector shocks. Shocks to total loans and to the tourism, construction, real estate, household, and energy sectors were considered with loss rates (that is, defaulted loans multiplied by the “loss-given-default” rate) of 2.5 percent and 5 percent of total loans and loss rates of 5, 10, and 15 percent of sectoral loans. The analysis also considers risks from potential sovereign distress, given some Caribbean countries’ high public debt and history of debt restructurings. A sharp increase in sovereign distress across the region is assumed, leading to simultaneous and uniform haircuts on Caribbean government debt. Haircuts of various magnitudes (5, 10, 20, and 30 percent of the face value of sovereign debt) are applied, and the resulting losses are deducted from banking system capital.24

Multisector shocks. Some sectors, notably tourism and construction, are strongly correlated. Given Caribbean economies’ limited diversification, fiscal performance would also be correlated with key sectors (for example, tourism and commodities). Thus, multi-shock scenarios were modeled to focus on risks from such cross-sectoral correlations. Specifically, simultaneous shocks are applied to (1) tourism and construction, (2) tourism and sovereigns, and (3) a joint shock to tourism, construction, and sovereigns.25


Domestic impact. The results of the economic scenario analysis suggest that at moderate levels of stress, the Caribbean banking systems were largely resilient to the economic and sovereign shocks, reflecting their robust capital buffers. Indeed, losses of up to 10 percent of sectoral exposures and 2.5 percent of total credit would not have significantly undermined the capital adequacy of most banking systems in the region (Table 10.1). However, the ECCU was vulnerable to shocks to total loans (loss rates of 2.5 percent and above), sovereign exposures (haircuts of 10 percent and above), real estate lending (loss rate of 5 percent), household lending and joint shocks to tourism and construction (loss rates of 10 percent and above), and tourism, construction and sovereign exposure (loss rate of 5 percent and above) reflecting that its banking system CAR, though higher than the conventional 8 percent threshold, was weaker than that of other Caribbean banking systems (Figures 10.1010.12).26

Figure 10.10.Shocks to Total Credit

Sources: National authorities; and IMF staff estimates.

Note: Each spoke represents a Caribbean banking system’s capital adequacy ratio (CAR), with the CAR increasing as the line moves farther out from the center. The solid blue line indicates initial CAR, the black dotted line is CAR after the domestic shock, and the yellow line represents the cumulative effect of the domestic shock and any inward spillovers. The red dotted line shows the Basel capital threshold. ECCU = Eastern Caribbean Currency Union.

Figure 10.11.Sovereign Haircuts

Sources: National authorities; and IMF staff estimates.

Note: Each spoke represents a Caribbean banking system’s capital adequacy ratio (CAR), with the CAR increasing as the line moves farther out from the center. The solid blue line indicates initial CAR, the black dotted line is CAR after the domestic shock, and the yellow line represents the cumulative effect of the domestic shock and any inward spillovers. The red dotted line shows the Basel capital threshold. ECCU = Eastern Caribbean Currency Union.

Figure 10.12.Shocks to Real Estate and Household Loans

Sources: National authorities; and IMF staff estimates.

Note: Each spoke represents a Caribbean banking system’s capital adequacy ratio (CAR), with the CAR increasing as the line moves farther out from the center. The solid blue line indicates initial CAR, the black dotted line is CAR after the domestic shock, and the yellow line represents the cumulative effect of the domestic shock and any inward spillovers. The red dotted line shows the Basel capital threshold. ECCU = Eastern Caribbean Currency Union.

Broader banking sector fragilities emerged at higher levels of stress. A sovereign haircut of 20 percent would have pushed Barbados, Jamaica, and the ECCU below the 8 percent CAR benchmark. Jamaica’s CAR would also have approached 8 percent in the event of a sovereign haircut of 10 percent, if combined with a 10 percent loss on tourism and construction loans. Losses of 15 percent of real estate loans would drive Suriname’s CAR slightly below 8 percent.

