Barbados: Financial System Stability Assessment

This paper presents key findings of the Financial System Stability Assessment for Barbados, including Reports on the Observance of Standards and Codes on Monetary and Financial Policy Transparency, Banking Supervision, Securities Regulation, Insurance Regulation, Corporate Governance, and Payment Systems. Systemic risks in the financial sector are generally contained, although the sector faces considerable challenges. Repercussions of the recent economic recession on the banking system are being felt, and profitability and asset quality are likely to be depressed in the near term.

Abstract

This paper presents key findings of the Financial System Stability Assessment for Barbados, including Reports on the Observance of Standards and Codes on Monetary and Financial Policy Transparency, Banking Supervision, Securities Regulation, Insurance Regulation, Corporate Governance, and Payment Systems. Systemic risks in the financial sector are generally contained, although the sector faces considerable challenges. Repercussions of the recent economic recession on the banking system are being felt, and profitability and asset quality are likely to be depressed in the near term.

Section I. Staff Report on Financial Sector Issues

I. Overall Stability Assessment

1. Systemic risks in the financial sector are generally contained, although the sector faces considerable challenges both in the short- and medium-term. Repercussions of the current economic slump, caused by the downturn in tourism, on the banking system are being felt, and profitability and asset quality are likely to be depressed in the near-term. Aggregate financial soundness indicators, however, suggest that the system can withstand a moderate recession without major difficulties. Over the medium-term, financial integration under the Caribbean Single Market and Economy (CSME) framework will necessitate adaptations in domestic policies, prudential regulations, and monetary policy instruments, and the authorities would be well advised to prepare in advance.

2. Indicators of the health of the banking system and sensitivity analysis suggest that the system is resilient and fundamentally sound. However, given that financial soundness indicators tend to lag current performance, the tentative nature of the sensitivity analysis, and the uncertainty surrounding the underlying assumptions, developments in asset quality and the adequacy of provisioning warrant close monitoring. Capital adequacy for the four locally incorporated banks is relatively high (18.2 percent of risk weighted assets) and all commercial banks reported profits in 2001. Although nonperforming loans (NPLs) increased in 2001, they accounted for 5 percent of total loans, with about half fully provisioned.

3. Stress tests indicate that credit risk is the primary source of vulnerability, but it would take a 90 percent increase in NPLs and full provisioning, for the system to breach the statutory capital adequacy requirement. While this may seem comforting, considering the rise in NPLs in 2001, or that seen in other countries in the context of a prolonged period of negative growth, the downside risks may be less benign than suggested by the analysis. For the least capitalized bank this quantum of increase in NPLs could create insolvency problems.

4. Off-shore banks are, to a large extent, insulated from the domestic banking system and their deposit taking activities are highly circumscribed, thereby limiting their potential to destabilize the domestic financial system. However, the importance of wealth management and treasury services in their operations exposes them to considerable market and transfer risks. While the dominance of equity and parent/owner deposits in their liability structure also provides them with the capacity to cope with these risks, because of the potential reputational consequences for Barbados, should these risks materialize, it seems important to explicitly provide for market risks in the capital requirements of offshore banks. The importance of soon introducing measures to better monitor market risks is also underscored by the merger of the Caribbean operations of Barclays PLC and Canadian Imperial Bank of Commerce (CIBC) to form First Caribbean International Bank (FCIB) with operations in jurisdictions with floating exchange rates and no capital account restrictions.

5. Considering the presence of exchange controls and the structure of banks’ portfolios, interest rate and operational risks do not, at this time, appear significant. Nevertheless, the gradual liberalization of the controls that has been initiated, the formation of the FCIB, headquartered in Barbados, the large portfolio of government debt held by banks, and the potential for contagion from turmoil in major Latin American countries underscore the importance of measures to better address these risks.

6. Compliance with the international supervisory standards is high both in the onshore and offshore banking sector which helps limit systemic vulnerability. Supervisory compliance in the offshore banking sector has been facilitated by the recent passage of the International Financial Services Act. The mission’s assessment of compliance with the Basel Core Principles for Effective Bank Supervision for the onshore banks and financial institutions indicates that of the 30 principles, 24 are “compliant” or “largely compliant,” 4 are “materially noncompliant” and 2 are “not compliant.” Areas with less than full compliance concern: the need to boost supervisorial resources, legislative changes to enhance the independence of the Central Bank of Barbados (CBB), information sharing with other supervisory agencies, measures against market risks, and consolidated supervision. Addressing these should result in greater resiliency of the financial system.

7. The rapid expansion of the credit union sector, with assets equivalent to 10 percent of GDP, has been associated with a weakening in the quality of their lending portfolio. One fifth of outstanding loans are classified as delinquent and their recovery may be affected by their concentration among lower income borrowers. Supervision of the largest five credit unions, accounting for over 80 percent of total assets of the sector, has been recently strengthened by intensified collaboration between the Registrar of Cooperatives and the CBB. Evidence from the recently initiated joint inspection program may necessitate amendment of the law to support a tightening of the regulatory and supervisory framework, including the authority to impose sanctions.

8. Settlement risk has been greatly reduced with the institution of the real time gross settlement system (RTGS) and the automated clearing system (ACH). The authorities deserve credit for undertaking the modernization of the payment systems, although a more complete assessment has not been possible pending experience with the full operation of RTGS system. The RTGS system is systemically important and has been designed to be in accordance with the CPSS Core Principles. The ACH is judged not to be systemically important.

9. The insurance sector is quite dynamic and has experienced good profitability and expanded operations in other countries in the region, but there are serious weaknesses in the regulatory and supervisory framework. Limited diversification opportunities in the saturated domestic market has induced insurance companies to seek business abroad, underscoring the need for vigilant supervision. The supervisory weaknesses are reflected in less than full observance of many of the Core Principles for Effective Supervision established by the International Association of Insurance Supervisors (IAIS). The assessment indicates that out of 17 principles, 10 for the domestic sector and 12 for the offshore sector are “observed” or “largely observed.” Areas of non-observance concern the organization and resources of the supervisor, implementation of prudential rules and onsite inspections.

10. Capital markets remain underdeveloped and appear to present little systemic risk, given the low level of activity in the market. Limited activity and market size underscore the need to consider the development of the stock market in a regional context. This could result in opportunities for diversification and reduction of fixed costs, but would require the adoption of common listing, trading, and settlement rules. In addition, it would warrant further relaxation of restrictions on investments on the stock exchanges within the region. The mission assessed the observance of the IOSCO Objectives and Principles and found that most of the principles are either “implemented” or “partially implemented” and only two are considered “not implemented.” Areas where implementation is not in line with international standards concern effective inspections and prudential and regulatory requirements. The assessment takes into account the progress made in strengthening securities regulations through the newly created but not as yet fully staffed Securities Commission.

11. Preparations for capital account liberalization should involve prudent macroeconomic policies and other well sequenced measures to foster efficient markets and strengthen supervision and regulation. It would be important, in particular, to ensure the adequacy of prudential regulations regarding foreign exchange exposures and market risks in order to limit the risk of instability from cross-border capital flows. In addition, the monetary policy framework and instruments will need to be more flexible and market oriented in order to facilitate both market development and monetary control.

12. The mission also found a high degree of observance of the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies. Transparency practices in accordance with the Code, however, are so far less prevalent in the securities area, but are likely to be largely observed once the Securities Commission becomes fully operational. In the insurance sector, there is a need to substantially enhance transparency practices. Accounting, auditing, and disclosure practices appear broadly in line with the international standards.

13. The authorities have worked hard to develop an effective framework for anti-money laundering and combating financing of terrorism (AML/CFT). The Anti-Money Laundering Authority is well organized and carries out its mandate through the Financial Intelligence Unit (FIU). The limited staff and resources of the FIU, however, necessitate heavy reliance on the supervisory bodies responsible for the oversight of various financial institutions. As a result, the degree of AML/CFT effectiveness is commensurate with that of the broader supervision of such institutions. In particular, effectiveness needs most attention in the insurance area and, to a lesser extent, given the limited activity, in the securities market.

14. The mission made a number of recommendations detailed in the main FSAP report, including:

  • Boosting the supervisory resources of the CBB to enable it to conduct regular onsite examinations of all onshore and offshore banks on an 18–24 months cycle; adopting regulations to provide for market and country risks for both onshore and offshore banks; and amending the Financial Institutions Act to strengthen the independence of CBB, impose aggregate limits on large exposure and connected lending, facilitate license revocation and distressed bank resolution, and require CBB’s prior approval of the external auditor for licensees.

  • Completing the CBB assisted on site examinations of the five large credit unions and making such examinations regular. Consideration could be given to introducing a separate credit unions law in light of the experience gained with these examinations. In the meantime, the capacity of the Registrar of Cooperatives to effectively supervise credit unions should be strengthened.

  • Instituting effective supervision and regulation of the insurance sector, including by increasing supervisory resources, independence and transparency, and by developing financial soundness standards and issuing related circulars.

  • Developing a framework for using market-based instruments of liquidity management and allowing greater market determination of interest rates.

II. Macroeconomic Setting and Risks

A. Recent Developments and Vulnerabilities

15. The global economic slowdown poses near-term macroeconomic challenges for Barbados.2 Following a prolonged period of robust growth, real GDP contracted 2.7 percent in 2001. The slump continued during the first half of 2002, reflecting the effects on the tourism industry of the global downturn and the September 11 terrorist attack. While aggregate financial soundness indicators suggest that the banking system can cope with the consequences of the slowdown, profitability of the sector is likely being squeezed and erosion in asset quality can be expected. Difficulties at individual institutions cannot be ruled out, although banks are making the required provisions for bad debts.

16. The banking system experienced high levels of excess liquidity during much of 2001 and 2002 in the context of low inflation, but lending rates did not respond commensurately. Concerns about collusive behavior among banks prompted the central bank to initially introduce an indicative average lending rate in July 2001 on credit to the productive sectors, which was subsequently made compulsory and reduced from 10 percent in August 2001 to its current level of 8.0 percent. The policy has not stimulated lending, since banks are of the view that the rate does not adequately compensate them for the riskiness of loans, notwithstanding the availability of a credit insurance facility. In principle, cross-border banking services could promote more competition. This should proceed in the context of the authorities’ plan to liberalize capital account transactions with the CARICOM (Protocol No. 2).

17. Prospects for the development and deepening of the financial system over the medium-term are linked importantly to the liberalization and integration of financial activities envisaged under the Caribbean Single Market and Economy (CSME) protocols. The authorities plan to gradually liberalize exchange controls, first vis-à-vis the Organization of Eastern Caribbean States (OECS), and then more broadly among the CARICOM countries. The strategic considerations underpinning this initiative are compelling and will likely yield substantial efficiency gains and diversification opportunities in the financial sector. At the same time, the different degrees of exchange controls, types of exchange rate arrangements, and monetary policy and prudential frameworks within CARICOM and vis-à-vis the rest of the world, necessitate careful preparation.

18. Preparations for capital account liberalization entail adaptations in domestic policies, regulations, and instruments. Prudent macroeconomic policies, especially restraint on wage increases and the fiscal deficit are important for preserving external competitiveness and the credibility of the exchange rate regime. Strengthened supervision and regulation, particularly regarding foreign exchange exposures and market risks, will be crucial in limiting the potential for financial instability from cross-border capital flows, A properly coordinated and sequenced liberalization will also necessitate a careful evaluation of the capacity of financial institutions to assess and manage risks associated with cross-border exposures and of the supervisory processes to contain their effects should the risks materialize.

19. The outlook for Barbados’ offshore financial sector is subject to some uncertainty. Activities in this sector have been attracted by low tax rates and the advantageous provisions of bilateral tax treaties with some countries. Doubts about the renewal of these treaties—with Canada (presently being renegotiated), the U.S., the U.K., and Switzerland—as well as competition from other countries offering similar advantages are beginning to deter new entrants. Meanwhile, the authorities have taken several measures to strengthen the regulation and supervision of the onshore and offshore financial sector, with a view to preserving and enhancing the reputation of Barbados as a financial center.

