Trinidad and Tobago: Press Release; Financial System Stability Assessment; and Statement by the Executive Director for Trinidad and Tobago

Press Release; Financial System Stability Assessment; and Statement by the Executive Director for Trinidad and Tobago


Press Release; Financial System Stability Assessment; and Statement by the Executive Director for Trinidad and Tobago

Executive Summary

The FSAP work was mostly conducted prior to the COVID-19 crisis. Given the FSAP’s focus on medium-term challenges and tail risks, its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. As the growth projections were significantly revised downward since the FSAP, the quantitative risk analysis on bank solvency was complemented to include illustrative scenarios to quantify the possible implications of the COVID-19 shock on bank solvency.

On the eve of the COVID-19 crisis, the financial system had weathered the 2016–18 economic slowdown but faced vulnerabilities. The banking system was well capitalized and liquid, and the general insurance sector had recovered from claims pertaining to climate-related events in the region. The Financial Action Task Force (FATF) had removed Trinidad and Tobago from the list of jurisdictions under increased monitoring, following significant progress in enhancing its AML/CFT framework. However, the financial system, which is nearly twice the size of the economy and is of regional importance, still faced vulnerabilities. These included the rise in household debt, a lack of supervisory independence and out-of-date regulatory frameworks; the sovereign-bank nexus and the absence of a macroprudential toolkit; and contagion risks between investment funds and banks. Growing regional exposures increased the potential for regional shocks from natural disasters (flooding, hurricanes, earthquakes) to propagate, while energy-related shocks could negatively impact growth and the fiscal position, with potential spillovers to the financial sector.

While banks appear resilient, potential vulnerabilities arise from group risks and the COVID-19 shock. Illustrative stress tests were subsequently run to quantify the possible impact on bank solvency in adverse COVID-19 economic scenarios. Given the unprecedented nature of the ongoing pandemic, these scenarios are associated with a substantial degree of uncertainty. The results suggest that under further strong deterioration of macrofinancial conditions some banks could breach their minimum capital requirements. The results also show that liquidity risks could arise through group structures. About 60 percent of investment funds are issued at fixed prices, and investors expect both preservation of capital and instant access. If the underlying value of a fund falls below the fixed price, these funds could quickly become depleted and liquidity stress could propagate across financial conglomerate structures from fund issuers to banks in the same group. Reform of the investment fund sector should be carefully sequenced to deliver a significant reduction in systemic risk by transitioning to floating-price products over time.

While the authorities have made progress in implementing recommendations from the 2010 FSAP, further reforms are required to consolidate and leverage these gains. Financial sector legislation and regulation have not kept pace with international best practice. The supervisors operate with guidelines in key areas, instead of binding powers, which limits their authority. Financial supervisors should be given powers to issue regulation independently, and their independence and resources strengthened. Up-to-date insurance legislation is expected to come into effect shortly, more than 10 years after the failure of a regionally systemic insurance group (CLICO), while a new dedicated legal framework for independent prudential regulation and supervision of credit unions is urgently required. The framework for designating and supervising systemically important financial institutions (SIFIs) should be strengthened and enhanced supervisory oversight and capital surcharge buffers implemented. The Central Bank of Trinidad and Tobago (CBTT) should be assigned an explicit macroprudential mandate and powers, and significant gaps in the data needed for financial stability analysis should be addressed.

Risks associated with the state’s role in the financial sector should be attenuated. The public sector absorbs roughly one-third of all domestic financial sector funds and sovereign exposure accounts for a sizeable share of financial institutions’ assets. The authorities should implement prudential policies that encourage banks to diversify portfolios and limit sovereign exposures. A comprehensive financial sector development policy would outline the goals for the state’s role in the financial sector, including for state-owned development finance institutions (DFIs).

The financial safety net should be strengthened to reduce the risk of financial bailouts. An upgraded resolution framework meeting best international practice is required, with a set of tools and powers able to preserve financial stability without putting taxpayers at risk. CBTT’s framework for emergency liquidity assistance (ELA) should also be enhanced.

The financial sector is vulnerable to climate and environmental risks and the authorities’ awareness and capacity need strengthening. Trinidad and Tobago’s exposure to physical and transition risks warrants a comprehensive environmental risk assessment to better understand and raise awareness of the impact of climate change and environmental risks on the financial sector. CBTT should ensure board level commitment and integrate material aspects of climate change and environmental risks into its supervisory approach and guidance over time. The authorities should also explore ways to deepen financial markets for green growth and resilience by developing a green finance strategy.

Table 1.

Trinidad and Tobago: FSAP Key Recommendations

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“I-Immediate” is within one year; “NT-near-term” is 1–3 years; “MT-medium-term” is 3–5 years.

Macrofinancial Context

A. Background

1. Trinidad and Tobago continues to face economic volatility. At the time of the FSAP the economy had been recovering from an energy-driven slowdown (Table 2). COVID-19 subsequently struck, and the authorities adopted a range of policy measures to contain the pandemic and mitigate the economic impact (Box 1). The economic growth projections for Trinidad and Tobago and oil price assumptions were significantly revised downward as a result of the COVID-19 shock. In light of these developments, the quantitative risk analysis on bank solvency was updated to confirm that the FSSA findings remain relevant and informative.

The Authorities’ Initial Responses to COVID-19

Containment measures: Have included the closure of the country’s borders, travel restrictions, and school and university closures.

Fiscal policy measures: The authorities announced fiscal support measures totaling about TT$3.7 billion (2.3 percent of GDP) and estimated the total revenue shortfall due to the outbreak and the energy price shock at around TT$9 billion (6 percent of GDP). The measures include but are not limited to providing salary relief (for up to three months) to temporarily unemployed workers and persons who would have had their incomes reduced; VAT and income tax refunds to individuals and small firms; and liquidity support to individuals and small businesses via subsidized credit union loans.

Monetary policy measures: CBTT lowered the policy rate by 150 bps to 3.5 percent, and the reserve requirement on commercial bank deposits by 300 bps to 14 percent. CBTT also announced that it would temporarily relax (for three months) the regulatory treatment of restructured bank loans (for payment deferrals, rate reductions and waivers of penalty charges) that were previously performing.

Table 2.

Trinidad and Tobago: Selected Economic Indicators1

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Sources: Trinidad and Tobago authorities; UN Human Development Report; WEO; and IMF staff estimates and projections.

Includes VAT and Financial Intermediation Services Indirectly Measured (FISIM).

Data refer to fiscal year, for example 2018 covers FY18 (October 2017-September 2018).

Defined as non-energy revenue minus expenditure of the central government.

Excluding debt issued for sterilization, public bodies’ debt, and borrowing from the CBTT.

1 Projections for 2020 are as of January 2020.

2. While the authorities have made progress in implementing the 2010 FSAP recommendations further reforms are merited. The work on consolidated supervision has advanced with CBTT adopting consolidated supervision guidance internally. Prudential reporting was expanded with the collection of additional regulatory data. A new modern insurance legislative and significantly strengthened supervisory regime are expected to come into effect shortly. As a member of the Caribbean Group of Bank Supervisors (CGBS), CBTT has provided input into the draft Regional Crisis Management Plan that includes the collaboration and coordination of 15 representative countries. The CBTT has implemented quarterly stress tests on the eight commercial banks. Both single factor and multi factor shocks are used for the solvency stress tests while liquidity stress tests are based on number of survival days (days until illiquid) in local currency and foreign currency. Results are reported in the CBTT Financial Stability Report. Subsequent to the FSAP missions the authorities promulgated the Basel II/III Financial Institutions (Capital Adequacy) Regulations containing, among others, the introduction of Pillar 2 requirements and additional elements of Basel III (including a leverage ratio and the capital conservation buffer). Despite these accomplishments to date, further reforms to strengthen financial sector oversight are crucial as discussed below.

B. Financial System Structure

3. The financial system is large (assets nearly twice GDP), diversified and of systemic importance in the region.

  • Financial conglomerates and SIFIs. There are six bank-led and two insurance-led groups accounting for about half of financial sector assets. The authorities designated 11 SIFIs comprising 4 bank groups, 2 insurance groups, and 5 statutory corporations. CBTT lacks formal powers to supervise the latter, and not all are systemic from a financial stability perspective. The two largest bank groups are majority government owned, and one is expanding in the region.