Cross-border spillovers. In the regional economic scenarios, second-round cross-border spillovers occur mainly from the ECCU to Barbados. This spillover pattern prevails because the ECCU emerges as the main trigger of spillovers in most economic scenarios given its relatively lower capital buffers, and because of its large interconnections with Barbados.27,28

Sovereign Risk Scenarios for Insurers

The results of the sovereign scenario analysis for insurers indicate that Caribbean insurance sectors were resilient overall to large sovereign haircuts. Most Caribbean insurance sectors can withstand sovereign haircuts of 20 to 30 percent and remain above the 8 percent CAR threshold (Figure 10.13). Nevertheless, Jamaican insurers would have fallen below this benchmark after a sovereign haircut of 20 percent. A shock to Jamaica’s insurance sector could spill over to Barbados’ insurance sector through Sagicor’s presence in both Barbados and Jamaica.

Figure 10.13.Single-Sector Shocks: Impact on Insurance Sector CAR

(Domestic impact)

Sources: National authorities; and IMF staff estimates.

Note: CAR = capital adequacy ratio.

Priorities for Financial Sector Regulation and Supervision in the Caribbean

Strong ex ante regulation and supervision of the financial sector, combined with adequate financial safety nets and crisis management frameworks, are needed to safeguard stability of the Caribbean financial system. Against the backdrop of the region’s integrated financial system with regionally active financial conglomerates and significant presence of foreign banks, national efforts need to be complemented with regional and global cooperation on financial sector oversight.

The Caribbean has traditionally followed a decentralized institutional structure for financial sector oversight, with different supervisors for each segment of the financial system, but the region is increasingly moving toward an integrated structure to facilitate and strengthen oversight. Most countries have moved to either a single- or dual-supervisory approach, which, in the latter case, means having distinct bank and nonbank supervisors (Table 10.2). Given the importance of financial conglomerates in the regional financial system, centralized financial sector oversight can enhance financial stability by helping limit regulatory arbitrage (by reducing regulatory gaps and the coordination problems among multiple agencies) and helping optimize scarce supervisory resources in the region’s resource-constrained economies.

Table 10.2.Financial Sector Supervision in the Caribbean
Financial SupervisorBanksCredit UnionsInsurance CompaniesOther Nonbank Financial Institutions
BarbadosCentral Bank of BarbadosFinancial Services Commission (FSC)FSCFSC
BelizeCentral Bank of Belize (CBB)CBBCBBCBB
Eastern Caribbean Currency Union1Eastern Caribbean Central Bank (ECCB)n.a.n.a.n.a.
Antigua and BarbudaECCBFinancial Services Regulatory Commission (FSRC)FSRCFSRC
DominicaECCBFinancial Services Unit (FSU) of Ministry of FinanceFSUFSU
GrenadaECCBGrenada Authority for the Regulation of Financial Institutions (GARFIN)GARFINGARFIN
St. Kitts and NevisECCBFinancial Services Regulatory Commission (FSRC)FSRCFSRC
St. LuciaECCBFinancial Services Regulatory Authority (FSRA)FSRAFSRA
St. Vincent and the GrenadinesECCBFinancial Services Authority (FSA)FSAFSA
GuyanaBank of Guyana (BG)Ministry of LaborBGBG
HaitiCentral Bank of Haiti (Banque de la Republiqued’Haiti-BRH)BRHMinistry of Economy and FinanceUnregulated
JamaicaBank of Jamaica (BOJ)Department of Cooperatives and Friendly Societies of Ministry of Industry, Investment and CommerceFinancial Services Commission (FSC)FSC
SurinameCentral Bankof Suriname (CBvS)CBvSCBvSCBvS
The BahamasCentral Bank of The Bahamas (CBoB)CBoBInsurance Commission of The Bahamas (ICB)Securities Commission of The Bahamas (SCB)
Trinidad and TobagoCentral Bank of Trinidad and Tobago (CBTT)Cooperative Development Division of Ministry of Labour and Small and Micro Enterprise DevelopmentCBTTSecurities Exchange Commission and CBTT
Source: National authorities.Note: n.a. = not applicable.

Offshore and international banks within the Eastern Caribbean Currency Union are managed by their respective national authorities rather than by the Eastern Caribbean Central Bank.

