Introduction

1. This note discusses the current status of banking supervision and regulation in Samoa based on selected Basel Core Principles (BCP). The progress towards implementing the main recommendations from a full BCP assessment in 2007 is also reviewed. Only the most critical principles from a financial stability perspective for Samoa are discussed, taking into account the significance of existing deficiencies and the conclusions of the 2007 assessment.

2. The note focuses on domestic commercial banks. The international (offshore) banking industry is small—with less than 10 percent of the assets of the domestic banking system—and stagnant. Furthermore, as the recommendations from the 2007 assessment have not been implemented by the Samoa International Financial Authority (SIFA), they remain valid and are highlighted in the text and in the table of recommendations. Other financial institutions, such as Public Financial Institutions (PFIs), insurance companies, and credit unions are excluded from the scope of the work, although it is underlined that their existence has impacted supervision of domestic banks due to the use of supervisory resources on matters related to several of them.

3. The note is organized as follows: the first section provides a brief overview of the financial system structure and bank vulnerabilities. Section two reviews the current status of financial oversight, discussing briefly the regulatory and supervisory frameworks. Section three reviews the main areas of concern identified in the 2007 full BCP assessment and the continued applicability of its recommendations in light of the limited progress achieved since then. Section four presents the main findings and recommendations of the current assessment.

Financial System Profile

A. Financial Sector Structure

4. Banks account for more than half of all assets, but the active role of the PFIs is reflected in a significant share of non-banks in the structure of the financial sector. Total financial system assets correspond to about 120 percent of GDP with bank assets accounting for almost 60 percent of system assets or 70 percent of GDP (Table 1).

5. Two Australian banking groups hold almost ⅔ of the domestic banking sector assets. The sector comprises four banks. Australia and New Zealand Banking Group Ltd (ANZ) and Westpac Banking Corporation (Westpac), are subsidiaries of the third and fourth largest Australian banks, ranked by assets, and hold 45 percent and 21 percent of total banking assets, respectively.^{2, 3} The two locally-owned banks, Samoa Commercial Bank and National Bank of Samoa, have market shares of 18 percent and 16 percent, respectively. Assets are concentrated in lending products with most of the lending targeting construction, trade and tourism sectors (Figures 1 and 2). Claims on the central government are very small (1.3 percent of assets), and banks do not hold government securities. Claims on the public sector, including SOEs and PFIs, were less than 6 percent at June 2014.

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Banking System Balance Sheet Structure

Citation: IMF Staff Country Reports 2015, 230; 10.5089/9781513502885.002.A001

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Loan Placements by Sector

Citation: IMF Staff Country Reports 2015, 230; 10.5089/9781513502885.002.A001

Source: CBS.1/ Including personal loans not classified elsewhere.2/ Figures have been revised since March 1999.3/ Figures have been revised since October 2005, due to reclassification of financial assets to their appropriate sectors.

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6. While liquid reserves with the CBS are large, liquidity positions should be closely monitored and maturity gaps identified. On average, banks hold around 20 percent of deposits in reserves at the CBS. The loan-to-deposit ratio is around 100 percent, but higher for foreign banks, which have more access to wholesale funding. Dollarization is limited due to capital controls and almost all foreign currency assets and liabilities are concentrated in the foreign banks.⁴

7. Non-banks are important providers of credit. The main non-bank institutions are the Samoa National Provident Fund (SNPF), a social security fund; the Development Bank of Samoa (DBS); the Samoa Housing Corporation (SHC); and the investment fund Unit Trust of Samoa (UTOS) (Box 1). The SNPF and DBS are the largest in terms of assets, but both UTOS and the SHC have been expanding rapidly in recent years. Like banks, PFIs lend for construction and real estate, but are also focused on other activities, including Small and Medium sized Enterprises (SMEs), State Owned Enterprises (SOEs), and loans to households. Funding sources include members’ contributions/premium (SNPF/SLCA), loans from the CBS and international financial institutions (DBS, SHC), and investments (UTOS), but no retail deposits. The financial position of these PFIs could have systemic implications due to macro and fiscal linkages, although the direct linkages of PFIs to the banking sector nevertheless appear to be limited.

