## 1bhsea2019002

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### Macrofinancial background
- Growth and structure:
  - Growth in this tourism-driven economy is projected to have risen to about 2.3 percent in 2018, with longer-term annual growth projections of 1.5 percent.
  - Tourism accounts for 45 percent of GDP.
  - Real estate investment and construction represent about 22 percent of GDP.
- Public finances and disasters:
  - Public debt-to -GDP rose to 55 percent in FY2017, from 38 percent in FY2012.
  - Over the last 20 years, The Bahamas has been hit by 11 hurricanes with an average cost of 4.3 percent of GDP; in the prior 20 years there were 4 hurricanes at an average cost of 3 percent of GDP.
- Exchange rate and monetary conditions:
  - The Bahamian dollar is pegged to the U.S. dollar at parity.
  - Residents have limited access to foreign exchange; capital controls afford some scope for monetary policy independence, but policy transmission is weak.
  - Credit creation is anemic and focuses on the household sector; commercial business lending was substantially reduced during the recent stagnation.

### Financial system — structure and performance
- System composition:
  - Seven banks domiciled in The Bahamas; four are foreign-owned and account for roughly three-quarters of banking assets. All seven are deemed systemically important.
  - Domestic financial sector assets estimated at US$18 billion in June 2018.
  - Offshore assets total US$256 billion as of June 2018 (approximately 20 times GDP).
- Asset composition and lending:
  - Bank portfolios concentrated in residential mortgages and consumer credit.
  - Sectoral composition of credit (June 2018): Consumer credit 38%, Business credit 17%, Residential mortgages 43%, Commercial mortgages 2%.
  - Share of credit to the public sector in banks’ domestic assets increased to 27.2 percent in 2018 from 21.1 percent in 2013.
- Capital, liquidity, profitability:
  - System-wide capital adequacy ratio (CAR) as of September 2018: 32 percent (regulatory target: 17 percent).
  - Ratio of liquid to total assets as of June 2018: 30 percent.
  - System-wide return on assets (ROA) has remained in the 2.2–2.5 percent range over the last three years.
  - Assets grew 1.9 percent annually from 2007–2017, 0.2 percentage points above inflation.
- Asset quality:
  - NPL ratio remains high at 9 percent, after peaking at 15.3 percent in 2013.
  - NPLs concentrated in residential mortgages; three institutions own 61 percent of all NPLs.
  - Large stock of restructured loans at increased risk of reverting to nonperforming status.
  - Specific provisions cover about 58 percent of NPLs; the ratio of NPLs net of specific provisions to capital was about 10 percent as of September 2018.
- Bank of The Bahamas (BOB):
  - BOB recapitalized in 2014 and 2017; portions of its NPLs were transferred at gross book value to a government-owned AMC, lowering system NPL ratio by about 3 percentage points in the period.
  - BOB held approximately 7 percent of total bank assets as of June 2018; NPLs at BOB remain high at 26 percent.
- Liquidity and reserves:
  - Excess liquidity permeates the banking sector; CBOB has maintained foreign reserve cover at about twice the statutory requirement.

### Offshore financial sector
- Size and composition:
  - Offshore assets: US$256 billion in June 2018 (US$427 billion at end-2013).
  - Banks: US$168 billion in assets.
  - Investment funds: US$86 billion in assets.
  - Insurance sector: US$1 billion in assets.
- Business model and risks:
  - Activities concentrate in private banking and treasury services with little credit creation or maturity transformation; fees represent 75 percent of income for the five largest banks.
  - Sector well segregated from the domestic economy through the currency regime; poses low stability-related risks but creates reputational risks and pressures on correspondent banking relationships (CBRs).
  - Offshore sector contributes less than 3 percent to GDP and less than 1 percent to government revenue.
- Supervision focus:
  - Supervision appropriately focused on AML/CFT.
  - New licensing regime announced in December 2018 allows financial institutions to serve both international and domestic clients—should be carefully monitored to ensure no new risks develop.

### Financial stability analysis — vulnerabilities and stress testing
- Key vulnerabilities:
  - Large stock of problem assets requires action across systemic risk monitoring, banking supervision, and crisis management.
  - Vulnerabilities to natural disasters and external economic contagion heighten risk.
  - Credit unions are small systemically but vulnerable to shocks; two largest credit unions and two domestic banks (about 15 percent of domestic banks’ assets) have NPL ratios significantly above 10 percent.
- Stress testing scope and scenarios:
  - Top-down stress tests cover domestic banks and the two largest credit unions, about 97 percent of all credit institution assets.
  - Main scenarios: Natural disaster (major hurricane), U.S. recession, and “Perfect storm” (simultaneous U.S. recession and major hurricane).
  - Stress test horizon: 3 years (annual frequency). Baseline uses October 2018 WEO projections.
- Selected stress test outcomes (system-level):
  - Baseline system-wide CAR (Sept. 2018): 31.2 (adjusted position: 30.6 after assuming 10 percent of restructured loans become nonperforming).
  - Under proportional NPL increases (All Banks CAR):
    - 50 percent → 27.6
    - 100 percent → 24.7
    - 150 percent → 21.7
    - 200 percent → 18.7
  - Under sectoral mortgage shock (150 percent, LGD 100 percent) → All Banks CAR 23.1.
  - Solvency stress scenario results:
    - Short period of stress caused by a major hurricane would weaken banks’ performance but not below the 17 percent target capital ratio.
    - A U.S. recession scenario would cause one bank with large NPLs and weak profitability to become undercapitalized (hurdle CAR = 14 percent).
    - Under combined shock, system-wide CAR would decline to 23 percent and two banks (15 percent of banking assets) would need additional capital (aggregate NPL increase of about 150 percent).
- System-wide NPL projections (2018–2021):
  - Baseline: 2018 8.7; 2019 9.4; 2020 10.0; 2021 10.7
  - Major hurricane: 2018 8.7; 2019 10.7; 2020 13.1; 2021 15.0
  - U.S. recession: 2018 8.7; 2019 11.1; 2020 14.8; 2021 18.8
  - Perfect storm: 2018 8.7; 2019 12.0; 2020 17.1; 2021 22.4
  - Adjusted (including restructured loans reverting to NPLs) Perfect storm: 2018 9.8; 2019 13.8; 2020 19.7; 2021 25.8
- Credit unions and offshore banks:
  - Two largest credit unions vulnerable; become undercapitalized under moderate stress (initial CAR 16.3; CA 9.8).
  - Offshore banks broadly resilient to traditional banking risks; 10 large offshore institutions: six primarily private banking, two wholesale treasury; institutions lending mainly to corporates do not become undercapitalized even with a 15 percent deterioration in loan quality.

### Systemic risk oversight and macroprudential policy
- Institutional setting:
  - CBOB acts as macroprudential policy (MPP) authority but no formal MPP framework or specific toolkit in place.
  - The Group of Financial Services Regulators should meet regularly to share information and coordinate responses.
- Data and policy recommendations:
  - Introduce a macroprudential capital buffer above a core common equity requirement—specifically a fixed macroprudential capital buffer instead of a dynamic counter-cyclical capital buffer (CCyB).
    - Justification: A CCyB would be difficult to implement given complex analytical and data calibration requirements; a static buffer requires less timely data and would be relaxed only in the event of a significant shock.
  - Operationalize the proposed Consumer Credit Bureau (highest priority) to improve visibility into household sector.
  - Develop a real estate price index and collect loan-level data to enable potential future implementation of LTV and DTI lending standards.
  - Ensure CBOB has sufficient powers to recommend regulatory policy regarding lending standards across banks and NBFIs.

### Banking supervision — strengths and weaknesses
- Effectiveness and gaps:
  - CBOB has a generally effective supervisory program given system size and complexity, using a principles-based approach and wide discretionary powers.
  - Areas for improvement:
    - Strengthen industry practices in credit risk management, assessment of problem assets, loan loss provisioning, and internal capital adequacy assessment (ICAAP).
    - Enhance supervisors’ assessments of boards, senior management, and internal audits.
    - Increase banking supervisory staffing to implement enhanced offsite surveillance and onsite inspections.
  - Capital regime:
    - DSIBs required to meet a 17 percent target for capital and the 14 percent trigger for supervisors to escalate coverage of SFIs.
  - Guidance and IFRS 9:
    - CBOB issued ICAAP guidelines in 2016; further guidance needed regarding validation of expected credit loss models under IFRS 9 effective January 2018.

### Crisis preparedness, resolution, and safety nets
- Legal reform and resolution powers:
  - Legislative reform on crisis management, resolution, and safety nets needs completion.
  - Recommended enact bank resolution legislation, including guidance for public AMCs, and administrative special resolution regime allowing CBOB to appoint a statutory administrator and liquidator without court recourse.
  - Proposed amendments clarify emergency liquidity assistance purpose, solvency tests, collateral mandates, penalty rates, and maturity limits.
- Asset Management Company (Resolve) and AMC concerns:
  - Resolve operations opaque; past transfers of problem assets at gross book value not in line with good international practice.
  - Resolve should run operations on a commercial basis with an explicit mandate to maximize asset value; audits mandated yearly (first anticipated in 2019).
  - Any bank with excessively high NPLs must submit a restructuring plan to CBOB; institutions must ensure forward-looking viability or be resolved.
- Deposit Insurance Corporation (DIC):
  - Fund at B$56 million as of year-end 2018 with a target balance of B$88.5 million; DIC Board considering raising the target to B$125 million (2 percent of insurable deposits).
  - At current premium of 5 basis points, DIC projections imply about a decade to reach B$125 million.
  - Recommendation: target at least 2 percent of insurable deposits in the near term and increase toward 4 percent over the longer term; combined with government borrowing capacity, a 2.0 percent fund would allow payout for any one medium-sized bank.
  - DIC has authority to borrow but no specified source for a stand-by line of credit; expedited procedures should be developed for access to backstop financing primarily from the MOF.
  - Expand DIC coverage to credit unions only when DIC has sufficient resources and credit unions are sufficiently capitalized and supervised.
- Crisis coordination:
  - Create a Crisis Management Committee (e.g., Financial Crisis Management Committee, FCMC) to improve coordination and operationalize reforms.