Source: National authorities.Note: n.a. = not applicable.

Offshore and international banks within the Eastern Caribbean Currency Union are managed by their respective national authorities rather than by the Eastern Caribbean Central Bank.

Cross-Supervisor Cooperation and Coordination

Cross-supervisor coordination, both within and across countries, is at a nascent stage in the region and could be supported through financial stability committees. Although jurisdictions around the world are increasingly creating financial stability committees to assess financial stability risks and coordinate policy responses, such committees are in place in only a limited number of Caribbean countries, and their mandates are largely restricted to information exchange (Table 10.3).29 Expanding coordination across financial supervisors within countries is particularly important for effective oversight in the Caribbean context, given that oversight remains the responsibility of more than one agency in most countries. Coordination could be expanded to include the measurement of systemic risk and formulation of crisis prevention policies, including the conduct of macroprudential policies. Such coordination could help strengthen national policy responses to systemic risks and, by allocating a crisis resolution role to such committees, help ensure a well-coordinated and timely response to financial risks, particularly those emanating from the region’s financial conglomerates (IMF 2011a).30 Each supervisor’s role in crisis resolution should be clearly delineated and agreed to in advance, potentially through national crisis management plans formulated by the financial stability committees. See Box 10.3 for a summary of policy recommendations.

Table 10.3.Caribbean Domestic Financial Oversight Committees
CountryFinancial Sector Oversight CommitteeMandateEstablishedMemorandum of UnderstandingMembership
BarbadosFinancial Oversight and Management CommitteeTo manage the production of the annual Financial Stability Report, to collaborate in the monitoring of the financial system, and to respond to financial crises2013YesCentral Bank of Barbados, FSC
Eastern Caribbean Currency UnionRegional Oversight CommitteeForum for information exchange, to coordinate harmonization of financial sector regulation and supervision, and to coordinate responses to financial stability risks2009 (no longer active)NoEastern Caribbean Central Bank, Eastern Caribbean Securities Regulatory Commission, national regulatory agencies of all ECCU members
JamaicaFinancial Regulatory CouncilTo develop policies and strategies to facilitate greater coordination and increase information sharing between financial agencies, with a particular focus on crisis management2001YesBank of Jamaica (BOJ), FSC, Jamaica Deposit Insurance Corporation (JDIC), Ministry of Finance and Public Service (MOFP)
Financial System Stability CommitteeTo monitor trends in the financial system and in the risk taking of individual institutions and sectors with regard to systemic risk2016YesBOJ, FSC, JDIC, MOFP
The BahamasGroup of Financial Services RegulatorsTo facilitate information sharing and cooperation2002YesCentral Bank of The Bahamas (CBoB), Insurance Commission of The Bahamas (ICB), Securities Commission of The Bahamas (SCB), Inspector of Financial and Corporate Services
National Crisis Management Group2014NoCBoB, ICB, SCB
Trinidad and TobagoNational Crisis Management Group (proposed)To be determinedNoCentral Bank of Trinidad and Tobago, Ministry of Finance, Deposit Insurance Corporation, Trinidad and Tobago Securities and Exchange Commission
Source: National authorities.Note: ECCU = Eastern Caribbean Currency Union; FSC = Financial Services Commission.
Source: National authorities.Note: ECCU = Eastern Caribbean Currency Union; FSC = Financial Services Commission.

Financial stability committees should be supported with appropriate institutional and legal arrangements. Membership of the few existing such committees in the Caribbean is broadly appropriate, covering all major stakeholders, including central banks, financial supervisors, ministries of finance, and in some instances, deposit insurers.31 However, it may be helpful to identify a lead institution responsible for financial stability, as Jamaica has done with the Bank of Jamaica. The appropriate lead institution may differ across countries (Nier and others 2011), but in practice, most countries allocate this responsibility to either the central bank, given its typical expertise in risk assessment and incentives to mitigate systemic risk, or the ministry of finance, given its fiscal responsibilities and broader legal powers. With supervision still decentralized in most Caribbean countries, explicitly vesting a lead authority with the mandate and power to conduct macroprudential policy in response to financial stability risks may also facilitate timely and effective responses to emerging risks. Information exchange and coordination among committee members could also be institutionalized through memoranda of understanding (MOUs) as exist in some Caribbean countries. MOU could include mechanisms for cooperation in the event of a crisis, which may help prevent ex ante concerns about the legality of supervisory powers and, in the event of financial distress, facilitate a faster supervisory response (Nier and others 2011).