  • Banks. On the eve of the COVID-19 crisis, capital adequacy and return on equity were above 20 percent. Nonperforming loans (NPLs) were low but retail refinancing and debt consolidation loans had risen (Figures 15, Tables 3 and 4). 1

  • Insurers. One insurer is the second largest in the region. The 2009 failure of CLICO caused a cross- border shock and precipitated a domestic fiscal outlay of 17 percentage points of GDP. Excluding CLICO, the life insurance has a strong capital base and general insurers were resilient to recent climate-event-related claims.

  • Investment managers. The largest issuer is state-sponsored; other major issuers form part of bank and insurance conglomerates.

  • Credit unions. The sector lacks an adequate regulatory and supervisory framework and reporting is weak. While assets of the sector are only 9 percent of GDP, membership is high.

Figure 1.
Figure 1.

Trinidad and Tobago: Banking System Structure

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.
Figure 2.
Figure 2.

Trinidad and Tobago: Bank Asset Quality

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.
Figure 3.
Figure 3.

Trinidad and Tobago: Bank Profitability

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.
Figure 4.
Figure 4.

Trinidad and Tobago: Bank Capital

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.
Figure 5.
Figure 5.

Trinidad and Tobago: Bank Liquidity

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.
Table 3.

Trinidad and Tobago: Structure of the Financial System

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Credit Unions’ assets as at December 2016.

Number refers to the number of issuers and assets to “Assets Under Management”.

Table 4.

Trinidad and Tobago: Banking Sector Financial Soundness Indicators

(In percent)

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Source: IMF, Financial Soundness Indicators (FSI) database.

Evolution of the Financial System Structure

Percent of Total Assets, 2009 vs. 2018

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Note: AUM in 2009 shows January 2010 amount. ‘Other’ includes thrift institutions, credit unions and development banks.Source: CBTT

Risk Assessment

A. Financial Sector Vulnerabilities

4. On the eve of the COVID-19 pandemic, potential vulnerabilities pertained to energy dependence, household debt, regional interconnectedness, sovereign exposures, and conglomerate structures. The economy is highly dependent on the energy sector and closely integrated within the region (Figures 611, Box 2). Spillovers could arise from natural (including climate related) and regional or domestic sovereign shocks. Energy shocks that trigger a prolonged downturn could pose financial stability risks. The public sector absorbs roughly one-third of all domestic financial sector exposures, which could potentially create adverse feedback loops. Domestic financial investment opportunities are limited, and outward investments constrained by explicit limits and foreign exchange (FX) shortages. Household debt has increased by almost 12 percentage points of GDP since 2010. Finally, about 60 percent of investment funds by assets under management (AUM) are at fixed prices, for which investors expect preservation of capital and instant access. If the underlying value of funds falls below the fixed price, they could quickly become depleted and propagate liquidity shocks across financial groups.

Figure 6.
Figure 6.

Trinidad and Tobago: Dominance of Regional Banks, 2018

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Source: Team depiction based on the Annual Reports of the respective banks and Fitch Connect.
Figure 7.
Figure 7.

Trinidad and Tobago: Dominance of Regional Insurance Companies, 2018

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Source: Team depiction based on the Annual Reports of the respective insurance companies.
Figure 8.
Figure 8.

Trinidad and Tobago: Domestic Financial Institutions’ Interconnectedness

(Percentage of lender’s total assets)

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.
Figure 9.
Figure 9.

Trinidad and Tobago: Commercial Banks’ Cross Border Interconnectedness

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.Notes: Data as of June 2019. Arrows point from the country source of the exposure (liability user) to the country carrying the exposure (liability holder). Arrow thickness is proportional to the size of the exposure relative to the GDP of Trinidad and Tobago. Node numbers show the absolute size of the country’s GDP relative to the GDP of Trinidad and Tobago.
Figure 10.
Figure 10.

Trinidad and Tobago: Commercial Banks’ Cross-Border Claims and Liabilities

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT, World Economic Outlook and IMF staff calculations.
Figure 11.
Figure 11.

Trinidad and Tobago: Commercial Banks, Insurers, Pension and Investment Funds Exposures to the Public Sector

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Sources: CBTT and IMF staff calculations.

5. The financial sector is also vulnerable to climate and environmental risks. While Trinidad and Tobago faces relatively less direct exposure to hurricanes (compared to other economies in the northern Caribbean region), the insurance sector was hit by recent hurricanes across the region, notwithstanding reinsurance arrangements cushioning the financial impact. Climate change is expected to add an additional layer of environmental risk—rising sea levels, intensification of hurricanes, and more volatile weather all would increase credit, market, operational, and underwriting risks. As Trinidad and Tobago is the largest natural gas and oil producer in the region, the financial sector is indirectly exposed to significant transition risks.

Banks’ Cross-Border Exposures by Region (June 2019)

Interconnectedness of onshore banking in the Caribbean is mostly established through the presence of international banks. Trinidadian banks loan books are not internationally exposed, 95 percent of loans are to domestic corporates and households. However, their investment portfolios and cross border equity exposures are more diversified. Most investments are in North America (25 percent), primarily in U.S. treasury bills (17 percent), followed by Europe and the CARICOM area. Investment in subsidiaries and affiliates, is mostly in the CARICOM area, in Barbados (11 percent) and St. Lucia (30 percent).

Source: FSAP calculations based on data provided by CBTT.

6. The financial system is also vulnerable to a prolonged COVID-19 outbreak. The broad impact of the COVID-19 crisis and associated uncertainties could risk impairing the financial system, either through losses in domestic and cross-border holdings or through conglomerate group structures (RAM, Table 5). Risks could materialize from specific or from mutually reinforcing vulnerabilities. Regarding COVID-19 specifically, longer containment and uncertainties about the intensity and the duration of the outbreak could reduce domestic economic activity. A more protracted economic contraction in global growth would have a sustained negative impact on Trinidad and Tobago’s production and exports from the energy sector, and on domestic investment and consumption. The resulting economic downturn could lead to stress in the financial sector due to increases in NPLs and or tightened liquidity conditions.

Table 5.

Trinidad and Tobago: FSAP Risk Assessment Matrix1

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The Risk Assessment Matrix shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 percent and 30 percent, and “high” a probability of 30 percent or more). The matrix reflects staff’s views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

B. Bank Solvency Stress Tests

7. The resilience of commercial banks was assessed by three illustrative stress scenarios: two COVID-19 scenarios, and a pre-COVID-19 adverse scenario. It is worth mentioning that while these illustrative scenarios represent severe but plausible macroeconomic shocks, they do not represent staff’s economic forecasts for Trinidad and Tobago, and are subject to an unusually high degree of uncertainty given the unfolding impact of the ongoing pandemic.

8. Although the scenarios differ, including with respect to their assumptions on financial conditions, the same methodology is used to quantify their implications on bank solvency. In all three scenarios, credit losses were estimated from cross-country analysis and loan classification and loan loss provisioning were adjusted.2 Using the methodology developed by Fund staff,3 credit-loss sensitivities to GDP were applied to the adverse scenario to obtain bank-by-bank credit losses. Two adjustments were made to the pre-stress test position of banks. First, the initial level of provisions was adjusted to that in 2009, given its current relatively low level. Second, the NPLs and capital ratios were adjusted to reflect the higher risk in refinancing and debt consolidation loans. Households may have utilized lower interest rates to restructure debt but could also have been facing loan repayment difficulties given the 2016–18 slowdown. The NPL stock was therefore increased by the total stock of refinancing and consolidation loans and additional provisions applied (using the provisioning rate for sub-standard loans). The impact of these consolidated adjustments plus the adverse-scenario shock raised the aggregate NPL ratio to about 12 percent.

COVID-19 Solvency Stress Test

9. The pandemic has led to a sharp deterioration in the economic outlook. Additional scenario analyses have been performed since the FSAP missions to quantify the impact of COVID-19 on bank solvency. These scenario analyses were based on the same three-year horizon satellite estimations used in the original exercise (described below and in Appendix II). Two scenarios were considered:

  • The COVID-19 central scenario, which incorporates the June 2020 World Economic Outlook (WEO) Global Assumptions for oil and gas prices and U.S. growth, envisages a sharp contraction in real GDP of close to 10 percent in 2020, followed by a rebound of 2–2% percent both in 2021–22.4

  • The COVID-19 downside scenario reflects potential further downside risks to the COVID-19 central scenario. This scenario incorporates a more prolonged recession in 2021, instead of a rebound, with the economy continuing to contract (by 7.2 percent in 2021) before mildly recovering in 2022. This scenario implies a cumulative decline in real GDP relative to the October 2019 WEO projections equivalent to 2.2 standard deviations over two years.