8. In addition, there is one microfinance institution (MFI) and several credit unions which are not effectively supervised despite having capacity to take deposits from the public. Samoa Pacific Business Development (SPBD) is the only MFI in Samoa with SAT 10 million in assets, SAT 6 million in loans and SAT 780,000 in deposits across 18,000 clients. A total of 13 credit unions are licensed to operate by the Ministry of Commerce, Industry and Labor (MCIL) but it is estimated that more are in operation. Supervision of the MFI and credit unions by MCIL is virtually non-existent, and financial information is not collected systematically or shared with the CBS. Based on limited data available, total assets of credit unions are estimated to be about SAT 20 million.

9. The international financial sector is limited in size and scope. There are seven international banks currently licensed in Samoa with total assets declining from US$112 million in 2005 down to US$ 54.4 million mid-2014, i.e., about one tenth of the domestic banking sector, and which are well capitalized. The operations of two of the seven licensees are restricted to serving exclusively members of their own groups, while the remaining five - being affiliates of investment advisers - deal with those advisers’ clients at arms’ length. There are no linkages between the domestic and international financial sectors.

Financial Regulation and Supervision

The 2007 Assessment and Subsequent Developments

23. The 2007 BCP assessment found that compliance had improved since the previous assessment. A full stand-alone BCP assessment was conducted in 2007 and covered procedures and practices for supervision of both domestic and international banks in the context of an IMF Assessment of Financial Sector Supervision and Regulation. The assessment was based on the entirety of the Twenty-Five BCPs first published in September 1997 by the Basel Committee on Banking Supervision, but also included an evaluation of measures needed for compliance with the 2006 BCPs. For the domestic banking sector, the assessment showed seventeen BCPs as “Compliant” or “Largely Compliant,” with a further four as “Not Applicable.” The remaining four BCPs were assessed as “Materially Non-Compliant.” As regards the international banking sector, the assessment showed twelve BCPs as “Compliant” or “Largely Compliant,” with a further four as “Not Applicable.” Of the remaining nine BCPs, two were assessed as “Materially Non-Compliant” and seven were assessed as “Non-Compliant.”

24. The 2007 assessment identified significant weaknesses in the supervision of domestic and international banks. The main areas of concern related to various forms of risk and their management (Table 2), as addressed in Section IV: “Arrangements for Ongoing Banking Supervision” of the September 1997 BCPs’ publication, where Part A covers “Risks in Banking” and Part B covers “Development and Implementation of Prudential Regulations and Requirements.” Broad areas for improvement were identified with respect to the supervision of domestic banks’ credit policies, connected lending, large exposures, and corporate governance policies. As for international banks, recommendations included on-site inspections, minimum risk-based capital requirements, and guidance on risk management and corporate governance.

Table 2.

Financial System Structure

(Percent of total assets)

Source: CBS Note: For fiscal year ending in June.

Table 2.

Financial System Structure

(Percent of total assets)

			2008/09	2009/10	2010/11	2011/12	2012/13	2013/14	Dec. 2014
Commercial banks			59.9	60.4	59.7	58.7	57.9	57.0	57.2
		Australia New Zealand Bank (Samoa) Ltd	26.6	25.6	24.6	23.7	24.9	24.6	26.0
		Westpac Bank Samoa Limited	16.8	16.2	14.7	15.8	13.7	11.9	12.2
		National Bank of Samoa Limited	8.5	8.2	8.9	8.6	8.9	7.4	9.0
		Samoa Commercial Bank Limited	8.1	10.4	11.5	10.7	10.5	13.1	10.1
Non monetary financial institutions			40.1	39.6	40.3	41.3	42.1	43.0	42.8
		National Provident Fund	25.9	24.7	25.4	26.1	26.9	24.4	24.4
		Development Bank of Samoa	8.2	8.0	8.6	8.8	9.2	9.6	9.4
		National Pacific Insurance Ltd	1.8	3.0	2.3	2.3	1.4	1.2	1.2
		Samoa Life Assurance Corp.	2.1	2.0	1.9	2.0	2.0	1.7	1.7
		Public Trust Office	0.6	0.5	0.5	0.5	0.5	0.4	0.4
		Samoa Housing Corporation	1.5	1.4	1.5	1.6	2.0	2.1	2.1
		Unit Trust of Samoa						3.6	3.7
Total Financial System			100.0	100.0	100.0	100.0	100.0	100.0	100.0
Total Financial System (percent of GDP)			99.4	109.3	102.5	99.0	100.3	119.2	120.1
	Commercial banks		59.6	66.1	61.2	58.1	58.1	67.9	68.7
	Non monetary financial institutions		39.8	43.3	41.3	40.8	42.2	51.2	51.4
	Nominal GDP (in millions of Tala)		1,661	1,623	1,767	1,847	1,835	1,847	1,900