### Governance of state-controlled financial institutions
- Governance recommendations:
  - Ensure institutions enjoy full operational autonomy to achieve defined objectives.
  - Prevent government as shareholder from redefining objectives in a non-transparent manner.
  - Boards should be nominated using a well-structured, merit-based and transparent process.
  - Ensure strong governance arrangements for state-controlled financial institutions (timing: ST).

### AML/CFT
- Status and priorities:
  - The Bahamas identified by FATF in October 2018 as a country with strategic AML/CFT deficiencies; authorities have political commitment and an action plan.
  - Continue implementing measures agreed with FATF and focus on improving effectiveness of AML/CFT framework.
  - Strengthen risk-based supervision of Financial Institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs); use full range of enforcement actions given lack of administrative fines imposed to date.
  - Enhance entity transparency, building on the recently enacted Register of Beneficial Ownership Act.
  - Assess ML/TF risks related to Fintech initiatives and the Economic Permanent Residency Program (EPRP); ensure appropriate due diligence on applicants’ source of funds.
  - Prevent pressure on correspondent banking relationships by ensuring availability of accurate beneficial ownership information.

### Financial inclusion, payment systems, and SMEs
- Main recommendations:
  - Open the Automated Clearing House (ACH) to regulated and supervised non-bank financial institutions and the Treasury; modernize the electronic payment infrastructure; differentiate debit and credit merchant discount rates.
  - Promote digitizing government payments and allow Treasury participation in the ACH.
  - Complete migration to chip-based cards and introduce Instant Payments to reduce transaction costs.
  - Work with commercial banks to introduce a “basic” account with lower-than-existing opening/maintenance fees.
  - Improve operations and coordination of public empowerment funds targeting SMEs; introduce an official SME policy and a uniform SME definition; CBOB should collect SME lending data.

### Table of main recommendations (selected items and timing)
- Banking Supervision:
  - Strengthen assessments of credit underwriting and enhance credit risk management and ICAAP reviews. Update guidelines on impaired assets and other asset classifications. Timing: I (immediate).
  - Ensure strong governance arrangements for state-controlled financial institutions. Timing: ST (short term).
  - Strengthen effectiveness assessments of bank boards, senior management, and internal audits. Timing: ST.
  - Increase staffing to support critical functions, including analytics and on-site examinations. Timing: ST.
- Financial Crisis Management and Safety Nets:
  - Enact bank resolution legislation, including guidance for public AMCs. Timing: I.
  - Create a Crisis Management Committee. Timing: I.
  - Increase DIC funding to reach 2 percent of insurable deposits. Establish a pre-arranged emergency funding facility. Timing: ST.
  - Resolve (state entity): resolve financial statements and asset sales information; commission a third-party comprehensive review. Timing: I/ST.
- Financial Stability Analysis and Stress Testing:
  - Operationalize the proposed Consumer Credit Bureau. Timing: I.
  - Improve data collection and analytical capacity; strengthen focus on key systemic and macroeconomic risks. Timing: ST.
  - Develop a real estate price index. Timing: ST.
- Systemic Risk Oversight and Macroprudential Policy:
  - Introduce a macroprudential capital buffer above a core common equity requirement (fixed buffer rather than CCyB). Timing: ST.
  - Collect loan-level data for potential implementation of LTV/DTI mortgage lending standards. Timing: ST.
  - Introduce CBOB recommendations regarding lending standards in NBFIs. Timing: ST.
  - Strengthen the role of the Group of Financial Services Regulators. Timing: I.
- AML/CFT:
  - Continue to strengthen AML/CFT risk-based supervision of FIs and DNFBPs. Timing: I.
  - Assess potential ML/TF risks related to Fintech initiatives and the EPRP. Timing: I.
  - Prevent pressure on correspondent banking relationships by ensuring availability of accurate beneficial ownership information. Timing: ST.
- Developmental (Financial Inclusion — Payment Systems and SMEs):
  - Open the ACH to regulated and supervised non-bank financial institutions and modernize the electronic payment infrastructure. Differentiate debit and credit merchant discount rates. Timing: ST.
  - Promote digitizing government payments and allow Treasury participation in the ACH. Timing: ST.
  - Improve operations and coordination of public empowerment funds targeting SMEs. Timing: I.
- Timing legend: I (immediate) = within one year; ST (short term) = 1–3 years.

*Source: IMF Financial Sector Assessment Program — Executive Summary and related appendices (1bhsea2019002).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Macrofinancial background
- The economy returned to moderate growth after stagnation; growth in this tourism-driven economy is projected to have risen to about 2.3 percent in 2018, with longer-term annual growth projections of 1.5 percent.
- Public debt-to -GDP rose to 55 percent in FY2017, from 38 percent in FY2012.
- Tourism accounts for 45 percent of GDP. Real estate investment and construction represent about 22 percent of GDP.
- Over the last 20 years, The Bahamas has been hit by 11 hurricanes with an average cost of 4.3 percent of GDP; in the prior 20 years there were 4 hurricanes at an average cost of 3 percent of GDP.
- The Bahamian dollar is pegged to the U.S. dollar at parity. Residents have limited access to foreign exchange; capital controls afford some scope for monetary policy independence, but policy transmission is weak.
- Credit creation is anemic and focuses on the household sector; commercial business lending was substantially reduced during the recent stagnation.

### Financial system — structure and performance
- The domestic financial system is moderate in size and dominated by banks: seven banks are domiciled in The Bahamas; four are foreign-owned and account for roughly three-quarters of banking assets. All seven are deemed systemically important.
- Bank portfolios are concentrated in residential mortgages and consumer credit due to limited commercial lending opportunities.
- System-wide capital and liquidity:
  - System-wide capital adequacy ratio (CAR) as of September 2018: 32 percent (regulatory target: 17 percent).
  - Ratio of liquid to total assets as of June 2018: 30 percent.
- Profitability:
  - System-wide return on assets (ROA) has remained in the 2.2–2.5 percent range over the last three years.
  - Assets grew 1.9 percent annually from 2007–2017, 0.2 percentage points above inflation.
  - Share of credit to the public sector in banks’ domestic assets increased to 27.2 percent in 2018 from 21.1 percent in 2013.
- Nonperforming loans (NPLs):
  - NPL ratio remains high at 9 percent, after peaking at 15.3 percent in 2013.
  - Three institutions own 61 percent of all NPLs.
  - Large stock of restructured loans at increased risk of reverting to nonperforming status.
- Liquidity: excess liquidity permeates the banking sector; CBOB has maintained foreign reserve cover at about twice the statutory requirement.
- Bank of The Bahamas (BOB):
  - Majority state-owned BOB recapitalized in 2014 and 2017; portions of its NPLs were transferred at gross book value to a government-owned AMC, lowering system NPL ratio by about 3 percentage points in the period.
  - BOB held approximately 7 percent of total bank assets as of June 2018; NPLs at BOB remain high at 26 percent.

### Offshore financial sector
- Offshore assets total US$256 billion as of June 2018 (approximately 20 times GDP), a 40 percent drop since the 2013 FSAP.
- Banks dominate the offshore sector with US$168 billion in assets; activities concentrate in private banking and treasury services with little credit creation or maturity transformation.
- Investment fund assets: US$86 billion, mainly in non-standard funds aimed at qualified investors.
- Offshore sector: well segregated from the domestic economy through the currency regime, poses low stability-related risks but creates reputational risks.
- Supervision focus: appropriately focused on AML/CFT; new licensing regime announced in December 2018 should be carefully monitored to ensure no new risks develop.

### Financial stability analysis — vulnerabilities and stress testing
- Large stock of problem assets requires action across systemic risk monitoring, banking supervision, and crisis management. Vulnerabilities to natural disasters and external economic contagion heighten this need.
- Aggregate capital and liquidity ratios act as strong buffers, but individual banks with large NPL stocks are vulnerable under severe stress.
- An FSAP-developed model shows hurricanes can amplify NPL losses in recession scenarios, leading to significant capital impairment.
- Credit unions are small systemically but vulnerable to shocks and have many small depositors.
- Funding and interconnection risks are muted.

### Systemic risk oversight and macroprudential policy
- Recommendation: consider implementing a macroprudential capital buffer for banks.
- Limited visibility into the household sector should be improved by operationalizing the proposed Consumer Credit Bureau.
- Develop a real estate price index and collect loan-level data to enable potential future implementation of loan-to -value (LTV) and debt-to -income (DTI) lending standards.
- Interagency coordination on systemic matters should be improved; CBOB should have authority to recommend regulatory policy regarding lending standards in NBFIs.
- Strengthen the role of the Group of Financial Services Regulators in systemic risk surveillance and oversight.

### Banking supervision — strengths and weaknesses
- Supervision is effective overall but needs improvements in macro-critical areas:
  - Strengthen industry practices in credit risk management, assessment of problem assets, loan loss provisioning, and internal capital adequacy assessment (ICAAP).
  - Enhance supervisors’ assessments of boards, senior management, and internal audits.
  - Increase banking supervisory staffing resources to implement enhanced offsite surveillance and onsite inspections.