Real GDP level

(2019 = 100)

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

10. The scenarios show that the COVID-19 shock will likely have a significant impact on bank capital. At the end of the risk analysis horizon, the aggregate capital adequacy ratio (CAR) for banks drops by 8 percentage points under the COVID-19 central scenario and by 12 percentage points under the COVID-19 downside scenario. No bank would fail the 8 percent minimum CAR under the COVID-19 central scenario. However, three banks (two large and one small) would go below the minimum CAR in 2022, in the COVID-19 downside scenario (combined recapitalization needs equivalent to 1.6 percent of GDP).

System Capital Adequacy Ratios

(In percent)

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

Pre-COVID-19 Solvency Stress Test

11. The pre-COVID-19 adverse scenario reflects those risks in the risk assessment matrix (RAM, Table 5) prior to the onset of the pandemic. These included a significant drop in energy prices, regional contagion, a (domestic) confidence shock, and sharp rise in risk premia. Weaker global growth and natural disasters including climate-related risks, were assumed to operate through transmission channels similar to the confidence shock and regional downturns, respectively. The adverse scenario produced a V-shaped recession, with a cumulative real GDP decline relative to the October 2019 WEO baseline equivalent to 1.5 historical standard deviations.5 While the risks used in the stress tests precedes the impact of the COVID-19 pandemic, key risks— such as a deep global recession, an abrupt tightening of financial conditions, and lower oil prices— are relevant in the context of the current crisis.

Real GDP Growth Rates

(In percent)

Citation: IMF Staff Country Reports 2020, 291; 10.5089/9781513559957.002.A001

12. Based on the stress tests undertaken before the COVID-19 shock, no bank would breach current capital minima in the adverse scenario. No bank became undercapitalized—below the minimum CAR of 8 percent required at the time of the stress tests—in the adverse scenario due to their strong initial capital buffers and profitability. However, one large bank did fall below 10 percent, a level which banks are required to transition to within a year under the new Basel II standard, and a smaller bank came close. The FSAP recommended that CBTT introduce scenario-based solvency stress tests.

C. Bank Liquidity Stress Tests

13. Liquidity stress test results suggest that while banks have adequate overall liquidity, they face FX risks. A cashflows-based liquidity stress test was implemented with run-off rates applied for each liability (e.g., up 68 percent for time deposits) by contractual maturity bucket. Cash and shorter-term securities were included in the bank’s counterbalancing capacity. Haircuts were applied to longer-term securities, given the lack of a deep secondary market. Banks proved resilient with sufficient counterbalancing capacity to meet severe aggregate deposit outflows. A large bank failed in the shortest maturity bucket, but only by a small share of its total deposits. FX liquidity buffers at three banks were, however, insufficient to meet FX deposit outflows at maturities up to one year. While the total FX liquidity gaps were small at the system-wide level, amounting to 1 percent of FX deposits, the results are significant because of the limited availability of FX.6 CBTT should implement cashflow-based liquidity stress tests in domestic and foreign currency.

D. Insurance Stress Tests

14. Two top-down solvency stress tests were applied. Shocks were applied to interest rates, market prices, and credit risks in the first test, and reinsurance costs in the second test, which simulated natural disaster shocks. Two solvency hurdles were applied for the current and new capital regime (see below). The tests covered seven of the largest insurers and included two life companies, three general insurers, and two composite insurers, representing 75 percent of the market. The largest five insurers were chosen for the first shock, to which all but the entity in liquidation proved robust, although the results underlined asset and liability duration mismatches. The three general insurers were used for the catastrophe scenario, one with significant regional exposure.

15. The insurers proved potentially vulnerable to a series of severe natural catastrophes. The catastrophic scenario applied three consecutive natural shocks within the region. These represent a significant but realistic escalation on risks realized to date. The catastrophe scenario consumed 30 percent of available regulatory capital under the incoming capital regime, and one general insurer failed.

E. Investment Fund Stress Tests

16. The adverse scenarios encompassed market and redemption risks. The principal objective of the tests was to establish how much support the funds would need from banks within the group to meet redemptions and continue to operate. The first test applied a 40 percent redemption level combined with higher interest rates and bond spreads, lower equity prices, and haircuts on asset fire sales. The second test simulated a sudden loss of confidence in the sector, resulting in 50 percent redemptions. Given the general illiquidity in the domestic markets, it was assumed that market sales of domestic assets would not be possible under stressed conditions, and the buyer would be the bank in the group, applying a haircut. Five fund managers representing 90 percent of total investment fund AUM were covered—the largest fund manager, a state-sponsored deemed SIFI, the next three largest fund managers (all in banking groups), and the largest in an insurance group. The results from both stress tests showed very sizeable calls on liquidity from the banking sector.

17. The results from the shock on investment funds were overlaid on the bank liquidity stress test results. The results from the second test above were applied and an additional assumption made that Trinidad and Tobago banks’ deposits in other countries in the region would be ring-fenced as foreign regulators sought to insulate their financial systems from an abrupt withdrawal of funds prompted by the shock in Trinidad and Tobago. Under this severe scenario, two additional foreign banks fail the liquidity test in all currencies and one additional large domestic bank failed the test in FX. In light of these findings, the authorities should periodically undertake conglomerate stress testing.

Financial Sector Oversight Framework

18. Financial sector supervision is undertaken by several agencies. The MoF is responsible for the enactment of laws and regulations for ensuring a safe and sound financial system. CBTT is responsible for supervising commercial banks, nonbank financial institutions, insurers, pension funds, bureaux de change, and financial market infrastructures. TTSEC supervises the securities market, investment funds, and broker-dealers. While the Commissioner for Cooperative Development at the Ministry of Labor and Small Enterprise Development currently supervises credit unions, it was recently announced that a new agency under the MoF would assume this responsibility. The Financial Institutions Act (2008) provides CBTT with a financial stability mandate; however, currently it lacks a designated macroprudential framework and powers. Significant data gaps need be remedied to enable effective micro- and macroprudential supervision (Appendix I).

A. Strengthening System-wide Oversight

Macroprudential policy

19. A strong and comprehensive macroprudential policy framework should be implemented. The Central Bank Act should be amended to provide CBTT with explicit macroprudential authority and tools and limits on loan-to-value and debt service-to-income ratios. The law should be amended to provide a legal foundation for macroprudential tools7 and to collect the data needed to calibrate them. The authorities should implement prudential policies that encourage banks to diversify portfolios away from sovereign exposures. The policies could take the form of one or more, non-mutually exclusive approaches, such as a carefully calibrated systemic risk buffer based on concentration of exposures, or Pillar II supervisory measures. Implementation should be phased in to avoid procyclicality and disruptions to both sovereign debt markets and bank lending capacity.

20. The framework for designating and supervising SIFIs should be strengthened. A revised SIFI methodology meeting best international practice should be applied. Identification should be accompanied by implementation of the capital surcharge and supervisory processes (enhanced monitoring), commensurate with the risks they pose. The Financial Institutions (Capital Adequacy) Regulations, 2020 (promulgated after the FSAP missions) introduced an additional charge for systemic banks, planned to be made effective in January 2022.

B. Supervision and Regulation

21. The powers, independence, and resources of the financial supervisors should be strengthened. Financial supervisors should be given powers to issue prudential regulations and take supervisory decisions independently from the MoF. The lack of such powers, combined with the excessively long time it currently takes to implement regulation, means that the supervisors currently operate without binding powers in key areas, limiting their effectiveness and compliance with international standards. Despite these constraints, the supervisors have taken important steps to strengthen supervisory oversight, including strengthening AML/CFT supervision, and oversight of financial groups, as well as commencing a transition to Basel II for banks. CBTT’s supervisory staff is stretched, however, given the number of institutions they supervise, and should be augmented. TTSEC has limited ability to control its budget, and the remuneration of professional staff is significantly below the level required to attract and retain requisite expertise. A cost-recovery review is underway and should develop realistic proposals to increase TTSEC’s resources.


22. The FSAP undertook an assessment against the international standard (Appendix IV), which identified that CBTT’s risk-based supervisory framework needs updating in key areas:

  • Capital: Draft Basel II/III capital regulations were awaiting parliamentary approval at the time of the FSAP. They were subsequently adopted in May 2020 and will strengthen resilience via higher capital requirements, including pillar II and III requirements, a leverage ratio and a capital conservation buffer.

