Front Matter Page

IMF Country Report No. 19/199

THE BAHAMAS

FINANCIAL SYSTEM STABILITY ASSESSMENT

This Financial System Stability Assessment on The Bahamas was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on May 16, 2019.

July 2019

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Front Matter Page

THE BAHAMAS

FINANCIAL SYSTEM STABILITY ASSESSMENT

May 16, 2019

Key Issues

Context: The Bahamian financial system is dominated by banks focused on mortgage and personal lending in a highly cyclical tourism-driven economy. More frequent and more destructive hurricanes pose a risk to both economic growth and the financial sector. Nonperforming loans (NPLs) in the small, illiquidity-prone housing market are high and lending activity has fallen during the prolonged post-GFC slowdown. The authorities have made progress in the implementation of the 2013 FSAP recommendations, particularly in strengthening financial system oversight, although important work remains. The offshore financial system has shrunk significantly over the last five years, contemporaneous with the global push for greater transparency in such activities. The Bahamas has been listed by the Financial Action Task Force (FATF) as a country with strategic deficiencies in the anti-money laundering/combating the financing of terrorism (AML/CFT) framework.

Findings: The Bahamian financial system appears to be resilient to current threats to its stability. High aggregate capital and liquidity ratios reflect strong buffers against systemic shocks, but some individual banks have high levels of NPLs and restructured loans that leave them vulnerable. Banking supervision is effective overall; however, practices need improvement in some macro-critical areas. Recent recapitalizations of a state-controlled financial institution highlight the need for improving bank recovery and resolution procedures. The offshore sector has very limited domestic linkages, but it creates reputational risks. The Bahamas is taking steps to address its FATF listing.

Policies: The Bahamian authorities need to take action against potential weaknesses— especially those stemming from the declining but still large stock of problem assets. The further strengthening of supervision of credit underwriting and timely resolution of NPLs are key objectives. The legislative reform of crisis management, resolution, and the safety net needs to be completed, and the Deposit Insurance Corporation needs additional funding. Operationalizing the consumer credit bureau and establishing a real estate price index will provide better macro-financial monitoring capabilities and enhance supervision. Authorities should focus on further improving the effectiveness of the AML/CFT regime and monitor pressures on correspondent banking relationships. Improving financial inclusion would increase consumer welfare and diversify bank balance sheets.

Approved By

James Morsink and Aasim M. Husain

Prepared By

Monetary and Capital Markets Department

This report is based on the work of the Financial Sector Assessment Program (FSAP) mission that visited The Bahamas in January 2019. The FSAP findings were discussed with the authorities during the Article IV consultation mission in April 2019. The FSAP team was led by Charles Cohen (mission chief) and included Claudio Visconti (deputy mission chief), Ljubica Dordevic, and Kalin Tintchev (all MCM, IMF); Francisca Fernando (LEG, IMF); Atsushi Oshima (WHD, IMF); Holti Banka and Ivor Istuk (both World Bank); and Tim Clark, Geraldine Low, and Vern McKinley (all external experts). The mission met with Deputy Prime Minister and Minister of Finance Hon. Kevin Peter Turnquest; Minister of Financial Services Hon. Theodore Symonette; Central Bank of The Bahamas Governor John Rolle; Attorney-General and Minister of Legal Affairs Senator Hon. Carl W. Bethel; Insurance Commission of The Bahamas Superintendent Michele Fields; Securities Commission of The Bahamas Executive Director Christina Rolle, as well as senior management and staff of these agencies. The mission also met with commercial banks, the Bahamas International Securities Exchange, insurance companies, legal and accounting companies, and other private sector representatives.

  • FSAPs assess the stability of the financial system as a whole and not that of individual institutions. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.

  • This report was prepared by Charles Cohen and Claudio Visconti, with contributions from members of the FSAP team. It is based on the information available at the time it was completed in April 2019.

Contents

  • Glossary

  • EXECUTIVE SUMMARY

  • TABLE OF MAIN RECOMMENDATIONS

  • MACROFINANCIAL BACKGROUND

  • A. Macrofinancial Setting

  • B. Financial System

  • FINANCIAL STABILITY ANALYSIS

  • A. Vulnerabilities and Risks

  • B. Stress Testing and Interconnectedness

  • FINANCIAL SYSTEM OVERSIGHT

  • A. Regulation and Supervision

  • B. Macroprudential Policy

  • C. AML/CFT Framework

  • CRISIS PREPAREDNESS AND FINANCIAL SAFETY NETS

  • A. Crisis Management

  • B. Deposit Insurance

  • OTHER ISSUES

  • BOX

  • 1. Hurricanes and Financial Stability in The Bahamas

  • FIGURES

  • 1. Domestic Financial Sector Structure

  • 2. Evolution of Bank Capital Adequacy

  • 3. Bank Profitability

  • 4. Composition of Bank Assets and Liabilities

  • 5. Credit Quality of Domestic Banks and Credit Unions

  • 6. Maturity Profile of Bank Assets and Liabilities

  • 7. Offshore Financial Sector Structure

  • 8. Offshore Banking Sector Composition of Assets and Liabilities

  • 9. Bank Claims and Liabilities vis-à-vis Nonresidents

  • TABLES

  • 1. Selected Economic Indicators

  • 2. Structure of the Financial System

  • 3. Financial Soundness Indicators

  • 4. FSAP Risk Assessment Matrix

  • APPENDICES

  • I. Banking Sector Stress Testing Matrix (STeM)

  • II. Stress Test Tables

  • III. Offshore Financial Sector

  • IV. The Case of Bank of The Bahamas

  • V. Financial Inclusion

  • VI. Implementation of 2013 FSAP Recommendations

Glossary

ACH

Automated Clearing House

AMC

Asset Management Company

AM L/CFT

Anti-Money Laundering/Combating the Financing of Terrorism

BOB

Bank of The Bahamas

BSD

Bahamian Dollar

CBOB

Central Bank of The Bahamas

CBR

Correspondent Banking Relationship

CET1

Common Equity Tier 1

DIC

Deposit Insurance Corporation

DNFBP

Designated Non-Financial Businesses and Professions

DSIB

Domestic Systemically Important Bank

DTI

Debt-to-Income

FATF

Financial Action Task Force

FCMC

Financial Crisis Management Committee

FSAP

Financial Sector Assessment Program

FX

Foreign Exchange

GDP

Gross Domestic Product

ICAAP

Internal Capital Adequacy Assessment Process

ICB

Insurance Commission of The Bahamas

IFRS

International Financial Reporting Standards

LTV

Loan-to-Value

MCM

Monetary and Capital Markets Department

MOF

Ministry of Finance

MOU

Memorandum of Understanding

NIB

National Insurance Board

NPL

Nonperforming Loan

ROA

Return on Assets

SCB

Securities Commission of The Bahamas

SFI

Supervised Financial Institution

STeM

Stress Testing Matrix

WEO

World Economic Outlook

The Bahamas: Financial System Stability Assessment
Author: International Monetary Fund. Monetary and Capital Markets Department