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.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
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.
James Morsink and Aasim M. Husain
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.
TABLE OF MAIN RECOMMENDATIONS
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
1. Hurricanes and Financial Stability in The Bahamas
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
1. Selected Economic Indicators
2. Structure of the Financial System
3. Financial Soundness Indicators
4. FSAP Risk Assessment Matrix
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
Automated Clearing House
Asset Management Company
Anti-Money Laundering/Combating the Financing of Terrorism
Bank of The Bahamas
Central Bank of The Bahamas
Correspondent Banking Relationship
Common Equity Tier 1
Deposit Insurance Corporation
Designated Non-Financial Businesses and Professions