B. Systemic Liquidity Management

20. Under the current circumstances there is little risk of a systemic liquidity crisis. The substantial excess liquidity, however, is symptomatic of an over-determined system, with a mandatory minimum savings deposit rate, a maximum average lending rate, and a pegged exchange rate regime supported by exchange controls. The efforts to administer lower domestic interest rates prevent lending rates from properly reflecting risk-return tradeoffs and cause banks to be overly cautious in extending credit.

21. The fixed exchange rate regime and exchange controls allow the CBB to give less priority to active day-to-day liquidity management and monetary policy is largely conducted through adjustment in administered interest rates.3 Excess liquidity mounted sharply in 2002, reflecting the persistent weak demand for credit following the widespread economic slowdown. In early June 2002, total bank reserves stood at almost three times the required reserves, while banks’ holdings of government securities were 30 percent higher than the prescribed minimum. As a result, the excess liquidity ratio (the ratio of the sum of excess reserves and excess government securities holdings to the deposit base) increased to more than 17 percent from 8 percent at the end of 2000 (Table 1), and treasury bill rates declined to historically low levels.4

Table 1.

Liquidity Indicators of the Banking System

(In BDS$ million; unless otherwise indicated)

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Source: CBB.

As of June 12, 2002.

Excess liquidity ratio is the ratio of the sum of excess reserves and excess government securities holdings to the deposit base.

22. There do not appear to be major legal or institutional impediments in the interbank market, but substantial excess liquidity at most banks has tended to drive down activity. The CBB estimates that commercial banks currently conclude “at best” only 2 to 3 transactions per week.5 While the excess liquidity ratio varies from bank to bank, there are no clear signs of market segmentation. Banks do, however, maintain counter-party limits on interbank exposures, and transactions in the market are typically overnight and unsecured.

23. The CBB’s tools for liquidity management include both direct and indirect instruments, although more flexible market-based instruments will be needed as exchange controls are liberalized. At present, the main instruments are changes in cash reserve and securities requirements, regular tender sales of government securities, and adjustments in official interest rates. The CBB does not conduct active open market operations and currently has only a small amount of government securities in its portfolio. It also maintains a discount facility which has not been used by banks for some time because of excess liquidity. The CBB could consider developing a framework for using market-based instruments for influencing monetary conditions in order to minimize distortionary costs on the banking system. Such a framework will be needed in an environment of liberalized capital flows and would require that rates of return on government securities are determined by the supply and demand of funds in a transparent auction process.

24. Consideration could also be given to a gradual deregulation of interest rates to support the liberalization of exchange controls. The present policy of stipulating a minimum savings rate introduces downward rigidity in interest rates. At the same time, the average lending rate is an attempt to induce commercial banks to reduce their intermediation spreads, but could in effect restrain banks’ lending and create an incentive for circumvention and compensation through increased level of fees and other charges. A preliminary decomposition of spread between lending and deposit rates indicates that the high spread likely inhibited financial intermediation and its widening in recent years may reflect banks’ rising costs and possibly the oligopolistic structure of the banking industry. Policies to foster greater competition for loans under a liberalized regime of capital flows could contribute to reducing the spreads and thereby increase financial intermediation.6

III. Overview of the Financial System and Regulatory Structure

25. Given the small size of the economy, the financial system in Barbados is quite sophisticated, although it remains dominated by banks. As in many other economies in the region, the system comprises both onshore and offshore activities. The onshore sector provides financial services for residents and has enjoyed stability and confidence in recent years. The offshore sector caters mostly to nonresidents outside the CARICOM area and has become an important contributor to economic activity. To preserve the perception of Barbados as a reputable financial center, the authorities have continued to adapt, modernize, and strengthen the supervision of the financial services industry.

A. The Onshore Financial Sector

26. The onshore financial sector is well developed and encompasses a wide range of financial institutions. There are 7 commercial banks, 14 nonbank financial institutions, 41 credit unions, 9 life insurance, and 10 general insurance companies (Table 2). At end-2001, assets of commercial banks accounted for 105 percent of GDP and about 81 percent of the assets of all deposit-taking institutions. In addition, commercial banks accounted for 82 percent of all deposits, around 74 percent of loans and advances.

Table 2.

Structure of Deposit-Taxing Institutions,1/ 1999–2001

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Sources: Central Bank of Barbados; and published annual financial statements of commercial banks.

Previously, so-called commercial houses, due to tradition, were also allowed to accept deposits from the general public, but this is now prohibited. Commercial houses can, however, issue commercial paper. In addition to deposit-taking institutions, Barbados Mortgage Finance Company, which is owned by Barbados National Bank and has total assets of about 3.0 percent of GDP at end-2001, and insurance companies can also lend to residents. Several quasi-fiscal funds (including Credit Guarantee Scheme for Small Businesses, Export Credit Insurance Scheme, Export Finance Guarantee Scheme, Export Rediscount Facility, Industrial Credit Fund, and Barbados Investment Fund), which are managed by the Central Bank of Barbados, can provide financing for specified purposes.

The financial year of some institutions ends October 31. Thus, aggregated figures do not fully reveal the exact sum of figures.

Barclays PLC and CIBC announced in July 2001 a plan to merge their activities in the Caribbean.

Privatization of the Barbados National Bank was initiated in December 2000, but not all shares floated were sold. The state thus remains the majority shareholder.

Nonbank financial institutions licensed under the Financial Institutions Act include trust-, finance-, and mortgage companies (including Barbados Mortgage Finance Company, which does not accept deposits), as well as merchant banks. One company is newly licensed and one does primarily business with nonresidents.

Published information includes five companies.

Published information includes three companies.

27. The commercial banking system is largely foreign owned. About 74 percent of the assets of commercial banks belong to either branches of foreign banks or subsidiaries of foreign-owned entities from Canada, United Kingdom, and Trinidad and Tobago. Some of the Caribbean activities of Barclays PLC and CIBC have been merged with the formation of FCIB, headquartered in Barbados, with operations in 15 countries and 8 jurisdictions. The bank is subject to supervision by the CBB which is the home country supervisor. The merger has resulted in further concentration in the banking system, with FCIB accounting for about 33 percent of total assets and Royal Bank of Canada, the second largest, for about 19 percent. The government continues to own a large share of Barbados National Bank (BNB). Following a loan workout arrangement for the sugar industry, the BNB was recapitalized in 1996 and has since remained profitable. The government expects to further reduce its ownership in the bank.

28. There are a number of other financial institutions—part III companies-comprising trust companies, finance companies, and merchant banks. They are not allowed to accept demand deposits, offer checking accounts, or have access to the Central Bank of Barbados’ discount facility. At the same time, they are not subject to required reserves and have a lower minimum capital requirement. The charter of each licensed part III institution specifies its activities. At end-2001, total assets of such institutions amounted to about 19 percent of GDP.

29. Credit unions have expanded rapidly in recent years and are competing with banks in the consumer lending segment. They are restricted from accepting demand deposits, issuing checkbooks and accepting deposits or making loans denominated in foreign currency. As of end-2001, there were 41 credit unions with 94,728 members—more than a third of the total population—with total assets equivalent to 9½ percent of GDP. The largest credit unions are almost as large as the smallest bank. Credit unions are allowed to accept deposits of nonmembers but are prohibited from lending to them.

30. Insurance companies account for the bulk of nonbank onshore financial activities and offer a broad range of insurance products. The industry is in the process consolidation, with the takeover of the Life of Barbados by The Barbados Mutual Life Assurance Society. The merged company will be the largest, accounting for local market share of about 65 percent. Privatization of the state-owned Insurance Corporation of Barbados was initiated in late 2000, but the government remains its largest shareholder. Up-to-date aggregate statistics on the industry are not available. At end-1999, total domestic business-related assets of onshore insurance companies were 17.5 percent of GDP.

31. The size of the economy, concentration of ownership and modest development of the mutual fund industry have likely limited the depth and diversity of financial markets. The Barbados Stock Exchange (BSE) was inaugurated in 1987 and currently has 25 listed securities. The mutual funds industry includes 9 open-end funds and one closed-end fund. The lack of diversification opportunities and the modest liquidity associated with concentrated ownership has limited the role of the Stock Exchange. The level of market activity and liquidity is one of the lowest in the Caribbean region. There are a few private pension funds, and new draft legislation governing these funds is currently being discussed.

B. The Offshore Financial Sector

32. The offshore financial sector—or the international financial services industry—is legally separated from the onshore sector. Activities between onshore and offshore banks, for instance, require special permission by the Minister of Finance. The offshore sector comprises international business companies, foreign sales corporations, exempt insurance companies, societies with restricted liability, and offshore banks (Table 3). Lower taxation and tax treaties with several countries, including the United States and Canada, along with fewer regulatory restrictions, have been a key factor in the growth of offshore financial activities. The offshore sector is now second only to tourism in terms of foreign exchange earnings and an important contributor to tax revenue.7 In 2001, the largest increase in the number of entities was in “societies with restricted liabilities” and offshore banks.

Table 3.

Number of Active Offshore Entities,1/ 1994–2001

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Sources: Central Bank of Barbados; Supervisor of Insurance; and Ministry of Industry and International Business.

Active means that the license fee is paid and the entity is awaiting business.

Includes total number of issued licenses. Some may not be active.

Since some entities are not active, the reported increase exaggerates the increase in active entities.

At end-2001, offshore banks managed 800 trusts and had 298 employees.

33. The number of offshore banks increased from 52 to 56 during 2001, while their assets increased from about 8⅓ times GDP at end-2000 to 11 times GDP at end-2001 (Table 3). The eight largest offshore banks account for 87 percent of total assets. Risks for depositors are, to a large extent, contained by restricting acceptance of third party deposits to offshore banks owned by qualified foreign banks (10) or well-capitalized companies (16); other offshore banks (30) are not allowed to do so.8 The balance sheet structure of offshore banks differs from that of commercial banks. At end-2001, investments accounted for 45½ percent of total assets and “due from head office and affiliates” 44½ percent of total assets. Equity capital was 47½ percent of total liabilities; “due to head office and affiliates,” 23 percent; long-term liabilities, 17¾ percent; and deposits 4¾ percent. After significant investment losses in 2000, return on assets again exceeded 3 percent of total assets.

C. Regulatory and Supervisory Framework

34. Supervision has improved during the 1990s, as better legislation and prudential regulations have been adopted, but additional challenges remain. Summary assessments of the compliance of supervisory oversight with international standards is presented in Section II. Under the Financial Institutions Act of 1996, effective July 1, 1997, the Minister of Finance is responsible for supervision, regulation, and licensing of commercial banks, trust companies, finance companies, merchant banks, and certain other nonbank financial institutions. The Act enables the Minister of Finance to delegate to the CBB certain supervisory and regulatory powers save those for granting and revoking licenses and issuing regulations. The Act establishes ownership limits for banks incorporated in Barbados, minimum capital requirements, lending limits to one borrower or group, propriety investment limits, and restrictions on connected lending. There are prudential regulations defining capital adequacy—although they only cover credit risk—loan classification and provisioning for impaired assets.

35. The new International Financial Services Act governing offshore banks came into effect on June 10, 2002. As in the case of licensees subject to the Financial Institutions Act, the supervisory authority has been assumed by the CBB. Offshore banks in practice observe the same prudential regulation regarding capital adequacy and loan classifications and provisioning as onshore financial institutions. In contrast to the previous Offshore Banking Act, the new act allows the CBB to conduct onsite inspections of offshore banks—one has already taken place.