A regional financial sector oversight committee could complement financial sector oversight committees at the individual-country level. Such cooperation could help strengthen the assessment of financial stability risks at the regional level and, in the event of a systemic risk event such as the CL Financial crisis of 2009, facilitate a coordinated regional response. Such cooperation currently takes place under a Regional Financial Stability Coordination Council (RFSCC), whose role could be transformed into that of a regional financial stability committee. The RFSCC’s mandate, currently restricted to information exchange, would need to be clarified, formalized, and broadened to include cooperation on systemic risk oversight and crisis management. To support the transition, the existing multilateral MOU on the exchange of information, cooperation, and consultation could be amended to formally establish the RFSCC’s expanded role and principles for supervisory cooperation.32

Box 10.3.Summary of Policy Recommendations

Financial Sector Supervision and Regulation

Cross-Supervisor Cooperation and Coordination

  • Introduce national and regional financial sector oversight committees with broad mandates that include risk assessment, crisis prevention, and crisis resolution
  • Institutionalize cross-supervisor information exchange and coordination through formal memoranda of understanding
  • Enhance cooperation and collaboration with home supervisors of large foreign banks

Financial Institutions


  • Strengthen supervisory capacity and enhance enforcement
  • Finalize adoption of Basel II and harmonize regional prudential standards
  • Formalize risk-based supervisory frameworks and harmonize risk assessment frameworks
  • Introduce consolidated supervision to mitigate cross-border risks
  • Expand supervisory colleges to cover all regional financial institutions


  • Strengthen macroprudential analysis and systemic risk assessment
  • Integrate systemic risk assessment into regulatory and supervisory frameworks
  • Identify systemic financial institutions and agree to an enhanced supervisory approach

Capital Markets

  • Improve data collection and adopt standard global risk measurements
  • Harmonize capital market regulation in line with global standards
  • Promote capital market integration
  • Identify systemic nonbank non-insurer financial institutions
  • Improve understanding of links between nonbank non-insurers and other institutions

Financial Safety Nets

  • Clarify lender of last resort facilities and develop emergency liquidity assistance frameworks
  • Introduce deposit insurance in countries where such insurance does not exist and address funding gaps of existing deposit insurers; consider extending deposit insurance to credit unions

Crisis Management

  • Coordinate financial crisis management through national financial sector oversight committees and a regional financial sector oversight committee
  • Develop national financial crisis management preparedness and management plans and finalize the regional financial crisis management plan
  • Introduce requirement for regionally systemic financial institutions to develop systemic risk management plans
  • Develop institution-specific cross-border cooperation agreements and recovery and resolution plans for all regionally systemic financial institutions

Correspondingly, membership of the RFSCC could be expanded to include all lead financial sector supervisors (bank and nonbank) from Caribbean countries, who would then be responsible for coordination with country-level oversight committees.33 Because some large financial conglomerates in the region operate across segments of the financial sector, broader participation in the MOU and the RFSCC, including by both bank and nonbank supervisors, would help facilitate the assessment of systemic risks originating from these complex institutions and eliminate information asymmetries that could lead to regulatory arbitrage.

Canadian-owned financial institutions have a large presence in the region, making cooperation and collaboration with their home supervisors essential for effective supervision. Caribbean supervisors have made increasing efforts to strengthen cooperation and collaboration with the Office of Superintendent of Financial Institutions, the Canadian banking regulator. The region’s host countries for Canadian banks are generally represented on supervisory colleges for the large Canadian banks operating in their jurisdictions, and several countries in the region have signed MOUs with the Office of Superintendent of Financial Institutions. Within the region, a College of Regulators was also established in 2010 for insurers, and supervisory colleges exist for the region’s systemic insurers. Nevertheless, scope remains for further improvement, including by strengthening the fluidity of information exchange between the Caribbean host countries and home supervisory agencies, and by establishing a clear legal framework for consolidated supervision of cross-border banking groups and for crisis management and resolution.

