## 1bhsea2023001 ## Source details **Canonical URL:** [1bhsea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1bhsea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1bhsea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1bhsea2023001.pdf.json) --- ### Mission, engagement, and objectives - IMF Monetary and Capital Markets (MCM) Department provided offsite Technical Assistance (TA) between October 18–November 8, 2021 to assist the Central Bank of The Bahamas (CBOB) and Deposit Insurance Corporation (DIC) in operationalizing the new bank resolution framework and the amended deposit insurance legislation. - Mission team: Mrs. Gayon Hosin (MCM, mission chief), Messrs. David Hoelscher and Geof Mortlock (MCM experts). - Engagement modalities: virtual meetings, workshops, seminars, presentations by CBOB and DIC on recovery, resolution, and deposit insurance, followed by Q&A. - Stakeholders engaged: officers of the CBOB and DIC, senior officers of the Ministry of Finance (MOF), the Securities Commission of The Bahamas (SCB), DIC Board members, senior management of three commercial banks, the Clearing Banks Association (CBA), and The Bahamas Cooperative League Limited (BCL). - Planned follow-up mission: targeted for November 7 to 18, 2022, focused on resolvability assessments, preparation of resolution plans and strategies, and related resolution regime elements. ### Main substantive findings and analysis - Legislative progress and scope - New legislation brought into force in September 2020 provides a reasonably comprehensive legal framework for the resolution of banks, including triggers, legal powers, and safeguards. - Amendments to the Protection of Depositors Act in 2020 clarify the DIC’s role and responsibilities and expand DIC membership to include commercial banks and credit unions. - Institutional arrangements and governance - CBOB currently responsible for supervision, resolution, and depositor protection; recommended clear separation between supervision and resolution functions to avoid conflicts of interest and foster operational independence. - Recommend establishing a separate Resolution Unit (RU) with responsibilities including developing resolution strategies and manuals, evaluating costs of resolution options, preparing resolution plans, and organizing crisis-simulation and capacity-building exercises. - Recovery planning - Recovery plans need stronger design and closer integration with banks’ and credit unions’ risk management frameworks, ICAAP, ILAAP, and contingency plans. - Governance: require robust governance arrangements, including board ownership, and periodic testing. - Supervisory framework: CBOB should review and update its supervisory early intervention framework to incorporate recovery plan triggering and improve use of early warning indicators. - Implementation sequencing: mission recommends a pilot program starting with larger banks, then extending to other SFIs after review. - Resolution toolkit and safeguards - Develop a resolution “toolkit” supported by statutory powers to guide resolution options, selection criteria, and implementation steps; toolkit should underpin institution-specific resolution planning, including for small institutions and D-SIBs. - Strengthen safeguards: require independent valuation of assets and liabilities; allow discretion to depart from equal treatment of creditors of the same class where necessary; introduce depositor preference in winding up. - Deposit Insurance (DIC) - Governance and organization: increase number of external, independent directors; review staffing needs and establish a small core of permanent staff supplemented by CBOB staff as needed. - Payout arrangements: aim for a seven-day payout period by strengthening data collection (SCV), technological base for reimbursements, and identifying paying agents. - Purchase-and-assumption (P&A): develop guidance and improve framework for determining maximum DIC contribution consistent with the “least-cost” principle. - Funding: increase DIC target fund level and raise levies to meet the target within five years; establish a back-up contingency funding facility from the MOF or the CBOB, indemnified by the MOF. - Credit unions - Cooperative Credit Unions Act 2015 lacks adequate triggers, powers for resolution, and safeguards; should be comprehensively reviewed and amended to align with international principles. - Inter-agency coordination and crisis preparedness - Current Group of Financial Services Regulators (GFSR) focuses on information exchange and excludes MOF and DIC for crisis management. Recommendation to establish a Financial Stability Council (FSC) comprising chiefs of GFSR member agencies with crisis management/financial stability roles plus MOF and DIC, supported by an MOU on financial crisis management. - Strengthen cross-border MOUs with home authorities to include recovery, resolution, and crisis management given dominance of foreign banks. - Enhance operational capacity via regular staff training, senior management workshops, inter-agency workshops, regular testing including crisis-simulation exercises, and extend capacity-building to include cross-border exercises. ### Key recommendations (selected, authority, priority, timeframe) - Implement recovery planning through a pilot program, initially for the large banks and then extending it to all SFIs (CBOB). — Paragraph 9; Priority: H; Timeframe: NT - Strengthen early warning indicators and the early intervention framework, incorporating recovery plan activation (CBOB). — Paragraph 13; Priority: H; Timeframe: NT - Develop a draft resolution toolkit that is supported by the legislative tools and powers (CBOB). — Paragraph 25; Priority: H; Timeframe: NT - Establish a Financial Stability Council and an MOU on financial crisis management (all agencies). — Paragraph 48; Priority: H; Timeframe: NT - Develop a strategy for structuring, organizing, and adequately resourcing the RU and the DIC independently from the Supervisory function within the CBOB (CBOB, DIC). — Paragraphs 23, 24, 39; Priority: H; Timeframe: NT - Develop procedures for DIC payouts and strengthen operating framework to support faster payouts, including requiring SCV data from banks and identifying private paying agents (DIC). — Paragraphs 39, 40; Priority: H; Timeframe: NT/MT - Increase DIC target fund level and increase premiums sufficiently to meet the target within the projected five-year timeframe (DIC). — Paragraph 43; Priority: M; Timeframe: NT - Establish an emergency back-up liquidity facility (DIC, MOF, CBOB). — Paragraph 44; Priority: H; Timeframe: NT - Strengthen the resolution regime for credit unions (CBOB). — Paragraph 35; Priority: H; Timeframe: MT - Seek to modify cross-border MOUs with home authorities to incorporate recovery and resolution (CBOB). — Paragraph 51; Priority: M; Timeframe: MT (Note: NT = Near term: < 12 months; MT = Medium term: 12 to 24 months.) ### Financial system overview and key statistics (preserve figures exactly) - System size and composition (At end-2020) - Total banking system assets: US$173.8 billion (1,753 percent of GDP). - Offshore banks hold 88.1 percent of total system assets. - Domestic portion: 22 institutions, assets US$20.0 billion (201.4 percent of GDP; 100.0 percent of domestic). - Total commercial banks: 8 institutions, assets US$15.2 billion (153.3 percent of GDP; 76.0 percent of domestic). - Domestic commercial banks: 3 institutions, assets US$3.6 billion (36.0 percent of GDP; 18.0 percent of domestic). - Foreign-owned/branch commercial banks: 5 institutions, assets US$11.6 billion (117.2 percent of GDP; 58.0 percent of domestic). - Other local financial institutions: 14, assets US$4.8 billion (48.2 percent of GDP; 24.0 percent of domestic). - Credit unions: 7, assets US$0.5 billion (5.0 percent of GDP; 2.5 percent of domestic). - Development banks: 1, assets US$0.1 billion (0.4 percent of GDP; 0.5 percent of domestic). - Offshore banks: 48, assets US$153.2 billion (1,546.3 percent of GDP; 88.1 percent of system). - Total system: 78 institutions, assets US$173.8 billion (1,753.1 percent of GDP; 100.0 percent of system). - Source: Central Bank of The Bahamas and IMF staff calculations. - Financial soundness indicators (As of December 2019 and December 2020) - Loans/total assets: 2019 — 62.4 percent; 2020 — 61.8 percent. - Nonperforming loans/total loans: 2019 — 8.0 percent; 2020 — 8.5 percent. - Specific provisions/nonperforming loans: 2019 — 76.4 percent; 2020 — 83.4 percent. - Liquid assets/total assets: 2019 — 29.6 percent; 2020 — 32.4 percent. - Regulatory capital/risk-weighted assets: 2019 — 28.1 percent; 2020 — 28.4 percent. - Regulatory Tier 1 capital/risk-weighted assets: 2019 — 27.0 percent; 2020 — 26.7 percent. - Return on assets: 2019 — 2.4 percent; 2020 — -0.1 percent. - Return on equity: 2019 — 10.6 percent; 2020 — -0.3 percent. - Additional observations - At end-2020, banking system average capital ratio estimated at 28.4 percent of risk-weighted assets and liquid assets to total assets at 32.4 percent. - All banks have significantly more capital than the CBOB’s target capital adequacy ratio of 17 percent of risk-weighted assets. - NPLs increased to 8.5 percent of total loans as pandemic loan deferrals declined from about one-third of credit facilities in June 2020 to 9.1 percent of private sector loans by year-end 2020. - Provisioning strengthened, with specific provisions covering 83.4 percent of NPLs. ### Liability structure, concentration, and pockets of weakness - Liability structure and systemic features - Overall, almost 80 percent of bank liabilities are deposits. - For the credit union segment, deposits represent almost 100 percent of total liabilities. - Opportunities for placing securities in the capital markets are limited. - The commercial banking sub-sector assets are 76 percent of total system assets. - The four largest commercial banks hold 54 percent of total system assets and 70 percent of total system insured deposits; those largest banks are foreign owned, with strong shareholders. - Capital and liquidity buffers have remained stable at these levels since the 2019 FSAP. - Pockets of weakness - Credit unions: - Hold 3 percent of deposits (13 percent of total insured deposits). - Tend to have weaker financial positions than banks; some face liquidity constraints; others do not meet capital requirements. - Supervisory and resolution frameworks for credit unions need strengthening. ### Recovery planning — guidance and supervisory expectations - Minimum requirement: all systemically important banks (SIBs) should have recovery plans setting out means to restore financial soundness following a significant shock; many jurisdictions require all deposit-taking institutions to maintain recovery plans, applied proportionately. - Recovery plans should contain: - Well-specified objectives. - Governance arrangements with ultimate ownership by each SFI’s Board. - Description of critical functions and services. - Triggers for activation of the recovery plan. - Target restoration points for key financial variables. - Recovery options. - Plans should include severe but plausible scenarios (idiosyncratic, market-wide, combined), specify recovery actions for each, and be integrated into Risk Appetite Statement, ICAAP, ILAAP, contingency plans, BCP, and stress testing. - Recommended implementation sequencing: - Pilot selected larger banks to prepare plans within six months after issuance of the CBOB’s consultation paper (draft proposed all SFIs prepare plans by end-June 2022). - CBOB to review draft plans, identify refinements, require pilot banks to revise plans before extending to all SFIs, subject to CBOB resourcing. - Organizational recommendations: - Establish a small team of senior supervisors to lead and coordinate review of SFI recovery plans; coordinate with home supervisory authorities for subsidiaries/branches of foreign banks. - CBOB should review supervisory early intervention framework to integrate activation of recovery plans and develop an early warning system; test regularly. ### Resolution planning, resolvability assessments, and toolkit - Resolution planning - CBOB should develop bank-specific resolution plans at least for SIBs identifying ways of resolution without putting public funds at risk; plans tailored to each bank and informed by resolvability assessments. - Resolution plans should ensure continuity of critical functions and pre-position bank’s structure/operations to enable least-cost resolution. - Resolvability assessments (three stages) 1. Assessment of feasibility of different resolution options for the bank. 2. Assessment of systemic impact of each resolution option. 3. Assessment of actions needed to improve resolvability under preferred options. - Resolvability assessments are confidential, undertaken by the CBOB, primarily focused on options not involving public funds. - Resolution toolkit purpose and key elements - Set out guidance on resolution options; criteria for selecting the appropriate option; detailed implementation guidance. - Toolkit prerequisites for bank-specific resolution plans and resolvability assessments. - Key elements: crisis diagnostics (solvency and liquidity), resolution strategies, selection criteria, implementation steps, cross-border crisis resolution, systemically important functions guidance. - Resolution options and instruments (indicative) - Purchase-and-assumption (P&A): transfer performing assets and deposits to a sound bank when closure is non-systemic; DIC may provide funding to acquiring institution; DIC funding limited to amount it would have paid out in liquidation. - Bridge bank: interim government-owned entity to maintain critical functions when no immediate acquirer; sales process ideally completed within a few months, legislative framework should allow up to two years with limited extension clauses. - Bail-in powers: CBOB can write down shareholders and creditors and trigger CoCos; bail-in currently limited by market structure (retail deposit dominance) and legal constraints; consider requiring D-SIBs to establish additional loss-absorbing capacity. - Asset management companies (AMCs): exceptional use in system-wide crises, with high potential cost and long operational timelines. - Closure and pay-out of insured deposits; closure and transfer of insured deposit accounts; transfer of assets/liabilities to acquiring bank or bridge bank; sale of the bank; recapitalization via bail-in or public funding (last resort). - Safeguards and valuation - Apply “no creditor worse off” safeguard: undertake counter-factual independent valuation to determine compensation if resolution leaves parties worse off than liquidation. - Require independent valuation of assets and liabilities; provide robust transparency and court challenge mechanisms. ### Deposit Insurance (DIC) — findings, statistics, and recommendations - Legal and institutional setup - Protection of Depositors Act amended in 2020 defines DIC structure, powers, responsibilities; DIC operates within CBOB with its own Board of Directors composed of six members: four ex officio and two external directors. - DIC has no formal employees; staffed by employees of the Bank Supervision Department. - DIC insures all deposits denominated in Bahamian dollars of both residents and nonresidents; foreign exchange-denominated deposits are not protected. - Membership compulsory for every licensed bank with Bahamian dollar deposits; Act expanded membership to include credit unions. - Funded by annual premiums levied on member institutions. - Payout speed and data gaps - DIC aims to pay out deposits within 20 days (international target is seven days). - Achievement hampered by lack of deposit data in Single Customer View (SCV) format and access limitations in some smaller banks and credit unions. - Fund size and adequacy (figures preserved) - Fund currently holds B$69.1 million or approximately 