  • Liquidity: Liquidity regulations should be issued for a liquidity coverage ratio (being planned) and a net stable funding ratio. Funding strategies, together with contingency liquidity arrangements, should be approved by bank Boards and stress tested.

  • Risks: CBTT should develop further guidance and/or conduct more in-depth analysis on key risk areas including market, credit (see below), liquidity, interest rate risk in the banking book, FX, cyber, AML/CFT,8 and climate risks, as well as enhancing its supervisory data in these areas.

  • Corporate governance: CBTT should update bank corporate governance guidelines to ensure banks have adequate internal control and risk management practices (risk data aggregation, IT, valuation methodology) in place and specify additional requirements for SIFIs (e.g., mandatory Board committees). CBTT needs to communicate examination findings on a timely basis and meet frequently with banks’ Boards/independent members.

23. CBTT should continue to strengthen oversight of credit risks. While NPLs were 3.4 percent of total loans at end-June 2019, past-due loans (more than 30 days overdue) were 4.5 percent and riskier refinanced and debt consolidation loans accounted for close to 7 percent of total loans. CBTT should build on steps already taken and conduct in-depth, regular onsite credit reviews at all large banks to assess the continuing adequacy of asset classification, quality of underwriting, and adequacy of provisioning. CBTT’s credit risk guidance should be updated to reflect international best practices.


24. The recently passed insurance legislation should significantly strengthen the supervisory regime. The failure of CLICO in 2009 triggered substantial fiscal outlays and propagated a cross-border shock. At the time of the FSAP, the insurance supervisor continued to work with serious limitations, including inadequate capital requirements and restrictions on related-party transactions, as well as insufficient legal authority for onsite supervision. Improvements in the new legislation include introducing risk-based capital,9 enhanced reporting, stricter requirements around corporate governance and in respect of market conduct, and strengthening CBTT’s enforcement powers, among others. Final amendments were recently approved by parliament and should be enacted urgently.10 Risk-based supervision will require enhanced technical skills and additional resources at CBTT. The supervisor will need to develop and issue technical guidelines, monitor the introduction of risk-based capital, develop a supervisory review and reporting framework, and adopt policy on enforcement measures including a “ladder of intervention”.

Investment funds

25. The regulatory regime for collective investment schemes is being updated. A new regulatory regime is being developed, with new binding requirements covering investment restrictions; reporting requirements; segregation and custody of client assets; asset valuation and pricing; fund borrowing; and suspension of redemptions. These reforms are critical for addressing the systemic risks posed by this sector and should be brought into force without delay. TTSEC should finalize implementation of the risk-based supervision framework as a matter of urgency and develop rules on liquidity management.

26. Investment fund structures should be reformed. The market is dominated by constant NAV funds (those with fixed prices), the regulation of which is insufficient to capture the risks they pose, both to the investors and to the financial groups that issue them. Experience during the global financial crisis triggered international reforms to transition away from such products, except for those with highly liquid, low-risk assets that are unavailable in the domestic market. While transitioning to variable NAV structures presents legal, operational, and market-impact challenges, it is critical to rebalance the sector away from quasi deposit-taking activities into longer-term investments. Reforms should be implemented in a carefully sequenced manner. Moving the industry to variable NAV structures requires levelling the regulatory playing field—removing statutory exemptions from which a large statutory corporation (which manages nearly half the assets invested in constant NAV funds) currently benefits.

Financial conglomerates

27. Group-level supervision of financial conglomerates needs to be strengthened, given their systemic importance. To underpin group-level risk assessments, risk-based supervision needs to be strengthened at the solo level.11 Although CBTT has the power to require a regulated financial holding company structure, CBTT’s group-level risk assessments do not incorporate analysis of all material financial entities (e.g., including insurance and securities firms) in the group. Despite CBTT adopting consolidated supervision guidance internally, it has not fully introduced the necessary prudential requirements nor implemented the principles underpinning this guidance as it pertains to all sectors. CBTT, together with TTSEC, should agree and communicate group-level prudential requirements together with expectations and consequences of non-compliance. Last, CBTT and TTSEC should continue to strengthen the regular sharing of data and views on group entities.

Credit unions

28. The supervision of credit unions requires urgent reform. The current legal framework dates back to 1971 and the supervisor lacks sufficient powers and resources. It also has a dual, conflicting mandate for developing all (including nonfinancial) cooperatives. A new dedicated legal framework should be introduced, with an independent authority that is solely responsible for regulation and supervision, with sufficient powers and resources. CBTT is best placed to meet this role, as replicating supervisory capacity for deposit takers would take time and duplicate scarce resources. If the authorities were to establish a new agency as announced, however, it would need operational independence, sound governance, adequate resources, and legal protection. Its Board should include professional and operationally independent members and exclude industry representatives to avoid conflicts of interest. A system-wide diagnostic followed by a clean-up of the sector is essential before introducing sector-wide deposit insurance.

Financial market infrastructures

29. The current legal/regulatory framework for payment systems should be updated. The Central Bank Act grants powers to CBTT for the supervision of the payments market. A guideline covers CBTT’s oversight of systemically important payment systems (SIPS); however, it does not cover in detail the various onsite and offsite processes and the type of data to be collected, including for cyber resilience measures. The Guideline treats both, large value payment systems and retail payment systems as SIPS in the context of oversight, despite the different levels of risk they introduce to the national payment systems. A comprehensive National Payments Law (as planned by the CBTT) should address these and other gaps in the current framework and allow for new types of payment service and infrastructure providers (FinTech). Local debit cards should also be made usable for online payments. Finally, cyber resilience policies and guidelines should be incorporated into the oversight framework, particularly for payments systems operators.

C. Market Integrity

30. In February 2020, the FATF removed Trinidad and Tobago from the list of jurisdictions under increased monitoring, based on the progress in implementing its AML/CFT framework. The country addressed the seven areas with strategic deficiencies identified in the 2017 action plan. The FATF considers that the institutional capacity and commitment are in place to continue strengthening the AML/CFT framework. Despite an impact from the financial integrity weaknesses identified, banks were able to maintain correspondent bank relationships. While issues with due diligence and wire transfers were reported, domestic banks were largely successful at maintaining their U.S. and non-U.S. relationships without significant disruption to cross-border transactions. The authorities should continue implementing reforms and progress in addressing the remaining FATF recommendations, and enhance internal information technology capacity to support the AML/CFT supervision activities with more data analysis.

Financial Safety Net

31. The resolution regime should be updated to meet best international practice. The authorities resolved past financial failures at significant cost and risk (Box 3). To mitigate this risk, an upgraded resolution regime should be introduced, with powers better able to impose losses on the creditors of failed financial entities while preserving financial stability. The scope of the current regime should be extended to additionally cover any other financial institutions systemic at the point of failure. It should include explicit powers to write-down or extinguish shareholders’ financial rights and impose losses on creditors (and/or convert them into shareholders), and to require adequate loss- absorbing capacity. The potential for a court to reverse resolution actions should be replaced with ex post review and compensation. Joint decision-making with the Minister of Finance should be limited to resolution cases that entail public funding. CBTT should be formally designated as the resolution authority, and it should establish a Resolutions Unit, with a clear separation between supervisory and resolution functions. Resolution plans should be prepared for at least those institutions that could prove systemic in failure.

32. Other aspects of the financial safety net should also be strengthened. CBTT should have legal authority, without having to rely on special emergency powers, to accept a wider range of collateral (including loans and not just securities), in providing ELA. Provision should be available to any financial institution that could prove systemic upon failure.12 Access should be at CBTT’s discretion for borrowers deemed solvent and viable on a forward-looking basis, against adequate collateral. If there is any uncertainty on these issues and CBTT still provides liquidity (e.g., in a systemic case), it should be indemnified for potential loss by the MoF. Solvency support should only be available from the government, not from CBTT. Any unrecovered public support should be recouped from levies on the financial sector. The deposit insurance scheme should be strengthened by setting a statutory target for initiation of payouts in seven days; enabling the deposit insurance fund to fund resolution of a member on a least-cost basis; and establishing a stand-by credit-line from the government. A cross-agency body should be established (as planned), chaired by CBTT and comprising the MoF, CBTT, TTSEC, the credit union supervisor, and the Deposit Insurance Corporation. It should be a forum for regular information exchange and coordination in respect of financial sector policy, regulatory and development issues, and be the coordinating body in a financial crisis.