Financial Institutions

Strengthened regulatory and supervisory frameworks for financial institutions and capital markets are also necessary for strengthening financial stability in the region. For banks, a regional effort is underway to strengthen traditional microprudential supervision of individual financial institutions, founded on the expected transition to Basel II by the end of 2017 and the ongoing transition to risk-based supervision.34 For insurers, progress has been more limited despite the lessons from the collapse of CL Financial in 2009. Critical gaps in the overall legal, regulatory, and supervisory structure for the sector contributed to CL Financial’s demise, particularly in Trinidad and Tobago where it was based. The regulatory framework did not formally allow the supervisor to oversee cross-market and cross-border activities and underestimated the risks of the insurance business. Specifically, there was no consolidated supervision of insurance entities under common ownership and no powers to exchange information with other regulators. Moreover, investment rules affecting the geographical and sectoral allocation of portfolio assets were not risk based (IMF 2006). These gaps remain largely unaddressed pending finalization of new insurance legislation in Trinidad and Tobago. More generally, throughout the region, the absence of investment limits for statutory funds may lead to concentrations in risky investments and hamper the statutory funds’ primary role as cushions against losses in the event of economic or financial downturns. Existing efforts to strengthen regulation and supervision of specific segments of the Caribbean financial system also need to be complemented with a strengthening of consolidated supervision, or group-wide supervision (including of nonbank and nonfinancial subsidiaries), particularly in light of the importance of financial conglomerates.35 Each country should formalize consolidated supervisory frameworks. A regional framework could then be established under a regional financial stability council to strengthen supervision of financial conglomerates.36

Stronger microprudential oversight needs to be complemented by enhanced macroprudential or systemic oversight. As a result of the important macro-financial links revealed by the global financial crisis, the Caribbean has begun to establish macroprudential oversight. Most countries have begun to integrate evaluations of systemic risk into their regulatory and supervisory frameworks, though cross-supervisor collaboration on macroprudential policy remains at the early stages. Several countries in the region have been publishing country-specific financial stability reports, and the region jointly published its first regional financial stability report in 2016. The joint report contains as a significant element an assessment of macroprudential risk (Caribbean Centre for Money and Finance 2016).37

Building on these efforts to strengthen systemic risk assessment, the region should start to develop macroprudential policy frameworks. As it stands, the region has yet to explore the potential of macroprudential policy tools to mitigate systemic risks to financial stability.38 These tools can be useful for targeting overall, sectoral, liquidity, or structural (for example, from interconnectedness) risks to financial stability. As part of these efforts, the region should consider identifying regionally systemically important financial institutions and agreeing to an enhanced supervisory approach for these institutions.

Capital Markets

Significant work also needs to be done to improve the regulatory framework for Caribbean capital markets. Caribbean capital markets remain relatively undeveloped. Nevertheless, it is important to address regulatory weaknesses that persist in data collection and in the adoption of standard risk measurements, in part resulting from a lack of sufficient resources dedicated to effective supervision. If endowed with adequate resources, regulators could improve data coverage and promote information sharing and cooperation with other regional regulators. Moreover, nonbank non-insurance systemic institutions among finance companies, intermediaries (broker-dealers), investment funds, and asset managers need to be identified and regulated, following the principles of investor protection, fairness, efficiency, and transparency of capital markets and the reduction of systemic risk.