0.9 percent of total insurable deposits and 2.7 percent of total insured deposits. - Current level would cover failure of only the three smallest credit unions and the four smallest banks; would not cover the largest credit union or any medium-sized banks. - By-law and legislative recommendations (selected) - Strengthen DIC mandate to state explicitly that objective is to preserve financial stability and protect depositors up to maximum coverage. - Permit DIC to finance resolution measures proposed by the RU, limit use of DIC funds to amount it would have paid in liquidation, consider setting a maximum (e.g., 50 percent of existing fund) that could be used in resolution. - Authorize DIC to analyze risks and formalize information sharing with supervisors; prohibit DIC from becoming shareholder of bridge bank; require any CBOB-provided resources to be indemnified by MOF. - Improve by-laws relating to intervention timing, SCV data enforcement, payout procedures, and appeal processes. - Governance and staffing recommendations - Increase DIC Board size from six to nine members; increase external Directors from two to five; Chair should be drawn from external Directors. - Appoint a small core of permanent staff; suggested minimum of three to four full-time staff including a CEO, a staff person for funding issues, and one–two staff for reimbursement, data preparation, and evaluation. - Provide specific training and pre-arranged insourcing options from CBOB in stress. - Strengthening reimbursement framework - Preconditions for rapid payout: (i) adequate human resources; (ii) information-sharing arrangements; (iii) early warning arrangements; (iv) advance access to depositor data in SCV format; (v) access to adequate funding sources including pre-arranged backup funding; (vi) management information system; and (vii) pre-arranged contracts with outsourcing partners (paying agents, call centers, legal services). - DIC should test members’ ability to produce SCVs and activate paying agents; consider covering foreign exchange-denominated deposits of domestic banks with payout in local currency at exchange rate on day of failure. - Funding and premiums - Conduct fund adequacy analysis using system structure, probability of default, loss-given-default, and historical data. - Example scenario: increasing fund target from 2 percent of insured deposits to 4 percent would expand coverage capabilities (see text for specifics). - CBOB examining premium increases in a scaled approach by 5.5 bps, 6 bps, 7.5 bps, and 10 bps; review increases to meet DIF target within five years; defer risk-based levies for now. - Establish dedicated, pre-arranged back-up funding arrangement, typically by MOF, with extremely fast access; CBOB may provide funding if indemnified by MOF. - Public awareness - Develop a public awareness policy framework identifying member institutions, information to distribute, and communication tools/channels (website, mass media, online/social media, educational activities). - Use information leaflets, dedicated website, and information sheets; conduct independent evaluation to measure effectiveness. ### Inter-agency coordination, cross-border cooperation, and contingency planning - Recommendation: Establish an inter-agency body such as a Financial Stability Council (FSC) comprising heads of relevant GFSR members with financial stability/crisis roles, plus MOF and DIC, operating under a published MOU. - FSC should meet at least quarterly, establish working groups, operate with equal participation, and have flexible chairing arrangements (central bank, MOF, or rotating). - Cross-border cooperation - Strengthen MOUs with home authorities to include recovery, resolution, and crisis management; extend supervisory colleges or establish crisis management groups to include recovery/resolution issues. - Coordinate recovery and resolution planning for foreign banks: clarify parent support, aim for whole-of-group parent-led resolution where feasible, otherwise prepare standalone host strategies. - Cross-border coordination should include MOF, DIC, and home counterparts on funding aspects where necessary. - Contingency planning and testing - Implement comprehensive contingency planning and testing framework with multi-year testing programs and inter-agency scenario tests. - Establish inter-agency working group on resolution contingencies led by CBOB under FSC auspices. - Test critical procedures yearly and plan multi-institutional scenario tests: arranging P&A packages quickly; procedures for buyers accessing confidential information; ability to establish and activate a bridge bank; DIC’s ability to obtain deposit information in correct format, process claims, arrange funding and payouts. - Next steps ahead of second mission (November 2022) - Tasks recommended: a) Establish domestic inter-agency coordination and information sharing structure; b) Draft: - (i) paper for strengthening credit union resolution framework; - (ii) strategy for structuring and organizing roles/functions of Resolution Authority and DIC; - (iii) resolution toolkit supported by legislative tools and powers; and - (iv) DIC’s preliminary procedures for payouts; c) Preliminary analysis of recovery plans. - These documents to be reviewed at IMF headquarters; second mission to provide further guidance on resolution toolkit, resolvability assessments, resolution plans, restructuring and operationalizing the DIC. - Comprehensive framework for resolvability assessments to include data requirements to identify critical functions, legal/group structure, functional support arrangements, funding structure, and separability of functions. ### Tables and specific data snapshots (figures preserved) - Table 4. The Bahamas: Financial System Structure (At end-2020) — select lines preserved exactly as presented: - Domestic financial market - Total (Type Count) 66 23,090.6 233.1 - Commercial banks: - Foreign owned/branch 22 19,957.6 201.4 - Domestic owned 8 15,185.1 153.2 - Other 5 11,615.4 117.2 - Local Financial Institutions 3 3,569.7 36.0 - 14 4,772.5 48.2 - Cooperatives: - Credit unions 7 492.1 5.0 - Development bank/ foundation 1 38.0 0.4 - Insurance companies 31 2,211.3 22.3 - Money Service Companies: - Remittance/ money transfer providers 5 391.6 4.0 - Total (A) 66 23,090.6 233.1 - International financial sector - Banks, Banks & Trust 48 153,202.1 1,546.3 - Other nonbank financial institutions - Pure Trusts 14 43.9 0.4 - Total International (B) 62 153,246.0 1,546.7 - Total Financial Sector (A+B) 128 176,336.6 1,779.8 - Source: Central Bank of The Bahamas. - Table 5. The Bahamas: Insured and Insurable Deposits of DIC Members (As at June 30, 2021) — select lines preserved exactly: - Banks (Member Institutions — Deposits Insured / Insurable / Covered Deposits % of Insured to Insurable Deposits) - Bank 2 510.878 1,866.487 27.4 - Bank 5 448.524 1,397.321 32.1 - Bank 1 424.104 1,575.571 26.9 - Bank 3 402.233 1,028.958 39.1 - Bank 6 172.559 663.438 26.0 - Bank 9 165.761 535.093 31.0 - Bank 7 90.334 357.622 25.3 - Bank 11 15.000 137.096 10.9 - Bank 4 1.749 68.474 2.6 - Bank 10 0.521 2.508 20.8 - Bank 8 0.283 2.016 14.0 - Total 2,231.946 7,634.584 29.2 - Credit Unions - Credit Union 1 156.542 190.993 82.0 - Credit Union 2 50.799 62.506 81.3 - Credit Union 3 44.673 53.143 84.1 - Credit Union 4 33.132 44.565 74.3 - Credit Union 5 33.116 37.427 88.5 - Credit Union 6 14.482 20.081 72.1 - Credit Union 7 1.312 1.312 100.0 - Total 334.056 410.027 81.5 - Aggregate 2,566.002 8,044.611 31.9 - Total DIC Fund B$69.1 million - as a percent of aggregate insured deposits 2.7% - as a percent of aggregate insurable deposits 0.9% - Source: CBOB and Fund staff calculations. *IMF staff extract from 1bhsea2023001.* ### Preface................................................................................................................. ### Preface ### Mission, engagement, and objectives - IMF Monetary and Capital Markets (MCM) Department provided offsite Technical Assistance (TA) between October 18–November 8, 2021 to assist the Central Bank of The Bahamas (CBOB) and Deposit Insurance Corporation (DIC) in operationalizing the new bank resolution framework and the amended deposit insurance legislation. - Mission team: Mrs. Gayon Hosin (MCM, mission chief), Messrs. David Hoelscher and Geof Mortlock (MCM experts). - Engagement modalities: virtual meetings, workshops, seminars, presentations by CBOB and DIC on recovery, resolution, and deposit insurance, followed by Q&A. - Stakeholders engaged: officers of the CBOB and DIC, senior officers of the Ministry of Finance (MOF), the Securities Commission of The Bahamas (SCB), DIC Board members, senior management of three commercial banks, the Clearing Banks Association (CBA), and The Bahamas Cooperative League Limited (BCL). - Planned follow-up mission: targeted for November 7 to 18, 2022, focused on resolvability assessments, preparation of resolution plans and strategies, and related resolution regime elements. ### Main substantive findings and analysis - Legislative progress and scope - New legislation brought into force in September 2020 provides a reasonably comprehensive legal framework for the resolution of banks, including triggers, legal powers, and safeguards. - Amendments to the Protection of Depositors Act in 2020 clarify the DIC’s role and responsibilities and expand DIC membership to include commercial banks and credit unions. - Recovery planning - Recovery plans need stronger design and closer integration with banks’ and credit unions’ risk management frameworks, ICAAP, and contingency plans. - Governance: recovery plans should have robust governance arrangements, including board ownership, and be tested periodically. - Supervisory framework: CBOB should review and update its supervisory early intervention framework to incorporate recovery plan triggering and improve use of early warning indicators. - Implementation sequencing: a consultation paper proposed draft recovery plans by end-June 2022 for all SFIs; mission recommends a pilot program starting with larger banks, then extending to other SFIs after review. - Institutional arrangements for resolution - CBOB currently responsible for supervision, resolution, and depositor protection; to avoid conflicts of interest and foster operational independence, a clear separation between supervision and resolution functions is recommended. - Establish a separate Resolution Unit (RU) with responsibilities including developing resolution strategies and manuals, evaluating costs of resolution options, preparing resolution plans, and organizing crisis-simulation and capacity-building exercises. - Resolution toolkit and safeguards - Develop a resolution “toolkit” supported by statutory powers to guide resolution options, selection criteria, and implementation steps; the toolkit should underpin institution-specific resolution planning, including for small institutions and D-SIBs. - Strengthen safeguards: while the law includes a “no creditor worse off” safeguard, the CBOB should have discretion to depart from equal treatment of creditors of the same class if necessary to contain systemic impact or maximize value for all creditors. Require independent valuation of assets and liabilities. Introduce depositor preference in winding up. - Credit unions and legislation - The Cooperative Credit Unions Act 2015 lacks adequate triggers, powers for resolution, and safeguards; it should be comprehensively reviewed and amended to align with international principles and good practice. - Deposit Insurance Corporation (DIC) - Governance and organization: increase number of external, independent directors; review staffing needs and establish a small core of permanent staff supplemented by CBOB staff as needed. - Payout arrangements: aim for a seven-day payout period by strengthening data collection, technological base for reimbursements, and identifying paying agents. - Purchase-and-assumption (P&A): develop guidance for P&A transactions and improve framework for determining the maximum DIC contribution consistent with the “least-cost” principle. - Funding: increase DIC target fund level and raise levies to meet the target within five years (defer introduction of risk-based levies). Establish a back-up contingency funding facility from the MOF or the CBOB, indemnified by the MOF. - Inter-agency coordination and crisis preparedness - Domestic coordination: current Group of Financial Services Regulators (GFSR) focuses on information exchange and does not include MOF or DIC nor deal with crisis management. Recommendation to establish a Financial Stability Council (FSC) comprising chiefs of GFSR member agencies with crisis management/financial stability roles plus MOF and DIC, supported by an MOU on financial crisis management. - Cross-border cooperation: strengthen MOUs with home authorities to include recovery, resolution, and crisis management given the dominance of foreign banks. - Capacity building: enhance operational capacity via regular staff training, senior management workshops, inter-agency workshops, regular testing of crisis management and resolution arrangements including inter-agency crisis-simulation exercises, and extend capacity-building to include cross-border exercises. ### Key recommendations (selected, with authority and timing) - Implement recovery planning through a pilot program, initially for the large banks and then extending it to all SFIs (CBOB). — Paragraph 9; Priority: H; Timeframe: NT - Strengthen early warning indicators and the early intervention framework, incorporating recovery plan activation (CBOB). — Paragraph 13; Priority: H; Timeframe: NT - Develop a draft resolution toolkit that is supported by the legislative tools and powers (CBOB). — Paragraph 25; Priority: H; Timeframe: NT - Establish a Financial Stability Council and an MOU on financial crisis management (all agencies). — Paragraph 48; Priority: H; Timeframe: NT - Develop a strategy for structuring, organizing, and adequately resourcing the RU and the DIC independently from the Supervisory function within the CBOB (CBOB, DIC). — Paragraphs 23, 24, 39; Priority: H; Timeframe: NT - Develop procedures for DIC payouts and strengthen operating framework to support faster payouts, including requiring SCV data from banks and identifying private paying agents (DIC). — Paragraphs 39, 40; Priority: H; Timeframe: NT/MT - Increase DIC target fund level and increase premiums sufficiently to meet the target within the projected five-year timeframe (DIC). — Paragraph 43; Priority: M; Timeframe: NT - Establish an emergency back-up liquidity facility (DIC, MOF, CBOB). — Paragraph 44; Priority: H; Timeframe: NT - Strengthen the resolution regime for credit unions (CBOB). — Paragraph 35; Priority: H; Timeframe: MT - Seek to modify cross-border MOUs with home authorities to incorporate recovery and resolution (CBOB). — Paragraph 51; Priority: M; Timeframe: MT (Notes: NT = Near term: < 12 months; MT = Medium term: 12 to 24 months.) ### Financial system overview and key statistics - System size and composition (At end-2020) - Total banking system assets: US$173.8 billion (1,753 percent of GDP). - Offshore banks hold 88.1 percent of total system assets. - Domestic portion: 22 institutions, assets US$20.0 billion (201.4 percent of GDP; 100.0 percent of domestic). - Total commercial banks: 8 institutions, assets US$15.2 billion (153.3 percent of GDP; 76.0 percent of domestic). - Domestic commercial banks: 3 institutions, assets US$3.6 billion (36.0 percent of GDP; 18.0 percent of domestic). - Foreign-owned/branch commercial banks: 5 institutions, assets US$11.6 billion (117.2 percent of GDP; 58.0 percent of domestic). - Other local financial institutions: 14, assets US$4.8 billion (48.2 percent of GDP; 24.0 percent of domestic). - Credit unions: 7, assets US$0.5 billion (5.0 percent of GDP; 2.5 percent of domestic). - Development banks: 1, assets US$0.1 billion (0.4 percent of GDP; 0.5 percent of domestic). - Offshore banks: 48, assets US$153.2 billion (1,546.3 percent of GDP; 88.1 percent of system). - Total system: 78 institutions, assets US$173.8 billion (1,753.1 percent of GDP; 100.0 percent of system). - Source: Central Bank of The Bahamas and IMF staff calculations. ### Financial soundness indicators (As of December 2019 and December 2020) - Assets of banks - Loans/total assets: 2019 — 62.4 percent; 2020 — 61.8 percent. - Nonperforming loans/total loans: 2019 — 8.0 percent; 2020 — 8.5 percent. - Specific provisions/nonperforming loans: 2019 — 76.4 percent; 2020 — 83.4 percent. - Liquidity - Liquid assets/total assets: 2019 — 29.6 percent; 2020 — 32.4 percent. - Capital adequacy - Regulatory capital/risk-weighted assets: 2019 — 28.1 percent; 2020 — 28.4 percent. - Regulatory Tier 1 capital/risk-weighted assets: 2019 — 27.0 percent; 2020 — 26.7 percent. - Profitability - Return on assets: 2019 — 2.4 percent; 2020 — -0.1 percent. - Return on equity: 2019 — 10.6 percent; 2020 — -0.3 percent. - Additional observations - At end-2020, banking system average capital ratio estimated at 28.4 percent of risk-weighted assets and liquid assets to total assets at 32.4 percent. - All banks have significantly more capital than the CBOB’s target capital adequacy ratio of 17 percent of risk-weighted assets. - NPLs increased to 8.5 percent of total loans as pandemic loan deferrals declined from about one-third of credit facilities in June 2020 to 9.1 percent of private sector loans by year-end 2020. - Provisioning strengthened, with specific provisions covering 83.4 percent of NPLs. *Source: IMF MCM Department TA mission Preface and Executive Summary.