36. The Cooperatives Societies Act of 1993 establishes the regulatory and supervisory framework for credit union, while day-to-day supervision is carried out by the Registrar of Cooperatives. Amendments to the Act calling for important changes, including prohibition for credit unions to accept deposits from nonmembers, are currently under discussion.

37. Supervision and regulation of the insurance sector has, hitherto, relied primarily on the good faith of industry participants which exposes the sector to significant risks. Recognizing that steps to formalize and improve regulation would help to protect the reputation and the charter value of the insurance business in Barbados, the Office of the Supervisor of Insurance has requested technical assistance on conducting on-site inspections through the Caribbean Regional Technical Assistance Center (CARTAC).

38. The Securities Act has established the Securities Commission (SC) as a new independent regulator. As a result, the Barbados Stock Exchange will be free from some of the regulatory functions that it has traditionally performed and will be able to focus more systematically on the development of the marketplace. The SC will address the regulatory issues which are expected to increase the transparency of the market, ensure investor protection, and promote the prudential oversight over the capital market.

IV. Performance of the Onshore Banking System and Sources of Vulnerabilities

39. Aggregate information as of the end of last year suggests that commercial banks are on reasonably sound financial footing.9 The average capital adequacy ratio of the four locally incorporated banks increased from 14.9 percent at end-1999 to 18.2 percent at end of fiscal 2001 (Table 4). The lowest reported capital adequacy ratio of a locally incorporated bank was 15.1 percent in fiscal year 2001. Profits before tax have remained comfortably above 2 percent of total assets, although they declined from 2.6 percent of total assets in 1998 to 2.2 percent of total assets in 2001. All commercial banks reported profits in 2001. Net interest revenue increased by 6.2 percent during the 2001 fiscal year. Fees and other income also increased from about 23 percent to 33 percent of gross revenue during the same period.10

Table 4.

Selected Financial Soundness Indicators for Commercial Banks, 1995-March 2002

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Source: Central Bank of Barbados.

Does not include branches of foreign banks.

Basically tier I capital.

End of 2001 fiscal year, which for some banks differs from calendar year.

The loan-to-deposit ratio is calculated in this table as loans and advances as a percent of deposits. The authorities use a different definition resulting in a higher loan-to-deposit ratio.

Sum of excess cash reserve requirements and excess of the statutory requirement to invest in government securities in percent of total assets.

Sum of excess cash reserve requirements and excess of the statutory requirement to invest in government securities in percent of required reserves.

Other loans, including personal loans, may be used to finance real estate activities. In 1999, a trust company transferred part of its loan portfolio to a commercial bank.

Nonperforming loans here include loans classified as substandard, doubtful, and loss.

Limits on open positions in foreign exchange only refer to so-called working balances and are reported once a week.

This spread does not fully reflect the intermediation margin due to fees, commissions, etc.

40. The economic slowdown has dampened the demand for credit and its effects are also beginning to be reflected in asset quality. Nonperforming loans increased from 3.8 percent of total loans at end-2000 to 5.0 percent at end-2001. Discussions with bank representatives indicate that banks were starting to see an increase in delinquencies and requests for restructuring of loans in early 2002. At the same time, deposits were increasing (10.2 percent in March 2002, year-on-year). While excess liquidity was at record levels and contributed to lowering the interest rates on government securities, it resulted in a smaller decline in deposit and lending rates.

41. The 12 nonbank financial institutions with primarily domestic operations reported equity capital of 13.5 percent of total assets in 2001. Equity capital of the least capitalized part III company was 5.7 percent of its assets. Profits before tax were 2.6 percent of total assets during the same period, with one company reporting a deficit.

Risks and Stress Tests

42. Credit risk is the main systemic vulnerability of the onshore banking sector in the current environment.11 The economy is particularly sensitive to business cycles in the United Kingdom, United States, and Canada through their effects on the tourism sector. Tourism is also vulnerable to changes in preferences and increased competition from other destinations. The construction sector expanded significantly during the boom ending in 1999, resulting in accelerating land and real estate prices which has now subsided. A decline in these prices, due to lower economic growth, possibly through reduced demand from the offshore sector, could affect the value of banks’ collateral. Finally, the manufacturing sector has been under pressure due to high costs and increased competition.

43. The CBB deserves credit for initiating stress testing of the banking system which links its macroeconomic model with the level of nonperforming loans. Since quarterly data on nonperforming loans are only available from the beginning of 1996, the robustness of the underlying regression may not be adequate. The time series is not sufficiently long to cover the full business cycle, so that the estimated relationship reflects only the period of relatively stable growth and declining nonperforming loans. In addition, the assumptions about banks’ profitability, although reasonable in light of the recent increase in fees and charges, may turn out to be optimistic bearing in mind the level of excess liquidity. The projections of the different scenarios, which are shown in Table 5, may thus err on the bright side, as suggested by the 32 percent increase in the share of nonperforming loans in 2001. Furthermore, the emphasis is on the average banking system rather than the individual banks, which, due to risk concentration to various sectors may be much more adversely affected.12

Table 5.

Results of Central Bank of Barbados’ Stress Testing

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Source: Central Bank of Barbados’ estimations.

A decline in tourism receipts of 15 percent corresponds to a decline in tourism GDP by 18½ percent, which would be record low. In 2001, tourism receipts declined by 8 percent.

In 2001, construction declined by 4 percent.

In 2001, the manufacturing sector declined by 8 percent in 2001.

44. Banks’ sensitivity to credit risk can also be illustrated by gauging the impact on banks’ capital adequacy ratio (CAR) by an increase in nonperforming loans. Since the branches of foreign banks are small compared to their parents’ other activities, they are excluded from this exercise. Based on data from end-2001 on loan classification, capital base (tier I plus tier II capital), and CARs, adjusted CARs are calculated for the four locally incorporated banks. The adjusted CAR reflects the impact of moving performing assets to nonperforming status. “Special mention” is included here in nonperforming loans, because recently there has been a significant increase in such loans, although they are not always so classified only on account of nonperformance. The minimum specific provision required for an asset classified as substandard is 10 percent, while the maximum provision is 100 percent for a loan classified as a loss.

45. The analysis shows that on average the banking system would be able to absorb an increase in nonperforming loans by 90 percent before reaching the statutory CAR and 145 percent before becoming insolvent (Figure 1). While the system appears resilient, the worst-case scenario discussed above results in an increase in nonperforming loans of 43 percent. However, it is noteworthy that in the aftermath of the problems of the early 1990s, nonperforming loans at end-1995 were 2½ times higher than the current level, although they have since been resolved and banks’ portfolios are now stronger and diversified. The stress test also shows that the least capitalized bank can absorb an increase in nonperforming loans of 45 percent before reaching the statutory CAR and almost 90 percent before becoming insolvent if full provisioning is required. More detailed analysis to better assess the impact of different types of shocks on individual banks would require additional data which are currently not collected.13

Figure 1.
Figure 1.

Capital Adequacy Ratio Adjusted for an Increase in Nonperforming Loans1/

Citation: IMF Staff Country Reports 2003, 035; 10.5089/9781451805987.002.A001

1/ Based on data of the four locally incorporated commercial banks at end of 2001 fiscal year.2/ In this figure, nonperforming loans include special mention, substandard, doubtful, and loss.

46. Banks are exposed to market risks, but the authorities do not consider them material in light of the pegged exchange rate arrangement, their supportive economic policies and exchange controls. Banks may accept deposits denominated in foreign exchange, which account for 11.3 percent of total deposits (March 2002), and are allowed to lend in foreign exchange, although such intermediation in foreign currencies is reportedly limited since it requires CBB’s permission. Banks are generally allowed to have open positions in foreign exchange related to working balances of up to 15 percent of their spot liabilities.14

47. While credit risk and operational costs are the main threats to bank profitability, banks are subject to some interest rate risk, which is limited by the stipulated minimum deposit rate and the maximum average lending rate for loans to the “productive sectors.” In the event that banks’ interest expenditures were to increase from the reported average of 4 percent in 2001 to 6 percent, all other things equal, profits before tax would likely be reduced from 2.2 percent of total assets to 0.9 percent. Banks also carry a significant portfolio of government securities (19 percent of total assets, March 2002), some of which have longer maturities. Although these are typically held by banks to maturity and not for trading purposes, their value would be significantly reduced by an increase in interest rates in the event that these were marked-to-market.

48. Due to excess liquidity in the banking system and access to the discount facility, liquidity risks are currently limited, although the position of individual banks varies over time. Banks are also subject to operational risk, which is limited by the verification of internal controls during on-site inspections. It would be important to soon introduce measures to better monitor market risks, especially in view of the envisaged gradual capital account liberalization within the CARICOM and the establishment of FCIB with operations in jurisdictions with different exchange regimes and degrees of openness of the capital account.

V. Performance and Risks in Nonbank Financial Institutions

A. Credit Unions

49. The credit union sector has expanded rapidly, reaching BDS$494 million in 2001, so that the larger institutions are now in competition with banks and require appropriate prudential supervision. The two largest credit unions (Barbados Public Workers and City of Bridgetown) account for some 70 percent of the membership base and 64 percent of total assets of all credit unions. Because of their orientation toward small savers and for social welfare considerations, credit unions are not subject to compulsory reserve requirements and the 0.2 percent tax on total assets and the income tax.

50. Delinquent loans continue to be a significant weakness at credit unions. As of March 31, 2002 delinquent loans represented some 20 percent of total loans outstanding. This compares with the World Council of Credit Unions PEARLS system of financial ratios recommendation that the portfolio at risk should not exceed 5 percent of the loan portfolio.

51. Amendments to the Cooperatives Societies Act of 1993 are currently under discussion. Although they call for important changes, including prohibition for credit unions to accept deposits from nonmembers, the proposed amendments do not provide adequate details on financial standards aimed at protecting institutions against the risk of insolvency and for making prudential supervision more effective. In this context, it would be important for the law to allow the regulator to be able to impose timely sanctions for breaches of regulations. The authorities might consider introducing a separate credit union law or adopting common standards for deposit-taking institutions.

52. The lack of adequate supervisory staff (six inspectors for 41 institutions) and resources have prevented the Registrar’s office from attaining its objective of one on-site inspection per year. To remedy the situation, inspections of the five largest credit unions—which account for 81 percent of the total assets of the credit unions—will in the future be undertaken jointly with the Central Bank. The first joint examination is currently underway and others will follow.

B. Insurance: Domestic and Offshore

53. The insurance sector is an important part of the financial system and limited availability of official data make profitability and capital adequacy difficult to assess (Tables 6 and 7). Discussions with the industry participants suggest that insurance companies have been profitable in recent years, although general insurance performance has been more volatile. Provisioning principles and capital for life insurers is self-regulated, and provisioning techniques reportedly are based, for most companies, on the Canadian system. For general insurance, the mission’s discussions with the industry and analysis of unpublished data suggest that provisioning methods may be less reliable across all companies. A proposal is under consideration by the Ministry of Finance to amend the insurance legislation to enhance, among other things, capital adequacy, and solvency requirements.

Table 6.

Insurance Sector: Summary Statistics

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Source: Ministry of Finance. Supervisor of Insurance unpublished data.

Figures for 2000 are, in some cases, not available and in other cases represent estimates.

Table 7.

Insurance Sector: Asset Composition

(In percent of total assets as of end-1999)

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Source: Ministry of Finance Supervisor of Insurance.

54. The exposure to natural hazards in the Caribbean is an important feature of the insurance sector. Recent developments in risk management products may provide for some resiliency in the event of a natural catastrophe on the island. The dependence on external reinsurance for property insurance is expected to reduce gradually as companies take advantage of the recent fiscal changes making catastrophe provisions more attractive for companies to establish.