Financial Safety Nets

Financial safety nets are an important complement to strong regulation and supervision for preserving financial stability. In the event of systemic shocks to financial stability, official financial assistance to financial institutions could be necessary for stemming contagion. Emergency liquidity assistance (ELA) is the primary means for providing official financial assistance; however, these facilities remain relatively underdeveloped in the Caribbean, potentially increasing the likelihood of regional spillovers from financial shocks. Although central banks in the region generally have the power to provide liquidity to the banking system through the discount window, explicit ELA facilities, which can play an important complementary role to lending through the discount window in times of financial stress, do not exist in most countries, including, most notably, countries with significant regionally systemic banking sectors such as Barbados and Trinidad and Tobago.39,40 In part, this hole in the region’s financial safety net reflects the limited historical need for such facilities in the region, given that most countries have not faced important liquidity crises or episodes of financial stress in recent history.41 Nevertheless, putting in place explicit ELA facilities should be a key priority for the region as it seeks to strengthen crisis preparedness and reform its crisis management framework.42

Deposit insurance is also a vital aspect of the financial safety net but is not yet prevalent in the Caribbean. Only four Caribbean countries have formal deposit insurance systems in place: The Bahamas, Barbados, Jamaica, and Trinidad and Tobago. The absence of deposit insurance throughout much of the region is a critical gap in the financial safety net that, if addressed, could strengthen the regional crisis management framework. There is also a need to strengthen the funding of existing deposit insurance schemes, most of which remain underfunded relative to both their target funding levels and international norms, potentially restricting their ability to fulfill their financial stability mandate.43

Crisis Management in the Caribbean

The Caribbean’s crisis preparedness depends on putting in place an ex ante crisis management framework. The region’s existing framework for crisis management is primarily based on national resolution regimes and associated funding modalities that are specific to the different segments of the financial system and individual countries, rather than an integrated national or regional approach to crisis management. Putting in place an integrated framework could begin at the national level, with the national financial stability committees (once established) coordinating the development of national crisis management plans. At the regional level, efforts to finalize a regional financial crisis management plan, which commenced following the collapse of CL Financial, could be reinvigorated under the auspices of a regional financial stability committee (perhaps a strengthened RFSCC). Finally, to complement the crisis management plans, given the presence of some large financial institutions with significant cross-border operations in the region, Caribbean regulators should require regionally systemic financial institutions to develop systemic risk management plans, and possibly “living wills,” that would specify how they would be resolved in a crisis.

Annex 10.1.Financial Sector Asset Structure
ECCUHaitiThe BahamasBarbadosBelizeTrinidad and TobagoGuyanaJamaicaSurinameCaribbean Total
Millions of U.S. Dollars
Domestic banks4,339.44,002.46,7390730.317,088.01,089.65,363.01,976.641,328.3
Foreign banks6,110.7182.96,4816,610883.53,134.01,172.44,087.0386.829,048.4
Credit Unions1,135.695.8370.6999.5451.71,752.727.7720.28.45,562.1
Insurance Companies1,153.11,8001,621.5129.06,479.0263.02,900.5298.914,644.9
Securities Firms1,080.5924.,052.10.06,195.1
Total Financial Sector13,819.34,281.015,390.610,155.52,194.528,499.92,644.517,122.72,670.896,778.9
Share of Total (percent)14.34.415.910.52.329.42.717.72.8
Percent of GDP
Domestic banks67.648.575.40.041.981.531.738.455.4
Foreign banks95.32.272.5144.150.714.934.129.310.8
Credit Unions17.
Insurance Companies18.
Securities Firms16.820.
Total Financial Sector215.451.8172.2221.4125.9135.976.9122.774.8
Percent of Financial Sector Assets
Domestic banks31.493.543.80.033.360.041.231.374.0
Foreign banks44.24.342.165.140.311.044.323.914.5
Credit Unions8.
Insurance Companies8.311.716.05.922.79.916.911.2
Securities Firms7.
Total Financial Sector100.0100.0100.0100.0100.0100.0100.0100.0100.0
Number of Institutions
Domestic banks117403332841
Foreign banks232462534150
Credit Unions495683412126283424371
Insurance Companies1211220211431161713265
Securities Firms3215350452320134
Total Financial Sector20779519631210528946861
“Sources: Bankscope; Caribbean Confederation of Credit Unions; Caribbean Financial Action Task Force; country authorities; and IMF staff estimates.Note: ECCU = Eastern Caribbean Currency Union. Table reflects latest available data. Domestic and foreign banks are classified by ownership. Offshore activity is excluded. The Bahamian securities firms’assets were unavailable and were therefore excluded.
“Sources: Bankscope; Caribbean Confederation of Credit Unions; Caribbean Financial Action Task Force; country authorities; and IMF staff estimates.Note: ECCU = Eastern Caribbean Currency Union. Table reflects latest available data. Domestic and foreign banks are classified by ownership. Offshore activity is excluded. The Bahamian securities firms’assets were unavailable and were therefore excluded.