Financial Development and Climate Risk

A. State’s Role in Financial Intermediation

33. A comprehensive financial sector development strategy should be developed. The efficiency of state-owned DFIs is hampered by their small size, unreliable funding, high NPLs, and, at times, overlapping mandates. Merging those with overlapping mandates into larger and financially stronger entities, and harmonizing regulation of them, would increase their efficiency and developmental impact. Consolidation should form part of a comprehensive financial sector development strategy that outlines priorities and responsibilities of the state’s role, financial intermediation, including as majority shareholder of the two largest commercial banks. Such a strategy should be developed by a high-level committee that includes all relevant stakeholders. In order to enhance investment options for the household sector beyond investment funds and bank deposits, the government should upscale its support for capital market development by publicly listing shares of viable state-owned enterprises and allocating a substantial fraction to retail investors.

34. The public pension system requires reform. The National Insurance Board (NIB) manages the public pension system and intermediates a sizeable volume of household savings. Outflows have been exceeding inflows from contributions since 2014, due to an aging population and a shrinking contributor base. Key recommendations from the International Labor Organization’s Tenth Actuarial Review include: (i) increasing contributions; (ii) reducing the pension for those retiring before age 65; and (iii) freezing minimum pensions. Without reforms, the NIB would need to embark on asset sales to meet distributions, critically weakening the public pension system.

B. Digital Financial Services

35. The use of digital financial services is low and would benefit from legislative reform. Drivers include the lack of innovative players in the market, high fees, lack of inter-operability in digital payment systems, paper-based government payments, and low financial literacy. The comprehensive national payments law and approval of the CBTT’s proposed E-Money Policy are needed to address gaps in the current legal framework and accommodate FinTech. CBTT completed public consultation of an E-Money Policy, which would allow new entrants (for example, telecom and payment services providers) and open up the market and create a level playing field, helping financial inclusion.

C. Climate and Environmental Risks

36. The financial supervisors should strengthen the understanding, management, and disclosure of climate and environmental risks. A comprehensive environmental risk assessment would help raise awareness of the impact of climate change and environmental risks on the financial sector. This should be supported by improved data collection and monitoring of regional and sectoral exposures to climate and disaster risks. The authorities should also help deepen financial markets for green growth and resilience. Green finance can help to fund greening of the private sector, ensure and amplify government policy, and potentially accelerate a low carbon transition and help resilience. The authorities should develop a comprehensive green finance strategy to align financial sector policies and incentives with climate objectives, including commitments under the Paris Agreement.

Appendix I. Data for Financial Stability Analysis

The FSAP faced challenges in securing adequate data to thoroughly analyze financial risks. While there has been some progress, e.g., the collection and analysis of macro financial data by TTSEC on collective investment schemes, data collection needs to be strengthened in many areas.

Banks: Expanding the granularity of individual bank-level data would help monitor the build-up of systemic vulnerabilities. CBTT should collect: (i) liquidity positions in domestic currency and FX, including separately categorizing stable and less stable funding sources (weekly or bi-weekly) as well as the term structure of bank’s liquidity profiles; (ii) a more granular breakdown of retail deposits, including the term structure of time deposits; (iii) secured and unsecured interbank asset and liability exposures (quarterly) both domestic and cross-border; (iv) market risk exposures of financial instruments; and; (v) NPL data in more dimensions, including by currency, product, sector1 (including the public sector even if guaranteed), type of institutional borrower, and residence; and a breakdown for allowance for loan losses by risk category. CBTT should improve the granularity of data collection and the speed with which it can be collected by implementing flat-file data bank returns (see proposed headings below). A more precise classification of loans and NPLs would help strengthen analysis (e.g., breakdown by type of borrower and by sector should be clearly separable) and support environmental analysis.

Insurers: CBTT should also enhance data collected from insurers including asset durations, a breakdown of insurance liabilities, reinsurance contracts and probable maximum losses. Datasets should allow for geographical breakdowns at the local and the group-level.

Credit unions: Not all credit unions are providing regulatory returns (fines for non-compliance are fixed in nominal 1971 terms). Inadequate data on loan delinquencies impedes assessment of the true health of the sector and a new regulatory and reporting regime is urgently required.

Investment funds: TTSEC recently strengthened macroprudential reporting. Further granularity on interconnections to banks and asset durations would help strengthen stress testing.

Property: Information on property prices in major cities should be collected to calculate real estate price indices for housing and commercial real estate—including sales prices by property type and location. Information on beneficiaries of government-run social programs that facilitate development of the mortgage market should be collected and analyzed to ensure the programs fulfill their development objectives without jeopardizing stability of the financial system.

Households and corporates: Information on household income and corporate balance sheets is needed to analyze debt servicing capacity, including under stress. Macroprudential indicators such as loan to value and debt service to income ratios are needed to inform the design and calibration of macroprudential tools. Currently, there is no credit registry and supervisors do not have access to data from the existing private credit bureau (to which lenders provide data on a voluntary basis). Information on corporate balance sheets covers few indicators and is limited to listed companies. While establishing a credit registry may take time, CBTT could, in the meantime, access information from the existing private credit bureau within a legal framework that ensures appropriate privacy. Alternatively, CBTT could collect such data from banks. Additional data on corporate ownership would facilitate monitoring of corporate vulnerabilities.

Flat file data returns should be developed by CBTT to collect the following from banks in a database multidimensional, array form (replacing two-dimensional returns) allowing for separate identification/ aggregation/disaggregation of different categories (e.g., NPLs in foreign currency by state owned enterprises):

Loans, NPLs, by Economic Activity, by bank and by date





Distributive Trades

Transp., Comm., Storage

Finance, Insurance (without real estate)

Personal Services

Other economic activities (excluding product lines or borrower types, see below)

Loans, NPLs, by product, by bank, by date

Consumer loans

Ow Credit cards

Ow Other Mortgages

Ow Residential mortgages

Ow Corporate

Other products

Loans, NPLs, by Institutional borrower, by bank, by date

Households Government Local Government State-owned enterprises Nonfinancial corporates Other banks

Nonbank financial institutions

Other institutional borrowers

Loans, NPLs, by Residence, by bank, by date



Loans, NPLs, by currency, by bank, by date

In local currency


Appendix II. Banking Sector Stress Testing Matrix (STeM)

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1 Hardy, D. C., and Schmieder, C., “Rules of Thumb for Bank Solvency Stress Testing.” IMF Working Paper. November 2013.

Appendix III. Nonbanking Sector Stress Testing Matrix (STeM)

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Appendix IV. Implementation of 2010 FSAP Recommendations

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ST short term; MT medium term; I implemented; LI largely implemented; PI partially implemented; NA no action.

Appendix V. Report on the Observance of Standards and Codes: Basel Core Principles for Effective Supervision

A. Introduction

1. This appendix summarizes the assessment of the implementation of the Basel Core Principles for Effective Banking Supervision (BCP) in Trinidad and Tobago.1 The assessment was undertaken by the International Monetary Fund (IMF) and the World Bank (WB) during the October 30 to November 18, 2019 mission, as part of the 2020 FSAP. It reflects the regulatory and supervisory framework in place as of that date. It is not intended to represent an analysis of the state of the banking sector or crisis management framework, which are addressed elsewhere in the FSAP.

2. Assessing the effectiveness of banking supervision requires a review of the legal framework, and detailed examination of the policies and practices of the institutions responsible for banking regulation and supervision. In line with the BCP methodology, the assessment focused on the Central Bank of Trinidad and Tobago (CBTT) as the supervisor of the banking system and does not cover the regulation and supervision of other financial intermediaries. The assessment team reviewed the framework of laws, rules, and guidance, and held extensive meetings with authorities and market participants. The team met officials of CBTT, the MoF, DIC, Institute of Chartered Accountants of Trinidad and Tobago (ICATT), the Bankers Association of Trinidad and Tobago, Caribbean Information and Credit Rating Agency, and banking sector participants. The authorities provided a comprehensive self-assessment of the CPs, as well as detailed responses to additional questionnaires, and facilitated access to staff and to supervisory documents and files on a confidential basis.

B. Methodology

3. The ratings assigned during this assessment are not directly comparable to those from the previous assessment. The methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012 was used for the current assessment and the authorities have opted to be assessed and graded on the essential criteria (EC) only. The prior BCP assessment, conducted in 2010, was based on the 2006 methodology. Since then, the methodology has been revised, leading to some substantive changes.