Source: CBS Note: For fiscal year ending in June.

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Table 2.

Financial System Structure

(Percent of total assets)

			2008/09	2009/10	2010/11	2011/12	2012/13	2013/14	Dec. 2014
Commercial banks			59.9	60.4	59.7	58.7	57.9	57.0	57.2
		Australia New Zealand Bank (Samoa) Ltd	26.6	25.6	24.6	23.7	24.9	24.6	26.0
		Westpac Bank Samoa Limited	16.8	16.2	14.7	15.8	13.7	11.9	12.2
		National Bank of Samoa Limited	8.5	8.2	8.9	8.6	8.9	7.4	9.0
		Samoa Commercial Bank Limited	8.1	10.4	11.5	10.7	10.5	13.1	10.1
Non monetary financial institutions			40.1	39.6	40.3	41.3	42.1	43.0	42.8
		National Provident Fund	25.9	24.7	25.4	26.1	26.9	24.4	24.4
		Development Bank of Samoa	8.2	8.0	8.6	8.8	9.2	9.6	9.4
		National Pacific Insurance Ltd	1.8	3.0	2.3	2.3	1.4	1.2	1.2
		Samoa Life Assurance Corp.	2.1	2.0	1.9	2.0	2.0	1.7	1.7
		Public Trust Office	0.6	0.5	0.5	0.5	0.5	0.4	0.4
		Samoa Housing Corporation	1.5	1.4	1.5	1.6	2.0	2.1	2.1
		Unit Trust of Samoa						3.6	3.7
Total Financial System			100.0	100.0	100.0	100.0	100.0	100.0	100.0
Total Financial System (percent of GDP)			99.4	109.3	102.5	99.0	100.3	119.2	120.1
	Commercial banks		59.6	66.1	61.2	58.1	58.1	67.9	68.7
	Non monetary financial institutions		39.8	43.3	41.3	40.8	42.2	51.2	51.4
	Nominal GDP (in millions of Tala)		1,661	1,623	1,767	1,847	1,835	1,847	1,900

Source: CBS Note: For fiscal year ending in June.

25. Attempts by the CBS to address areas of concern were not completed. Initiatives by the CBS to deal with weaknesses identified in the 2007 assessment were disrupted by a series of events. Firstly, Samoa suffered severe dislocation due to a sequence of major exogenous shocks (e.g., natural disasters such as the 2009 tsunami and tropical cyclone Evan in 2012) and, secondly, there was diversion of scarce supervisory resources within CBS, inter alia, to development of a supervisory regime for PFIs. Progress was achieved in regard to issues related to AML/CFT and was instrumental in having Samoa ultimately made subject to a “normal reporting” regime by the Asia Pacific Group on Money Laundering (“APGML”) in 2014, reduced from the “enhanced reporting” regime previously applied.

26. Recommendations from the 2007 assessment for the supervision of domestic banks remain largely unaddressed. These include that the CBS: (i) issue more detailed guidance on the standards expected to be observed by banks in their credit policies and use those to evaluate effectiveness of banks’ systems and controls for managing credit risk; (ii) collect information on connected lending, and use off-site surveillance and on-site inspections to monitor banks’ compliance with restrictions on such exposures; and seek legal power to rule on the existence of specific cases of connected lending; (iii) require banks to establish Board-approved, comprehensive risk management policies which enable them to identify, evaluate, monitor and control all their material non-credit risks, including interest rate, market, country and operational risks, and assess the adequacy of these policies and procedures during on-going supervision; (iv) require banks to report all single exposures which exceed 10 percent of capital for fully effective monitoring of concentration risk.¹⁰ (detailed recommendations in Appendix Table 1)