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This chapter draws on the Caribbean Regional Financial Project, which was directed by Elie Canetti supervising a team led by Kimberly Beaton and comprising Qiaoe Chen, Fabio di Vittorio, Udi Rosenhand, and Kalin Tintchev. Xiaodan Ding, Anayo Osueke, and Xin Xu made additional contributions.


See IMF 2011b, Box 1.


To date, Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago have joined the Caribbean Single Market and Economy.


Offshore assets are not included in the data cited in this chapter, including in charts and tables.


As of 2014, 371 credit unions operated in the region. About 15 percent of the population belong to a credit union.


According to Bankscope. Data were the latest available as of 2014.


Tree Canadian banking groups—the Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada, and Scotiabank—have sizable operations in the Caribbean. CIBC’s operations are through its majority ownership in FirstCaribbean International Bank.


ECFH is the sole owner of the largest bank in St. Lucia, the majority owner in the largest bank in St. Vincent and the Grenadines, and the second-largest shareholder in Eastern Caribbean Amalgamated Bank of Antigua and Barbuda.


The National Bank of Dominica has cross-border exposure through its ownership stake in Caribbean Union Bank of Antigua and Barbuda.


Royal Bank of Canada’s regional holding company is registered in Trinidad and Tobago, while CIBC’s regional holding company is headquartered in Barbados. Scotiabank’s Caribbean operations have a more dispersed structure with no unique regional holding company.


The holding company Sagicor Financial Corporation has subsidiaries in Aruba, The Bahamas, Barbados, the Cayman Islands, Costa Rica, Jamaica, St. Lucia, Trinidad and Tobago, and the United States.


Guardian Group has subsidiaries in Aruba, The Bahamas, Barbados, Bermuda, Curaçao, Grenada, Jamaica, St. Lucia, Trinidad and Tobago, and Europe.


However, some of the two insurance companies’ assets are held outside the Caribbean, notably in Sagicor’s U.S. subsidiary, which held assets of US$1.9 billion at the end of 2016.


A rise in long-term interest rates reduces the value of existing fixed-rate assets, and a sharp rise in short-term rates negatively affects profitability, given the need to roll over repo agreements with households.


Respondents were instructed to classify claims held on a branch or office of a financial institution under the country of the incorporated parent.


Somewhat surprisingly, the within-Caribbean cross-border exposures of banks from Trinidad and Tobago, another Caribbean banking hub, were reported to be relatively minor.


Chapter 11 considers asset quality in the region and proposes a comprehensive strategy to address impediments to the resolution of problem loans.


Because data were not collected from sovereigns, the directional map shows only claims on sovereigns, but not claims of sovereigns on either the banking or insurance sectors.


More technically, the map uses the Fruchterman-Reingold Algorithm. It is based on unweighted bilateral financial flows and tends to put the country with the most links (or edges) in the center and the less connected ones on the periphery. The position of the node does not consider the magnitude of a bilateral flow, but only whether there is an actual flow. See Fruchterman and Reingold (1991).


It is assumed that the risk-weighted capital ratio (CAR) of the trigger banking system falls below 4 percent.


A systemic spillover is defined as a fall in the recipient banking system’s capital ratio (CAR) (or the insurance system’s non-risk-weighted capital ratio) below the Basel I minimum of 8 percent (see methodology below).


This implicitly assumes that the capital adequacy ratio of the trigger banking system or insurance sector falls below 4 percent. See methodology below.


The ratios for the ECCU may overstate actual exposures because both domestic and international banks’ exposures are included in the numerator while only capital for national banks is included in the denominator.


Loss rates were determined based on standard stress-testing practices and expert judgment. For example, losses of 5 percent of total loans would result from defaults on 10 percent of total loans, assuming a loss-given-default of 50 percent. This shock is roughly equivalent to two standard deviations based on the distribution of nonperforming loan ratios across Caribbean banking systems.