### Crisis preparedness, resolution, and safety nets
- Legislative reform on crisis management, resolution, and safety nets needs completion.
- Recommendations and actions:
  - Enact bank resolution legislation, including guidance for public AMCs.
  - Create a Crisis Management Committee (e.g., Financial Crisis Management Committee, FCMC) to improve coordination and operationalize reforms.
  - Deposit Insurance Corporation (DIC) needs additional funding; recommendation to increase DIC funding to reach 2 percent of insurable deposits and establish a pre-arranged emergency funding facility.
  - Issue Resolve (state entity) should resolve financial statements and asset sales information, and commission a third-party comprehensive review of its operations.

### Governance of state-controlled financial institutions
- Strengthen governance to ensure operational independence and effective supervision:
  - Ensure institutions enjoy full operational autonomy to achieve defined objectives.
  - Prevent government as shareholder from redefining objectives in a non-transparent manner.
  - Boards should be nominated using a well-structured, merit-based and transparent process.

### AML/CFT
- The Bahamas is taking steps to address FATF identification of strategic AML/CFT deficiencies; progress made on some technical compliance deficiencies.
- Authorities should focus on improving the effectiveness of the AML/CFT regime:
  - Continue to strengthen risk-based supervision of financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) by enhancing risk analysis, dedicating resources, and using enforcement actions.
  - Assess potential ML/TF risks related to Fintech initiatives and the Economic Permanent Residency Program.
  - Prevent pressure on correspondent banking relationships by ensuring availability of accurate beneficial ownership information.

### Financial inclusion, payment systems, and SMEs
- Main recommendations:
  - Open the Automated Clearing House (ACH) to regulated and supervised non-bank financial institutions and the Treasury; modernize the electronic payment infrastructure; differentiate debit and credit merchant discount rates.
  - Promote digitizing government payments and allow Treasury participation in the ACH.
  - Improve operations and coordination of public empowerment funds targeting SMEs.

### Table of main recommendations (selected items and timing)
- Banking Supervision:
  - Strengthen assessments of credit underwriting and enhance credit risk management and ICAAP reviews. Update guidelines on impaired assets and other asset classifications. Timing: I (immediate).
  - Ensure strong governance arrangements for state-controlled financial institutions. Timing: ST (short term).
  - Strengthen effectiveness assessments of bank boards, senior management, and internal audits. Timing: ST.
  - Increase staffing to support critical functions, including analytics and on-site examinations. Timing: ST.
- Financial Crisis Management and Safety Nets:
  - Enact bank resolution legislation, including guidance for public AMCs. Timing: I.
  - Create a Crisis Management Committee. Timing: I.
  - Increase DIC funding to reach 2 percent of insurable deposits. Establish a pre-arranged emergency funding facility. Timing: ST.
  - Issue Resolve: resolve financial statements and asset sales information; commission a third-party comprehensive review. Timing: I/ST.
- Financial Stability Analysis and Stress Testing:
  - Operationalize the proposed Consumer Credit Bureau. Timing: I.
  - Improve data collection and analytical capacity; strengthen focus on key systemic and macroeconomic risks. Timing: ST.
  - Develop a real estate price index. Timing: ST.
- Systemic Risk Oversight and Macroprudential Policy:
  - Introduce a macroprudential capital buffer above a core common equity requirement. Timing: ST.
  - Collect loan-level data for potential implementation of LTV/DTI mortgage lending standards. Timing: ST.
  - Introduce CBOB recommendations regarding lending standards in NBFIs. Timing: ST.
  - Strengthen the role of the Group of Financial Services Regulators. Timing: I.
- AML/CFT:
  - Continue to strengthen AML/CFT risk-based supervision of FIs and DNFBPs. Timing: I.
  - Assess potential ML/TF risks related to Fintech initiatives. Timing: I.
  - Prevent pressure on correspondent banking relationships by ensuring availability of accurate beneficial ownership information. Timing: ST.
- Developmental (Financial Inclusion — Payment Systems and SMEs):
  - Open the ACH to regulated and supervised non-bank financial institutions and modernize the electronic payment infrastructure. Differentiate debit and credit merchant discount rates. Timing: ST.
  - Promote digitizing government payments and allow Treasury participation in the ACH. Timing: ST.
  - Improve operations and coordination of public empowerment funds targeting SMEs. Timing: I.
- Timing legend: I (immediate) = within one year; ST (short term) = 1–3 years.

*Source: IMF Financial Sector Assessment Program — Executive Summary content provided in the PDF.*

### Appendix III.

### Appendix III. FINANCIAL STABILITY ANALYSIS

### A. Vulnerabilities and Risks
- Banking system trends and asset quality:
  - Declining investment portfolios and persistently high NPLs since the global financial crisis.
  - Weaknesses persist in residential mortgage portfolios (Figure 5).
  - Two of the seven domestic banks (about 15 percent of the seven domestic banks’ assets) and the two largest credit unions have NPL ratios significantly above 10 percent, making them vulnerable to further write-offs.
  - Specific provisions cover about 58 percent of NPLs. The ratio of NPLs net of specific provisions to capital was about 10 percent as of September 2018.
  - Following substantial provisioning in 2014 bank profits dropped sharply, but then recovered; as of June 2018, all banks but one were profitable.
  - Reduced lending helped increase the risk-weighted capital ratio to 32 percent in September 2018 from 28.6 percent in December 2016.
  - Low private sector credit reflects strained borrowers’ debt-servicing capacity.
  - Absence of a credit bureau and of a strong businesses book-keeping make assessment of borrowers’ creditworthiness challenging.
    - Note: In January 2019, the CBOB selected a credit bureau service provider, but the credit bureau will take time to become fully operational.

- Collateral and real estate market risks:
  - Banks rely heavily on potentially hard-to-value collateral for residential mortgage loss mitigation.
  - Real-estate market is small; properties are sometimes challenging to value due to lack of comparable sales, limited transaction disclosure requirements, and no housing price index.
  - Historically properties have become illiquid under significant shocks, leading to prolonged NPLs and significant write-downs.

- Interest rate and credit risk:
  - Credit risk dominates interest rate risk in a largely floating rate environment.
  - Under rising interest rates debt servicing capacity will fall, potentially boosting NPLs and lowering earnings.
  - Maturity mismatches are small given prevalence of variable rate loans and deposits (Figure 6).

- Regional interconnections:
  - Risks from regional financial interconnections seem low.
  - Despite significant foreign bank presence, domestic banks’ interconnections with regional banks, sovereigns and insurers are on average small relative to capital, and potential cross-border spillovers are low.
  - Four subsidiaries of major Canadian groups account for roughly three-quarters of banking system assets.

### B. Stress Testing and Interconnectedness
- Scope and scenarios:
  - Top-down stress tests cover domestic banks and the two largest credit unions, which cover about 97 percent of all credit institution assets.
  - Main risk sources: contagion from severe U.S. and/or regional recessions, and natural disasters.
  - Other risks: severe real estate price corrections and tighter global financial conditions; CBR pressures on offshore banks (primarily liquidity risks).
  - Three scenarios tested (Appendix II Table 1) using October 2018 WEO as baseline:
    - Natural disaster scenario modeling a major hurricane negatively impacting tourism, employment, and bank asset quality.
    - U.S. recession scenario leading to significant bank losses in mortgages and consumer loans.
    - “Perfect storm” scenario: simultaneous U.S. recession and major hurricane, leading to an extreme-but-plausible cumulative GDP decline of 2-standard deviations.
  - Innovative model shows hurricanes can amplify NPL losses in recession scenarios, leading to significant capital impairment (Box 1).
    - Historical note: tail end of hurricane loss distribution corresponds to 22 percent of GDP and occurred in 2004 after damage from hurricanes Jeanne and Frances.
    - GDP growth 2-year cumulative standard deviation is about 6.5 percent from 1978–2017.

- Solvency stress test results:
  - Overall banking system resilient to a range of adverse scenarios, but weaknesses widen under severe stress (Appendix II Table 2).
  - Weakness drivers: high NPLs and low ROA.
  - Short period of stress caused by a major hurricane would weaken banks’ performance but not below the 17 percent target capital ratio.
  - A U.S. recession scenario would cause one bank with large NPLs and weak profitability to become undercapitalized.
    - The stress tests were conducted on total regulatory CAR using a hurdle rate of 14 percent.
    - These shocks imply aggregate NPL increases of about 70 percent and 120 percent, respectively.
  - Under the combined shock, the system-wide CAR would decline to 23 percent and two banks (15 percent of banking assets) would need additional capital.
    - Implying an aggregate NPL increase of about 150 percent.
  - Sensitivity tests for credit risk broadly confirm results (Appendix II Table 3).
  - Macroeconomic scenario results: system-wide CAR (2019–21) shown with stressed-bank counts and asset shares:
    - Baseline: (0, 0, 0)
    - Major Hurricane: (0, 0, 0)
    - U.S. Recession: (1, 7.3, 0.1)
    - Perfect Storm: (2, 15.1, 0.4)

- Market risk and liquidity:
  - Banking system shows resilience to market risk; small asset-liability mismatches keep CARs above triggers after large interest rate shocks (Appendix II Table 4).
    - The impact of interest rate shocks on banks’ net interest income was measured over a 1-year horizon, using granular data on the time-to-maturity profile of bank assets and liabilities up to 1 year.
  - Small net open FX positions limit exchange rate shock impact.
  - Liquidity tests reveal a shortfall in one bank with lower liquid assets and large long-term loans (Appendix II Table 5).