55. The offshore insurance sector is driven primarily by the various taxation treaties between Barbados and, in particular, the USA and Canada. This segment of the insurance industry has offered both a source of employment opportunities and revenue for the government through license fees, although its asset base appears to be strictly external. The presence of bilateral tax treaties allows insurance companies, after complying with the Barbadian fiscal rules, to repatriate profits net of taxes to their home country without incurring any further tax liability. Uncertainty surrounding the continuation of these taxation arrangements, which are currently being renegotiated, has led to a reduction in the number of new licenses issued. In the event that these treaties were to be withdrawn altogether the offshore market would have to rely on limited alternative advantages and, in all probability, would not be viable.

56. The insurance supervisory and regulatory standard in Barbados has, hitherto, relied primarily on the good faith of industry participants. This approach exposes the sector to important risks. Single negative events may significantly damage the reputation of a jurisdiction in an increasingly regional and global market. Steps to formalize and improve regulation would help to protect the reputation and the charter value of the insurance business in Barbados from negative shocks. The Office of the Supervisor of Insurance has requested technical assistance on conducting on-site inspections through the Caribbean Regional Technical Assistance Center (CARTAC).

57. Insurance supervision needs more resources and redesigned processes to enforce the current provisions in the law. On site inspections need to be conducted and supported by a more analytical rather than compliance oriented off site analysis. This, in turn, will require better information collection. While full compliance with all requirements of supervisory independence under the IAIS principles may be difficult, independence of the supervisor needs to be enhanced. Supervisory independence should be supported by greater transparency and public reporting.

C. Capital Market Issues

58. Given their limited activity, securities markets appear to present little systemic risk to the financial sector. As of July 2002, there were 25 issues traded on the Barbados Stock Exchange (BSE) regular market, and 2 funds traded on the junior market. Market capitalization as of year-end 2001 was approximately US$1.8 billion or 71 percent of GDP (Table 8), but the volume of transactions has remained extremely low. Over the last three years, the liquidity ratio, given by the ratio of trades in the regular market over stock market capitalization, has never exceeded half of a percentage point. The liquidity of the market suffers from the limited diversification opportunities offered by the size of the economy and from the ownership concentration. The increased transparency and the clearer regulatory framework introduced with the new Securities Act should help to enhance the role played by the BSE.

Table 8.

BSE: Main Indicators, 1999–2001

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Source: Annual reports and website of the BSE.

Capitalization of listed stocks.

Ratio of turnover on the regular market (net of pass through trades) over stock market capitalization.

59. The low level of activity and the size of the Barbadian market underscore the need to consider the development of stock market activities in a regional context. The limited volume of activity is a common feature of all the stock exchanges of the region. The few diversification opportunities offered by each individual market constrains the demand for investments and the volume of trades, keeping low the revenues of market intermediaries and the amount of resources directed toward the stock market. A reduction of fixed costs and an increase in the number of listings can result from the adoption of common listing, trading and settlement rules within the region, and from removal of the restrictions on investments in the stock exchanges of the region.

VI. Financial Safety Nets and Crisis Management

60. The potential for financial instability may be contained by a well designed deposit insurance scheme in a properly supervised banking system. In October 2002, the authorities announced plans to introduce a compulsory deposit insurance scheme for institutions licensed under the Financial Institutions Act. At present, the government guarantees the deposits of the state-owned bank (BNB), which will be phased out over a two- to three-year period, while new deposits will be covered by the new scheme. It is contemplated that the level of coverage will be related to GDP per capita, similar to that in other countries in the region. The premium will initially be uniform. The corporation will also be able to borrow with a guarantee from the CBB or the government.

61. An appropriately designed deposit insurance scheme protecting small depositors could contribute to financial stability by reducing the risk of runs on banks. However, this requires a careful tailoring of the system that minimizes moral hazard and the political temptation to expand its scope. Given the size of the financial sector, it may be desirable to consider a simple system along the lines of a “pay box” whereby the administering entity only collects the premiums and makes payments to eligible depositors. The scheme should not include any provision that could allow the coverage of deposits with financial institutions that do not contribute to the scheme. This is particularly important in light of the present weaknesses of credit unions among nonbank deposit taking institutions. If credit unions are to be covered de facto, they should come under the same degree of supervision as commercial banks. Since, in the event of insufficient funds, the corporation will be allowed to borrow from the CBB or the MoF, it would be important that government rather than the CBB accepts this risk.

62. The CBB is the lender-of-last-resort. Since most of the banks are foreign owned, they are expected to rely on parent resources for emergency assistance. The authorities indicated that any lender-of-last resort liquidity support would be provided to commercial banks on a case-by-case basis. They are of the view that any adverse developments in a bank would be reflected in its frequent resort to the discount window. This would provide the CBB ample opportunity to pursue corrective actions at the concerned bank. In recent years, there has been no such emergency lending. Commercial banks may borrow from the CBB through discount facility for their short-term liquidity needs, but banks have not used this facility for a long time. The interest rate on such borrowing is currently set at 7.5 percent and lending is collaterized by government securities. There is no explicit individual or aggregate quota on the use of this facility.

63. The significant foreign ownership of the banking system provides some assurances of support by the parent in the event of distress. Recent examples of parents walking away from a subsidiary, however, suggest that the CBB should not fully rely on parent support. The CBB should revisit the need for contingency plans in light of the experience gained during the takeover of BCCI’s activities in Barbados (which became the Mutual Bank).

64. The legislation delegates authority to the CBB to control and seize the administration of a licensee for its reorganization or its compulsory winding-up under specified circumstances.15 The Financial Institutions Act, however, includes provisions that could prevent speedy action and thus increase the risk for erosion of the assets of the institution. It is unclear if the CBB can fully control the operations during the appeal period. Reorganization is currently subject to court determination. While checks and balances must be in place to ensure the rule of law, it is also important that reorganization and compulsory winding-up procedures, which currently require complicated and time consuming court proceedings with an appeal process, do not prolong the resolution of a distressed bank situation. These provisions are expected to, and should be, reviewed in context with the introduction of deposit insurance. A more proactive approach may be facilitated if prompt corrective action provisions were to be introduced.

VII. Other Issues

A. Transparency and Disclosure Practices

65. An assessment of observance of the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies found that overall transparency practices regarding the CBB’s monetary policy are very good. The monetary policy process is well structured and open. The procedures and practices governing the instruments of monetary policy are adequately disclosed through various publications and other means, including the monthly Economic and Financial Statistics, the CBB’s Annual Report, the Annual Statistical Digest, the Economic Review, other publications, and its website.

66. With respect to transparency in financial policies, while observance is generally high in banking, it could be strengthened in other nonbanking areas. Barbados starts with the considerable advantage that much of the legislation supporting the supervisory infrastructure is sound. The new Securities Act, and the International Financial Services Act, provide good foundations, but some amendments may be needed to The Financial Institutions Act to match the IFSA and the Central Bank of Barbados Act to provide for the disclosure of prudential supervision of the payments system. Also, since the Securities Commission is just getting established, there is yet to be adequate transparency of its regulations and procedures. The Insurance Act and its administration are opaque and changes to make the operations of the Office of the Supervisor of Insurance transparent could be useful.

B. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)

67. Barbados has worked hard to develop an effective regime for anti-money laundering and combating the financing of terrorism16 The Money Laundering (Prevention and Control) Act (“MLPCA”) was enacted in 1998 and amended in 2002; the Anti-Terrorism Act was enacted in 2002; the Mutual Assistance in Criminal Matters Act was amended in 2001; and Know Your Customers Guidelines have been issued for all financial services providers. The institutional structure has also been strengthened in 2000 with the creation of the Anti-Money Laundering Authority (“AMLA”). The AMLA is charged with ensuring compliance by all financial institutions with the AML/CFT requirements.

68. The AMLA is well organized and functions through its supervisory board (SB). The SB consists of representatives from the Commissioner of Police, Inland Revenue, Customs authorities, Supervisor of Insurance, Corporate Affairs and Intellectual Property Office, Central Bank, and the Solicitor General’s office. The Financial Intelligence Unit (“FIU”) conducts AMLA’s day-to-day activities. It receives, analyzes and disseminates pertinent financial information and intelligence and investigates suspicious transactions. The FIU has developed a networking mechanism through the organization of an Intelligence Committee (IC) to enhance cooperation among the authorities. The IC is comprised of the government entities represented on the SB plus the Registrar of Cooperatives, Director of International Business and the Immigration Department. The FIU meets the Egmont Group’s definition and Barbados was recently admitted to Egmont membership at its annual meeting June 5, 2002

69. Given the FIU’s limited staff, it cannot be realistically expected to assess compliance in the entire financial sector.17 Thus, it relies heavily on the supervisory authorities of various financial institutions. This approach is complemented by the networking mechanism and seems to work well in the domestic banking sector, supervised by the Central Bank of Barbados.

70. AML/CFT supervision of offshore banking has commenced. The Central Bank of Barbados has conducted some off-site compliance reviews and initiated an on-site inspection program in the offshore banks. In view of the risk posed by money laundering in the offshore banking sector, it appears prudent to proceed expeditiously with the implementation of such a program to ensure AML/CFT compliance.

71. Effective supervision in the insurance and the capital markets sectors is only now getting off the ground. AML/CFT compliance programs are also needed in these sectors and should be implemented in line with the appropriate risks for these industries. Currently there is little activity in the securities sector and the risk of money laundering may not be as significant as in some other financial institutions.

72. Another area of concern is the apparent lack of an effective process for AML/CFT prevention in the credit union sector. The Registrar’s office has not conducted AML/CFT onsite inspections until recently when its staff began joint inspections with the Central Bank of Barbados in some of the larger credit unions. The CBB’s involvement in this program will be ongoing and will, in association with the Financial Intelligence Unit, include training of staff for assessing observance of AML/CFT guidelines. Although it will commence inspections of small and medium sized credit unions as soon as feasible, the circumscribed nature of the activities and membership of the credit unions are a deterrent for money laundering through this channel.

73. The AMLA and the financial regulators should consider alternatives in light of the risks that money laundering poses in these areas. The AMLA could, as an interim measure, require that regulators request written reports from the respective entities they supervise in order to assist in determining compliance with AML/CFT requirements.

Section II: Summary Assessments of the Observance of Financial Sector Standards

This section of the Financial System Stability Assessment for Barbados contains information on the observance of international standards and codes relevant for the financial sector. The assessment has helped to identify the extent to which the supervisory and regulatory framework is adequate to address the potential risks in the financial system. It also provides an assessment of the transparency practices regarding monetary and financial policy.

As part of the FSAP, the following detailed assessments of standards were undertaken: Basel Core Principles for Effective Banking Supervision: Messrs. Keith Bell (external expert, formerly with the Office of Superintendent of Financial Institutions, Canada) and Tonny Lybek (IMF); the International Organization of Securities Commission (IOSCO) Objectives and Principles of Securities Regulation: Ms. Melinda Roth (World Bank); the Committee on Payment and Settlement Systems (CPSS) Core Principles for Systemically Important Payment Systems (CPSIP); Mr. Robert Keppler (World Bank); the International Association of Insurance Supervisors (IAIS) Insurance Supervisory Principles: Mr. Craig Thorburn; and the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies; Messrs. Vassili Prokopenko (IMF) and Carlisle Proctor (external expert, formerly with the Reserve Bank of Australia). The assessments were based on the authorities’ answers to questionnaires and work during the FSAP mission during June 24 to July 12, 2002.

Barbados’ compliance with international supervisory standards is generally high, especially in the onshore and offshore banking sectors. The establishment of the Securities Commission under the Securities Act paves the way for strengthened supervision of securities markets. Considerable weaknesses are identified in the insurance area where there is a pressing need to strengthen supervision both in the onshore and offshore segments of the industry. Transparency practices regarding monetary and financial policies are generally in line with best practices. Reflecting supervisory weaknesses, transparency practices are also deficient in the insurance sector.