* ### 3. The liability side of the onshore financial system is dominated by deposits. ### 3. The liability side of the onshore financial system is dominated by deposits. ### Liability structure and systemic features - Overall, almost 80 percent of bank liabilities are deposits. - For the system’s credit union segment, deposits represent almost 100 percent of total liabilities. - Opportunities for placing securities in the capital markets are limited. - Of the 22 banking licensees in the domestic system, 11 are members of the [text truncated in source]. - The commercial banking sub-sector assets are 76 percent of total system assets. - The four largest commercial banks hold 54 percent of total system assets and 70 percent of total system insured deposits. - Those largest banks are foreign owned, with strong shareholders. - Capital and liquidity buffers have remained stable at these levels since the 2019 FSAP, which assessed the banking system as resilient to a range of adverse scenarios, although some individual banks’ high NPLs warranted caution. ### Pockets of weakness - Credit unions: - Hold 3 percent of deposits (13 percent of total insured deposits). - Tend to have weaker financial positions than banks. - Some face liquidity constraints; others do not meet capital requirements. - The supervisory and resolution frameworks for credit unions need to be strengthened. *Findings (summary)* - The banking system is highly concentrated. - Dominance of foreign-owned banks poses challenges for resolution. - Recovery and resolution frameworks have been strengthened since the 2019 FSAP and CBOB consultations with LEG, but further upgrades are needed to bolster resolution funding, institutional arrangements, and capacity. ### II. Crisis planning and preparation — Recovery planning - At minimum, all systemically important banks (SIBs) should be required to have recovery plans that set out means to restore financial soundness following a significant financial shock. - Many supervisory authorities require all deposit-taking institutions to maintain recovery plans; requirements are generally standardized and applied proportionately. *Guidance recommended for recovery plans* - Plans should contain: - Well-specified objectives. - Governance arrangements (ultimate ownership by each SFI’s Board). - Description of critical functions and services. - Triggers for activation of the recovery plan. - Target restoration points for key financial variables. - Recovery options. - Plans should include scenarios of a severe but plausible nature, including idiosyncratic and system-wide scenarios, and specify likely recovery actions for each scenario. - Recovery plans should be integrated into: - Risk Appetite Statement - Internal Capital Adequacy Assessment Process (ICAAP) - Internal Liquidity Adequacy Assessment Process (ILAAP) - Capital and liquidity contingency plans - Business continuity plan (BCP) - Stress testing *Findings on CBOB actions* - The CBOB is introducing recovery planning requirements for SFIs. - A draft consultation paper has been prepared by the CBOB for consideration by the SFIs, with the intention of receiving their comments within two months of its issuance. - The draft proposed that all SFIs prepare recovery plans by end-June 2022 for CBOB review. *Recommendations for implementation* - Start with a pilot of selected larger banks: - Pilot banks could be asked to prepare plans within six months after issue of the CBOB’s consultation paper (scheduled to be by mid-2022). - CBOB to review draft plans, identify areas needing refinement, and then require pilot banks to revise plans before extending requirements to all SFIs, subject to CBOB resourcing capacity. - Expand the draft consultation paper to cover: - Addition of well-defined objectives anchored to demonstrating capacity to restore financial soundness within a reasonable timeframe. - Robust governance with Board ownership. - Explicit linkages to ICAAP, ILAAP, other contingency plans, stress testing, and the Risk Appetite Statement. - Specification of critical functions and continuity arrangements. - Triggers that apply well before any breach of regulatory requirements, linked to early warning indicators. - Restoration points for key financial variables set well above regulatory minima. - Recovery options that are realistic, prioritized, and quantified in terms of contribution to capital and liquidity. - Severe but plausible scenarios, including idiosyncratic and system-wide scenarios, with indicated recovery actions for each. - Preparatory legal and operational measures to implement recovery options timely. - Communications strategies covering stakeholder information needs, key messaging, and channels. - Processes for review and regular testing of the recovery plan. *Organizational recommendations* - Establish a small team of senior supervisors to lead and coordinate review of SFI recovery plans; team to ensure consistent review approach and assist supervisors. Once capacity is built, team could be disbanded and responsibility returned to SFI supervisors. - For subsidiaries/branches of foreign banks, CBOB should coordinate with home supervisory authorities to assess whether parent recovery plans provide appropriate financial and operational support, while ensuring the local recovery plan identifies initiatives to maintain local financial and operational soundness, including protection/conservation of local capital/net asset position in stress. - CBOB should review its supervisory early intervention framework to integrate activation of recovery plans and further develop an early warning system; test these regularly. ### II.B Resolution planning - CBOB should develop bank-specific resolution plans at least for SIBs that identify ways of resolution without putting public funds at risk. - Resolution plans should be tailored to each bank and informed by resolvability assessments. - Likely resolution forms for a large bank include: - Recapitalization by parent/shareholders. - Separation of critical functions and systems and transfer to another bank, a bridge bank, or merger. - A key element is ensuring continuity of critical functions and services and pre-positioning the bank’s structure and operations to enable least-cost resolution. *Foreign-owned banks* - Resolution planning should be developed in close coordination with home resolution authorities. - Authorities should begin discussions with home-country resolution authorities to evaluate resolution strategies and develop coordinated approaches where possible. - For groups with a single point of entry strategy, planning should focus on whether resolution would enable the parent to provide required capital, liquidity funding, and operational support to Bahamian operations. *Standalone resolution scenarios* - Resolution plans must cover scenarios where group resolution does not meet domestic financial stability and depositor protection objectives. - Authorities should prepare to resolve the local entity on a standalone basis and enable separation and resolution of the subsidiary/branch in The Bahamas in ways that maintain continuity of critical functions and services. ### II.C Resolvability assessments - Resolvability assessments involve three stages: 1. Assessment of feasibility of different resolution options for the bank. 2. Assessment of the systemic impact of each resolution option. 3. Assessment of actions needed to improve resolvability under preferred options. - Objective: identify structural and operational impediments to effective resolution and make recommendations to enhance resolvability. - Resolvability assessments are confidential, undertaken by the CBOB, and primarily focused on resolution options that do not involve putting public funds at risk. ### III. Bank resolution and crisis management — Bank resolution framework - Legislation reforms introduced in 2020 enhanced the CBOB’s powers to resolve troubled banks, including triggers, legal powers, and safeguards. - Legal updates include reforms in: - CBOB Act 2020 - Banks and Trust Companies Regulation Act 2020 - Protection of Depositors Act 2020 - Reforms empower CBOB to use an administrative approach to resolve troubled banks and establish the DIC as a paybox within the CBOB with its own Board. - The Protection of Depositors Act 2020 adds credit unions as insured DIC members; equivalent resolution framework reforms have not yet been established under the Cooperative Credit Unions Act 2015. *Findings on operational process* - CBOB is the resolution authority for banks and is responsible for supervision, resolution, and depositor protection (the DIC). - Once supervisors determine an institution is failing or has failed, CBOB triggers resolution and places it under statutory administration; the administrator determines the appropriate resolution option, which may include forced mergers, closure and transfer of assets/liabilities, recapitalization by new investors, or bail-in of subordinated debt and convertible securities. - Legislation provides safeguards including a “no creditor worse off” safeguard. - CBOB does not have discretion to depart from pari passu treatment of creditors in the same class, constraining some resolution options (e.g., bail-in involving conversion or write-down of unsecured liabilities may be difficult if senior unsecured liabilities including deposits are treated pari passu). - In contrast, depositor preference in other jurisdictions facilitates more flexible use of bail-in or selected business transfer. *Funding for resolution* - Funding comes from asset recoveries from the institution under administration and from the DIC. - The DIC can provide financing to an acquiring entity, or provide capital for a bridge bank. - Use of DIC funds cannot exceed the amount the DIC would have incurred in paying out insured depositors under liquidation. *Alignment with international standards* - The new resolution law is broadly aligned with the Key Attributes but: - Some resolution tools, including bail-in authority, are not consistent with international standards and should be enhanced. - Creditor protection should be strengthened. ### Recommendations — legal and governance underpinnings of resolution - Legal underpinnings: - Support resolution tools with stronger protections for creditors and greater flexibility in developing resolution options. - Require independent valuation of assets and liabilities to inform resolution actions. - Allow departure from pari passu treatment of similarly ranked creditors where necessary to prevent contagion or maximize bank value. - Introduce depositor preference that places deposit liabilities in a more senior position than other senior unsecured creditor claims to facilitate resolution tools (such as P&A) where not all depositors are transferred. - Governance structure: - Ensure independent structures and governance for departments responsible for supervision, resolution, and the deposit insurer within the CBOB to avoid conflicts of interest. - Consider establishing a Resolution Unit (RU) within the CBOB with separate reporting lines and governance to: - Develop manuals for resolution tools. - Identify resolution options for credit unions. - Develop resolution strategies for each category of SFI. - Undertake resolvability assessments. - Prepare resolution plans and organize regular crisis-simulation exercises. - In an institution failure, identify least-cost resolution option, ensure needed finances, oversee implementation, package assets for P&A transactions, and oversee recapitalization and restructuring where required. - Staffing: - RU would include three or four staff with specialized training to build skills before a crisis. ### Findings and next steps - CBOB is seeking to operationalize the new legal powers and instruments. - A well-designed legal framework is necessary but not sufficient; guidance and operational readiness are required to apply the legal framework effectively to achieve resolution objectives. - Further work on resolution strategies, tools, and operational manuals is recommended. *Source: IMF country report chapter excerpt.