System holding firm
The Central Bank in partnership with the Financial Services Commission recently released the Financial Stability Report 2014.
THE BARBADIAN FINANCIAL SYSTEM continued to demonstrate resilience in spite of challenging economic conditions.
Over the course of the 12 months ending September 2014, most deposit-taking entities (banks, trust companies and finance houses) and insurance firms faced low demand for major financial products by the private sector. Consequently, growth was weak and in some instances, entities recorded a contraction on their balance sheets.
For the banks, loan growth was driven by one particular loan to Government, as well as mortgage lending in the personal sector. However, this increased exposure to Government was offset by a reduction in the banking systems’ holdings of Government securities, both longer dated debentures and short-term Treasury bills.
In addition, while several of the large hotel loans that had proven problematic were resolved, this improvement was more than offset by a notable expansion in loan losses associated with the personal sector.
Consequently, bank profitability was down by nearly one-quarter as banks made allowances for losses on a larger proportion of their loan portfolio. Weak profitability also spurred some banks to focus on restructuring in order to meet profitability goals, a strategy which has also been replicated in several of the Canadian parent banks.
Pension – Sources: Financial Services Commission
Like banks, the deposit-taking finance houses and trust companies also struggled to generate growth, while isolated firms recorded some success, loans were marginally lower than a year ago.
Furthermore, loss provisions were higher than a year earlier although non-performing loans (NPLs) showed an improvement over the period.
In contrast, credit unions registered significantly higher lending to their membership, even as their client base continued to be impacted by rising unemployment and a sluggish domestic economy.
However, the portfolio of NPLs held by the credit unions continued to climb, especially those categorised in the most severe “default” category. The Financial Services Commission has estimated that the insurance sector’s assets fell by two per cent in 2014. Insurance entities also reduced their holding of Barbados’ Government-issued domestic debt up to the end of September 2014.
Financial stability indicators and stress tests performed for the financial system strongly suggest that the system remains stable and able to withstand a wide variety of severe economic shocks. This may be attributed to the simplicity of the business models employed, strong parent companies, the accumulation of robust capital buffers and – in the case of the insurance industry – the presence of substantial reinsurance assets.
This approach of focusing on simple banking models and traditional insurance products is currently being promoted by international regulators who have argued that the resilience of international banks needs to be increased by reducing the risk associated with wholesale funding and proprietary trading.
Linkages in the financial system also have the potential to be a major source of systemic vulnerability, particularly through inter-company exposures, and these potential contagion effects were also considered.
Liquidity – Source: Central Bank of Barbados
In addition to contagion risk, liquidity risks as well as insurance-related risk were also carefully examined in the report. Following the publication of the International Monetary Fund’s Financial Sector Assessment Programme in February 2014, policymakers have continued their efforts to improve the management of the sector, in terms of revisions to guidelines by both the Central Bank and the Financial Services Commission.
Among the areas addressed were internal capital adequacy assessment, the standardised approach to credit risk, and the measurement of operational risk.
Commercial banks remain the dominant subgroup in the domestic financial space accounting for approximately 61 per cent of financial assets, although there was a slight erosion of their share of the total assets.
Banks, while maintaining lending to individuals, have recorded a contraction in lending to business over the previous two years. In contrast, the credit unions’ focus on individual lending allowed their share of total domestic assets to rise to 11 per cent, as loans to members continued to expand over the previous five years. Concentration within the credit union sector remained heavily skewed, as four of the 35 credit unions account for more than 85 per cent of total assets, membership, loans and deposits.
Trust and mortgage finance entities focus on mortgage and consumer financing to private individuals and several of them are affiliated with commercial banks or other conglomerates, while the banks themselves have Canadian, United States or Trinidadian parents.
The life insurance industry is dominated by a single company, while the non-life market is more competitive. The major insurance companies operate both regionally and internationally although several smaller insurers operate solely in the domestic market.
Collectively, the total assets of the financial system grew 2.3 per cent per year on average since the global recession reaching $16 billion at September 2014, an equivalent to 185 per cent of gross domestic product. The majority of this growth has been driven by expansion in loans, particularly mortgages, and holdings of Government securities.
However, during the current year, total assets declined by 2.5 per cent reflecting contractions in the asset base of all institutions, with the exception of credit unions.