I. Compliance with the Basel Core Principles for Effective Banking Supervision

A. Commercial Banks and Part III Companies

Main Findings

74. Many of the Core Principles for Effective Supervision of commercial banks and part III companies are either “compliant” or “largely compliant.” Only 2 principles are not compliant, of which currently one is of limited importance. The representatives of the Bank Supervision Department (BSD) are fully aware of the remaining weaknesses in the existing legal framework and procedures.

Preconditions for effective banking supervision and CP 1

75. The legal, business, and accounting framework in which licensees operate and supervision takes place are generally sound and well established. The supervisory authority has extensive powers to control the risks assumed by licensees. The required involvement of the Minister of Finance in certain regulatory actions could compromise the CBB’s judgments in certain situations and impact its independence. While the Minister has the power to delegate any of his or her supervisory and regulatory functions under the FIA to the CBB (save those for licensing and revocation of licenses), it has not formally been done. Moreover, under the FIA, the Minister has substantial powers to establish prudential safety and soundness regulations. To date, these powers have not been used extensively. Senior management of the supervisory authority is confident that it possesses an adequate number of qualified staff to provide timely, comprehensive onsite and offsite supervision to the present number of licensees. However, it is also cognizant that a growing, diverse group of financial institutions, coupled with developments in the industry, will bring forth the necessity of additional resources.

Licensing and structure, CPs 2-5

76. The FIA defines the term ‘bank’ as “a company carrying on the business of banking.” The latter term is defined, in circular fashion in part, as ‘generally the undertaking of any business appertaining to the business of banking provided that such business has not been specifically prohibited by the Central Bank.” While such a definition imparts flexibility, it requires that licenses be precisely drawn and that supervision be timely. The FIA prohibits use of the term ‘bank’ and its derivatives except by institutions regulated by the CBB as banks. The criteria for establishing licensees and approving the scope of their operations are thorough and include the appropriate considerations. Mergers of licensees (by either share acquisition or transfer of undertaking) are subject to the prior approval of the Minister. While the CBB has the authority to review and give prior approval to the proposed establishment, by licensees, of branches, representative offices or subsidiaries (and to consider the risks involved for the licensee and to the supervisory interests of the CBB), it does not have the power to review and give prior approval to significant corporate acquisitions by licensees.

77. There must be prior review and approval by the Minister of the proposed acquisition of a shareholder interest above the threshold level of 20 percent of the value of the stated capital of an institution incorporated in Barbados and licensed pursuant to the FIA, which is comparatively high.

Prudential regulations and requirements, CPs 6-15

78. The CBB has imposed a minimum eight percent capital adequacy ratio of risk-weighted assets, but the CBB’s capital adequacy requirements do not yet embrace market risk-related computations, capital charges, or detailed reporting requirements

79. A regulation establishing procedural requirements for asset quality classification and provisioning has been issued and provides substantive guidance to licensees’ credit operations. However, while it does have a set of guidelines for its own internal use in monitoring the financial condition of licensees, the CBB has not issued guidelines and regulations that provide licensees comprehensive instructions and requirements for lending and investment policies and procedures (including credit concentrations and connected lending), the related internal control systems, or for country, market and transfer risk (CPs 7-11). Regarding risk management process, the CBB has not yet introduced internal control, risk management, and corporate governance regulations (CP 13).

80. The CBB requires that licensees maintain adequate internal control systems and appoint competent external auditors who evaluate and report on the adequacy of internal controls in the conduct of the annual audit. The CBB determines that such systems are in place and competent, independent auditors make that independent assessment of such controls during its onsite inspections. Given its present level of inspection resources and the number of licensees, the CBB’s target is to conduct an onsite inspection of each licensee every 18 to 24 months (CP 14).

81. The CBB has introduced a know-your-customer guideline, in keeping with the international standards of the Financial Action Task Force (FATF), to enforce the control of money laundering. Compliance on money laundering is evaluated at the onsite inspections and licensees are required to report suspicious transactions to the Financial Intelligence Unit (FIU) (CP 15).

Methods of ongoing supervision, CPs 16-20

82. The CBB performs both onsite and offsite supervision. Comprehensive and targeted onsite inspections are planned in consultation with the offsite supervision unit and conducted using standardized written procedures. The BSD generally performs their functions effectively based on appropriate procedures. The BSD’s senior management is confident that the human resources that are devoted to supervision are adequate to ensure timely and comprehensive supervision to the present number of licensees. However, it is also cognizant that a growing, diverse group of financial institutions, coupled with development in the industry, will bring forth the necessity of additional resources (CP 16).

83. The BSD plans to initiate regular meetings with management of FIA licensees, which will supplement meetings held during the onsite examination cycle. Regularly scheduled discussions with the external auditors of licensees are not yet a normal part of the supervisory process, but the BSD meets annually with external auditing firms to discuss regulatory issues generally (CP 17). The CBB has full authority to request and access any information needed in the exercise of its supervision. The various prudential reports are submitted by licensees in hard copy or ‘disk’ format for subsequent entry into the CBB’s data system. They are reviewed, analyzed, and followed up with each licensee’s management by the offsite supervision unit on an as-required basis (CP 18). In addition to its onsite inspections, the CBB can use the reports of the licensees’ external auditors, or external auditors specially appointed by the CBB, as significant sources of supervisory information. Licensees are required to designate as their external auditor a member of an auditing association approved by the CBB. The external auditor of a licensee is obligated to report to the CBB where the auditor believes that there has been non-compliance with the requirements of the license or the governing statute and regulations (CP 19).

84. The CBB practices direct and indirect supervision, including onsite inspection, offsite surveillance, and prudential reporting, and imposes its prudential standards on a consolidated basis for all of the locally-incorporated licensees within its jurisdiction, including their subsidiaries and foreign operations, although they may not report quarterly on a consolidated basis (CP 20).

Information requirements, CP 21

85. Licensees are required to prepare prudential and other financial information and other reports in accordance with appropriate international accounting standards. Public disclosure requirements are in place. The CBB ensures that information provided from licensees’ records is verified periodically through onsite inspections. There is no requirement that the external auditors verify such information.

Remedial measures and exit, CP 22

86. The CBB has authority to pursue a series of graduated remedial measures in the event that a licensee has supervisory problems or fails to comply with prudential regulations, or infracts one of the CBB’s internal guidelines. The CBB has been generally successful in obtaining prudential compliance and correction of matters requiring attention through its ongoing supervisory communications with licensees, without the necessity to invoke the use of sanctions and penalties. The Minister must approve certain remedial actions.

Cross-border banking, CPs 23-25

87. The CBB has the authority to supervise the overseas operations of locally incorporated licensees. The BSD recognizes that it will have to include examinations of overseas establishments of licensees’ activities in its ongoing supervisory process (CP 23). Supervisory information is exchanged, as appropriate, with foreign home and host country supervisory authorities through ongoing informal contacts, as necessary (CP 24). The CBB enforces the same supervisory policies and standards, as appropriate, on the operations of foreign banks in Barbados, as are required for locally incorporated institutions (CP 25).

Table 9.

Summary of Main Findings of Assessment of Implementation of the Basel Core Principles for Commercial Banks and Part III Companies

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Authorities’ Response and Next Steps

88. The authorities broadly agree with the assessment and recommendations with two important exceptions. They do not agree that the required involvement of the Minister in certain regulatory actions mentioned under General Preconditions for Effective Banking Supervision and in the assessment of Core Principle 1 could compromise the CBB’s judgments in certain situations and impact its independence. Instead, they see intervention by the Minister of Finance and the Governor of the CBB in exceptional cases as one way to resolve difficult situations before initiating timely and costly legal procedures. The Bank Supervision Department ensures that banks make appropriate provisions.

89. Furthermore, the authorities are generally concerned that the assessors have not adequately appreciated the level of sophistication of the financial system under review. The exchange controls, for instance, limit banks’ lending abroad, and together with interest controls, they reduce market risks. Accordingly, the authorities argue that the rating of CP 6 and CP 12 are harsh and should be revised upwards, while CP 11 should be assessed as “not applicable.”

90. The authorities agree with the assessors’ recommended actions to address the identified weaknesses. Most of the recommendations will be addressed during the envisaged review of the Financial Institutions Act, while new regulations and guidelines will address remaining issues.

B. Offshore Banks

Main Findings

91. Offshore banks are exempt from exchange controls, and some are not allowed to accept third party deposits. In contrast to the former Offshore Banking Act, the newly adopted IFSA explicitly enables the CBB to conduct onsite examination of offshore banks.

92. Many of the Core Principles for Effective Supervision of offshore banks are either “compliant” or “largely compliant.” Thus, only 2 principles are “not compliant.” The representatives of the Bank Supervision Department are fully aware of the remaining weaknesses in the existing legal framework and procedures.

Preconditions for effective banking supervision and CP 1

93. The recently enacted IFSA provides powers, almost identical to the FIA, to the Minister of finance, who has delegated the supervisory and regulatory functions to the CBB, save those for licensing, revocation, and cancellation of licensees, and establishing regulations.

Licensing and structure, CPs 2-5

94. The terms “international financial services” and “bank” are protected in the IFSA. The IFSA requires the Minister’s prior review and approval of a proposed acquisition above the threshold level of 10 percent of the value of the stated capital of a licensee (in contrast to 20 percent in the FIA).

Prudential regulations and requirements, CPs 6-15

95. All licensees subject to the IFSA have been asked to abide by the four regulations made under the FIA (capital adequacy ratio, loan categorization and provisioning, financial statements, and fees). CBB’s capital adequacy requirements do not yet embrace market risk-related computations. Other risks will be reviewed during onsite inspections.

Methods of ongoing supervision, CPs 16-20

96. The CBB performs offsite supervision, and has just begun to conduct onsite inspections with the enactment of the IFSA. In contrast to FIA licensees, regular annual meetings with IFSA licensees, occasionally together with the external auditor, ensures regular contact between the CBB and the management. Moreover, in contrast to the FIA, a licensee’s external auditor is subject to prior approval by the CBB. Both the FIA and the IFSA require that the external auditor of a licensee report to the CBB where the auditor believes that there has been non-compliance with the requirements of the governing statute and regulations or the conditions of the license.

Information requirements, CP 21

97. IFSA licensees are required to prepare prudential and other financial information and other reports in accordance with international accounting standards or their parent’s accounting standards. Public disclosure requirements are in place. The CBB will now ensure that information provided from licensees’ records is verified periodically through onsite inspections. There is no requirement that external auditors verify such information.

Remedial measures and exit, CP 22

98. The IFSA authorizes the CBB to pursue a series of graduated remedial measures in the event that a licensee has supervisory problems or fails to comply with prudential regulations, or infracts one of the CBB’s internal guidelines. The CBB has been generally successful in obtaining prudential compliance and correction of matters requiring attention through its ongoing supervisory communications with licensees, without the necessity to invoke the use of sanctions and penalties. The Minister must approve the use of certain remedial actions.

Cross-border banking, CPs 23-25

99. The CBB has the authority to supervise the overseas operations of locally incorporated IFSA licensees. In isolated instances, the CBB has conducted onsite examinations of the overseas establishments of IFSA licensees and recognizes that it will have to include these activities in its ongoing supervisory process. Supervisory information is exchanged, as appropriate, with foreign home and host country supervisory authorities through ongoing informal contacts, as necessary.

Table 10.

Summary of Main Findings of Assessment of Implementation of the Basel Core Principles for Offshore Banks

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Authorities’ Response and Next Steps

100. The CBB generally agrees with the assessment and recommendations. Regulations will be issued to: (i) introduce capital requirements for market risks; (ii) provide guidance on country and transfer risks; and (iii) introduce an aggregate limit for large exposures. Guidelines for corporate governance are currently being prepared. The Handbook and the Manual will be revised to reflect current practices.