27. Likewise, recommendations for supervision and regulation of international banks by SIFA have not been implemented. Those recommendations addressed, inter alia; (i) the lack of individual capital requirements based on risk profile; (ii) the lack of guidance on banks’ risk management; and (iii) the need to expand on-site inspections with an emphasis on asset quality and classification. There is still no Prudential Guidance from the SIFA to the international banking sector, or any supervision beyond SIFA’s receipt and filing of a quarterly report and its review of audited accounts prior to the grant of an annual license renewal to each international bank. The 2007 assessment also expressed concern regarding: (i) the potential for infringement of the operational independence of SIFA, given the legal powers of the MoF to grant licenses and to take other important supervisory measures; (ii) the potential conflict between the SIFA’s promotional and supervisory roles; and (iii) the minimal published data on the international banking sector. All these issues are still unaddressed. (detailed recommendations in Appendix Table 2).

Table 3.

Core Principles Assessed “Materially Non-Compliant” or “Non-Compliant” in 2007

Source: 2007 BCP Assessment

Table 3.

Core Principles Assessed “Materially Non-Compliant” or “Non-Compliant” in 2007

Domestic Banks—1997 CPs		International Banks—1997 CPs
CP 6 Capital Adequacy		CP 6 Capital Adequacy	NC
CP 7 Credit Policies	MNC	CP 7 Credit Policies	NC
CP 8 Loan Evaluation and Loss Provisions		CP 8 Loan Evaluation and Loss Provisions	NC
CP 9 Large Exposure Limits		CP 9 Large Exposure Limits	NC
CP 10 Connected Lending	MNC	CP 10 Connected Lending	MNC
CP 11 Country Risk	MNC	CP 11 Country Risk	NC
CP 12 Market Risk		CP 12 Market Risk	NC
CP 13 Other Risks	MNC	CP 13 Other Risks	NC
CP 14 Internal Control and Audit		CP 14 Internal Control and Audit	MNC

Source: 2007 BCP Assessment

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Table 3.

Core Principles Assessed “Materially Non-Compliant” or “Non-Compliant” in 2007

Domestic Banks—1997 CPs		International Banks—1997 CPs
CP 6 Capital Adequacy		CP 6 Capital Adequacy	NC
CP 7 Credit Policies	MNC	CP 7 Credit Policies	NC
CP 8 Loan Evaluation and Loss Provisions		CP 8 Loan Evaluation and Loss Provisions	NC
CP 9 Large Exposure Limits		CP 9 Large Exposure Limits	NC
CP 10 Connected Lending	MNC	CP 10 Connected Lending	MNC
CP 11 Country Risk	MNC	CP 11 Country Risk	NC
CP 12 Market Risk		CP 12 Market Risk	NC
CP 13 Other Risks	MNC	CP 13 Other Risks	NC
CP 14 Internal Control and Audit		CP 14 Internal Control and Audit	MNC

Source: 2007 BCP Assessment

Main Findings and Recommendations

28. The compliance with the Basel Core Principles was assessed according to the September 2012 methodology and based on the following steps. The current status of bank regulation and supervision was described in the authorities’ detailed self-assessment of observance completed before the main mission. In addition, the relevant laws and regulations were reviewed and interviews were conducted with the management and staff of the CBS’ Financial Supervision Department, senior officials of the SIFA, and representatives from the domestic banks, and private audit firms.¹¹

29. The findings and recommendations are based on selected principles. Not presenting a full-assessment format is predicated on Samoa’s small and simple banking sector. As a result, the discussion below is focused on those BCPs for which further development of procedures and practices would be the most important. Emphasis is placed on the supervisor’s powers, resourcing levels (which have a clear impact on supervisory practices and procedures), and the need for greater guidance from the supervisor to the industry on risk and its management. The current recommendations – substantive and demanding as they are – reflect a focused assessment and thus should be regarded as the “first cut” in supervisory development, even if addressed effectively, since the 2012 BCP methodology is more demanding than the previous methodologies and requires many more supervisory elements to be in place. For instance, it incorporates 39 new assessment criteria, comprising 34 “Essential” criteria and 5 new “Additional” criteria. In addition, 34 “Additional” criteria from the 2006 BCPs were re-categorized as “Essential” criteria that represent minimum baseline requirements for all countries assessed.