- Credit unions:
  - Sensitivity tests for the two largest credit unions reveal significant vulnerability to credit risk.
  - They become undercapitalized under moderate stress due to weak capital buffers (one credit union is broadly compliant; the other is currently under the 10 percent unweighted capital requirement and CBOB should impose corrective actions) and NPLs above 10 percent (Appendix II Table 6).
  - Credit unions more resilient to credit concentration and interest rate risks than banks given larger exposure to short-term consumer loans.
    - Note: risk-weighted threshold is indicative given that credit unions currently do not have to comply with risk-weighted capital requirements.

- Offshore banks:
  - Stress tests on offshore banks suggest traditional banking risks in the sector are broadly contained.
  - Of the ten large offshore institutions covered, six engage primarily in private banking, and two in wholesale banking (mainly intra-group treasury operations).
    - The ten large offshore institutions include the top-five by balance sheet assets and the top-five by fiduciary assets.
  - Final stress test results include the remaining two banks engaged in more traditional banking (Appendix II Table 7).
  - These institutions lend mainly to corporates and do not become undercapitalized even with a 15 percent deterioration in loan quality (Appendix II Table 8).
  - Credit concentration risk is more relevant for one institution, which would see its capital to asset ratio approach the 5 percent hurdle rate in the event of a default of its five largest borrowers.
    - Tests were conducted on the unweighted CAR and used a hurdle rate of 5 percent given some data limitations.
  - Maturity mismatches are small and sensitivity to interest rate risk is low.

- Interconnectedness:
  - Contagion risk from bilateral linkages of banks and insurers appears limited.
  - Analysis covered seven onshore banks, the two largest credit unions, eight large offshore banks, and the ten largest domestic insurers.
  - Contagion simulation shows only one credit union is vulnerable to potential counterparty default, as each of its deposits with two banks exceed its capital; given the credit union’s small size, associated financial stability risks are low.
    - Network analysis was based on Espinosa-Vega and Solé (2010). Data as of September 2018.

- Data issues and recommendations for stress-testing:
  - Improve granularity of bank-level data by loan classifications, provisions, collateral, and restructured loans to enhance credit risk monitoring.
  - Develop a real estate price index to strengthen monitoring of housing price trends and collateral valuations.
    - A direct stress test of the impact of a decline in local housing prices is not possible at present given data limitations.
  - Collect data on household leverage and loan-level loan-to-value and debt-to-income ratios to improve monitoring of mortgage portfolio risks.
  - Expand data collection for credit unions and offshore financial institutions to better integrate them into stress testing exercises conducted by CBOB.

*Source: Appendix III. FINANCIAL STABILITY ANALYSIS (Data as of September 2018).*

### FINANCIAL SYSTEM OVERSIGHT

#### A. Regulation and Supervision
- CBOB supervisory capacity and practices:
  - CBOB has a generally effective supervisory program given the size and complexity of the banking system; uses a principles-based approach and wide discretionary powers over corrective measures, to be strengthened with the proposed resolution regime.
  - Several legislative and regulatory updates: AML/CFT, guidance/consultation proposals for Basel II/III reforms; enhanced risk-based supervision on AML in offsite surveillance and onsite examinations.

- State ownership and supervisory independence:
  - CBOB heavily engaged in recovery efforts of one of its largest domestic banks, which is majority state-owned.
  - State ownership of the bank may have hindered CBOB’s operational independence in the past.

- Resource and supervisory focus recommendations:
  - Risk-based supervision could be more effectively targeted; increased resources likely needed.
  - Supervisors should conduct more frequent onsite examinations of DSIBs’ corporate governance, risk management and internal controls, and carry out in-depth reviews of material risks.
  - Resources needed to support offsite analytic practices and CBOB’s legislative initiatives.

- Board and governance oversight:
  - CBOB should increase interaction with banks and use thematic onsite examinations.
  - Given supervisory reliance on auditors and board attestations, CBOB should require, in case of material errors, third party or supervisory review of all aspects of certifications.
  - Boards should obtain “reasonable assurance” qualifications if external auditors/consultants are used.
  - CBOB should undertake more direct assessments of boards of directors and senior management effectiveness with respect to specific responsibilities.
    - CBOB’s Guidelines for Corporate Governance (2013) updated in line with Basel Core Principles, but principles-based assessment may attenuate accountability.

- Governance of state-controlled financial institutions:
  - In line with OECD guidelines for corporate governance of SOEs, governance should ensure:
    1. Full operational autonomy to achieve defined objectives.
    2. Government as shareholder does not redefine objectives in a non-transparent manner.
    3. Boards nominated via a well-structured, merit-based and transparent process.

- Capital regime and ICAAP:
  - CBOB updated capital regime largely in line with key aspects of Basel II standards.
  - Current required regulatory capital ratios are super-equivalent to Basel:
    - DSIBs required to meet a 17 percent target for capital and the 14 percent trigger for supervisors to escalate coverage of SFIs.
  - Credit, operational, and market risks captured in capital requirements.
  - CBOB issued ICAAP guidelines in 2016; more supervisory attention recommended on ICAAP reviews.

- Credit risk management and NPLs:
  - CBOB should undertake deeper reviews of credit risk management at largest SFIs, including NPL and impaired asset treatment.
  - Guidelines allow SFIs to follow a variety of credit risk methodologies for NPLs and provisioning, which could lead to inconsistent asset classification, collateral valuation, and loss provisioning (particularly for residential mortgages).
  - CBOB has conducted only five in-depth DSIB credit reviews since 2015; imperative to ensure credit risk management practices are effective and NPLs accurately identified and provisioned.
  - With IFRS 9 effective January 2018, further guidance needed regarding validation of expected credit loss models; credit risk management guidance should be updated immediately.

- AML/CFT oversight:
  - CBOB should continue enhanced supervisory oversight of SFIs’ AML/CFT compliance.
  - CBOB has reviewed SFIs’ board policies and undertaken focused onsite reviews of about twenty percent of all SFIs.
  - Essential that CBOB takes timely corrective measures when discovering AML/CFT compliance gaps.
  - Recommended CBOB review compliance of Credit Unions with AML/CFT requirements.

- Onshore-offshore linkages and licensing regime:
  - Direct linkages between banks’ onshore and offshore operations are relatively small due to licensing and separation requirements.
  - New licensing regime announced in December 2018 allows financial institutions to serve both international and domestic clients—subject to exchange controls—and should be carefully monitored to ensure no new risks develop.

#### B. Macroprudential Policy
- Current status and need for framework:
  - CBOB acts as macroprudential policy (MPP) authority but no formal MPP framework or specific toolkit in place to counter systemic risks.
  - Reduced scope for monetary policy (small economy, exchange rate peg, large share of foreign banks) increases importance of macroprudential policy, especially given potentially volatile real estate sector and limited market monitoring.

- Institutional coordination:
  - The Group of Financial Services Regulators should meet regularly to share information and coordinate responses to emerging systemic risks; group has mostly focused on AML/CFT coordination but provides a forum for systemic risk discussion.

- Recommendations for formalization and powers:
  - Formalize a macroprudential framework including:
    - Clear assignment of the MPP mandate to the CBOB.
    - Setting out objectives of the MPP body in law.
    - Specifying decision-making arrangements for macroprudential actions.
  - Framework would enable CBOB to implement and release the proposed macroprudential buffer and operationalize initiatives to close data gaps.
  - Ensure CBOB has sufficient powers to recommend regulatory policy actions across the financial system (including banks and nonbanks) to ensure uniform lending standards—particularly mortgages by insurance companies (regulated by the ICB) and mortgages and personal loans by non-financial firms (lightly regulated by the SCB).

*Source: Appendix III. FINANCIAL STABILITY ANALYSIS (Data as of September 2018).*

### 38.      CBOB should prepare for future implementation of LTV and DTI-based mortgage

### 1bhsea2019002 - 38.      CBOB should prepare for future implementation of LTV and DTI-based mortgage

### Macroprudential mortgage measures and borrower resilience
- Recommendation: CBOB should prepare for future implementation of LTV and DTI-based mortgage lending standards to increase resilience of borrowers, including to adverse events such as hurricanes.
- Rationale: Given the high capital ratios of most banks, more uniform lending standards and the use of prudential ratios to guide lending exposure would be the most effective way of implementing counter-cyclical measures.
- Main policy measures proposed:
  - Higher equity requirements.
  - Repayment capacity limits.
- Implementation timing: Not urgent under subdued current market conditions, but data collection and analytical tools should be developed in anticipation of future use.

### Existing prudential settings (as noted in the text)
- CBOB already imposes an LTV of 85 percent on personal loans and a total debt service ratio of 40–45 percent of ordinary monthly income.

### Data gaps and recommended data infrastructure
- Identified weaknesses:
  - Authorities have little ability to track household indebtedness.
  - No reliable source of data on the critical housing sector.
- Priority actions:
  - Establishment of the credit bureau should be given highest priority to support appropriate calibration and enforcement of any debt-to-income limits.
  - Establish a residential real estate price index to enhance market monitoring, collateral valuation, and the setting of lending standards.
  - Collect loan-level data to enable the use of macroprudential lending standards.
  - Strengthen the CBOB’s Financial Stability Report (FSR) analysis of key MPP statistics, such as the credit-to-GDP gap.
- Data note: Crucial underlying administrative data on property sales must be developed.