II. Compliance with the CPSS Core Principles for Systemically Important Payment Systems

A. General

101. An assessment of the stability, efficiency, and soundness of payment system activities according to the CPSS Core Principles for Payment Systems was undertaken under the auspices of the IMF-World Bank Financial Sector Assessment Program (FSAP), based on information up to July 2002. The assessment was conducted by Mr. Robert Keppler (World Bank).

Information and methodology

102. Payment systems in Barbados are in transition and two newly designed automated systems are being implemented. These are an automated clearing (ACH) system to process truncated checks and a modern automated Real Time Gross Settlement System—owned and operated by the Central Bank of Barbados (CBB)—to process large value credit transfers and other time critical credit transfers. Initially, the ACH system will process low value checks. Settlement of ACH clearing balances will take place through the RTGS system twice per day. Other systems, such as the funds transfer leg of the stock exchange system, will also settle through the RTGS system. From the outset, the RTGS system has been designed to satisfy the CPSS Core Principles. It is estimated that some 1,500 transactions per day will be processed via the RTGS system. This represents approximately 5 percent of the typical daily volume of all payment transactions and approximately 70 percent of the total daily value of such transactions. As the ACH system will process low value payments, it is not considered to be a systemically important payment system.

103. The RTGS system is a systemically important payment system. The assessment is based on a comprehensive set of system and user documentation provided by the CBB. This includes technical system design documentation, user training documentation, commercial bank and accountant general operational procedures, security procedures including failure recovery and contingency planning procedures, relevant S.W.I.F.T. documentation, operational readiness check lists, participant terms and conditions (contractual arrangements between participants and the central bank relating to the provision of settlement accounting services), a legal opinion from the CBB’s external legal counsel, a description of the Virtual Private Network (VPN) system access policy which will be used by participants to connect with the central bank systems, and miscellaneous project documents including a draft CBB Board Paper describing the envisaged cost recovery and pricing policy, and a draft public policy document “The Role of the Central Bank in Payment Systems.” These sources were supplemented with several discussions held with officials of the central bank and with the CBB’s external legal counsel.

B. Institutional Setting and General Pre-conditions

104. All licensed commercial banks are eligible for participation in the RTGS system. In addition, transactions relating to government activities under the control of the accountant general will be processed via the system. The RTGS system has real time links to the central bank general ledger system (Prophecy); thus all transactions that have an impact on a participants’ position in the books of the central bank will be reflected in a timely manner in the settlement accounts maintained in the RTGS accounting module. This is a major feature of the system and provides real-time access to current account balances for commercial bank treasurers and accountant general staff. Participants will have real time tools to assist them to proactively manage their payments queues and thus optimize the use of liquidity available to them. In addition, the system has a range of gridlock busting mechanisms that allows appropriate bi-lateral or multilateral off-set arrangements to be invoked to further optimize the use of system liquidity. In summary, the RTGS functionality is similar to that observed in advanced economic markets such as member states of the European Union.

105. Barbados is a relatively small banking system that cannot afford expensive infrastructure. This was recognized at the outset of the RTGS project and steps were taken to acquire the necessary information technology infrastructure and specialized RTGS software at acceptable levels of cost - both initial cost and on-going operational costs. For security reasons and to reduce project risk a decision was made to use the S.W.I.F.T. Fin-system (V-Copy configuration) for submitting and receiving payments instructions. However, to minimize SWIFT message costs, all nonvalue messaging such as account balance monitoring inquiries, and payments queue management, will be undertaken via browser based software installed in participant work stations that access the relevant RTGS servers via the central bank VPN services.

106. Legal opinions were sought from the external legal advisers to the central bank on all substantial matters that relate both to the central bank’s role in establishing an RTGS system as well as critical issues such as; a) finality and irrevocability of RTGS payments, b) the degree to which the RTGS system is insulated from the provisions of the Barbados Insolvency Act; and c) the consistency of the proposed Terms and Conditions (Participant Contracts) with existing legislation including the Arbitration Act. Barbados has already enacted an Electronic Transactions Act that provides legal validity to electronic records and digital signatures. The Evidence Act has also been amended to ensure that electronic features are acceptable as evidentiary material in judicial matters. There are no substantial legal impediments to regarding the implementation of the RTGS system.

107. The following assessment of the RTGS system design and envisaged operational arrangements is based on the Guidance Note for Observance of Core Principles for Systemically Important Payment Systems (CPSIPS) issued by the International Monetary Fund and the World Bank in August 2001.

Table 11.

Main Findings of the Assessment of the Observance of CPSS Core Principles for Systemically Important Payments Systems—Central Bank of Barbados RTGS System (CBRTGS)

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Recommended actions

Table 12.

Recommended actions to improve observance of CPSS Core Principles and Central Bank Responsibilities in applying the CPs—CBRTGS

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III. Observance of IOSCO Principles of Securities Supervision

A. General

108. This assessment covers the Barbados securities sector, for which regulation and supervision are largely the responsibility of the Securities and Exchange Commission (SC). The main objectives of the assessment are to determine levels of observance of the International Organization of Securities Commissions (IOSCO) principles and to suggest areas where further development may be appropriate. This assessment was undertaken as part of a Financial Sector Assessment Program (FSAP) for Barbados.

109. The assessment was conducted by Ms. Melinda Roth, Senior Financial Sector Specialist, Financial Sector Development Department of the World Bank. The assessment is based on the recently updated Barbadian IOSCO self-assessment as well as a review of the securities laws; internet sites and other documents; web sites and documents from the Barbados Stock Exchange (BSE) and information from the Barbados Central Securities Depository Inc. (BCSDI), and other publicly available information. Extensive discussions were held with the BSE/SC. In addition, meetings with market participants and other officials also provided input to the assessment.

110. The assessment is based on the Principles of Securities Regulation adopted by IOSCO in September 1998 and updated in February 2002 which contain detailed explanations in specific areas that should be observed under each principle. The assessment was based on the current status of the SC, recognizing that it is still in a transition phase and is not yet fully operational. This assessment notes which principles may be affected and should change when the transition ends.

B. Industry Background and Overview

Supervisory framework

111. The SC was established in 2001 through the implementation of the Securities Act (2001 – 13). Functions and responsibilities of the SC are defined in this Act which seems comprehensive and well drafted. Seven commissioners have been appointed by the Minister of Finance, including a Chairman. Staffing of the SC is not yet complete, as a CEO/General Manager and a legal advisor remain to be hired.

112. Before the new Securities Act, the securities market functioned without any independent regulatory oversight. The new Act separated the oversight functions from the Barbados Stock Exchange (BSE) attributing it to the SC. However, until the SC becomes fully operational, several regulatory powers have been delegated to the BSE, including monitoring the members of the BSE, regulation of daily trading, registration and licensing of market participants, approval of registrars and transfer agents for new securities and issuance of certificates of approval of prospectuses. Other powers have been delegated to the Barbados Central Securities Depository Inc (BCSDI), including regulation of clearing and settlement of transactions and approval of prospectuses in the case of new issues.

113. The independence of the regulator is important for market integrity, but will also help in the development of the capital markets. Given the resource constraints, removal of the regulatory functions from the BSE will help focus it more on issues related to the efficiency and development of the marketplace. In turn, the SC will be able to focus on market supervision, the protection of investors, and the promulgation of a clear regulatory structure which should also help the process of integration of markets within the Caribbean region.

Market structure

114. Stock Exchange: The original trading facility in Barbados was established in 1987, but in August 2001, the Barbados Stock Exchange was reincorporated according to the Securities Act. As of July 2001, the BSE has introduced electronic trading. Trading sessions occur twice a week. As of July 2002, there were 25 issues traded on the regular market, and 2 funds traded on the junior market.

115. Market Infrastructure: The Barbados Central Securities Depository Inc (BCSDI) is a wholly owned subsidiary of the BSE and is registered as a self-regulatory organization (SRO) under the Securities Act. BCSDI is responsible for clearing and settlement. Currently, the system uses a simple check settlement system, but with the introduction of a RTGS system a delivery versus payment (DVP) is to be adopted for securities transactions which could effectively eliminate any settlement risk in securities trading.

116. Market Intermediaries: There are 8 licensed brokers in Barbados as of July 2002. In addition there are 5 mutual fund asset companies (some of which manage more than one fund) with approximately BDS$200 million under management.

117. Debt Markets: The trades on debt instruments are even less frequent than those on equities. Annual volume in 2001 for government securities in the secondary market, was BDS$10 million. There are also two issues of corporate bonds, but both issuers are in the tourism sector and the bonds are guaranteed by the government.

C. Preconditions

118. Among the most critical preconditions for effective securities supervision are sound and sustainable macroeconomic policies conducive to investment and savings, enforceable property rights, a supportive political environment free from corruption, well developed infrastructure (such as legal and accounting practices, clearing and settlement systems, payments system) and an effective judicial system. Corporate governance and insolvency mechanisms are also necessary. These appear to be largely in place in Barbados in the form of enacted laws and institutions, although the implementation of the laws and the effectiveness of institutions have yielded mixed results.

119. IOSCO also lists several attributes necessary for effective regulation: no unnecessary barriers to entry and exit from markets and products; market openness to the widest range of participants which meet predefined entry criteria; regulator’s awareness of the impact of new policies. These preconditions appear to be met in Barbados.

D. Main Findings

120. Most of the principles have been “implemented” or “partially implemented,” with only two principles determined to be “not implemented.” The SC has the potential to act as a strong regulator with comprehensive powers, and it has the willingness to carry out its supervisory mandate. In fact, the legal framework (mainly the Securities Act) is excellent as it is thorough, including broad powers for the SC, immunity of staff discharging their duties in good faith, strict confidentiality and conflict of interest clauses for commission members and SC staff, definitions and penalties for improper market behavior and strong disclosure requirements for issuers.

121. However, the SC is not yet fully staffed nor fully operational. In addition, the regulations pursuant to the Securities Act need to be passed as does the new Mutual Funds Act and its accompanying regulations. The passage of this legislation will improve the IOSCO assessment.

122. The remaining priorities facing the SC are in the areas of enforcement and ensuring compliance. While the Securities Act provides the proper tools for the SC, such mechanisms have not been used in the market as no third party oversight existed previously. The SC needs to be staffed adequately to supervise efficiently all market participants and mutual funds. Licensing and submission of annual reports are insufficient to ensure protection of investors and proper functioning of the market. Inspections, investigations and enforcement actions are required.

Other suggested areas of improvement include the following:

  • increased disclosure including immediate or as soon as practical disclosure of legal insider buying and selling;

  • risk based prudential requirements should be implemented for licensed market intermediaries; and

  • securities clearing and settlement should move toward DVP principles and T – 3 settlement cycle.

123. A summary of the main findings of the assessment of observance to IOSCO Principles is as follows:

Table 13.

Summary of Main Findings for Securities Supervision Principles

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E. Recommended Action Plan and Next Steps

Recommended actions

A recommended action plan to improve the implementation of the IOSCO objectives and principles is presented below:

Table 14.

Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation

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Authorities’ Response

Principles relating to the Regulator – Ps1-5: The Securities Commission has communicated the importance of the enactment of this legislation and is satisfied that the matter is being addressed by the Chief Parliamentary Counsel. It is anticipated that it would be enacted before December 31, 2002.

Principles of Self-Regulation – Ps6-7: The Securities Commission is cognizant of its legal responsibility to regulate SROs. The BSE and BCSDI are also aware that they are under the regulatory responsibility of the SC. As soon as this Report is finalized, the Boards of the BSE & BCSDI will be made aware of the requirement to submit Board Minutes to the SC.

Principles for the enforcement of securities regulation 8-10: Inspection, investigation and surveillance are priority areas for implementation as soon as the Commission is fully staffed and operational.