* ### 26. The operationalization of the resolution regime would be facilitated by the ### 26. The operationalization of the resolution regime would be facilitated by the ### Resolution toolkit: purpose and prerequisites - A resolution toolkit should set out guidance on: - resolution options; - criteria for selecting the appropriate option; and - detailed guidance on implementation. - The toolkit should identify strategies and powers needed to resolve: - smaller, non-systemic institutions; - D-SIBs; and - a framework for addressing financial distress in a D-SIB. - Establishment of the resolution toolkit is a prerequisite to developing bank-specific resolution plans that draw on the toolkit’s guidance. - Appendix II provides indicative guidance and highlights specific issues concerning existing resolution powers. ### Purchase and assumption (P&A) - Use case: - Applicable when a bank’s closure does not present systemic risks; package performing assets and deposits for sale to a sound bank and liquidate the residual entity. - Policy issues to determine: - Law appears to permit the DIC to provide funding directly to the acquiring institution to balance packages of assets and liabilities, but the DIC does not provide open bank assistance to acquiring banks. - Resolution authority must determine which depositors are incorporated into the P&A; at minimum, all insured deposits should be transferred using DIC resources. - Possibility of transferring all depositors to reinforce depositor confidence depends on amount of performing assets and public policy on imposing losses on uninsured depositors or finding fiscal resources. - Asset valuation challenges can deter bidders; measures include advanced notice to potential acquirers (subject to strict confidentiality) or “sweeteners” such as limited “put back” rights. - Further discussion: Appendix II, paragraph 38. ### Bridge bank - Use case: - If no immediate acquirers and failure would have negative systemic impact, establish a bridge bank as an interim step. - Desirable where failing bank has substantial impaired loans and non-critical functions so transfer of critical functions/viable assets to a bridge bank may be lower cost and facilitate eventual sale. - Legal and operational features: - Option allowed under Bahamian law. - Bridge bank operates as a normal bank, taking deposits and providing credit while an acquirer is sought. - When activated, the RU can transfer performing assets and on-balance sheet liabilities from the failed bank to the bridge bank. - Typically government-owned, directly or via a special holding company to ensure arm’s-length ownership; neither the CBOB nor the DIC should be shareholders. - If operating for an extended period, bridge bank should meet all prudential regulations, including capital requirements. - Timing: - Sales process should ideally be completed within a few months; legislative framework should allow more time where necessary, for example, up to two years, with appropriately limited extension clauses. ### Bail-in powers - Current state: - The CBOB can already write down shareholders and creditors and can trigger contingent convertible bonds (CoCos). - Use of CoCos is extremely limited in The Bahamian market. - Impediments in The Bahamas: - Excluding insured deposits, bank liabilities largely comprise retail deposits, often excluded from bail-in. - Market is not deep enough for development of loss-absorbing securities. - Bail-in requires complex real-time valuation and may be legally contested. - Potential roles and prerequisites: - Bail-in may suit complex banks and cross-border group resolution scenarios where home authority will not cascade capital to a Bahamian subsidiary. - May be feasible for major domestically owned banks with significant unsecured liabilities beyond deposits. - If adopted, additional measures needed include: - (i) ensuring banks hold sufficient loss-absorbing liabilities; and - (ii) appropriate exclusions to prevent contagion to other banks. - Consider requiring D-SIBs to establish additional loss-absorbing capacity (e.g., via long-term senior unsecured bonds). - Further work: - These issues could be explored further in the second mission in November 2022. ### Asset management companies (AMCs) - Assessment: - AMCs can be useful under some circumstances but come with high potential cost and should be exceptional. - Effectiveness depends on purchase price of assets: - If AMC pays market prices, distressed bank recognizes losses and likely needs recapitalization/restructuring. - If assets transferred at book value, losses pass to government. - AMCs typically operate slowly; losses can be a drain on government resources and result in warehoused assets for years. - AMCs address backward-looking problems but not forward-looking viability. - Recommended use: - Consider only in system-wide banking crisis where managing homogeneous NPLs centrally yields efficiency benefits (e.g., large syndicated loans). ### Special conditions for credit unions - Weaknesses identified: - Resolution framework for credit unions is weak; Cooperative Credit Unions Act 2015 should be reviewed and amended. - Required legal changes: - Provide well-specified comprehensive triggers for entry into resolution, including triggers to initiate resolution before balance sheet insolvency. - Enable CBOB to initiate and complete resolution without court approval and without mandate from credit union members. - Powers needed for the CBOB: - appoint a statutory manager/administrator to assume control; - transfer some or all of a credit union’s business undertaking to another financial institution (not necessarily a credit union); - merge credit unions; and - execute a stay on actions by creditors or other parties that could impede resolution transactions. - Strengthen CBOB powers to close a credit union quickly and efficiently and request the DIC to make payouts to insured depositors. - New law should limit courts to ex post review for determining compensation to parties rendered worse off compared with conventional winding up. ### Deposit Insurance — Findings - Legal and institutional setup: - Protection of Depositors Act recently amended; defines DIC’s structure, powers, responsibilities. - DIC operates within the CBOB with its own Board of Directors composed of six members: four ex officio members and two external directors. - DIC has no formal employees; staffed by employees of the Bank Supervision Department. - DIC insures all deposits denominated in Bahamian dollars of both residents and nonresidents; foreign exchange-denominated deposits are not protected. - Mandate: provide insurance against loss of part or all deposits and to promote and contribute to financial stability; authorized to provide financing for resolution measures. - Membership compulsory for every licensed bank with Bahamian dollar deposits; Act expanded membership to include credit unions. - Funded by annual premiums levied on member institutions. - Payout speed and data gaps: - DIC aims to pay out deposits within 20 days (international target is seven days). - Achievement of 20-day goal hampered by lack of deposit data in single customer view (SCV) format and access limitations in some smaller banks and credit unions. - Fund size and adequacy: - Fund currently holds B$69.1 million or approximately 0.9 percent of total insurable deposits and 2.7 percent of total insured deposits. - Current level would cover failure of only the three smallest credit unions and the four smallest banks; would not cover the largest credit union or any medium-sized banks. - Protection of Depositors Act does not envision funding by the CBOB or placing funds in the market in case of shortfall; DIC may request a loan from the government or assess extra levies on member institutions. ### Deposit Insurance — Recommendations (Governance and staffing) - Governance: - DIC’s governance structure and staffing should be strengthened; current board dominated by ex officio government members, including Governor of CBOB as Chair, reducing independence. - Proposed board changes: increase size from six to nine members and increase external directors from two to five — balance benefits and risks, especially regarding DIC fund and coverage levels. - Staffing: - Appoint a small core of permanent staff and arrangements to quickly ramp up staffing (e.g., “insourcing” additional FTE from the CBOB during stress). - Initial staffing recommendation: minimum of three to four persons, including a CEO, a staff person for funding issues, and one to two staff for reimbursement, data preparation, and evaluation. - Provide specific training. ### Deposit Insurance — Recommendations (Strengthening reimbursement framework) - Elements required for rapid payout: - (i) adequate human resources; - (ii) information-sharing arrangements with other safety-net participants; - (iii) early warning arrangements; - (iv) advance access to data on depositors, including qualitative review of data; - (v) access to adequate funding sources; - (vi) management information system; and - (vii) pre-arranged contracts with outsourcing partners (paying agents, call centers, legal services). - Testing and readiness: - The DIC should test members’ ability to produce SCVs and activating paying agents quickly and effectively. - Coverage consideration: - Consider covering foreign exchange-denominated deposits of domestic banks; payout should be in local currency at the exchange rate on the day of failure. ### Deposit Insurance — Recommendations (Funding) - Fund adequacy analysis: - DIC should conduct an analysis of fund adequacy using banking system structure, probability of default, loss-given-default, and historical data from other jurisdictions. - Example scenario: increasing fund target from 2 percent of insured deposits to 4 percent would allow the fund to cover the small and two medium-sized credit unions, the largest credit union, or the small banks and one medium-sized bank. - Premiums: - CBOB is examining possibility of increasing premiums in a scaled approach by 5.5 bps, 6 bps, 7.5 bps, and 10 bps. - Review these increases in light of need to reach DIF target within five years. - Exercise caution with risk-based premiums at this stage as increasing premiums in the weakest banks could be counterproductive. - Back-up funding: - DIC should have a dedicated, pre-arranged back-up funding arrangement, typically provided by the MOF, with extremely fast access. - CBOB may provide funding within a formal agreement that credits to the DIC are indemnified by the MOF. - Any use of emergency funding should be repaid from asset recoveries or levies on members. ### Deposit Insurance — Recommendations (Public awareness) - Develop a public awareness policy framework that identifies: - member institutions; - information to distribute on deposit insurance; and - communication tools and channels: (i) website; (ii) mass media: newspapers, magazines, television, and radio; (iii) online and social media; and (iv) educational activities. - Mechanisms: - Information leaflets, dedicated website, and information sheets for banks to provide depositors outlining deposit insurance and reimbursement procedures. - Evaluation: - Conduct an independent evaluation to measure effectiveness of public awareness programs. ### Inter-agency coordination — Findings and recommendations - Findings: - Domestic coordination on financial stability and crisis management is underdeveloped. - Current domestic coordination body is the Group of Financial Services Regulators (GFSR) comprising heads of CBOB, Securities Commission, Insurance Commission, Compliance Commission, Gaming Board, and Financial Intelligence Unit. - GFSR meets quarterly and focuses mainly on information exchange on regulatory issues; does not specifically deal with financial crisis management and does not include the MOF or the DIC. - No regular mechanism to engage MOF on financial stability and crisis management; DIC not sufficiently engaged in its independent capacity in inter-agency discussions. - Recommendations (implied by findings): - Strengthen cooperation and coordination among key government agencies for information sharing, crisis management policies and procedures, regular training and crisis exercises, and development of policy responses to financial crises and system-wide strategies. *Source: 1bhsea2023001 - 26. The operationalization of the resolution regime would be facilitated by the* ### 48. The Bahaman authorities should establish an inter-agency body, such as a ### 1bhsea2023001 - 48. The Bahaman authorities should establish an inter-agency body, such as a ### Inter-agency coordination: Financial Stability Council (FSC) - Recommendation: Establish an inter-agency body (e.g., Financial Stability Council (FSC)) comprising the heads of relevant members of the GFSR with financial stability and crisis management roles, plus the MOF and the DIC. - Mandate and operations: - Focus on facilitating regular information exchange, cooperation and coordination on financial stability and crisis management issues. - Capacity building through a program of regular staff training and senior management workshops within the CBOB and the DIC, and on an inter-agency basis. - Operate under a published MOU that sets out the FSC’s objectives and modus operandi, the responsibilities of each member agency, and the matters on which cooperation and coordination are needed. - Meet at least quarterly to review financial stability indicators and to coordinate the approach to financial sector regulatory issues. - Establish working groups, as appropriate, to support the FSC’s analysis and policy development; the nature of possible working groups could be discussed in the second mission to the extent that these relate to resolution matters. - Administrative arrangements: - Ensure all member agencies are equal participants and agree a suitable chairing arrangement. - Chairing examples: central bank chair (recognizing financial stability mandate), MOF chair (given its potential importance in a financial crisis), or a rotating chair arrangement. - Common principle: any member agency can require an item to be placed on the agenda and call for a meeting at any time. - Working groups are usually chaired by the agency with the most responsibility for the matters addressed. ### Cross-Border Cooperation and Coordination - Findings: - In a banking system with significant foreign-owned bank participation (as in The Bahamas), effective cross-border cooperation is essential. - The CBOB has MOUs with home supervisory authorities of both offshore and domestic banks to facilitate information exchange and is a participant in supervisory colleges. - The CBOB has not yet entered into MOUs specifically focused on resolution and crisis management and has not had significant engagement with home authorities on recovery and resolution issues. - There is an underdeveloped framework for cross-border coordination of early stress alerts, early intervention, recovery planning, resolution planning, and resolution — a significant gap in the institutional framework. - Recommendations: - Strengthen cross-border cooperation arrangements, including development of new MOUs or modifications to existing MOUs to establish respective responsibilities in relation to all phases of bank stress from early intervention through to resolution. - Likely need to extend the scope of supervisory colleges to incorporate recovery and resolution issues, or establish crisis management groups to facilitate discussion of these matters. - Develop a coordinated approach to recovery and resolution plans for foreign banks operating in The Bahamas: - For recovery plans: CBOB should work with home authorities to clarify extent and nature of parent-bank support arrangements. - For resolvability assessments and resolution plans: agree an information exchange and coordination framework aiming for whole-of-group (parent-led) resolution to ensure continuity of critical functions and systems in Bahamian subsidiaries/branches. - If whole-of-group resolution is not feasible or satisfactory for The Bahamas, or visibility on such a plan is lacking, CBOB should prepare to pursue stand-alone resolution strategies enabling separation of the host business from the parent group while maintaining continuity of critical functions and minimizing disruption to The Bahamas’ financial system stability. - Cross-border coordination may need to include MOF, DIC, and their home counterparts on funding aspects of resolution contingencies; cross-border MOUs on crisis management and resolution may need to include these agencies. ### Contingency Planning - Findings: - The Bahamas has a long record of financial stability. The banking system is sound, with both high capital and liquidity levels. - CBOB and DIC authorities have little operational experience dealing with a failure; unfamiliarity with procedures when faced with shocks may result in relatively costly resolution. - Recommendations: - Implement a comprehensive contingency planning and testing framework to develop familiarity with tools and procedures and ensure processes operate as expected. - Many jurisdictions create a specialized contingency planning group to design and implement multi-year testing programs. In The Bahamas, such a program would be discussed and approved either by the heads of each agency or by the proposed FSC (chaired by the Governor of the CBOB) with senior-level representatives from the MOF, the Securities Commission, and the DIC. - Contingency planning should have a wider system focus than bank resolution plans, including public options where necessary. MOF involvement is required whenever public funding, guarantees, or temporary public ownership are required; MOF should be involved in contingency plan elements relating to public funding. - Establish an inter-agency working group on resolution contingencies led by the CBOB under the auspices of the proposed FSC. - Plan and run contingency tests for critical