4. The 2012 methodology reflects lessons from the global financial crisis (GFC) and emerging supervisory best practices. New principles have been added to the methodology, along with new ECs for each principle, that provide more detail. Altogether, the revised CPs now contain 247 separate essential and additional criteria against which a supervisory agency may be assessed. In particular, the revised BCPs strengthen the requirements for supervisors, the approaches to supervision, and supervisors’ expectations of banks. While the BCPs set out the powers that supervisors should have to address safety and soundness concerns, there is heightened focus on the actual use of the powers in a forward-looking approach through early intervention.

5. The standards were evaluated in the context of the sophistication and complexity of the financial system of Trinidad and Tobago. The CPs must be capable of application to a wide range of jurisdictions, whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, a proportionate approach is adopted within the CP, both in terms of the expectations on supervisors for the discharge of their own functions, and in terms of the standards that supervisors impose on banks. An assessment of a country against the CPs must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, risk profile, and cross-border operations of the banks being supervised. In other words, the assessment must consider the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another.

6. An assessment of compliance with the BCPs is not, and is not intended to be, an exact science. Reaching conclusions requires judgments by the assessment team. Banking systems differ from one country to another, as do their domestic circumstances. Furthermore, banking activities are undergoing rapid change after the crisis, prompting the evolution of thinking on, and practices for, supervision. Nevertheless, by adhering to a common, agreed methodology, the assessment should provide the authorities with an internationally consistent measure of the quality of their banking supervision in relation to the revised CPs, which are internationally acknowledged as minimum standards.

C. Preconditions for Effective Banking Supervision

7. Although Trinidad and Tobago’s financial system remains stable, notwithstanding the 2016–17 recession, the overall increase in household debt since 2011, together with high sovereign debt concentrations, could prove problematic if economic conditions worsen. Following the real GDP contraction of 6.3 percent in 2016, driven mainly by the energy sector, the economy of Trinidad and Tobago is slowly recovering. Household debt to GDP increased by about 10 percentage points from 2013 to 2018 and continues to be a potential source of vulnerability to the financial system. As of end-2018, total household debt2 stood at TT$56 billion, representing roughly 35 percent of GDP. The banking sector accounts for approximately 60 percent of total estimated household debt, with exposures to households at 22.6 percent of total assets (or 160 percent of total capital). Further, domestic sovereign exposures in the banking, insurance, and pension sectors accounted for 29.4 percent of their combined assets at end-2018, which, under a negative shock, could significantly impact the health of financial institutions and the broader financial system.

8. CBTT plays a significant role in promoting and maintaining financial stability. To this end, CBTT works closely with the MoF as well as other domestic regulatory agencies on matters concerning financial stability in Trinidad and Tobago. On matters of systemic importance, the MoF has worked closely with CBTT in dealing with past financial crises, as well as in the drafting or formulation of any legislation pertaining to financial institutions and financial stability measures. Lastly, the MoF has primary responsibility for all fiscal matters.

9. The Trinidad and Tobago public infrastructure, including its legal system, oversight of professionals, accounting standards, and governance and supervision of other financial markets appear strong, as follows:

  • a. The legal system of business laws, including corporate, bankruptcy, contract, consumer protection, and private property laws, as well as an independent judiciary, are in place;

  • b. Professionals (e.g., accountants, auditors, and lawyers) are subject to transparent and ethical standards with oversight by their respective regulatory Boards. Trinidad and Tobago has also adopted International Financial Accounting Standards (IFRS 9) that promote fairness, transparency and accuracy with standards of conduct with oversight by the ICATT. Further, the external auditors are subject to a stringent accreditation standards program overseen by the ICATT;

  • c. Although the banking and insurance sectors and financial markets have rules for regulation and supervision of entities by CBTT and TTSEC, respectively, some pieces of legislation are currently being updated (e.g., the pending Insurance Act, 2018 (IA) expected to be enacted in the near future);

  • d. The Credit Bureau of Trinidad and Tobago, originally established in 1985 and is privately owned, provides services to both individuals and financial institutions including: credit bureau reporting (both verbal and written reports), business credit assessments, trade references and company title searches. Although banks rely on this information as part of their underwriting of loans, CBTT neither has access to this credit information nor formally requires banks to make use of it; and

  • e. Basic economic, financial and social statistics are made available to the public through various government websites but are lacking in some important respects (e.g., quarterly GDP data is unavailable).

10. CBTT regulates and supervises Trinidad and Tobago’s national payments systems (NPS) and oversees all payment system providers. The NPS consists of all systems which facilitate the clearance and settlement of payments, including the large-value systems (e.g., the Real Time Gross Settlement (RTGS) system and the government Securities Settlement system) and the retail payment systems (e.g., check clearing and card payment schemes). CBTT has adopted the internationally accepted standards of the Core Principles for Systemically Important Payment Systems.

11. The authorities have dealt with several financial crises in past decades at significant financial cost and the framework for crisis management, recovery and resolution planning is currently under development. CBTT’s legislative framework includes a range of resolution tools, including CBTT’s special emergency powers for resolving financial institutions in crisis.3 CBTT is currently rolling out its recovery and resolution planning requirement to all SIFIs. CBTT has drafted a National Crisis Management Plan that proposes arrangements for the coordination of TTSEC, DIC, and the MoF in times of crisis. Further, CBTT, in its capacity as one of the lead supervisory authorities operating in the Caribbean region and as a member of the CGBS, has provided input into the draft Regional Crisis Management Plan that includes the collaboration and coordination of 15 representative countries.

12. The DIC is well funded but the deposit insurance limit has not proven binding. The DIC’s mandate includes the collection of annual deposit insurance premiums, the accumulation and management of an ex ante deposit insurance fund (TT$3.5 billion as at June 30, 2019), paying insured deposits and acting as receiver or liquidator of insolvent financial institutions. The current level of the fund represents about 11 percent of insured deposits and about 3 percent of total domestic deposits. DIC’s charter does not provide for the authority to conduct its own independent onsite assessment of the financial soundness of its member banks, therefore DIC relies heavily on the information provided from CBTT. The CBTT Governor is DIC’s Chairman of the Board and includes four other Board members. All Board members are appointed by the MoF. Trinidad and Tobago has a recurring history of the government bailing out creditors of failed financial institutions (including banks, insurers, and a credit union). Most recently, the DIC paid out the creditors of the failed CLICO investment bank using government funds.

13. CBTT has wide authority to provide ELA, exposing the central bank to potentially undue risks. CBTT may provide immediate liquidity assistance to commercial banks via repurchase agreements, lending via the discount windows or collateralized loans.4 In addition, CBTT can provide uncollateralized support to a bank, as necessary, to prevent its failure where there is a threat to the financial system of Trinidad and Tobago.5 Such unsecured lending could expose CBTT to undue financial risks.

14. Although banks have implemented IFRS9, Basel II Pillar 3 disclosure requirements need to be implemented to improve transparency of information to market participants. The accounting, auditing and financial reporting requirements are governed by various corporate laws and the ICATT. Banks fully implemented IFRS9 internationally accepted accounting standards, effective January 1, 2018. TTSEC requires listed companies to produce, publish and file quarterly and annual financial statements. Although banks not listed with the TTSEC are required to file annual audited financial statements (per S. 80 of the Financial Institutions Act (FIA)), most banks operating in Trinidad and Tobago place quarterly and annual financial information on their websites.

D. Main Findings

Responsibilities, Objectives, Powers, Independence (CPs 1–2)

15. CBTT’s independence is limited by the extensive role of the MoF in the supervisor’s governance, decision making, and internal organization. CBTT does not have the power to set prudential criteria (FIA S. 9) and the process to update regulations takes excessively long, impinging on CBTT’s ability to maintain supervisory standards that remain effective and relevant to changing industry and regulatory practices. The FIA allows the MoF to: (i) make regulations to set prudential criteria (S. 9); and (ii) to intervene in the supervisory decision-making process: for example, CBTT needs to consult the MoF before approving or refusing a banking license (S. 21); the MoF could also prescribe criteria for CBTT’s approval of banks’ branch and representative offices (S. 50). Furthermore, the Central Bank Act (CBA) enables the MoF to approve CBTT rules “for its internal administration and management” and its Code of Ethics, as well as to request information on salary, organizational structure, and vacant positions.