### Macroprudential capital buffer recommendation
- CBOB is moving to a Basel III compliant capital standard.
- Recommendation: Introduce a macroprudential capital buffer above a core CET1 requirement — specifically a fixed macroprudential capital buffer instead of a dynamic counter-cyclical capital buffer (CCyB).
  - Justification: A CCyB would be difficult to implement given complex analytical and data calibration requirements.
  - Advantage of static buffer: Requires less timely data and analytical effort; would be relaxed only in the event of a significant shock.

### AML/CFT framework and related financial-sector risks
- Status: The Bahamas identified by FATF in October 2018 as a country with strategic AML/CFT deficiencies; authorities have political commitment and an action plan.
- Recommendations and priorities:
  - Continue implementing measures agreed with the FATF and focus on improving the effectiveness of the AML/CFT framework at mitigating key risks.
  - Strengthen AML/CFT supervision of Financial Institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs), with emphasis on risk-based supervision of DNFBPs.
  - Use the full range of enforcement actions available, given the lack of administrative fines and sanctions imposed to date.
  - Enhance entity transparency, building on the recently enacted Register of Beneficial Ownership Act.
  - Monitor high-risk areas such as Fintech initiatives and the Economic Permanent Residency Program (EPRP); ensure appropriate due diligence on applicants’ source of funds.
  - Assess ML/TF risks related to Fintech initiatives and ensure effective AML/CFT measures in line with FATF Recommendations.
- Correspondent banking: Ongoing pressures in correspondent banking relationships (CBRs), especially for offshore banks without foreign parents; monitor these pressures.

### Crisis preparedness, resolution framework, and financial safety nets
- Legal reform: An ambitious legal reform is underway to align crisis management, resolution, and safety net frameworks with international best practices; implementation of deposit insurance, asset management, and recovery and resolution planning should accompany legal reforms and be finalized without delay.
- Resolution framework improvements:
  - Proposed administrative special resolution regime allowing CBOB to appoint a statutory administrator and liquidator without court recourse.
  - Provisions for recovery plans and CBOB powers to develop resolution plans.
  - Amendments clarify emergency liquidity assistance purpose, solvency tests, collateral mandates, penalty rates, and maturity limits.
- Asset Management Company (AMC) concerns:
  - Current resolution regime lacks statutory provisions defining AMC features (establishment, governance, accountability, strategy, sunset).
  - Resolve (the existing AMC) operates with opaque operations and unclear accountability; it should run operations on a commercial basis with an explicit mandate to maximize asset value.
- Restructuring requirement:
  - Any bank with excessively high NPL levels and a potentially challenged business model should submit a restructuring plan to the CBOB; institutions must ensure forward-looking viability or be resolved.
- Crisis coordination:
  - CBOB considering creation of a Financial Crisis Management Committee (FCMC) consisting of the Group of Financial Services Regulators and the MOF to coordinate operationalization of legal amendments and draft an approved crisis management plan.

### Deposit Insurance Corporation (DIC) capacity and recommendations
- Current fund position: The fund is at B$56 million as of year-end 2018 with a target balance of B$88.5 million; the DIC Board is considering raising the target to B$125 million (2 percent of insurable deposits).
- Funding and levy:
  - Recommendation: The levy should be increased to meet the target, as based on DIC’s projections it would take about a decade to reach B$125 million at the current premium of 5 basis points.
- Target reassessment:
  - Recommendation: Reassess the target fund for a range of realistic crisis scenarios; mission recommended targeting at least 2 percent of insurable deposits in the near term and increasing to closer to 4 percent over the longer term.
  - Combined with envisaged borrowing capacity from the government, a 2.0 percent fund would allow for any one of the medium-sized banks to be paid out by the deposit insurance scheme.
- Coverage expansion caution: Expanding DIC coverage to credit unions should only occur when DIC has enough resources; CBOB must ensure credit unions are sufficiently capitalized and effectively supervised.
- Legal changes and powers:
  - Proposed amendments to the Protection of Depositors Act (PDA) establish CBOB as the resolution authority and transfer part of DIC’s current resolution powers.
  - Proposed amendments empower the DIC to contribute to purchase and assumption transactions on a least-cost basis.
- Backstop financing:
  - DIC has authority to borrow but no specified source for a stand-by line of credit; expedited procedures should be developed for access to backstop financing, which should be available primarily from the MOF.

### Other issues: sovereign debt and market development
- Authorities revamping sovereign debt institutional arrangements, issuance strategy, and market infrastructure to promote domestic debt market development by establishing a debt management office within the MOF.
- Rationale: Increasing domestic sovereign debt issuance would improve the sovereign risk profile and benefit domestic pension and insurance companies with few sources of long-duration assets.
- Constraint: Increasing issuance may be challenging in the short-term given a lack of scale.
- Recommendation: Maintain Bahamian presence in the Eurobond market and explore increased access to the Eurobond market for domestic investors, provided this does not materially impact the balance of payments.

*Source: 1bhsea2019002 — IMF country report excerpt.*

### 56.      CBOB considers increased financial inclusion as a critical reform area. The FSAP

### 1bhsea2019002 - 56.      CBOB considers increased financial inclusion as a critical reform area. The FSAP

### Financial inclusion: main recommendations
- Increase competition and financial inclusion through expansion and modernization of existing retail clearinghouse services.
- Facilitate shift away from cash and towards electronic payments by Government initiatives.
- Reduce demand and supply constraints to SME access to finance (Appendix V).

### Domestic financial sector: structure and size
- Domestic financial sector assets estimated at US$18 billion in June 2018.
- Domestic-majority owned banks: 25.5 (percent of GDP).
- Foreign-subsidiaries banks: 69.3 (percent of GDP).
- Credit Unions: 3.4 (percent of GDP).
- Other Local Financial Institutions: 25.9 (percent of GDP).
- Domestic Insurers: 16.9 (percent of GDP).
- Domestic financial institutions: Number reported as 52, 54, 57 across reported rows in Table 2 context.
- Memo: Table 2 items present Assets (B$ billion) and Assets (Percent of GDP) across 2013, 2016, June 2018 for multiple institution types (see source tables for full breakdown).

### Banking sector capital, profitability, liquidity, and asset composition
- Banking sector CAR: held steady overall; banks with resident operations increased CAR after receiving fresh capital and reducing risk exposure; banks with resident and nonresident operations decreased CAR slightly due to stronger growth in risk assets.
- Return on assets: series showing recovery after large loan-loss provisions and write-offs; ROA values across 2013–Jun-18 in charts (see source figures).
- Net interest income, bad debt write-offs, provisions, non-interest income and non-interest expenses shown in Figure 3 (quarterly annualized).
- Bank asset composition highlights:
  - Increase in share of credit to the public sector in domestic credit.
  - Bank deposits remained stable but fixed deposits declined.
  - Ample liquidity and limited lending opportunities boosted liquid assets and free reserves.
  - Sectoral composition of credit (June 2018): Consumer credit 38%, Business credit 17%, Residential mortgages 43%, Commercial mortgages 2% (percent of credit to the private sector).
- Banking sector liquidity indicators (Figure 4):
  - Weighted average deposit rate (RHS) and Eligible liquid assets (percent of required liquid assets) series through Jun-18.
  - Free cash reserves (percent of required reserves) series through Jun-18.

### Credit quality and maturities
- Nonperforming loans to total gross loans:
  - 2012: 13.6
  - 2013: 15.3
  - 2014: 15.3
  - 2015: 14.2
  - 2016: 11.4
  - 2017: 9.2
  - June 2018: 8.9
- NPLs concentrated in residential mortgages; NPL spikes in slowdowns and persistence over extended periods.
- Credit unions: higher NPLs and lower provisions relative to banks; large credit unions sample covers two largest credit unions representing about 65 percent of credit unions' assets at end-2017.
- Maturity profile (June 2018):
  - Banks' exposure to government securities increasing (Domestic Government Securities shown as percent of banking sector assets).
  - Maturity mismatches not large due to predominantly adjustable rate loans.
  - Banks with nonresident operations more exposed to interest rate risk; maturity mismatches smaller in banks with resident operations.

### Offshore financial sector
- Offshore sector assets estimated at US$256 billion in June 2018.
- Offshore sector composition (numbers):
  - Banks &/or Trusts: 1,301 (number)
  - Insurers: 8 (number)
  - Investment Funds: 668 (number)
- Offshore banking and investment funds assets in the Bahamas down by 39 percent since last FSAP.
- Cross-border claims on "Offshore Centers" illustrated by BIS classifications and time series (U.S. dollars).
- Private banking: most private banking assets are held in fiduciary trusts for clients.
- Treasury management: assets mainly on-balance sheet, held as balances with other banks and in debt securities.
- Citibank assets included in offshore banking sector due to predominantly offshore activities.
- Note: Insurance sector assets omitted in one chart as they account for a stable US$1 billion in total assets. Investment funds assets measured as net asset value; not strictly comparable with other institutions’ on-balance sheet total assets.

### Bank cross-border exposures
- Exposure to nonresidents primarily vis-à-vis banks; net claims concentrated on the U.S. and the U.K. in developed countries.
- Emerging markets exposure: net claims concentrated on Brazil.
- Vis-à-vis International Financial Centers and Latin America shown in Figure 9 with country breakdowns (claims and liabilities).