Principles for co-operation in regulation 11-13: The Commission has started its research in this area. The approach is to ascertain whether it is necessary to obtain another formal arrangement for sharing information on Securities business if there is already a Country to country bilateral arrangement in place. If the answer is no, the Commission would acquire the list of countries with whom Barbados already has such an Agreement and treat requests for countries which do not have the arrangement on a case by case basis, obtaining the final approval from the Minister, to share the information.

Principles for Issuers Ps 14-16: Work has already started in this area beginning with the Mutual Funds. Timeframes for reporting are written into the Act with a maximum of 7 days to report or the Commission could impose a fine.

Principles for Collective Investment Schemes – Psl7-20: The Bill and Regulations are ready for approval as soon as Parliament resumes from Summer recess, October 1, 2002.

Principles for market intermediaries. Ps21-24: Prudential guidelines as well as risk based prudential requirements are being considered beginning with the Broker-Members of the BSE.

Principles for the Secondary Market – Ps25-30: CBB plans to ‘go live’ with RTGS on October 1, 2002. Within two weeks after that date, BSE & BCSDI plan to follow suit with remote trading and simultaneous computerized clearance and settlement since the electronic system is tightly coupled.

IV. Assessment of Observance of the IAIS Insurance Core Principles

A. General Background and Overview

124. The assessment of the Insurance Sector in Barbados was performed as part of the joint IMF-World Bank Financial Sector Assessment Program. The main objectives of the assessment are to determine the levels of observance with the International Association of Insurance Supervisors (IAIS) principles, and to suggest areas where further development may be appropriate. The assessment covers both on-shore and off-shore insurance sectors and has been undertaken by Mr. Craig Thorburn, Senior Financial Sector Specialist, Financial Sector Department of the World Bank.

Information and methodology used for assessment

125. The assessment is based on a review of the self assessment prepared by the Supervisor of Insurance in comparison with the International Association of Insurance Supervisors (IAIS) Core Principles and Core Principles Methodology; review of the insurance laws in Barbados—including the Insurance Act 1996, which regulates on-shore companies, and the Exempt Insurance Act, which regulates off-shore insurance operations; and discussions with the Supervisor of Insurance, several insurers, ratings agencies and auditors.

B. Institutional Setting and Market Structure

126. The private insurance sector in Barbados is taken to cover non life insurance (referred to as general insurance) and life insurance. In 2000, Swiss Re Sigma 6/2001 reported that the insurance market in Barbados had total premiums of US$184 million. The market is small in world and regional terms, ranking 79th in the world, compared with: Trinidad and Tobago, US$424 million, ranked 57th; the Bahamas, US$321 million, ranked 65th; and Jamaica US$303 million, ranked 66th. Premiums per capita are high at US$692 ranked 28th in the world and second only to the Bahamas in the region US$1070 ranked 21st. Premiums as a percentage of GDP for Barbados, commonly referred to as “insurance penetration,” stood at 7.4 percent, ranking the country 16th on this measure.

127. The domestic market is stable and is reported to be profitable. The relatively small population combined with the levels of insurance and numbers of distributors suggests that companies have little prospect of benefiting from organic growth in the domestic market and, as a result, are focusing on increasing the product lines to their customer base and achieving economies through acquisition. We are advised that there are 19 companies operating in the domestic market of which 9 are life insurers and 10 are non life insurers. Four of the 19 companies are branch operations.

Non Life (General) Insurance

128. The domestic non life insurance market is dominated by the motor insurance class which represents by far the largest product line in the market. Motor insurance includes both third party liability insurance as well as property damage type covers. This line of business covers two-thirds of the total net premiums in the general insurance sector.

129. Accident and sickness insurance has been consistently the second largest class at around 12 percent of the total net premium.

130. For property insurance, the third largest class at around 10 percent of net premiums, cessions to reinsurers are high at between 85 percent and 90 percent of premiums for the industry as a whole. In part, the reason for this is the significant reinsurance needs and costs associated with the catastrophe risk exposures in Barbados, although it is noted that insurers have not made material claims for hurricanes for several decades.

131. The Insurance Corporation of Barbados is large and is still majority owned by the state. The company has been partially privatized and it is intended to further reduce the level of public ownership in the future.

Life Insurance

132. The Barbadian domestic life insurance market represents BDS$116 million of premiums, most significantly represented by individual life insurance products. In addition, annuity business is a growing market reflecting increased interest in retirement planning. The other class, group life insurance, is fairly mature. Reinsurance cessions in life insurance are low.

133. There are over 80,000 policies in force; a high number compared to the size of the population. Total levels of insurance, measured by sums insured, exceed BDS$5,000 millions suggesting that sums insured per capita are also high relative to average earnings.

134. The largest companies, the Barbados Mutual Life Assurance Society (the Mutual) and the Life of Barbados Limited (LOB), have been undergoing change. LOB was the subject of an active takeover which involved a competitive bidding duel between the Mutual and a non-Barbadian company which was eventually resolved in favor of the Mutual. This leaves the Mutual’s combined operations as dominant in the market with an estimated market share in excess of two-thirds of the domestic life insurance market. The company is undergoing a process of demutualization and listing. The share of the company’s business represented by the domestic sector is less than l/5th.

Off Shore Sector

135. There are around 180 active off shore companies. The vast majority of these are of USA and Canadian origin. These companies report as having premium income of around BDS$10 billions before reinsurance and BDS$5 billions net of reinsurance. Assets exceed BDS$30 billions against liabilities of BDS$25 billions. Assets and liabilities are materially and in many cases entirely off shore.

C. General Preconditions for Effective Insurance Supervision

136. The supervision of insurance, both the local market and the off shore sector, falls under the Minister of Finance and is officially performed by the Supervisor of Insurance. This authority is granted for the domestic market under section 4(1) of the Insurance Act 1996 and for the off shore market under various sections of the Exempt Insurance Act of 1983. The domestic legislation represented an update of previous legislation, the Insurance Act of 1972, illustrating a longer history of industry regulation.

137. The definition of companies under the Insurance Act distinguishes between foreign companies and others in such a way that the corporate law applying is the general corporate law of the home country. Foreign companies are defined to be those outside the Caribbean Community and CARICOM Market. There is a dependency on the corporate laws both within the domestic market, the CARICOM market, and outside the CARICOM.

138. It is considered that the judicial system does not present any concerns for the effective operation of the insurance regulation and supervisory requirements. There is a small but well qualified actuarial profession in the country, and considerably larger in number than most countries of similar size. Transparency is subject to a separate assessment so is not subject to comment here.

D. Main Findings

Table 15.

Main Findings of the Assessment of Observance of the IAIS Insurance Supervisory Principles

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E. Recommended Action Plan and Authorities’ Response to the Assessment

Recommended action plan
Table 16.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

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Authorities’ response to the assessment

139. The authorities are generally in agreement with the assessment and recognize that there are areas that can be improved by instituting internal codes of conduct for the industry; others would require more research and a more formal approach to become compliant. It is also recognized that additional resources are required but it should be noted that arrangements have been made with the Ministry of Finance in this regard.

140. It is expected that these matters would be addressed systematically going forward.

V. Observance of the IMF’S Code of Good Practices on Transparency in Monetary and Financial Policies

A. Monetary Policy

General

141. The assessment of the observance by the Central Bank of Barbados of the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies (MFP Transparency Code) for monetary policy was conducted as part of the joint IMF-World Bank Financial Sector Assessment Program (FSAP) mission to Barbados that took place in June-July 2002. The assessment was based on (i) a review of relevant laws and regulations, (ii) information available on the CBB web site and in a variety of official CBB publications, and (iii) discussions with the CBB, the Ministry of Finance, and market participants. The assessment has taken into account the implementation issues mentioned in the Supporting Document to the MFP Transparency Code.18

142. The Barbadian authorities cooperated fully with the assessment and provided all of the necessary information and documentation requested by the mission.

Main findings

143. Monetary policy in Barbados is conducted by the Central Bank of Barbados (CBB). Since 1975, Barbados has maintained an exchange rate targeting framework of its monetary policy, with the Barbados dollar pegged to the U.S. dollar at BDS$2 = US$1. The record indicates that the exchange rate peg has served well as a nominal anchor, and Barbados has preserved price stability and steady real effective exchange rate.

Clarity of roles, responsibilities, and objectives of the CBB for monetary policy

144. Objectives of monetary policy, institutional framework, relations between monetary and fiscal operations, and agency roles performed by the CBB are clearly defined in laws and regulations, including the Central Bank of Barbados Act (CBB Act). There are, however, several areas in which transparency could be further enhanced. The authorities could consider: (i) to publicly disclose the institutional responsibilities for the choice of exchange rate regime; (ii) to publicly clarify whether loans from the CBB to the government under the Special Loans Act are included in the limit on CBB temporary advances to the government; (iii) to disclose the interest rate charged on the CBB credits to the government and that paid on the deposits of the government with the CBB; (iv) to disclose the extent of the CBB’s involvement in the rest of the economy; and (v) to disclose the CBB’s responsibilities in the management of domestic and external public debt.

Open process for formulating and reporting of monetary policy decisions

145. An open process for formulating and reporting monetary policy decisions is fully observed. The CBB Act establishes the basic instruments and methods of monetary policy. Policy changes are promptly communicated and explained in the CBB’s press releases, the monthly Economics and Financial Statistics, and the Annual Report. Fundamental changes are in practice—but not in law—precede by consultations with the parties concerned. However, there is a tendency to limit the communication of policy measures to affected parties, instead of to the public at large. In this regard, a more active dissemination of the information through the CBB’s web site could substantially improve outreach.

Public availability of information on monetary policy

146. Transparency practices are fully observed in the area of public availability of information on monetary policy. Barbados participates in the IMF’s General Data Dissemination System. Presentations and releases of the CBB data meet the GDDS standards related to periodicity and timeliness of data and broadly meet the GDDS standards related to coverage of data. The CBB has a broad range of publications, and it maintains close contacts with media representatives. Governor of the CBB holds quarterly conferences and gives occasionally interviews and public speeches. The CBB also maintains a web site, and the texts of regulations issued by the CBB are available to the public free of charge.

Accountability and assurances of integrity by the CBB

147. Following the legislative requirements, the CBB publicly discloses audited financial statements of its operations in the Annual Report, The CBB staff is subject to specific standards of conduct, and the CBB has internal governance procedures to ensure the integrity of its operations. To enhance the transparency of the CBB’s operations, a consideration could be given to disclose more information on the existing internal mechanisms to control the CBB’s activities as well as to disclose the outcome of internal audit reports and the corrective actions taken.

148. Table 17 briefly summarizes the main recommendations based on the assessment of MFP Transparency Code for monetary policy.

Table 17.

Recommended Plan of Actions to Improve Observance of IMF’s MFP Transparency Code Practices—Monetary Policy

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Authorities’ response

149. The CBB reviewed the draft assessment and provided additional clarifying information, which was incorporated into the final assessment. Overall, the authorities were broadly in agreement with the assessment. They stressed, however, that the assessment of transparency practices should take into consideration individual country circumstances. This was particularly important for small island economies, where because of the small number of institutions and population, as well as personal and institutional interconnectedness, a literal application of the transparency code could be problematic.

B. Banking Supervision

General

150. This assessment reviews the extent to which the IMF’s Code of Good Practice on Transparency in Monetary and Financial Policies pertaining to Banking Supervision is followed by the authorities in Barbados. It was carried out in the context of the FSAP for Barbados during June 24 to July 4, 2002 by Mr. C. C. Procter, a Consultant to the IMF with relevant experience with the Reserve Bank of Australia in collaboration with Mr. Keith Bell (formerly of OFSI Canada), a Consultant who assessed compliance with the Basel Core Principles of Effective Banking Supervision.

151. Discussions were held with the Director, and key staff, of the Department of Bank Supervision in the Central Bank of Barbados (CBB). Consultations were also held with commercial banks (both domestic and foreign), external auditing firms, and a commercial law firm. Extensive use was made of the three Self-Assessment Questionnaires prepared by the authorities covering

  • the Basle Core Principles for both the Onshore and Offshore sectors, and

  • the IMF’s MFP Transparency Code.