Licensing, Changes in Control, and Acquisitions (CPs 4–7)

16. The licensing and approval processes are generally sound but requires some improvements. Although banking applications are infrequent, CBTT conducts a robust assessment of the license applications challenging the business plans and the financial projections. However, there is no prohibition against borrowing the required initial capital. Further, CBTT’s approval threshold of 10 percent for a change in significant ownership needs to be extended to a potential buyer that is not an ‘acquirer’ (financial entity or its controlling or significant shareholder), for which the threshold is currently too high at 20 percent.

Supervisory Cooperation, Consolidated and Cross-Border Supervision (CPs 3, 12, and 13)

17. CBTT should create a formal mechanism to strengthen the sharing of SIFI information with domestic agencies that is pertinent to the financial health of systemic banks. It is important that agencies discuss views on both emerging risk issues (macroprudential risks) together with potential impacts on the health of SIFIs (microprudential impacts), in order to take timely financial stability measures during normal times and in the lead up to a major bank failure to protect the stability of Trinidad and Tobago’s financial system.

18. Recovery and resolution plans, together with resolvability assessments, need to be conducted and relevant aspects shared with both domestic and foreign regulators. Further, it is key that the draft National Crisis Management Plan and the draft Regional Crisis Management Plan be finalized, as well as the development of internal crisis management operational preparedness measures be put in place. CBTT must also ensure all MoUs are up to date and include appropriately detailed provisions for the ongoing flow of information.

19. Given the nature of the interconnectedness of the financial groups that operate both domestically and internationally, CBTT should continue with its efforts to enhance consolidated supervision. CBTT introduced a Consolidated Supervision Framework in 2016 (for internal purposes), rolled out enhanced data requirements for banking groups and conducted several joint onsite examinations with key foreign regulators. More emphasis is required on the cross-sector analysis of financial entities within financial groups (e.g., investment funds, insurance) to ensure a group-level risk assessment view by CBTT. Further, key initiatives are currently being rolled out (e.g., the Internal Capital Adequacy Assessment Process (ICAAP) and Liquidity Coverage Ratio (LCR)) at the group level that will need attention.

Supervisory Approach (CPs 8–10)

20. CBTT’s risk-based supervisory framework, needs to be updated to reflect enhanced supervisory requirements for SIFIs. Although CBTT has identified SIFIs within the banks/banking groups and contemplated a capital surcharge back in 2014, CBTT has not required additional prudential requirements nor articulated an enhanced supervisory framework for SIFIs (e.g., communicated the need for enhanced monitoring, formalized data requirements, etc.). While CBTT’s risk-based supervisory framework is comprehensive, some aspects of the process are too labor intensive6 and should be streamlined to make the best use of its supervisory resources. Further, CBTT’s Banks, Nonbanks Supervisory Unit’s resources should be augmented, given its broad mandate to supervise SIFIs, banks and nonbanks, oversee “Deemed SIFIs” as well as develop regulatory guidance.

21. CBTT’s current mix/frequency of onsite examinations and offsite surveillance for SIFIs, timeliness of the release of examination reports, and direct access to banks’ Boards needs to be strengthened. Specifically, CBTT needs to strengthen its supervisory assessments of SIFIs to include more frequent onsite supervision of banks’ strength in overall risk management and internal control systems, focusing on the key risk areas of credit, market, interest rate risk in the banking book (IRRBB), foreign exchange, and liquidity. Further, CBTT should ensure that the onsite examination reports are completed and released on a timely basis to ensure banks quickly address key examination findings. In addition, given CBTT’s current practice to not meet with the full Boards of the banks (e.g., CBTT currently meets with the Chairs of Audit and Risk Committees), to enhance its level of contact with the Boards, CBTT should determine the criteria as to when it would meet with the full bank’s Board/independent representatives (e.g., to discuss the findings of onsite examinations, to share key emerging and strategic risk information, as well as to ensure the Board’s continued understanding of CBTT’s regulatory and supervisory expectations).

22. CBTT should reassess the adequacy of regulatory data that is being collected to ensure that supervisors have access to all the necessary risk data. Data on liquidity, market, foreign currency, IRRBB, country risks, and exposures to related parties should be included or enhanced as appropriate. In addition, any pertinent data that is being collected by CBTT (e.g., data that the Statistics Unit or the Research Department collects) should be made available to supervisors, if relevant. Further, CBTT’s data validation mechanisms will benefit from the future planned adoption of an electronic software system versus some of the manual verification and validation processes currently in place.

Corrective and Sanctioning Powers of Supervisors (CP 11)

23. Although CBTT has an adequate range of legislative powers to take corrective measures in dealing with problem banks, it should formalize its internal reporting and release its “ladder of intervention” document to the banks. CBTT should augment its reporting processes for tracking problem financial institutions through an aggregate report on all banks being monitored to both the Inspector (the individual responsible for the supervision of financial institutions at CBTT), and to CBTT’s Governor/Board to ensure operational preparedness to deal effectively in practice with emerging risk issues. Moreover, CBTT should contemplate releasing its “ladder of intervention” to the banks to clarify what corrective measures CBTT may utilize depending on the risk profile of the problem bank.

Corporate Governance and Internal Audit (CPs 14 and 26)

24. CBTT’s Corporate Governance Guideline (2007) is outdated and does not capture several essential elements, including the need for banks’ Board-approved risk appetite frameworks. CBTT is currently developing a new Corporate Governance Guideline, expected to be released in 2020, which will address the requirements for Board-approved risk management policies and practices, as well as articulate internal audit and compliance functions. Once the new Guideline is released, CBTT should undertake a full-scope review of banks’ corporate governance frameworks, at least for the more complex banks, as well as improve its direct contact with Boards, including independent Board members, to ensure banks’ compliance with the new corporate governance requirements.

Capital (CP 16)

25. Laws, regulations, and prudential standards pertaining to banks’ capital adequacy requirements have not been updated as necessary to ensure they remain effective and relevant to changing industry and regulatory practices. Although CBTT is in the process of introducing the Basel II capital framework for banks, banks are subject to Basel I capital adequacy requirements. The Draft Capital Regulation, soon to be promulgated by parliament, will bring into force the new Basel II capital adequacy requirements for banks. Banks have been required to report capital requirements under both frameworks on a parallel run basis for close to two years. Further, CBTT’s Basel Policy Paper ‘Phase 2’, published early November 2019 outlined banks’ requirements to prepare ICAAPs (based on nature, size, and complexity of the bank) as well as introducing a new leverage ratio, a capital conservation buffer, and Pillar 3 disclosure requirements. Further amendments to the Draft Capital Regulations were released for public consultation on November 26, 2019 proposing, among others, adjustments to risk weights for certain national discretion items and a capital surcharge for SIFIs.

Credit Risk and Problems Assets, Provisions and Reserves (CPs 17–18)

26. Although total NPL levels remain relatively low at 3.4 percent, as at end-June 2019, CBTT should be vigilant in its assessment of the quality of banks’ underwriting and asset classification practices. As at end-June 2019 past-due loans (1 to 89 days) amounted to TT$3.2 billion or 4.5 percent of total commercial loans. Further, there was a continued rise in higher risk consumer-refinanced (TT$2.4 billion) and debt consolidation loans (TT$2.6 billion), which together represented 15 percent of commercial banks’ total consumer loans of TT$33.3 billion. Given the current level of past-due loans and the continued increase in consumer-refinanced and debt consolidation loans, CBTT should conduct an in-depth thematic credit review to assess their potential impact on the currently reported low NPL levels of 3.4 percent of total loans in the banking sector.

27. CBTT needs to reassess its onsite credit examination program to ensure adequate coverage of all SIFIs as well as updating guidance currently available to banks. CBTT conducted an in-depth thematic credit review in 2016–2017 at five of the largest commercial banks, which indicated at that point in time that banks were maintaining adequate underwriting standards for both consumer and commercial lending. CBTT has also conducted some touch-point follow-up onsite examinations, as well as monitored banks’ progress in identifying any deficiencies found at that point in time. CBTT needs to ensure continued adequate assessment of credit risk management practices at the SIFIs on a more in-depth and frequent basis. Further, CBTT’s credit risk guidance is spread over several outdated guidelines and, therefore, it should be a priority for CBTT to develop and release an updated credit risk management guideline to banks.

28. Although IFRS 9 accounting standards have been implemented by all banks, CBTT needs to update its current guidance on the measurement, monitoring and control of impaired assets. Further, given CBTT currently places its reliance on the external auditor to assess the adequacy of banks’ expected loss credit risk models, as well as the models for valuation of Level 2/3 assets, CBTT should ensure supervisors have a good understanding of banks’ credit risk management practices.