procedures, for example: - Ability to arrange P&A packages quickly. - Procedures for potential buyers to access confidential information. - Ability to establish and activate a bridge bank. - DIC’s ability to obtain deposit information in the correct format, process deposit data, identify claims, and arrange for funding and payouts. - Test individual processes yearly and plan multi-institutional scenario tests to refine approaches. - Ensure critical areas are tested regularly; testing frequency should reflect the nature and importance of each critical area. ### Next Steps (ahead of the second mission scheduled for the second half of 2022 — in November 2022) - Tasks recommended to be completed: a) Establish a domestic inter-agency coordination and information sharing structure; b) Draft the following: - (i) a paper for strengthening the credit union resolution framework; - (ii) a strategy for structuring and organizing the roles and functions of the Resolution Authority and the DIC; - (iii) a resolution toolkit that is supported by the tools and powers in legislation, based on guidance provided; and - (iv) the DIC’s preliminary procedures for payouts; and c) Preliminary analysis of recovery plans. - Process: - These documents will be reviewed at headquarters and feedback will be provided to the CBOB. - The second mission will provide further guidance on development of the resolution regime, including the resolution toolkit, resolvability assessments, and resolution plans, as well as next steps in restructuring and operationalizing the DIC. - A comprehensive framework for resolvability assessments of D-SIBs and large banks will include data requirements from banks to identify critical functions and shared services, legal structure of the banking group, functions performed by legal entities, extent and nature of parent-bank functional support arrangements, funding structure of the banks, and extent of separation—or separability—of critical and non-critical functions and services. - The mission will review and advise on the resolution regime for offshore banks and credit unions and provide further guidance on the DIC’s strategy for operationalizing its role, including payouts and reimbursements. ### Key statistics and financial system snapshots (preserve figures exactly as presented) - Table 4. The Bahamas: Financial System Structure (At end-2020) - Domestic financial market - Total (Type Count) 66 23,090.6 233.1 - Commercial banks: - Foreign owned/branch 22 19,957.6 201.4 - Domestic owned 8 15,185.1 153.2 - Other 5 11,615.4 117.2 - Local Financial Institutions 3 3,569.7 36.0 - (another line) 14 4,772.5 48.2 - Cooperatives: - Credit unions 7 492.1 5.0 - Development bank/ foundation 1 38.0 0.4 - Insurance companies 31 2,211.3 22.3 - Money Service Companies: - Remittance/ money transfer providers 5 391.6 4.0 - Total (A) 66 23,090.6 233.1 - International financial sector - Banks, Banks & Trust 48 153,202.1 1,546.3 - Other nonbank financial institutions - Pure Trusts 14 43.9 0.4 - Total International (B) 62 153,246.0 1,546.7 - Total Financial Sector (A+B) 128 176,336.6 1,779.8 - Source: Central Bank of The Bahamas. - Table 5. The Bahamas: Insured and Insurable Deposits of DIC Members (As at June 30, 2021) - Banks (Member Institutions — Deposits Insured / Insurable / Covered Deposits % of Insured to Insurable Deposits) - Bank 2 510.878 1,866.487 27.4 - Bank 5 448.524 1,397.321 32.1 - Bank 1 424.104 1,575.571 26.9 - Bank 3 402.233 1,028.958 39.1 - Bank 6 172.559 663.438 26.0 - Bank 9 165.761 535.093 31.0 - Bank 7 90.334 357.622 25.3 - Bank 11 15.000 137.096 10.9 - Bank 4 1.749 68.474 2.6 - Bank 10 0.521 2.508 20.8 - Bank 8 0.283 2.016 14.0 - Total 2,231.946 7,634.584 29.2 - Credit Unions - Credit Union 1 156.542 190.993 82.0 - Credit Union 2 50.799 62.506 81.3 - Credit Union 3 44.673 53.143 84.1 - Credit Union 4 33.132 44.565 74.3 - Credit Union 5 33.116 37.427 88.5 - Credit Union 6 14.482 20.081 72.1 - Credit Union 7 1.312 1.312 100.0 - Total 334.056 410.027 81.5 - Aggregate 2,566.002 8,044.611 31.9 - Total DIC Fund B$69.1 million - as a percent of aggregate insured deposits 2.7% - as a percent of aggregate insurable deposits 0.9% - Source: CBOB and Fund staff calculations. *Italicized source attribution: IMF staff extract from 1bhsea2023001.* ### 10. The issues referred to above are covered in more detail later in this paper. ### 10. The issues referred to above are covered in more detail later in this paper. ### Board oversight and governance of recovery plans - The board must maintain a close overview of senior management’s performance in relation to the recovery plan to satisfy itself that senior management has performed all responsibilities effectively. - The board must understand its own responsibilities, including recovery actions entrusted to the board. - The board must: - maintain a comprehensive understanding of the recovery plan and be satisfied that it complies with all regulatory requirements, is comprehensive, and is practical and realistic; - ensure the plan is subject to regular testing and assess the results of tests; - occasionally participate in tests as active participants and as observers. - Indicative supervisory questions on governance over preparation and sign-off: - a. Does the recovery plan have an ultimate “owner” in the bank, with suitable skills, experience, and seniority, such as the Chief Risk Officer? - b. Was the recovery plan prepared by a senior-level team of staff with dedicated responsibility for developing the recovery plan? - c. Did the team responsible for preparing and maintaining the recovery plan comprise representatives of the key areas of the bank relevant for the plan, including the CRO (or deputy), CFO, Head of Treasury, Head of Operations, Head of IT, Head of Legal, Head of Compliance, and Head of Communications? - d. Was the recovery plan subject to comprehensive oversight by the Board Risk Committee and ultimately by the board? - e. How thorough was the Board Risk Committee and board review and sign-off of the plan? How much time did the Board Risk Committee and board dedicate to reviewing the recovery plan? - f. How thorough was the controlling shareholders’ review and sign-off of the plan, particularly as regards responsibilities applicable to them, such as in relation to capital issuance? - g. What arrangements have been made to ensure that all relevant staff are aware of the recovery plan? - h. Do the board members demonstrate a thorough understanding of the recovery plan and the board’s responsibilities in relation to all relevant elements of the plan? - Indicative supervisory questions on governance in activation: - a. Is there a clearly defined governance process for the activation of the recovery plan? Who has the power to activate the recovery plan? - b. If the board is not involved in activating the recovery plan, when would the board be convened to consider the situation and determine or agree to the recovery strategy, and to ensure that the board has effective oversight of the recovery process? - c. Does the recovery plan clearly set out responsibilities for decision-making in respect of particular recovery actions? For example, does it set out those recovery actions which are subject to board approval, those which are subject to CEO approval, and those which can be made by others under delegated authority? - d. Is there a clear allocation of authorities for exercising recovery actions? - e. Is there a crisis committee with responsibility for coordinating recovery actions? - f. Is there a board-level crisis committee that oversees and approves the recovery strategy and key recovery actions? - g. Do the board members understand their responsibilities in the recovery plan, including for particular recovery actions? ### Integration of recovery planning with risk management arrangements - Recovery planning must be closely integrated with banks’ risk management policies and processes and treated as a critical component of the risk management framework. - Noteworthy linkages to ensure effectiveness: - a. Role of stress testing (especially reverse stress tests) in assessing impacts on capital and liquidity and informing scenarios used in the plan. - b. Importance of early warning indicators (EWIs), supported by robust management information systems, in informing management and board on triggering of the recovery plan and linkage between EWIs and relevant risk settings in the Risk Appetite Statement (RAS). - c. Close linkages between the recovery plan and a bank’s ICAAP and ILAAP, particularly regarding the setting of the restoration point for capital and liquidity. - d. Importance of triggers being informed by and linked to minimum risk tolerances in the RAS. - e. Importance of restoration points being informed by and linked to desired risk settings in the RAS. - f. Linkages between recovery plan (triggers and recovery actions) for capital-related matters and the bank’s capital contingency plan, and for liquidity-related matters and the bank’s liquidity contingency plan. - g. Linkages between recovery planning and business continuity planning (BCP), particularly for key operational requirements for recovery actions. - h. Feedback from the recovery plan to the bank’s risk appetite settings and risk limits (e.g., adjustments of risk limits and capital and liquidity buffers following shocks or supervisory conclusions about plan credibility). - Supervisory indicative questions on integration: - a. Is the recovery plan adequately integrated with the bank’s stress testing arrangements? - b. Have the scenarios, restoration points, and recovery actions been informed by stress test results? In particular, have reverse stress tests been used by the bank to identify the magnitude of economic and financial shocks required to cause the bank to breach recovery plan triggers? - c. Is the recovery plan integrated with the bank’s risk management framework and RAS, especially as regards the setting of triggers and restoration points? Are the triggers for the recovery plan aligned to minimum tolerance levels in the RAS in respect of capital and liquidity? - d. Are early warning indicators (EWIs) used in the recovery plan informed by the bank’s stress testing and RAS? - e. Is the recovery plan integrated with the bank’s ICAAP and capital contingency plan? - f. Is the recovery plan integrated with the bank’s liquidity contingency plan? - g. Is the recovery plan integrated with the bank’s BCP? ### Overview of the bank — structure, critical functions, and services - The recovery plan should include comprehensive information on the bank’s structure and operations, including: - a. ownership structure, identifying all parties with a significant ownership stake; - b. group structure (organization chart and identification of each entity); - c. functional interdependencies if part of a financial conglomerate; - d. functions performed by the bank and other entities in the group domestically and abroad; - e. financial products and services provided by the bank and each entity in the group; - f. key risks of the bank and each entity and description (or reference) to the risk management framework for material risks; - g. nature of inter-connections between entities, including financial and operational inter-connections; - h. location of all branches of the bank and offices of other entities domestically and in other countries; - i. identification of correspondent banks and other banks or financial service providers with significant dealings; - j. nature and extent of participation in financial markets, by category; - k. nature and extent of participation in payment and settlement systems; - l. entities that provide critical functions or services to the bank and group; and - m. extent and nature of any outsourcing of critical functions and services to parties outside the group. - Identification and design of recovery actions: - Banks must identify critical functions and services, legal entities and jurisdictions where they are located, and inter-dependencies; recovery actions should ensure these functions and services can be maintained without interruption. - Recovery plans should identify all critical functions and services, the legal entities (including outsourced providers) that perform them, their jurisdictions, and inter-dependencies. - FSB definitions (as provided): - Critical functions: activities performed for third parties where failure would disrupt services vital for the real economy and financial stability due to size, market share, interconnectedness, complexity, and cross-border activities. Examples include payments, custody, certain lending and deposit-taking, clearing and settling, limited segments of wholesale markets, market-making in certain securities, and highly concentrated specialist lending sectors. - Two elements of a critical function: - it is provided by a bank to third parties not affiliated to the bank; and - sudden failure to provide that function would likely have a material impact on third parties, give rise to contagion or undermine market confidence due to systemic relevance of the function and the bank. - Critical shared services: activities performed within the firm or outsourced where failure would lead to inability to perform critical functions and thus disrupt functions vital for the real economy or financial stability. Examples: IT, facility management, administrative services. - Minimum lists of critical functions and services to be included: - Critical functions (at a minimum): - a. deposit-taking, particularly capacity to receive deposits into transaction-facilitated deposit accounts and short-term deposits; - b. wholesale funding, including capacity to receive deposits from other banks, correspondent banks and corporate entities, capacity to transact with the central bank for money market operations, issuance and servicing of bonds and paper, capacity to meet obligations under securities lending, repos and risk transformation services; - c. lending and loan servicing, particularly capacity to provide credit under committed credit facilities (such as overdrafts and standby facilities), participation in existing syndicated lending facilities, trade finance, leasing and factoring; - d. credit card services; - e. payments, clearing and settlement, and custodial services, including retail and wholesale payments services, capacity to meet obligations to payment and settlement service providers and other Financial Market Infrastructures (FMIs), treasury and cash management services; - f. capacity to meet obligations (paying and receiving) in relation to financial derivatives, such as swaps, options, forward contracts and other financial instruments used by the bank or its clients for risk hedging purposes; and - g. capacity to meet obligations in relation to capital market transactions and services. - Critical services (at a minimum): - a. IT and other systems and controls required to perform all critical functions; - b. systems to maintain all customer and client records; - c. systems to maintain all financial and management accounting records and reporting obligations; - d. systems to identify, measure, monitor and control all material risks (including credit risk, exposure concentration risk, liquidity risk, interest rate risk, basis risk, currency risk, equity risk, asset price risk, operational risks, and reputation risk); and - e. systems to meet all regulatory obligations and other legally binding regulatory requirements. - Recovery plans should set out the financial and operational recovery actions to maintain critical functions and services without interruption and to manage contagion risk from interlinkages within a financial conglomerate or corporate connectedness. - Supervisory indicative questions on bank overview: - a. Does the recovery plan provide sufficient detail of the bank’s organizational structure and group structure? If part of a financial