➢ Responsibilities, objectives and powers (CP 1)

Inter alia, this Core Principle requires that banking laws, regulations and prudential standards be updated as appropriate.

30. The FIA is the cornerstone of Samoa’s supervisory architecture and some areas merit attention for improvement. The FIA should be amended to provide: (a) the CBS with legal capacity to waive large exposure limits in appropriate circumstances based on robust analysis.; (b) the CBS with power to remove bank Board members and senior executives when warranted; (c) a clear definition of a “significant ownership” position by a bank shareholder, with capacity for CBS to deem parties to be related and to require deductions of related parties’ exposures from capital when assessing a bank’s capital adequacy; and (d) the CBS with power to use certain administrative remedial measures, by removing the prior involvement of the Court in the matter.

31. Power provided in the FIA for the issuance of regulations “necessary or expedient for giving full effect to this Act” should be used. This power has never been used and should be exercised to set out detailed, prescriptive requirements on matters now covered (or omitted coverage) by the nine “Prudential Statements” issued to domestic banks by CBS between 1995 and 1999.

32. The “Prudential Statements” issued by the CBS do not contain the detailed, prescriptive guidance that has become the international supervisory standard over time. The current Prudential Statements (PSs) date from 1995–1999 and, firstly, set out the CBS’ overall approach to supervision and then address separately: (i) licensing, ownership and management; (ii) capital adequacy; (iii) concentration of credit exposure; (iv) liquidity; (v) “connected” lending and direct ownership interests; (vi) asset quality, provision for losses and suspension of interest; and (vii) accounting and internal control systems; and (viii) foreign currency exposures. However, the PSs should be amended to include new or improved supervisory requirements with respect to policies for controlling credit risk, connected lending, operational risk, interest rate risk, corporate governance and liquidity and, although not currently material, market and country risks.

➢ Independence, accountability, resourcing and legal protection for supervisors (CP 2)

33. In view of the CBS’ increased responsibilities, a careful assessment of staffing should be conducted. The CBS has taken additional mandates since the last assessment which, in effect, give it responsibility for the supervision of all domestic financial intermediaries. While there is merit in such a centralization of responsibilities, it should be accompanied by allotment of sufficient dedicated resources of the required standard. (It is recommended below that an annual program of on-site inspections be initiated, primarily targeting the locally-owned banks. For the fiscal year ending June, 2015, it would be appropriate only to conduct on-site inspections of the two locally-owned banks, given the limited staff of the FSD. In this context, the sufficiency and technical skills of the staffing now available for bank supervision should be evaluated and additional resources sought, if necessary.)

➢ Supervisory approach; Supervisory techniques and tools; Supervisory reporting; and Corrective and sanctioning powers of supervisors (CPs 8-11)

34. The CBS should engage in an annual program of on-site inspections guided by risk-based supervision. It should also target the locally-owned banks based on their higher relative riskiness. As a general principle, the on-site inspections should also be used to verify supervisory reports and obtain more information on classified assets, connected lending, and country exposures. (To date, only one cycle of prudential inspections has been completed for domestic banks.) In addition, the CBS should conduct an in-depth assessment of balance sheets, including an asset quality review of potentially vulnerable banks, possibly through appointing an experienced external assessor. As for the international banks, which are supervised by SIFA, no prudential inspections have been performed and published data is insufficient.

35. The single cycle of prudential inspections on domestic banks completed in 2013 did serve to highlight significant issues with supervisory reporting. Weaknesses were identified especially regarding classified assets and connected lending, highlighting the need for a consistent inspection program to be put in place. Historically, the CBS’ bank supervisory processes have been almost exclusively off-site and focused on review of prudential returns and published financial statements. The CBS’ current suite of returns has components filed weekly (condensed balance sheet and foreign exchange position), monthly (detailed balance sheet with schedules and computation of the bank’s capital adequacy ratios), and quarterly (income statement; summary of past due and non-performing loans; together with a schedule of 10 largest borrowers; schedule of credit portfolio and deposits by residual maturity). Notably absent is a bank’s liquidity profile showing “gap” positions, an omission which should be rectified.