Risks (CPs 19–25)

29. CBTT may wish to reassess the adequacy of its large exposure limits for banks that operate in multiple jurisdictions in the Caribbean region to align with international standards, where appropriate. CBTT may wish to consider recalibrating the large exposure limits to be based on Tier 1 capital versus total capital. Further, CBTT may wish to reconsider certain exemptions currently in place (the trading book and the inter-banking exposures) to ensure that banks’ exposures to concentration risk are adequately measured and captured.

30. CBTT needs to enhance its monitoring of banks’ market risk exposures as well as update its supervisory framework to ensure an in-depth understanding of banks’ market risk management policies, processes, and systems. Specifically, CBTT needs to develop guidance around expectations of banks’ use of models, valuation practices, and stress testing. Supervisory practices need to be developed to ensure adequate oversight by CBTT of the strength of banks’ market risk management practices.

31. CBTT should develop a guideline on IRRBB and update its supervisory framework to ensure an in-depth understanding of bank’s interest rate risk management policies, processes, and systems. At a minimum, CBTT’s IRRBB guidance should set minimum requirements for asset- liability management, including diversification, setting target levels for interest margins, limits for off-balance sheet items sensitive to interest rate changes, establishing procedures for setting interest rates on deposits and other liabilities, and permissible limits of maturity gaps of the bank’s assets and liabilities. Supervisory practices need to be developed to ensure adequate oversight by CBTT of the strength of banks’ interest rate risk management practices.

32. Although CBTT has minimum prudential liquidity reserve requirements for banks, it does not yet have in place risk-based liquidity requirements. CBTT is expected to release a Liquidity Risk Guideline outlining banks’ requirements that, among other things, will establish an LCR for banks. In addition, this new guidance should ensure banks use an appropriate range of tools to measure liquidity risk, including bank’s capability to aggregate key liquidity risk information on a timely basis at a group level. Funding strategies, together with contingency liquidity arrangements, should be Board-approved and tested under various stress scenarios. Further, CBTT should contemplate adopting the net stable funding ratio (NSFR) Basel III requirements, given the need for banks to assess, and for CBTT to be aware of, banks’ longer-term funding horizon.

33. CBTT needs to develop a guideline on banks’ Operational Risk Management frameworks that would encompass banks’ requirements to mitigate existing areas of operational and technological risk. Specifically, CBTT needs to update its current draft Outsourcing Guideline, formulate expectations around recovery and business resumption planning, IT systems, security and integrity of data, and managing and escalating cyber-risk attacks.

34. The CBTT’s technical risk expertise should be strengthened. Given the need to develop risk guidance for banks and to enhance CBTT’s supervisory practices around market risk review procedures specifically, it is essential that CBTT secure industry experience to help build the necessary expertise to assess and challenge banks’ practices in this regard. This technical risk expertise should also be able to provide CBTT with support in the other risk areas of IRRBB and liquidity risk.

Disclosures and Transparency (CPs 27–28)

35. Although all banks fulfill disclosure requirements in accordance with IFRS9, CBTT should work toward adopting Basel II Pillar 3 disclosure requirements. The Financial Institution Capital Adequacy Regulation (2018) (Draft Capital Regulation), awaiting promulgation by parliament, as well as CBTT’s Circular announcing in its draft policy paper “Phase 2—Basel II and III implementation” released November 2019, both outline CBTT’s intention to move toward banks’ compliance with Pillar 3 disclosure requirements. The Draft Capital Regulation will confer to CBTT the power to specify which information banks would have to disclose that would strengthen key information for market participants.

Abuse of Financial Services (CP 29)

36. Many recent changes in the legislative and supervisory guidance have augmented the need for banks to effectively comply with all AML/CFT requirements. Many pieces of legislation pertaining to financial institutions’ AML/CFT compliance requirements were updated or introduced in 2018–19 (e.g., amendments to the Companies Act, May 2019 to address deficiencies regarding the adequacy, accuracy, and timeliness of obtaining key beneficial ownership information). Further, CBTT updated its AML/CFT Guideline effective April 2018, which strengthened its expectations regarding banks’ AML/CFT regulatory and supervisory requirements, including the requirement to have group-level AML/CFT compliance.

37. CBTT needs to conduct regular onsite examinations to secure an independent “supervisory view” of the degree of banks’ compliance. In addition to the internal and external auditors’ reviews of banks’ self-assessment against AML/CFT legislative and supervisory requirements, CBTT must continue with its efforts to roll out its AML/CFT risk-based supervisory program. Together with the assistance of CBTT’s AML/CFT experts, it will be key for supervisors to independently confirm banks’ compliance with AML/CFT requirements.

38. CBTT should address any outstanding recommendations made by the Caribbean Financial Action Task Force (CFATF) that are specifically related to banking supervision and to reassess the adequacy of its current AML/CFT expertise. CBTT should introduce monetary sanctions for noncompliance with AML/CFT requirements. In addition, CBTT should continue its efforts to address any remaining gaps highlighted in the FATF Mutual Evaluation Report of June 2016 and successive follow-up reports, most recently in June 2019, that relate directly to banking supervision. Further, given CBTT’s broader oversight of AML/CFT compliance in other sectors (e.g., insurance), CBTT needs to reassess the adequacy of its AML/CFT expertise to ensure adequate coverage for banks.

E. Authorities’ Response to the Assessment

39. The CBTT appreciates the detailed assessment of its banking system against the Basel Core Principles conducted by the FSAP team and takes careful note of the recommendations made to improve oversight of the banking system and by extension financial stability. The CBTT acknowledges that several of the recommendations were identified in the Bank’s 2016/17–2020/21 Strategic Plan and were in various stages of progress. Such initiatives include the implementation of Basel II/III, development and/or update of guidelines for inter alia corporate governance, credit, market, operational and liquidity risk management, guidelines for the designation and enhanced oversight of SIFIs, improvement of the stress testing regime, and finalizing of the National Resolution/Crisis Management framework. Consequently, we shall take on board the recommendations made in this assessment to ensure that the frameworks and guidelines developed are robust.

F. Summary Compliance with the Basel Core Principles

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G. Recommended Actions to Improve Compliance with the Basel Core Principles and the Effectiveness of Regulatory and Supervisory Frameworks

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Refinanced loans replace an existing debt obligation into a new loan under different terms; consolidation loans amalgamate multiple debt obligations into a single one—they display higher NPL ratios than other loan categories.


Cross-country estimates were used as the FSAP was unable to find a robust statistical relationship between bank NPLs and GDP over the period used.


The COVID-19 central scenario reflects a stress test scenario rather than an economic forecast for Trinidad and Tobago.


The 1.5 standard deviation shock was used in recognition that the financial sector had already weathered a multi-year slowdown that led to a negative real output gap in recent years.


FX rationing presents risks, e.g., significant intervention would reduce system-wide liquidity.


CBTT issued detailed revised guidance on AML/CFT in 2018.


With a five-year transitional period to implement the new capital requirements.


Requiring presidential proclamation, which awaits final revisions to tax legislation and approval of the regulations.


Including strengthen analysis of key risk areas for banks and finalizing the implementation of risk-based supervision in insurance and securities sectors.


Potential recipients could include insurers designated as SIFIs, and large credit unions whose disorderly failure could give rise to systemic distress once they are adequately supervised.


For example, the current returns for the “real estate’, ‘financial services and real estate’ and ‘consumer’ (which includes mortgages) segments do not enable total real estate loans to be separately identified.


The BCP assessment was conducted by Geraldine Low (IMF external expert) and Ezio Caruso (World Bank staff).


Household debt comprises credit extended to households from: commercial banks, nonbanks, insurance companies, credit unions, the Home Mortgage Bank, the Trinidad and Tobago Mortgage Finance Co. and other retail merchants. (source: CBTT’s “Financial Stability Report 2018,” December 2018 footnote 22, page 36).


S. 44D of the Central Bank Act (CBA).


S. 36 (1) of the CBA.


44D (1)(v) and 44(D)(2) of the CBA.


Certain aspects of the supervisory framework appear labor-intensive (e.g., the review of quarterly Board minutes, the production of extensive section notes which are produced either as part of the monitoring or onsite examination framework, the supervisory planning document, etc.) could be streamlined to free up resources to cover other aspects of the supervisory framework.