conglomerate, does it set out interlinkages and interdependencies? - b. Is there sufficient information on ownership structure, including identification of all parties with a significant ownership stake? - c. Does the recovery plan identify adequately all critical functions and services, including critical shared services within the bank and group? - d. Does it identify the legal entities that provide critical functions and services? - e. Does it identify the inter-dependencies (functional and financial) between legal entities providing critical functions and services? - f. Does it identify all material outsourcing arrangements for critical functions and services, including legal entities, jurisdictions, and reference to legal contracts? - g. Does it identify back-up and business continuity arrangements for all critical functions and services, or refer to these matters being identifiable in the bank BCP? - h. Are cross-border operations adequately identified? - i. Does it identify the financial products and services provided by the bank and each entity in the group? - j. Does it identify the sources of funding for the bank and other entities in the group? - k. Does it identify the key risks of the bank and each entity in the group, and a description (or reference) to the risk management framework applied to identify, measure, monitor and manage all material risks? - l. Does it identify correspondent banks and other banks or financial service providers with which the bank or group has significant business dealings? - m. Does it identify the nature and extent of participation of the bank and group in financial markets, by category of financial market? - n. Does it identify the nature and extent of participation of the bank and group in payment and settlement systems? ### Triggers for activation of the recovery plan and early warning indicators (EWIs) - Triggers must be clearly defined and relate to key risk metrics relevant to the financial soundness of the bank and group. - Typical triggers include: - Capital ratio (e.g., CET1, tier 1 and total capital ratios); - Liquidity ratio (e.g., HQLA to total liabilities, LCR); - Asset quality (e.g., NPLs over 90 days past due as a percentage of total loans); - Profitability (e.g., NPAT as a percentage of total assets or equity); and - Credit rating. - Trigger-setting guidance: - Triggers should enable invocation well before the bank breaches prudential requirements and before significant difficulties arise. - Triggers for capital and liquidity are often set at or slightly above minimum tolerance levels in the RAS. - Triggers for asset quality are generally set at or below the maximum tolerance in the case of NPLs/total loans. - Triggers for profitability are generally set at or slightly above minimum tolerance for ROE or ROA. - If credit rating is used, it is usually set at or slightly above minimum tolerance for the rating level in the RAS; example: one or two notches above the minimum rating for investment grade (BBB- or equivalent). - Service-disruption trigger example: - Include a trigger for sustained interruption to critical functions and services for more than x hours (e.g., more than 8 hours) or where disruption could cause material reputational damage and/or inability to meet payment and settlement obligations. - Qualitative triggers (examples): - requests from counterparties for early redemption of liabilities; - difficulties in issuing liabilities at current market rates; - unexpected loss of senior management; - adverse court rulings; - negative market commentary; - fraud or malfeasance events; - significant events causing reputational damage. - EWIs and monitoring: - Banks should include in the recovery plan or supplementary material the nature of EWIs for each trigger and how they are monitored. - EWIs should enable early identification of emerging stress that could lead to breach of triggers. - Indicative examples of EWIs by risk category: - Capital: - Early-stage deterioration in capital ratios. - Capital ratios falling below target levels in the RAS or in ICAAP. - Rapid growth in lending. - Increase in the proportion of higher-risk lending. - Increase in risk appetite. - Adverse movement in risk environment. - Deterioration in risk management quality. - Increase in risk-preferent activity. - Deterioration in asset quality. - Declining profitability. - Liquidity: - Early-stage deterioration in liquidity ratios. - Reduced reinvestment of maturing deposits. - Shortening of average maturity of funding. - Acceleration in withdrawal of deposits. - Increase in risk premium on funding costs. - Adverse movements in asset/liability maturity mismatch. - Reduced cashflows (actual or forecast) from loan portfolio. - Reduced ability to obtain funding in the inter-bank market. - Asset quality: - Early-stage deterioration in asset quality indicators. - Increase in unemployment and underemployment. - Lengthening in loans past due. - Increase in requests from borrowers for loan restructuring due to stress. - Increase in interest rates. - Increase in household and corporate leverage. - Decline in asset prices relevant to collateral values. - Profitability: - Increase in operating expenses. - Reduced net interest margins. - High wage inflation. - Weakening in asset quality. - Increased competitiveness and contestability in key financial markets. - Higher forecast expenses associated with IT/cyber security risk factors. - Higher forecast expenditures on bank restructuring and technology updates. - Supervisory review of triggers and EWIs is implied by the subsequent "Issues to be assessed by supervisors" section. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1bhsea2023001.pdf* ### 29. Indicative questions that supervisors could consider in reviewing the triggers for ### 29. Indicative questions that supervisors could consider in reviewing the triggers for recovery plans ### Triggers and EWIs - Does the recovery plan differentiate between the triggers for activation of the recovery plan as a whole, and the triggers for the activation of specific recovery actions? - Do the triggers enable the recovery plan to be activated well before any breach of prudential requirements has occurred? - Are the triggers set in relation to the risk tolerances in a bank’s Risk Appetite Statement (e.g., the bank’s lower tolerance levels for capital ratios and liquidity ratios, and its upper tolerance for impaired loans and for exposure concentration ratios)? - What monitoring arrangements are in place to enable the senior management and the board to regularly monitor data in relation to the triggers? - What systems apply for alerting the senior management and board to a breach or risk of future breach of the triggers? - Are the triggers supported by comprehensive EWIs? Are there EWIs that provide reliable predictors of possible future breaches of recovery plan triggers, including in relation to capital, liquidity, asset quality and profitability? - What monitoring arrangements are in place to enable the senior management and board to regularly monitor data in relation to the EWIs? - Are the EWIs structured so that they identify escalating levels of potential risks of future trigger breaches, such as a ‘traffic light’ structure for EWIs? - Does the plan clearly set out the process by which a bank would activate its recovery plan and to activate particular recovery actions? - Does it identify the persons responsible for the different elements of the activation process? - Is there a clear documentation of delegated authorities for particular actions? - Is there an appropriate process for escalation of decision-making? ### Restoration points for recovery — General guidance - The ‘restoration point’ for recovery needs to be clearly specified in a bank’s recovery plan. - Minimum requirement: restore capital and liquidity to levels that comfortably meet the regulator’s regulatory requirements, with a sufficient cushion to achieve a very low probability of any future breaches of these requirements. - Higher restoration points should often be specified to: - ensure the bank can restore and maintain market confidence and retain access to inter-bank funding; - reduce the probability of subsequent near-failures. - Banks tend to set restoration points towards the higher end of the target range for key risk metrics in their RAS; e.g., as for capital and liquidity. - Banks should clearly set out the restoration points and the rationale. ### Restoration points — Metrics to include - CET1 ratio; - Tier 1 capital ratio; - total capital ratio; - HQLA ratio; - LCR ratio; - profitability, expressed both in ROA and ROE terms; - asset quality, expressed in terms of relevant indicators of impaired and restructured assets, as a percentage of total assets or total loans. - Restoration points should also include reference to a target credit rating (where the bank already has a rating). - Other possible restoration points: defined measures of market confidence in the bank, depositor satisfaction, other stakeholder satisfaction, and resumption of business-as-usual operation of all critical functions and services. ### Issues for supervisors on restoration points - Supervisors should assess whether the recovery plan sets out clearly and specifically the restoration points for the above factors, and the reasons stated by the bank for selecting the restoration points in question. - Supervisors need to satisfy themselves whether the restoration points are realistic and achievable. - Assess whether restoration points are consistent with the bank resuming normal operations, especially for critical functions and services, and maintaining market confidence. Indicative supervisory questions on restoration points: - Does the recovery plan establish restoration points for key variables, such as capital, liquidity, asset quality and profitability? - How has the bank set these restoration points? Were the levels of restoration points for capital and liquidity set in relation to the bank’s minimum tolerances in the Risk Appetite Statement? Were they set taking into account the bank’s stress tests? - Do the restoration points provide reasonable assurance that future breaches of prudential requirements will not occur? In particular, has the bank set post-recovery capital and liquidity levels at a sufficiently high level? - Would the restoration points enable the bank to retain an acceptable credit rating (sufficient to maintain access to financial markets and inter-bank funding)? ### Recovery options — General guidance - Recovery options must be comprehensive, sufficiently detailed, and include step-by-step implementation guidance. - The person(s) authorized to take each action must be identified clearly, with all delegated authorities made clear. - The maximum plausible amount that the recovery action would contribute to capital or liquidity should be identified. - Emphasis on actions practicable and implementable within a relatively short timeframe (e.g., within three months, and no longer than six months). - Banks should prioritize recovery actions with greatest near-term benefit to capital, liquidity, profitability and asset quality, and that have credibility with key stakeholders. For each recovery action, the plan should specify: - the quantitative amount that the recovery action would contribute to the restoration of capital, liquidity, profitability or asset quality; - the period of time required to complete the recovery action; - the processes and procedures required to implement the recovery action to the point of completion; - the documentation that has been prepared or that will need to be prepared to ensure prompt implementation of the recovery action; - the potential legal and regulatory requirements which must be met to implement the recovery action and the means by which these requirements will be met; - the persons in the bank (including directors) with the authority to approve implementation steps for the recovery action. - Recovery actions need to address underlying causes of the problem and provide guidance on steps to identify and resolve these causes, potentially including engaging an independent expert party. ### Recovery actions in relation to capital - Recovery plan should set out comprehensive and detailed recovery actions to restore capital (CET1, Tier 1 and total capital) to the target level. - Actions must be realistic, practicable and credible, with priority to those with greatest probability of successful implementation in the shortest period. - Recovery actions should generally be capable of completion within three months desirably, and not more than six months. Typical capital recovery action categories: - raise equity from existing shareholders via a rights issue (desirably underwritten by an investment bank) or through private placement of equity to existing controlling shareholders, consistent with what is permitted under the bank’s constitution; - raise equity from new investors, such as the issuance of shares to selected potential shareholders; - convert debt into equity where the bank has a tranche of debt with contractual provisions to enable it to be converted into equity upon specified triggers being met; - write down debt where the bank has a tranche of debt with contractual provisions to enable the debt to be written down upon specified triggers being met; - suspension of distributions (including dividends) to shareholders; - reduction or suspension in new lending, so as to reduce the amount of additional capital required; - initiatives to reduce operational expenses, so as to reduce the amount of additional capital required; - sale of assets or change in the mix of assets so as to reduce the amount of additional capital required and to increase the risk-weighted capital ratio by reducing the amount of risk-weighted credit exposures; - sale of subsidiaries; - issuance of new debt that meets the eligibility criteria for inclusion in tier 2 capital. - For each action, banks should specify estimated amounts and timeframes, step-by-step implementation arrangements, and draft documentation or detailed term sheets. - Feasibility, amount, sequencing, and timeframe differ between idiosyncratic and market-wide scenarios; actions generally more feasible and faster in idiosyncratic scenarios. ### Recovery options for liquidity - Liquidity recovery actions must be specific, realistic, practicable and credible, prioritized by probability of successful implementation and contribution to estimated liquidity needs. - Speed is critical: success and credibility are measured in hours and days, rather than weeks or months. - Recovery actions categories include: - sell marketable securities; - obtain liquid assets from controlling shareholders where feasible; - raise liquidity via borrowing from other banks under committed standby facilities; - borrow from the central bank under business-as-usual liquidity facilities provided routinely to banks by the central bank; - sell illiquid assets in exchange for liquid assets, including via sale and repurchase agreements or securitisation; - lengthen the maturity profile of liabilities; - shorten the maturity profile of assets (where feasible); - reduce the need for liquidity by reducing new lending and reducing operating expenses, where feasible; - renegotiating the terms of scheduled debt repayments and debt servicing where this is considered feasible and prudent. - All liquidity actions should be quantified in terms of the estimated impact on liquidity, with implementation steps, timeframes, and draft documentation or detailed term sheets provided. ### Recovery options for profitability - Recovery actions must be realistic, practicable and credible, and capable of delivering intended outcomes in a realistic timeframe. - Profitability restoration is likely less urgent in the short term and likely to take longer than capital and liquidity recovery, so lower short-term