### Key financial soundness indicators (Table 3, selected)
- Regulatory capital to risk-weighted assets:
  - 2012: 29.1
  - 2013: 31.1
  - 2014: 32.8
  - 2015: 33.3
  - 2016: 28.6
  - 2017: 32.5
  - June 2018: 32.5
- Capital to assets: 26.3 (2012), 26.5 (2013), 25.9 (2014), 27.0 (2015), 26.0 (2016), 26.5 (2017), 25.6 (June 2018).
- Specific provisions to nonperforming loans:
  - 2012: 33.0
  - 2013: 29.5
  - 2014: 41.1
  - 2015: 47.5
  - 2016: 60.0
  - 2017: 52.0
  - June 2018: 58.1
- Return on assets (annualized quarterly notation; 2018 figures not annualized in table):
  - 2012: 1.5
  - 2013: 1.4
  - 2014: -1.2
  - 2015: 1.9
  - 2016: 2.0
  - 2017: 1.8
  - June 2018: 1.0
- Return on equity:
  - 2012: 5.9
  - 2013: 5.4
  - 2014: -4.6
  - 2015: 7.0
  - 2016: 7.9
  - 2017: 6.8
  - June 2018: 3.8
- Liquid asset to total assets:
  - 2012: 20.2
  - 2013: 21.8
  - 2014: 22.6
  - 2015: 24.1
  - 2016: 25.9
  - 2017: 29.0
  - June 2018: 30.1
- Spread between domestic lending and deposit rates:
  - 2012: 8.9
  - 2013: 9.4
  - 2014: 10.4
  - 2015: 10.4
  - 2016: 11.3
  - 2017: 10.8
  - June 2018: 10.5
- Loans to assets:
  - 2012: 74.0
  - 2013: 72.8
  - 2014: 72.2
  - 2015: 70.6
  - 2016: 69.1
  - 2017: 64.8
  - June 2018: 63.7

### FSAP Risk Assessment Matrix (selected risks, relative likelihood, impact)
- A severe price correction in the real estate market.
  - Relative likelihood: Medium
  - Impact: High. Could lead to significant losses on bank’s residential mortgage portfolios and potential liquidity issues due to difficulty in disposing of nonperforming assets.
- Contagion from a major regional economic downturn or banking crisis.
  - Relative likelihood: Medium
  - Impact: Medium. Could impair the banking system via losses in cross-border holdings, lack of resolution planning for multi-jurisdiction banks, or strategic retreat by key offshore banks.
- Contagion to the real economy from a severe U.S. recession.
  - Relative likelihood: Medium
  - Impact: High. Could trigger severe local slowdown and significant bank losses in mortgages and consumer loans.
- Tighter global financial conditions.
  - Relative likelihood: High
  - Impact: High. An abrupt change in global risk appetite could lead to sharp increases in interest rates and reduced FDI inflows, impacting tourism, employment, and debt service capacity of borrowers.
- Natural disasters.
  - Relative likelihood: High
  - Impact: High. A hurricane may cause severe degradation of domestic infrastructure and impact tourism, employment, and debt service capacity of borrowers.
- Further pressure on CBRs.
  - Relative likelihood: Medium
  - Impact: Low/Medium. Could affect profitability and liquidity of banks not part of reputable international bank groups; potential business migration towards the latter group.

*Source: IMF staff summary of content unit "1bhsea2019002 - 56.      CBOB considers increased financial inclusion as a critical reform area. The FSAP" (extracted content).*

### Appendix I. Banking Sector Stress Testing Matrix (STeM)

### 1bhsea2019002 - Appendix I. Banking Sector Stress Testing Matrix (STeM)

### BANKING SECTOR: SOLVENCY RISK — Scope and Methodology
- Institutional perimeter:
  - All 7 domestic banks and 2 largest credit unions.
  - 10 large offshore banks (results reported for 2 banks with more traditional banking business).
- Market share:
  - About 97 percent of total banking assets.
  - 65 percent of credit union assets.
  - 61 percent of offshore banking assets.
- Data and baseline date:
  - Supervisory data as of September 2018.
- Methodology and models:
  - IMF stress testing framework.
  - Small dynamic stochastic general equilibrium macro-financial model.
  - Satellite panel regressions for NPLs, ROA and credit growth.
  - Balance-sheet methods, regulatory information and behavioral assumptions to project banks’ solvency positions.
- Stress test horizon:
  - 3 years (annual frequency).

### Solvency Scenarios and Tail Shocks
- Scenario set:
  - Baseline: Variables follow the IMF WEO October 2018 projections.
  - Adverse (hurricane): major hurricane → cumulative decline of real GDP relative to the baseline equivalent to 1 std.
  - Adverse (U.S. recession): severe U.S. recession → cumulative decline of real GDP relative to the baseline equivalent to 1.5 std.
  - Adverse (“perfect storm”): simultaneous U.S. recession and major hurricane → cumulative real GDP decline relative to the baseline equivalent to 2 std.
- Macro-financial variables modeled:
  - Tourist arrivals, real GDP growth, consumer inflation, nominal and real short-term rates, nominal and real credit growth, real U.S. GDP growth, U.S. property prices, hurricane losses as a percent of GDP.

### Solvency Sensitivity Analyses (credit, interest rate, currency, sovereign)
- Credit risk (NPLs):
  - Proportional to existing NPLs: increases by 50, 100, 150 and 200 percent.
  - Proportional to total loans: increases by 3, 5 and 10 percent of total loans.
  - Sectoral NPL increases: Mortgages (150 percent); Commercial loans (150 percent); Consumer loans (150 percent).
  - Defaults of largest 1, 3, 5 borrowers.
- Interest rate risk (income effect):
  - Parallel shifts in interest rates in domestic/foreign currency of 300 and 500 bps.
- Currency risk:
  - Currency devaluation of 15 and 25 percent.
  - Currency revaluation of 15 and 25 percent.
- Sovereign risk:
  - Sovereign bond haircuts of up to 30 percent.

### Risks, Buffers, and Reporting
- Risks/factors assessed:
  - Total credit losses, credit growth, profits, repricing gap, shocks to credit quality of sectoral and large exposures, losses from maturity and currency mismatches, direct/indirect FX risk, counterparty risk.
- Behavioral adjustments:
  - Assumptions for credit growth in scenarios as well as dividend payout ratios.
- Reporting format:
  - Country-specific minimum CAR (trigger ratio).
  - Capital to asset ratio for offshore banks and for credit unions.

---

### BANKING SECTOR: CONTAGION RISK — Scope and Methodology
- Institutional perimeter:
  - All 7 domestic banks and 2 largest credit unions.
  - 8 large offshore financial institutions.
  - 10 largest domestic insurance companies.
- Market share:
  - 7 domestic banks and 2 largest credit unions constitute approximately 97 percent of domestic credit institutions’ assets.
  - 8 large offshore banks constitute around 35 percent of offshore banking assets excluding foreign branches.
  - 10 largest insurance companies constitute approximately 93 percent of aggregate assets in the domestic insurance sector.
- Data and baseline date:
  - Supervisory data as of September 2018.
- Methodology:
  - Espinosa-Sole (2010) interbank network model.
- Tail-shock design:
  - Default of institutions.
  - Assumes LGD of 100 percent and that funding from a failed bank is not rolled over; borrower banks must replace funding by selling assets with a haircut of 30 percent.
- Reporting:
  - Failed capital as a percentage of aggregate capital in the network.

---

### BANKING SECTOR: LIQUIDITY RISK — Scope and Methodology
- Institutional perimeter:
  - All 7 domestic banks.
- Market share:
  - Approximately 97 percent of total banking assets.
- Data and baseline date:
  - Supervisory data as of September 2018.
- Methodology:
  - Cash-flow-based (contractual maturity ladder).
- Risks and buffers:
  - Risks: Funding liquidity shock; Market liquidity shock.
  - Buffers: Counterbalancing capacity.
- Tail shocks:
  - Assumptions for run-off rates on funding sources and roll-off rates on assets to estimate the funding gap.
- Regulatory standards and reporting:
  - Hurdle metrics: funding gap, survival period.
  - Output: Survival period in days by bank; Number of banks that are liquid/illiquid.