The document ‘Reform of the Supervision and Regulation of Financial Institutions -Barbados’ prepared for the Ministry of Finance in 1997, provided some useful background.

152. The core pieces of Legislation are the Central Bank of Barbados Act, the International Financial Services Act 2002,19 and the Financial Institutions Act 1996.

153. There are currently 57 banks in the offshore banking sector. Total assets are about 9 times those of the domestic banking industry. Offshore banks provide international financial services, and in general are not involved in retail business, or business in Barbadian dollars. Hence a number of issues that may be significant for transparency in the domestic market do not apply to, or are less significant for, international banks. This assessment accordingly focuses on the domestic market, with specific reference to the offshore market where appropriate.

154. The CBB is responsible for the regulation and supervision of the banking sector, both domestic and offshore, under mandate from the Minister of Finance. The broad objectives and institutional framework of the Bank in this area are set out in the legislation viz. the Central Bank of Barbados (CBB) Act; the Financial Institutions Actl996 (FIA); the International Financial Services Act 2002 (IFSA); and Regulations made under the FIA.

Main Findings

155. Given the relative size of the banking sector, the CBB has a predominant regulatory role. A significant requirement, in filling that role, is the degree of transparency of the regulatory requirements and practices. Important consideration in this regards are the CBB’s ability to share information and cooperate with the other supervisors. There is a need to require that, as a minimum, that the provisions on information sharing that appear in the IFSA are mirrored in the FIA.

156. A number of jurisdictions have found accountability and transparency are enhanced by having the Governor of the central bank appear regularly before an appropriate committee of the Parliament, to explain policy developments and take questions. Such a role might be envisaged for the Governor of the CBB.

157. The Supervision Department of the CBB might consider a more active role in the important task of increasing understanding in the community generally about the role, purpose and functioning of the regulatory structure supporting the banking industry. Part of this task could involve providing more wide ranging, timely data on aspects supervision. It could also involve replacing a lot of the implicit understandings that exist now between the bank supervisors and the banking industry with more codified, publicly available, rules and procedures.

158. The CBB should develop and promote its dispute handling role, and generally become more active in the consumer protection area. Banks should be required to alert their customers to the CBB’s role in this area.

Table 18.

Recommended Plan of Actions to Improve Observance of IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies—Banking Supervision

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Authorities’ Response

159. The authorities were broadly in agreement with the assessment. They stressed, however, that the assessment of transparency practices should take into consideration individual country circumstances. This was particularly important for small island economies, where because of the small number of institutions and population, as well as personal and institutional interconnectedness, a literal application of the transparency code could be problematic.

C. Insurance Regulation

General

160. This assessment reviews the extent to which Barbados observes the IMF’s Code of Good Practice on Transparency in Monetary and Financial Policies pertaining to Insurance Regulation. It was undertaken in the context of the FSAP for Barbados during June 24 to July 4, 2002. The assessment was carried out by Mr. C. C. Procter, a Consultant to the IMF, with relevant experience with the Reserve Bank of Australia, in collaboration with Mr. Craig Thorburn of the World Bank, who assessed compliance with the IAIS Insurance Core Principles.

161. Discussions were held with key staff of the Barbados Office of the Supervisor of Insurance Extensive use was made of the Self Assessment Questionnaires prepared by the local authorities covering the IAIS Core Principles, and the IMF’s MFP Transparency Code. The document ‘Reform of the Supervision and Regulation of Financial Institutions -Barbados’ prepared for the Ministry of Finance in 1997 provided some useful background..

162. The key pieces of Legislation are the Insurance Act 1996 (as Amended) and the Exempt Insurance Act (as Amended).20

163. Offshore licenses are issued by the Minister of Finance (delegated to the Supervisor) whereas, in the domestic market, the Supervisor of Insurance has a more direct role. Compliance issues with the offshore companies rest with the Supervisor. Exempt (offshore) companies focus primarily on business from outside Barbados. Hence a number of issues significant to transparency in the domestic market do not apply to, or are less significant for, the offshore companies. This assessment accordingly focuses on the domestic insurance market, with specific references to the offshore sector where that seems appropriate.

164. Regulation of the insurance industry in Barbados is carried out by the Office of the Supervisor of Insurance. This is a public service function, responsible to the Minister of Finance. The Insurance Act provides the broad objectives and the institutional framework for the operations of the Supervisor.

Main Findings

165. The operations of the Office of the Supervisor, being located within the Finance Ministry, are somewhat opaque. Also, as presently configured, the ability of the Supervisor to relate effectively with other regulators is restricted.

166. The Supervisor should have a greater role in publicizing the operations of his Office, and the affairs of the industry. The prime source of information on the industry, the Annual Report of the Office, has not been prepared for some years; this omission should be repaired at the earliest opportunity.

167. More should be done to develop and publicize procedures and guidelines; comprehensive data should be regularly made available.

Table 19.

Recommended Plan of Actions to Improve Observance of IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies—Insurance Regulation

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Authorities’ Response

168. The authorities are broadly in agreement with the assessment. They indicated that they have requested assistance through the CARTAC to strengthen supervision of the insurance sector which would also contribute to bringing transparency practices in line with international standards.

D. Securities Regulation

General

This assessment surveys the extent to which Barbados observes the Code of Good Practice on Transparency in Securities Regulation. It was undertaken in the context of the FSAP for Barbados during June 24 to July 4, 2002. The assessment was carried by Mr. C. C. Procter, a Consultant to the IMF with relevant experience in the Reserve Bank of Australia, in collaboration with Ms. Melinda A Roth of the World Bank, who assessed compliance with the IOSCO Core Principles.

169. Discussions were held with key staff of the Barbados Stock exchange/Barbados Securities Commission (see comments in paragraph 3), and with institutions in the market.

170. The key piece of Legislation is the Securities Act 2001-13. Extensive use was also made of the Self-Assessment Questionnaire compiled by the authorities for the IOSCO Core Principles. Useful data are available on the Barbados Stock Exchange web site.

171. A significant difficulty in making this Assessment is that implementation of the new Securities Act 2001 is not yet complete. This Act provides for a new Securities Commission oversight of the market. While the seven Commissioners have been appointed, staff are not yet in place and the Commission is well short of being fully operational. Some key staff are juggling roles in several bodies—the Commission, the Stock Exchange, and the Registry—during this transitional phase; this creates a significant lack of transparency, and potential conflicts of interest. When the new Commission is fully staffed and operational, it can reasonably be expected that the transparency of the supervisory regime will be significantly enhanced.

172. The new Securities Act provided for the reconstitution of the stock market in the form of the Barbados Stock Exchange, with effect from August 2001.21 Additionally, the Act provided for the establishment of the Barbados Central Securities Depository Institution, as a wholly owned subsidiary of the BSE. The CSDI is regulated by the Securities Commission under its powers to administer the clearing and settling of securities. The CSDI has been given the capacity to handle both equities and government paper.

Main Findings

173. The new Securities Act provides a solid legal foundation for the development of the Barbados securities market. However, the Legislation has now been in place for 11 months, and much remains to be done to make it operational. In the transitional stage in which the securities market in Barbados finds itself at the moment, day-to-day operations are heavily dependant on a few key experienced staff, who often find themselves filling multiple roles.

Table 20.

Recommended Plan of Actions to Improve Observance of IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies—Securities Regulation

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Authorities’ Response

174. The authorities are broadly in agreement with the assessment and considered the assessment to be fair. They stressed, however, that transparency practices in the area of securities regulation will be greatly enhanced once the Securities Commission becomes fully operational.

1

The FSAP team was led by Messrs. S. Kal Wajid (IMF, Mission Chief) and Giovanni Majnoni (World Bank, Deputy Mission Chief) and was composed of Messrs. Robert Keppler, John McDowell, Craig Thorburn, Mss. Bikki Randhawa, Melinda A. Roth (all World Bank); Messrs. Tonny Lybek (MAE), Vassili Prokopenko (MAE), Mss. Ruby Randall (WHD), Massa Lansanah-Richardson (Admin. Assistant-MED) (all IMF); and Messrs. Carlisle Procter (external expert, formerly with the Reserve Bank of Australia), Keith Bell (external expert, formerly with the Office of Superintendent of Financial Institutions, Canada), and Erik Huitfeldt (external legal expert).

2

Macroeconomic developments and risks are discussed in detail the staff report for the 2002 Article IV consultation (SM/02/3S3).

3

The Barbadian dollar has been pegged to the U.S. dollar since mid-1975 at BDS$2.00=US$1.00.

4

Three-months treasury bill rates stood at around 2.5 percent at the end of second quarter 2002.

5

The CBB does not collect the information on the performance of interbank money market.

6

An analysis of intermediation spreads is contained in the Selected Issues Volume of the FSAP report.

7

Precise figures on the importance of the offshore sector are not available. There are a number of derivative effects, largely from payment of wages, taxes, and purchases of local goods and services. It has been estimated that the offshore sector contributes to the employment of more than 3,000 persons and generates around US$110 million annually in foreign exchange inflows (See Michelle Doyle and Anthony Johnson: “Does Offshore Business Mean Onshore Economic Gains,” Working Paper of the Central Bank of Barbados, 1999). It is estimated that offshore activities contribute almost 40 percent of the government’s corporate tax revenue, with international business companies as the main contributors.

8

Third party deposits refers deposits from persons other than a licensee’s shareholders, holding company, subsidiaries, associates, or affiliates.

9

Banks are required to follow International Accounting Standards (IAS).

10

The CBB publishes monthly aggregated summary balance sheet information of the commercial banks; PriceWaterhouseCoopers collects and publishes the annual Financial statements of individual banks (http://www.pwcglobal.com/br).

11

There is also a risk for natural disasters, but Barbados is, due to its location, historically less prone to hurricanes than other countries in the Caribbean. The insurance sector is particularly vulnerable to such events, suggesting a need for diversifications of their assets across countries.

12

As of March 2002, commercial banks’ credit sectoral distribution was; personal loans 40 percent; tourism 11 percent, distribution 9 percent; professional and other services 9 percent; construction 6 percent; statutory bodies 5 percent; manufacturing 4 percent; financial institutions 4 percent; agriculture 2 percent; and other credits 10 percent. Banks’ loans and advances accounted for 48 percent of local assets, and government securities for 18½ percent of total assets.

13

Currently, banks report lending to different sectors, but reporting of classified loans is done on an aggregated basis. It is encouraging that the CBB is planning to collect information about loan categorization for credit to each sector, including restructuring of loans, which will allow for more detailed analysis of individual banks’ vulnerability to specific economic sectors.

14

If a bank has a short position in forwards, it may maintain a long spot position equivalent to 20 percent of the short position in forwards or 15 percent of spot liabilities, whichever is higher. If a bank does not have a short position in forwards, it may maintain long spot position equivalent to 15 percent of spot liabilities. Some banks have a specified nominal limit reflecting their needs. The calculation does not include options. Banks only report their position of a specific day during the week to the CBB.

15

The CBB uses an internal note for handling distressed banks including seizure and control.

16

The mission’s assessment is based on the draft AML/CFT methodology developed by the IMF and the World Bank.

17

The FIU is staffed with a director, four analysts, and one support staff.

18

The assessment was undertaken by Vassili Prokopenko (IMF).

19

The International Financial Services Act deals with offshore banks. The International Business Companies Act, and its Regulations, also have a bearing on establishment.

20

The Exempt Insurance Act deals with offshore companies.

21

The Governor of the Central Bank is a Director ex-officio.

Barbados: Financial System Stability Assessment
Author: International Monetary Fund
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    Capital Adequacy Ratio Adjusted for an Increase in Nonperforming Loans1/