priority is acceptable, but critical for longer-term survival. - Useful categories: - Initiatives to reduce operating expenses, consistent with maintaining acceptable risk management practices and critical functions and services. - Initiatives to increase revenue from under-performing business lines where feasible and where this is consistent with the bank’s risk appetite and risk management frameworks. - Initiatives to reduce or eliminate business activities that do not meet defined ROA and ROE hurdles. - Initiatives to reduce average funding costs where feasible, consistent with the bank’s risk appetite and risk management frameworks. - Where feasible, estimate contribution to profitability, expected timeframe, and steps required. ### Recovery options for asset quality - Asset quality recovery actions tend to be longer term but should be achievable within timeframes credible to markets and stakeholders. - Recovery action categories: - restructuring of loans to enhance recoverability – e.g., by elongating the term of the loan, suspending interest payments, etc.; - transferring impaired loans into an asset management company owned by the bank; - selling impaired loans to other parties; - write-off loans considered to be irrecoverable; - strengthening the quality of lending policies and procedures, and associated credit risk management arrangements, to enhance asset quality for new loans. - For each action, identify expected impacts on asset quality, timeframe, and detailed implementation steps. ### Other recovery actions - Possible removal of staff, including senior management, to the extent they have been responsible for the cause of the bank’s stress situation or are impediments to the recovery process. - Actions to minimize or manage potential contagion risk between entities in the banking group or financial conglomerate. - Actions to address underlying causes of the bank’s/group’s financial stress, potentially including: - Establishment of an internal review process to evaluate the causes of the situation and the remedies to address those causes. - Possible appointment of an external, independent party to undertake an assessment of the causes and remedies. - Board oversight of these processes. - Reporting to the regulator. - Transparency, including public reporting on causes and remedies. ### Issues to be assessed by supervisors — recovery actions (general) Indicative supervisory questions: - Does the recovery plan contain a comprehensive suite of recovery actions in respect of capital, liquidity, asset quality, profitability, maintenance of critical functions and services, and communications with stakeholders? - Are the recovery actions credible and realistic? - Have the recovery actions been set out by priority of action (i.e., sequence of implementation) and in the relevant categories? - Have the impacts of the recovery actions been quantified (e.g., in terms of contribution of the bank’s capital, liquidity, etc.)? - Can the recovery actions be implemented in a timely manner (e.g., within 1 week for near-term liquidity recovery, within 1 month for longer-term liquidity recovery, and within 3 to 6 months for capital recovery)? - For each recovery action, is there comprehensive and detailed guidance on step-by-step implementation procedures? - Have the responsible persons and delegated authorities been identified for each recovery action? - Have any legal or regulatory obstacles to recovery actions been identified and the solutions to those obstacles set out in the recovery plan? - Is there supportive documentation for recovery actions – e.g., capital issuance term sheets, indicative capital offer documents, liquidity standby facility documentation, etc.? - Does the recovery plan adequately differentiate between idiosyncratic and system-wide scenarios in terms of the impact these would have on: - the selection of recovery actions; - the implementation process for recovery actions; - the likely success or failure of recovery actions; - the amount of funds obtained (or saved) by particular recovery actions; and - the timeframe for implementation of recovery actions? ### Capital recovery actions — supervisory questions - Do the recovery actions include sufficient capital-raising options? - Have the capital-raising options been prioritized in terms of the sequence in which they would occur? - Have the capital-raising options been quantified, indicating a maximum plausible amount of capital that could be raised (or capital savings that could be made)? - How long would it take to raise capital? Does the recovery plan provide sufficient detailed information to determine whether capital can be raised within (at most) a 3 to 6 month period from the time that the recovery plan activation has been triggered? - Does the recovery plan identify in detail the implementation steps required to implement particular capital-raising recovery actions? - Does the recovery plan identify all regulatory approvals needed for capital-raising recovery actions? - Has the bank prepared the necessary legal documentation, or at least terms sheets, for capital-raising recovery options? - For bail-in debt (if any), is the process for contractual bail-in documented? - Does the recovery plan adequately differentiate between idiosyncratic and system-wide scenarios in terms of the types of capital recovery actions that could be used, the amounts likely to be raised, the probability of successful implementation and the timeframe required for implementation? - Have other recovery actions for capital restoration and conservation been identified in sufficient detail, such as: - selling assets; - selling subsidiaries; - reducing the average risk weight of assets by changing the composition of assets to lower-risk assets; - reducing new lending; - suspending distributions to shareholders; - reducing expenditures, etc.? - Have these options been prioritized and quantified; and - Have the implementation procedures for each option been documented adequately? *Source: 1bhsea2023001 - 29. Indicative questions that supervisors could consider in reviewing the triggers for recovery plans* ### 54. Indicative questions that supervisors could consider in reviewing the liquidity-related ### 54. Indicative questions that supervisors could consider in reviewing the liquidity-related recovery actions ### Liquidity-related recovery actions - a. Have the liquidity-raising/saving recovery options been prioritized? - b. Are the recovery options practicable? Can they be implemented in sufficient time to meet liquidity needs? - c. Are they quantified? - d. Do they contain detailed implementation guidance? - e. Do the recovery actions include sufficient options for reducing cash outflows – e.g., via reduced new lending, reduced expenditures, suspension of dividends, etc.? - f. Do the recovery actions include sufficient options for increasing cash inflows – e.g., via access to standby facilities, liquid asset injections from shareholders, acceleration of loan repayments? - g. Does the plan contain sufficient initiatives to increase High Quality Liquid Assets? - h. Does it contain sufficient measures to attract new deposits and retain existing deposits, and to lengthen the maturity of funding where feasible? - i. Has draft documentation been developed to facilitate liquidity recovery actions, such as draft liquidity injection documentation, standby documentation, terms sheets for such documentation, etc.? - j. Do the recovery options identify potential sources of borrowing; e.g., particular banks, securitization vehicles, or a borrowing facility with shareholders? ### Profitability recovery actions (section 55) - a. Do the recovery actions include adequate initiatives to restore the bank to an acceptable level of profitability, and within a reasonable period of time? - b. Are cost reduction actions adequately identified and quantified? Would cost reduction options weaken the ability of the bank to continue to perform critical functions and services? - c. Are actions to increase revenue and margins adequately identified and quantified? - d. Would revenue-enhancing recovery actions be consistent with maintaining prudent risk management or create excessive risks? - e. Have the recovery actions been prioritized and quantified? - f. Have the procedures required to implement them been adequately documented? ### Asset quality recovery actions (section 56) - a. Do the recovery actions include adequate initiatives to identify impaired assets? - b. Do the recovery actions include undertaking an asset quality review (if needed)? If so, have the procedures been adequately identified and documented? - c. Does the recovery plan identify how impaired assets would be managed in ways that maximize recovery value? - d. Does it contain measures to address the problems that created asset impairment – e.g., measures to strengthen the credit risk management process? - e. Does it contain initiatives to prevent further deterioration in asset quality – e.g., ceasing to extend credit to poor quality borrowers, etc.? ### Critical functions/services recovery actions (section 57) - a. Does the recovery plan identify all material critical functions and services, including the legal entities that perform each category of function and service and the legal jurisdiction in which it operates? - b. Does the recovery plan identify how the bank will maintain critical functions and services with no or minimal interruption? - c. How realistic are these recovery actions? - d. Have the recovery actions been prioritized? - e. Are the recovery actions supported by detailed implementation processes and IT arrangements? - f. Are they consistent with the bank’s BCP, where consistency would be expected? ### Other recovery actions (section 58) - a. Does the recovery plan include actions that are designed to identify and potentially remove persons from the bank/group to the extent that they are thought to have been part of the cause of the problem or are obstructing the recovery process? - b. Does the recovery plan identify actions to address possible intra-group contagion risk, particularly in the bank is part of a large group or financial conglomerate? - c. Does the recovery plan identify generic processes for reviewing and assessing the causes of the problem in question and the remedies to seek to avoid a repeat of the problem? ### Scenarios for recovery plans — general guidance (sections 59–63) - 59. Standard supervisory regulation on recovery planning requires banks to include three types of scenarios in their recovery plans: - a. an idiosyncratic scenario: i.e., a scenario in which the bank has been impacted by financial shocks, such as major loan losses, liquidity events or operational risk losses, but where the financial system remains stable; - b. a market-wide scenario: i.e., where the financial system is in stress, such as in a severe recession, with many banks sustaining capital and liquidity pressures, and with the bank in question being similarly affected; and - c. a combined scenario: combining elements of the idiosyncratic and market-wide scenarios, which occur simultaneously; e.g., where the financial system is under stress and the bank in question sustains major losses. - 60. The recovery plans should provide reasonably comprehensive descriptions of the scenarios used for the recovery plan, including detailed information on the magnitude of impact on capital, profitability, asset quality and liquidity, together with all material assumptions made. It is particularly important that the scenarios used include severe impacts on both capital and liquidity, where the bank’s minimum regulatory requirements for capital and liquidity are breached. - 61. It is important that banks do not design recovery plans on the basis of particular causes of an adverse impact on their capital and liquidity position. The cause of the impact on capital and liquidity is much less important than the magnitude of the impact. The recovery planning process risks becoming overly complicated if plans are developed on the basis of detailed macroeconomic analysis and with overly specific narratives. Moreover, recovery plans tend to be less useful if they are overly scenario-specific. Therefore, it is generally preferable for a recovery plan to have broad-based, high-level scenarios that do not involve detailed storylines, but that provide relevant details for impacts on: - a. loan losses; - b. operation risk losses (if the scenario involves these – e.g., a fraud or money laundering event); - c. profits; - d. capital; - e. cash inflows and outflows; - f. liquidity position; and - g. losses (or gains) arising from market risks as a result of assumed changes in asset prices, interest rates and exchange rates. - 62. Scenario analysis should include an identification of all material assumptions made for the scenario, including in respect of macroeconomic variables and the state of the financial system. Financial projections for each scenario should generally extend for two years from the point of initial impact. The projections should incorporate the financial impacts of recovery actions taken in the scenario. The selection of recovery actions should take into account the nature of the scenario. For example, initiatives to raise capital and to access liquidity from other banks are likely to be much more challenging in a market-wide or combined scenario than in an idiosyncratic scenario. The recovery strategy should reflect these types of considerations. - 63. Scenarios should be informed by stress tests, particularly reverse stress tests that involve breaching the bank’s—and the group’s—minimum regulatory capital and liquidity ratios. In the market-wide scenario, consideration should be given to including climate change impacts to the extent that the bank in question considers them to be relevant to their risk profile. ### Issues to be assessed by supervisors on scenarios (section 64) - a. Does the recovery plan contain credible and severe scenarios, with clearly specified and quantified impacts on capital, liquidity, asset quality and profitability? - b. Do the scenarios include impacts on capital and liquidity that are severe enough to cause the bank to breach its minimum capital and liquidity regulatory requirements? - c. Are the scenarios based on the bank’s stress testing (especially reverse stress tests)? If so, are the assumptions and model parameters for the stress tests identified (either in the recovery plan or by reference to another document)? - d. Do the scenarios include financial projections for the bank and banking group extending out two years? - e. Are the financial projections supported by clearly identified assumptions? - f. Do the scenarios clearly differentiate between an idiosyncratic scenario (in which the financial system is operating normally and only the bank in question has sustained major losses) and a market-wide scenario (in which many banks are experiencing very adverse economic and financial shocks)? - g. Does the recovery plan identify the assumptions made as to the different impacts that idiosyncratic and market-wide scenarios have on the nature, feasibility, timeframe, and success of recovery actions? - h. Does the recovery plan adequately identify the recovery actions taken for each scenario and the incorporate the financial impacts of these actions into the financial projections? - i. Does the recovery plan differentiate between recovery actions needed for fast-moving events and slow-moving events, especially as regards impacts on liquidity and the likely recovery strategies needed to respond to these? ### Communications — general guidance (sections 65–67) - 65. Communications aspects of recovery plans are important. In particular, recovery plans need to identify all stakeholders (internal and external), the information needs of each stakeholder category and the means by which those needs can