---

### Appendix II — Key Macroeconomic Scenario Projections (selected series, in percent)
- Real GDP growth (2018–2021)
  - Baseline: 2018 2.3; 2019 2.1; 2020 1.6; 2021 1.5
  - Major hurricane: 2018 2.3; 2019 -2.2; 2020 -1.8; 2021 0.4
  - U.S. recession: 2018 2.3; 2019 -2.8; 2020 -3.3; 2021 -1.7
  - Perfect storm scenario: 2018 2.3; 2019 -4.9; 2020 -4.9; 2021 -2.3
- Inflation (2018–2021)
  - Baseline: 2018 2.5; 2019 2.4; 2020 2.3; 2021 2.1
  - Major hurricane: 2018 2.5; 2019 2.4; 2020 1.3; 2021 0.6
  - U.S. recession: 2018 2.5; 2019 2.4; 2020 1.1; 2021 0.1
  - Perfect storm scenario: 2018 2.5; 2019 2.4; 2020 0.7; 2021 -0.6
- Short-term interest rate (T-bill rate) (2018–2021)
  - Baseline: 2018 1.6; 2019 2.1; 2020 2.0; 2021 1.9
  - Major hurricane: 2018 1.6; 2019 2.1; 2020 1.4; 2021 1.0
  - U.S. recession: 2018 1.6; 2019 2.1; 2020 1.4; 2021 0.8
  - Perfect storm scenario: 2018 1.6; 2019 2.1; 2020 1.1; 2021 0.3
- Tourist arrivals (2018–2021)
  - Baseline: 2018 2.9; 2019 4.9; 2020 3.4; 2021 3.2
  - Major hurricane: 2018 2.9; 2019 -2.2; 2020 0.2; 2021 3.2
  - U.S. recession: 2018 2.9; 2019 -7.1; 2020 -3.9; 2021 0.1
  - Perfect storm scenario: 2018 2.9; 2019 -10.3; 2020 -5.3; 2021 0.1
- U.S. real GDP growth (2018–2021)
  - Baseline: 2018 2.9; 2019 2.5; 2020 1.8; 2021 1.7
  - U.S. recession: 2018 2.9; 2019 -3.0; 2020 -1.5; 2021 0.5
  - Perfect storm: same as U.S. recession in the stress period.
- Change in U.S. housing prices (Florida market) (2018–2021)
  - Baseline: 2018 8.0; 2019 6.0; 2020 4.0; 2021 3.0
  - U.S. recession: 2018 8.0; 2019 -15.0; 2020 -10.0; 2021 -5.0
  - Perfect storm: same as U.S. recession in the stress period.
- System-wide NPL ratio (2018–2021)
  - Baseline: 2018 8.7; 2019 9.4; 2020 10.0; 2021 10.7
  - Major hurricane: 2018 8.7; 2019 10.7; 2020 13.1; 2021 15.0
  - U.S. recession: 2018 8.7; 2019 11.1; 2020 14.8; 2021 18.8
  - Perfect storm scenario: 2018 8.7; 2019 12.0; 2020 17.1; 2021 22.4
- Adj. system-wide NPL ratio (includes restructured loans falling back into NPLs)
  - Baseline: 2018 9.8; 2019 11.2; 2020 11.9; 2021 12.9
  - Major hurricane: 2018 9.8; 2019 12.4; 2020 15.1; 2021 17.4
  - U.S. recession: 2018 9.8; 2019 13.4; 2020 17.8; 2021 22.5
  - Perfect storm scenario: 2018 9.8; 2019 13.8; 2020 19.7; 2021 25.8

---

### Capital Adequacy and Recapitalization Metrics (selected results)
- Regulatory threshold (trigger CAR ratio):
  - Based on a domestic regulatory threshold (trigger CAR ratio) of 14 percent.
- Regulatory capital ratio (CAR) — initial positions (Sept. 2018):
  - System: 31.2
  - Domestic: 33.6
  - Foreign: 30.1
- Adjusted position (after initial adjustment assuming 10 percent of restructured loans become nonperforming):
  - Adj. position: System 30.6; Domestic 32.7; Foreign 29.6
- Notes on recapitalization:
  - The recapitalization amount is estimated as the capital injection needed to restore CAR to 14 percent. Projected nominal GDP based on the October 2018 IMF World Economic Outlook.

---

### Sensitivity Tests — Selected Quantitative Outcomes (CAR and related metrics)
- System CAR outcomes under NPL increases (All Banks CAR)
  - Initial position (Sept. 2018): 31.2
  - Adj. position: 30.6
  - Increase in NPLs proportional to existing NPLs:
    - 50 percent → 27.6
    - 100 percent → 24.7
    - 150 percent → 21.7
    - 200 percent → 18.7
  - Increase in NPLs proportional to total loans:
    - 3 percent → 28.8
    - 5 percent → 27.5
    - 10 percent → 24.5
  - Sectoral shock (mortgage loans, 150 percent, LGD 100 percent) → All Banks CAR 23.1
  - Large borrower defaults (assuming LGD of 70 percent):
    - 1st largest borrower → All Banks CAR 28.8
    - 3 largest borrowers → 27.0
    - 5 largest borrowers → 25.9
- Market risk sensitivity (All Banks CAR)
  - Interest rate shocks:
    - -300 basis points → 29.8
    - -500 basis points → 29.3
    - +300 basis points → 31.3
    - +500 basis points → 31.8
  - Exchange rate shocks:
    - 15 percent devaluation → 30.6
    - 25 percent devaluation → 30.6
  - Sovereign haircuts on government securities:
    - 10 percent haircut → 28.2
    - 20 percent haircut → 25.8
    - 30 percent haircut → 23.3

---

### Credit Unions — Sensitivity Test Highlights
- Coverage:
  - Tests cover the two largest credit unions representing about 65 percent of the credit union sector's total assets.
- Initial position (Sept. 2018):
  - Risk-weighted capital ratio (CAR): 16.3
  - Capital to asset ratio (CA): 9.8
- Increase in NPLs (assuming LGD of 70 percent):
  - Proportional to existing NPLs:
    - 50 percent → CAR 13.1
    - 100 percent → CAR 10.0
    - 150 percent → CAR 6.8
  - Proportional to total loans:
    - 3 percent → CAR 14.7
    - 5 percent → CAR 13.8
    - 10 percent → CAR 11.2
- Interest rate shocks (credit unions CA and asset-share outcomes):
  - -300 basis points → CAR 16.0; CA 9.6; share 75.6
  - -500 basis points → CAR 15.7; CA 9.4; share 75.6
  - +300 basis points → CAR 16.7; CA 10.0; share 0.0
  - +500 basis points → CAR 16.9; CA 10.1; share 0.0

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### Offshore Banks — Balance Sheet Structure and Sensitivity
- Ten offshore banks (selected balance-sheet items; assets in $US million):
  - Bank 1 assets: 47,566
  - Bank 3 assets: 35,869
  - Bank 2 assets: 9,146
  - Bank 5 assets: 1,043
  - Bank 6 assets: 990
  - Bank 8 assets: 491
  - Bank 9 assets: 367
  - Bank 10 assets: 1,443
  - Bank 4 assets: 1,162
  - Bank 7 assets: 964
- Capital to asset ratios (CA) and example CARs for offshore banks (selected)
  - CARs reported (examples): 18.3; 15.6; 30.2; 20.0; 27.5; 100.4; 11.9; 25.4
  - Capital to asset ratios (examples): 10.6; 6.1; 16.3; 6.9; 15.2; 7.9; 16.8; 76.5; 9.5; 21.6
- Summary sensitivity tests for large offshore banks (capital to assets ratio, hurdle CA = 5 percent)
  - Initial position (Sept. 2018): CA 15.0
  - Adj. position: CA 14.9
  - NPL increases (proportional to existing NPLs):
    - 50 percent → CA 14.8
    - 100 percent → CA 14.6
    - 150 percent → CA 14.5
  - NPLs proportional to total loans:
    - 3 percent → CA 14.1
    - 5 percent → CA 13.7
    - 10 percent → CA 12.4
  - Default of large borrowers (assuming LGD 70 percent):
    - 1st largest borrower → CA 14.0
    - 3 largest borrowers → CA 12.5
    - 5 largest borrowers → CA 11.3
  - Interest rate risk (one bank with available data):
    - -300 basis points → CA 14.7
    - -500 basis points → CA 14.6
    - +300 basis points → CA 15.1
    - +500 basis points → CA 15.2

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*Source: Appendix I and Appendix II of 1bhsea2019002 - Appendix I. Banking Sector Stress Testing Matrix (STeM), supervisory data as of September 2018 and IMF staff estimates.*

### Appendix III. Offshore Financial Sector

### Appendix III. Offshore Financial Sector

### Structure and Business Model
- Total assets of the offshore sector:
  - US$256 billion in June 2018.
  - US$427 billion at end-2013.
- Sector composition by asset size:
  - Banks: US$168 billion in assets.
  - Investment funds: US$86 billion in assets.
  - Insurance sector: US$1 billion in assets.
- Recent trends and drivers:
  - Significant asset decline since 2013 in the context of global efforts to strengthen AML/CFT and tax transparency standards, increased cooperation between Bahamian authorities and OECD countries, and various tax amnesties in multiple jurisdictions.
  - Similar asset declines observed in Cayman Islands, Guernsey and Jersey.
  - Business model shift toward wealth preservation and legacy planning; client base increasingly concentrated in Latin America (particularly Brazil).
  - Reasons for holding assets or structuring lending operations in The Bahamas include strong legal and economic institutions, political stability, and flexible regulation.
- Exchange control and market segmentation:
  - Strict exchange controls historically insulate the local economy from the international sector; offshore banks historically unable to offer services to domestic residents.
  - Authorized Dealer Exchange Control designation: can deal in all currencies, including Bahamian dollars.
  - Resident status: allows banks to offer services in the BSD market.
  - Offshore banks: may operate freely in foreign currencies but require initial Exchange Control authorization to operate an External Bahamian dollar account.
  - Onshore foreign currency position regulation: "The larger of the sum of net short or long positions in all foreign currencies, including all on and off-balance sheet assets and liabilities of an onshore bank cannot exceed the minimum of 5 percent of its Tier 1 capital and B$5 million."
  - Onshore banks are subject to regulatory capital requirements of 17 percent.

### Offshore Banks
- Core activities:
  - Private banking and trust services.
  - Treasury operations on behalf of affiliated institutions.
  - Limited engagement in term lending or liquidity transformation.
- Asset and income characteristics:
  - Private banking institutions hold substantial off-balance sheet fiduciary assets and relatively smaller mostly liquid on-balance sheet assets.
  - For the five largest banks, fees represent 75 percent of income.
  - On-balance sheet assets mainly for cash management: highly-liquid securities or balances with related financial institutions.
  - Client assets are held in individual accounts; limited redemption risk compared with collective investment vehicles.
- Lending profile:
  - Primary lending is margin lending against investment portfolios with initial and variation margin based on daily mark-to-market.
  - These arrangements reduce traditional credit risks associated with bank lending.
  - A few banks offer mortgage loans (including for high-end Bahamian real estate); these loans are small in number and total magnitude.
  - Regulatory note: "Any lending facility offered to nonresidents and secured by pledged B$ assets is subject to explicit authorization by CBOB."
- Treasury operations:
  - Entities conducting treasury operations hold 91 percent of offshore banking on-balance assets.
  - Functions include consolidated treasury for related entities, investing aggregated surplus cash in bulk, intra-group treasury management, and limited global booking services including a small amount of structured notes issuance.
- Cross-border linkages:
  - BIS locational bank statistics (as of end-June 2018): about two thirds of total claims and liabilities to nonresidents were vis-à-vis banks, of which 70 percent were intragroup.
  - Claims concentrated on advanced economies, offshore centers, and Latin America; advanced economies were predominantly net suppliers of funds.