36. Information processing from prudential returns needs to be modernized for supervisors to have access to adequate data. Returns are filed in “hard copy” and PDF format and data are subsequently recast by the CBS’ staff on spreadsheets for analysis of banks’ performance and adherence to prudential standards found in the FIA and PSs. This is a time-consuming process and the CBS should investigate obtaining a standard package for the electronic filing of returns.

37. Banks should be required to report all single exposures over 10 percent of capital. This would include many exposures that fall below the current 25 percent ceiling under the FIA and not captured by the present quarterly return of each bank’s 10 largest borrowers. In addition, the reporting does not provide sufficient information for full and effective monitoring of concentration risk.

38. Banks should be required to submit an external auditors’ certificate verifying accuracy of returns to the CBS. This procedure is expressly contemplated by the FIA, but has not been implemented to date. Given past performance of some banks, and any further delay in implementing an on-site inspection program, serious consideration should be given to using this power. Relatedly, the CBS should require each bank to deliver a copy of the “Management Letter”/”Internal Control Memorandum” provided to management by the external auditor at the conclusion of the annual audit.

39. The CBS should address deficiencies in the implementation of Risk-Based Supervision (RBS). While the CBS supervision staff has drawn benefit from participation in RBS workshops, gaps in full implementation of the practice are apparent.¹² An Institutional Profile and a Supervisory Plan for each bank is not maintained and, as previously noted, on-site supervision is sporadic. Moreover, full implementation of RBS requires effective—and timely—follow-up to close out issues raised in the supervisory cycle. Review of the on-site inspections conducted in mid-2013 has revealed instances where this was not achieved, although the inspections were instrumental in revealing inaccuracy in prudential returns, particularly as regards asset quality, provisions for loss and suspension of interest accrual. It is clear that on-site supervision should play a greater role in the fulfillment of the CBS mandate as bank supervisor. Adequate resources should be engaged for the purpose, including experienced inspection staff from other jurisdictions to act as mentors.

➢ Home/host relationships; (CP13)

40. The CBS should regularly activate the provisions of the 5 June 2014 Multilateral Memorandum of Understanding with the APRA regarding ANZ. Typically, APRA organizes conference calls with all relevant host supervisors of Australian banks every three to six months and will provide host supervisors of subsidiaries incorporated in overseas jurisdictions with its assessment of the parent, if requested. Such requests should be made by the CBS. It is also APRA’s practice to invite a representative from the host supervisor to accompany APRA when undertaking an inspection of Australian banks operating in the host supervisor’s jurisdiction. In the event that APRA arranges to make such an inspection of ANZ’s Samoan subsidiary, the CBS would draw benefit from accepting the standard invitation.

➢ Corporate governance; Risk and its Management; Internal Control and Audit; (CPs 14-26)

41. Banks should be provided with more detailed guidance on corporate governance and risk management. The guidelines date from 1995–1999 and the CBS should seriously consider their revision to cover all of these risks and those areas currently omitted. Specifically, the CBS should issue more detailed guidance to domestic banks on the standards to be observed in individual credit policies. The CBS would then use them to evaluate the effectiveness of banks’ systems and controls for managing credit risk. Banks should also be required to have in place comprehensive risk management policies, approved at Board level, to enable them effectively to identify, evaluate, monitor and control material non-credit risks, including interest rate, market, liquidity, country and operational risks. In this context, the CBS should assess the adequacy of these policies and procedures during on-going supervision. As for the international banks, SIFA should develop guidance on all of these standards for the sector. To this end, the CBS and SIFA could benefit from a coordinated review of Prudential Standards already in use by banking supervisors in other countries. A coordinated approach, underpinned by an appropriate Memorandum of Understanding between the CBS and SIFA, would help guard against development of inconsistent standards in common areas of supervisory practice.