The haircuts were determined based on historical experience with debt restructuring in the region.


In the absence of reliable performance data for individual sectors, the cross-sectoral correlation analysis involved judgments about real links across sectors. A better understanding of such economic links in the Caribbean could be a subject for future research.


The analysis used an “adjusted” initial CAR for the ECCU banking system.


About two-thirds of the cross-border exposures between the ECCU and Barbados were in the form of deposits, which have seniority in bank liquidations and hence a lower risk profile.


It is also worth noting that we abstracted from feedback effects on the trigger country and among trigger countries in multiple-shock scenarios, focusing only on spillovers to target countries. For example, if the initial shock affected Barbados, Jamaica, and the ECCU, we measured only spillovers to other countries.


Exceptions are the Financial Regulatory Council in Jamaica and the newly established Financial Oversight Management Committee in Barbados, which have mandates for crisis prevention and management in addition to information exchange. In Belize and Suriname, the centralization of financial sector supervision within each country’s respective central bank obviates the need to put in place formal financial sector oversight committees.


The authorities’ intentions in The Bahamas and Trinidad and Tobago to put in place National Crisis Management Groups would be a positive step forward in this regard.


Financial sector oversight committees should also be given the power to request and collect information directly from both financial and nonfinancial firms to assess the contribution to systemic risk of firms that may not otherwise be subject to supervision and regulation (IMF 2011a).


The MOU was signed in 2011. Signatories include the Central Bank of Aruba, the Central Bank of The Bahamas, the Central Bank of Barbados, the Bank of Guyana, the Banque de la Republique d’Haiti, the Bank of Jamaica, the Central Bank of Trinidad and Tobago, and the Financial Services Commission of the Turks and Caicos Islands.


Signatories to the MOU are primarily bank regulators, and not all Caribbean countries are signatories. The region is jointly developing common regional supervisory guidelines under Basel II.


The region is jointly developing common regional supervisory guidelines under Basel II. Harmonization of prudential standards, to the extent that it is not accomplished by the ongoing transition to Basel II, could also facilitate supervisory assessments of banks with significant cross-border links.


Only Barbados has published formalized consolidated supervision guidelines for banks, and Jamaica has developed a framework for nonbank consolidated supervision.


Consolidation frameworks should include national and regional ownership mappings and consolidated balance sheets of significant financial conglomerates (including those that also contain nonfinancial corporations).


See Lim and others (2017) for an assessment of financial stability reports in Latin America and the Caribbean.


For instance, no country in the region has calibrated capital and liquidity requirements according to macroprudential considerations, as recommended by Basel III. Macroprudential objectives can be achieved by recalibrating microprudential requirements, such as targeting higher loan-loss provisioning requirements and risk weights for banks identified as systemically important. These requirements could also be countercyclical to mitigate the buildup of macroprudential risks (IMF 2013).


Jamaica is a key exception. The Bank of Jamaica implemented an Enhanced Liquidity Management Framework in 2013.


The Central Bank of Trinidad and Tobago and the Central Bank of The Bahamas do have broad authority to extend emergency liquidity for systemically important financial institutions; however, explicit ELA frameworks and associated operational modalities are not in place.


Important exceptions are the financial crisis experienced in Jamaica in the 1990s and, more recently, the failure of the two regional insurance companies CLICO and BAICO. In the case of CLICO and BAICO, solvency support rather than liquidity support was provided. The Central Bank of Trinidad and Tobago has not provided liquidity support in more than two decades.


Consistent with international best practice, ELA should be provided only to solvent but temporarily illiquid financial institutions, in exchange for sound collateral discounted to take account of counterparty and market risks at penalizing interest rates.


For example, the balance of the funds of Barbados Deposit Insurance Corporation, Jamaica Deposit Insurance Corporation, and The Bahamas Deposit Insurance Corporation as a share of estimated insured deposits stood at 2.6, 4.8, and 0.7 percent as of 2015. Underfunding can be partly attributed to low premiums relative to international norms.

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