### Investment Funds
- Structure and types:
  - Few traditional collective investment vehicles.
  - Most assets held in non-standard funds: Specific Mandate Alternative Regulatory Test (SMART) Funds and “Professional” Funds aimed at qualified investors.
  - SMART Funds primarily used as wealth management vehicles for single individuals or families.
- Trends and sizes:
  - SMART Funds: 14 percent growth in the number of entities since the last FSAP; NAV around B$21 billion in 2017.
  - Professional Funds: assets declined by over sixty percent since 2013 to around B$16 billion (NAV) in 2017.
  - Standard funds open to the general public: NAV around B$3.4 billion in 2017.
  - Recognized Foreign Funds: not licensed but registered due to Bahamas-based service providers.

### External Insurers
- Sector size and composition:
  - Offshore insurance sector is small, populated by captive and non-captive insurers.
  - Total assets grew by around 37 percent between 2013 and 2016 to roughly B$1 billion.
  - About one third of sector assets composed of captive insurers.

### Vulnerabilities and Risks
- Risk characteristics:
  - Business models limit risks associated with traditional banking (limited credit creation, limited maturity and liquidity transformation).
  - Main risks to domestic financial system are reputational, particularly adverse impacts on correspondent banking relationships (CBRs).
- Home institutions:
  - So-called home institutions (without a foreign parent financial group) are not subject to group-level risk management frameworks and depend on CBRs, warranting more scrutiny in risk-based supervision.
- Macrofinancial implications:
  - Exchange controls effectively separate onshore and offshore operations.
  - Despite sector size, contribution to national aggregates is limited:
    - Offshore financial sector contributes less than 3 percent to GDP.
    - Offshore financial sector contributes less than 1 percent to government revenue.
  - Authorities emphasize sector importance as a source of middle-class employment.

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### Appendix IV. The Case of Bank of The Bahamas

### Background and timeline
- Ownership prior to instability: government of The Bahamas and National Insurance Board (NIB) controlled 65 percent of BOB; private individuals held the remainder.
- Problems identified:
  - 2011 CBOB discovery of material operational weaknesses.
  - Subsequent examination found outsized lending to politically exposed persons and deep problems in commercial lending.
  - Negative publicity led to liquidity tightness in late 2012 and early 2013 with large deposit withdrawals.

### Authorities' intervention (two-staged bailout)
- Resolve creation and Resolve #1 (October 2014):
  - Creation of Resolve, a state-owned asset management company.
  - Transfer of nonperforming assets of B$100 million to Resolve in exchange for equivalent government promissory notes backed by a government-issued ‘Letter of Support’.
  - After restructuring, regulatory capital increased to about 47 percent of risk-weighted assets.
  - Government control increased from 65 percent to 79 percent.
  - Justifications: BOB as a DSIB, insufficient DIC funding to cover insured depositors (B$120 million in insured deposits with less than B$40 million in the DIC), and large government deposits at BOB.
- Resolve #2 (August 2017):
  - Second transfer of B$176 million in gross book value of problem assets (purchase of distressed assets at gross book value noted as not in line with good international practice).
  - Around this time promissory notes issued in 2014 were redeemed by the government.
- Transparency and audits:
  - Audits of Resolve are mandated yearly; first such audit anticipated to be completed in 2019 to improve Resolve’s opaque status and accountability.
- Bank asset quality as of September 2018:
  - NPLs about B$102 million (26 percent of total loans).
  - Restructured loans about B$105 million.
  - NPLs net of specific provisions represented about 25 percent of capital.

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### Appendix V. Financial Inclusion

### Recommendations to support competition and inclusion
- Extend access to retail clearinghouse services (Automated Clearing House Limited, ACH) to regulated and supervised nonbanks such as credit unions and e-money issuers.
  - Note: anticipated in the draft new Central Bank Act.
- Complete migration to chip-based cards and apply differentiated fees to debit and credit card merchant discount rates.
  - Chip-based cards part of targeted payments system modernization.
- Introduce new payment systems such as Instant Payments to reduce transaction costs for individuals and merchants.

### Government and CBOB actions to digitize payments and broaden access
- Government actions:
  - Facilitate shift away from cash and cheques toward electronic payments.
  - Move government payments (especially on the collection side) toward digitization.
  - Treasury should join the ACH and implement an Integrated Financial Management System.
- CBOB actions:
  - Promote establishment of an effective and sound private-sector payment network; act as catalyst in retail payments.
  - Put in place an action plan to reduce cheque usage.
  - Work with commercial banks to introduce a “basic” account with lower-than-existing opening/maintenance fees for those who have never held a bank account.
  - Authorities envisage a cash-use reduction strategy in the next phase of payments modernization, to include the digital BSD currency.

### SME finance reforms
- Constraints on both credit demand and supply require reforms:
  - Introduce an official SME policy and a uniform SME definition.
  - CBOB should start collecting SME lending data from all supervised entities.
  - Modernize collateral registration process and enable seamless offering of alternative financial products.
  - Reduce information asymmetry.
  - Support diversification and increased private sector financing via investments and risk-sharing activities of improved public economic empowerment funds.

### Implementation of 2013 FSAP Recommendations — selected items and status
- Banking sector:
  - Recruit additional staff with emphasis on specialists. Timeframe: Near term. Compliance: Completed.
  - Amend legislation so that if Governor is removed, reasons would be publicly disclosed. Timeframe: Near term. Compliance: Provisions have been drafted and are under review.
  - Implement draft guidance on bank responsibilities for managing operational, interest rate, and market risk. Timeframe: Near term. Compliance: Completed.
  - Develop guidelines on the scope and methods of consolidated supervision. Timeframe: Near term. Compliance: In progress. A first draft guideline developed but held in abeyance pending legislative amendments under consideration.
- Insurance and Pensions:
  - Introduce a standard methodology for valuation of long-term insurer liabilities. Timeframe: Near term. Compliance: Guideline on minimum standards in place.
  - Implement fully the 3-year plan towards risk-based supervision (RBS); initiate onsite comprehensive examinations without delay. Timeframe: Medium term. Compliance: Completed.
  - Develop consumer complaint handling support; consider establishing ombudsman. Timeframe: Medium term. Compliance: Complaints filing process strengthened and independent arbitration process introduced in 2017.
  - Amend legislation to require intermediaries to establish a premium payment trust account separate from intermediary’s account. Timeframe: Near term. Compliance: The Insurance Act mandates a separate trust account.
  - Introduce staggered terms for ICB Board and publish reasons for removal of Board members or the Superintendent. Timeframe: Near term. Compliance: Drafting amendments to the Insurance Act.
  - Develop regulations for group supervision, corporate governance and risk management and conduct onsite reviews in line with ICP 23. Timeframe: Near term. Compliance: No regulations; ICB cooperates with other regulators under MOUs and colleges.
  - Promulgate regulation for new pension fund legislation without delay. Timeframe: Near term. Compliance: Pending.
- Capital Markets:
  - Replace Investment Funds Act 2003 (IFA) and its regulations. Timeframe: Near term. Compliance: Draft bill under consultation; IFA expected to be approved in 2018.
  - Delete exclusion in Securities Industry Act 2011 (SIA) permitting selling investment fund shares without a license if sole securities business. Timeframe: Near term. Compliance: Pending; addressed as part of IFA overhaul.
  - Subject all locally resident related parties to full due diligence in licensing investment fund; subject managers/advisers, operators and custodians to ongoing oversight. Timeframe: Near term. Compliance: Pending; addressed as part of IFA overhaul.
  - Consider appointing a public interest oversight body for auditing profession and BICA, possibly to SCB. Timeframe: Near term. Compliance: Not started.
  - Develop plan to deal with failure of a licensee (possibly as part of NFCMP). Timeframe: Near term. Compliance: Not started.
- Safety Net and Crisis Management:
  - Prepare crisis management plan draft for Ministry of Finance (MoF). Timeframe: Near term. Compliance: Stalled pending enactment of legislation.
  - Implement crisis management plan. Timeframe: Medium term. Compliance: Not started.
  - Develop a category of ‘systemic banks’ narrowed to those eligible for solvency support or extraordinary intervention. Timeframe: Near term. Compliance: Completed.
  - Develop a target ratio for DIC equity capital and determine primary and secondary borrowing sources. Timeframe: Near term. Compliance: In progress.
    - 2017 assessment of the DIC Fund increased the 2013 minimum target ratio from 100 basis points to 150 fifty basis points of insurable deposits.
    - During 2019, discussions will be arranged between the DIC and Ministry of Finance to formalize a government borrowing line of credit.
    - Board will be requested to approve a change to a differential risk-based premium, an increase in the annual base premium and an increase in the fund target ratio over a specified timeframe.

*Source: Appendix III–V, 1bhsea2019002 - Appendix III. Offshore Financial Sector*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1bhsea2019002.pdf_