best be addressed. Communications actions should include proactive and reactive communication initiatives, including: - a. call center communications arrangements and upscaling for high volumes of calls; - b. web-based communications; - c. Question and Answer material; - d. communications with correspondent banks and other counterparties on matters relating to scheduled payments and settlements; - e. communications with credit rating agencies and the financial news media; - f. information and processes to facilitate news media briefings; and - g. guidance for communications via social media. - 66. Recovery plans should also address the need for synchronized communications, especially the ability of a bank to announce, with credibility, the recovery actions it plans to take at the same time as it announces the adverse impact that prompted such actions. This is especially important for banks listed on the stock exchange or with other regulatory arrangements that require the banks to announce material developments that could impact on investor decisions as soon as the information becomes available. In that situation, it is critical that a bank has a well-developed strategy to enable it to announce the “good news” ( i.e., the recovery actions) at the same time as the “bad news.” - 67. The recovery plan should identify the responsibilities of the board, CEO, CFO, and other key officers in the communications strategy. The plan should set out the means by which communications will be coordinated within the bank, within the group and with the relevant agencies (e.g., banking supervisor and the stock exchange). If the bank is part of a financial conglomerate, the communication strategy should include guidance on how the different entities in the conglomerate coordinate their communications processes and achieve consistency of message. ### Issues to be assessed by supervisors on governance and communications (section 68) - a. Does the recovery plan identify all internal and external stakeholders? - b. Does the recovery plan set out stakeholder information needs in sufficient detail? - c. Does it set out how and when the information will be provided to each category of stakeholder? - d. Does the recovery plan cover communications via different processes and are these adequate, including communications via: - i. news media statements; - ii. news media conferences; - iii. social media; - iv. call centers; - v. web-based information; - vi. automated emails; and - vii. telephone banking messaging? - e. Does the recovery plan contain communication process steps in sufficient detail? - f. Does the recovery plan identify who would be the lead communicators within the bank (including at board and senior management levels)? - g. Does it include draft material for news media releases, call center scripts, etc.? - h. Does the bank have a strategy to escalate call center capacity for high-volume calls? ### Preparatory measures — general guidance and examples (sections 69–71) - 69. To improve the feasibility of recovery actions, a bank needs to consider the key inter-dependencies for implementing each recovery action and identify the preparatory measures that should be taken in advance to alleviate operational barriers and complexities. Such preparatory measures might, for example, include possible changes to organizational or legal structures in the bank and group, the separation of critical functions and services so that they can be self-supporting, and the preparation of documentation and procedures to facilitate recovery actions (especially those involving capital issuance, securitization, asset sales and accessing liquidity via standby facilities). - 70. The recovery plan should describe the preparatory measures to be taken to improve the effectiveness of recovery options, with work program to implement the measures. - 71. Examples of common preparatory measures include: - a. Share issuance terms sheets, documentation, and issuance procedures—for ordinary shares, preference shares and hybrid instruments (e.g., subordinated debt capable of conversion to equity). - b. Subordinated debt terms sheets, documentation, and issuance procedures, including tier 1 subordinated debt and tier 2 subordinated debt. - c. Terms sheets and documentation for equity and debt underwriting agreements. - d. Identification of potential underwriters. - e. Identification of potential institutional investors. - f. Identification of potential merger partners and indicative procedures for merger. - g. Documentation and operational pre-positioning for securitization of loans. - h. Documentation and operational pre-positioning for asset sale and repurchase arrangements. - i. Procedures and arrangements needed to sell subsidiaries, if required. - j. Indicative shareholder resolutions and board resolutions for particular recovery actions. - k. Terms sheets and documentation for liquidity standby facilities. - l. Draft indicative news media statements and Q and A material. - m. Documentation of service-level agreements for all outsourced services and critical shared services. ### Issues to be assessed by supervisors on preparatory measures (section 72) - a. Has the bank identified potential impediments to recovery actions that could be addressed through preparatory measures? - b. Has the bank identified the preparatory measures it intends to put in place? - c. Is the list of preparatory measures complete and comprehensive? - d. Does the bank have a work program to implement preparatory measures? Is the work program adequately structured and resourced? - e. What progress has been made in implementing preparatory measures? - f. Have the preparatory measures been approved by the board? - g. Has internal audit assessed the progress made in implementing preparatory measures? - h. Has there been any testing of the preparatory measures? ### Testing of recovery plans by banks — general guidance (sections 73–75) - 73. It is critical that recovery plans are subject to rigorous testing. Testing can be done in a number of ways, depending on objectives and scope. For example, tests can be structured to evaluate: - a. the ability of the bank to detect emerging stress, such that the triggers for the recovery plan are able to be invoked as and when required; - b. the ability of the bank to implement recovery actions relating to particular categories of recovery—capital, liquidity, asset quality, profitability, etc.; - c. the ability to communicate effectively with stakeholders (role-played); - d. the performance of senior management in terms of its responsibilities in a recovery process; - e. the performance of the board in terms of its responsibilities in a recovery process; especially high-level approvals and communication with external stakeholders and the financial news media; - f. the data systems required for recovery; - g. the legal documentation required for certain recovery actions; - h. the ability to implement recovery actions within the specified timeframes, especially for time-critical actions; and - i. the degree of integration of the recovery plan with the bank’s risk management framework, ICAAP, BCP and governance arrangements. - 74. There are several different forms of testing for recovery planning purposes. The options can include “walk-through” tests of processes and procedures for particular scenarios, live simulation exercises for particular elements of the recovery plan (e.g., capital, liquidity, or communications), and full-scale live simulations to test the entirety of the recovery plan. For any substantive testing, it is imperative that the members of senior management are involved in the tests, especially for live simulation exercises, with each member of senior management playing his/her own role. For some tests, it will also be appropriate for members of the board to be included in the exercise, e.g., to test the Board Chairperson’s ability to communicate effectively with external parties (role played). Of particular importance is the testing of senior management and board members’ capacity to communicate with role-played news media and financial markets, including under realistic time pressure. - 75. The recovery plan should set out the framework for the regular testing of the plan. This should include the objectives and scope of testing, the parties responsible for organizing and conducting the tests, the processes, and procedures for conducting the tests, and the means by which the test results will be documented and reviewed by the board, and by internal audit. ### Issues to be assessed by supervisors on testing arrangements (section 76) - a. Has the bank identified the proposed arrangements for testing the recovery plan on a regular basis? Has the bank specified clear objectives for testing? - b. Is the scope of testing sufficient? Does it cover all elements of the recovery plan? - c. Does testing include members of senior management team (including CEO) and board? - d. Is Internal Audit involved in the testing process? - e. Is the frequency of testing sufficient? - f. Has an “owner” for the testing process been identified? - g. Is the testing process adequately resourced? - h. Are external parties be involved in the testing process? - i. Are the results of tests reported to the board and integrated into future revisions of the recovery plan? *Source: 1bhsea2023001 - 54. Indicative questions that supervisors could consider in reviewing the liquidity-related recovery actions* ### 77. A bank’s recovery plan needs to be subject to comprehensive and regular review— ### 77. A bank’s recovery plan needs to be subject to comprehensive and regular review— ### Recovery plan review requirements - Recovery plans should be subject to comprehensive and regular review—generally annually. - Reviews should identify internal review processes applied by the bank, including reviews by: - the risk management unit; and - internal audit. - Reviews should cover all aspects of the recovery plan, including: - the scenarios; - triggers; - recovery actions; and - governance arrangements. - Reviews should be informed by testing of the recovery plan. - Occasional external reviews by independent experts can be helpful, particularly when: - external experts are present at regular tests and can use insights from tests to assess adequacy; and - assessing adequacy of management and board responsibilities, given internal staff may not be able to review such matters freely and impartially. ### Issues supervisors should assess - Indicative supervisory questions for assessing review/update processes: - Has the bank set out the proposed arrangements for the regular review of recovery plans? Are the arrangements adequate? - Has an “owner” for the review process been identified? - How frequently is the recovery plan reviewed? - How will the review be integrated with the bank’s review of its risk management framework, risk appetite, ICAAP, BCP, etc.? - What is the involvement of the CEO, EXCO, Board Risk Committee and the board in the review process? ### Appendix II — Purpose and scope of a resolution toolkit - Purpose: - Provide guidance for the resolution authority on activation, selection, implementation, and communication of resolution. - Provide guidance on coordination of resolution actions between domestic agencies and for cross-border coordination. - Be supplemented by bank-specific resolution plans detailing implementation for individual banks. - Key elements of a bank resolution toolkit: - Crisis diagnostics—solvency assessment and systemic impact assessment. - Resolution strategies, selection criteria, and implementation steps. - Cross-border crisis resolution. ### Crisis diagnostics — Solvency and financial soundness assessment - Supervisory assessment in emerging stress should evaluate the bank’s current and forward-looking position regarding: - balance sheet solvency (i.e., surplus of assets over liabilities); - common equity tier 1 capital position; - total tier 1 capital position; - total capital position; - exposure to shareholders and other related parties; - level of NPLs; - level of specific provisions in relation to NPLs; and - expected loss on NPLs. - Analysis should estimate a range of capital values from best case to worst case, with assets valued at expected recoverable values net of realization expenses. - Asset valuations should be on a “going concern” basis unless bank closure is expected, in which case valuations would be on a “gone concern” basis. - Where subsidiaries perform essential functions, solvency and liquidity assessment of relevant subsidiaries is required. - Desirable supervisory capacity: - undertake solvency, capital adequacy and liquidity assessments under acute time pressure (e.g., within 24 hours); - conduct periodic testing of that capacity. ### Crisis diagnostics — Liquidity assessment - Liquidity assessment should include analysis of: - the amount and quality of liquid assets; - access to parent or other shareholder liquidity (where applicable); - access to committed standby facilities with other banks; - amount and nature of assets capable of being used for collateral to obtain liquidity from the CBOB or other sources; - maturity profile of liabilities, both using contractual and behavioral maturities, under assumed stress conditions; - schedule of projected payment and settlement obligations for a defined period (e.g., next one, two weeks, month, etc.); and - stress testing of liquidity by estimating the capacity of the bank to meet payment and settlement obligations, including deposit withdrawals, under a range of plausible stress scenarios. ### Systemic impact assessment - The toolkit should guide the CBOB, in liaison with the MOF, DIC and other agencies, to assess the systemic impact of a bank in distress, taking into account: - that systemic impact varies over time and with financial system fragility; - assessments must be made at the time of distress and factor in prevailing circumstances. - Systemic impact assessments should draw on D-SIB framework criteria, including: - market share in key lending sectors; - market share in the deposit market (differentiating retail and wholesale deposits); - share of payments services, differentiated by payment system and product; - share of lending to economic and social infrastructure providers; - inter-connectedness (including intra-group and between banks); - potential for the bank to cause contagion; - substitutability of systemically important financial functions; and - complexity (including group structure complexities and cross-border activity). - Assessments should be undertaken on both a solo entity basis and a banking group basis where relevant. - Contagion risk analysis should include assessment of: - contagion via inter-bank exposures; - contagion via related party exposures (credit to parent banks and substantial shareholders); - credit rating downgrade risks associated with parent-bank stress; - reputation impacts associated with parent bank or major shareholder distress; - contagion from functional dependencies between banks with common shareholdings; - contagion via common credit exposures (e.g., syndicated lending); - contagion impact on interest rate and foreign currency derivatives requiring replacement under stress; and - confidence-linked contagion risks and potential for a generalized depositor run. ### Influence of systemic impact on resolution strategy - Systemic impact assessment will influence resolution strategy: - Small bank with little systemic impact and unrecoverable → closure and prompt pay-out of insured depositors or deposit account transfer via P&A likely. - SIB → a form of “open resolution” keeping core banking functions open likely. ### Resolution strategies and systemically important functions - Toolkit should identify main resolution strategies, options, criteria for selecting options, and procedures to implement particular options. - Guidance on systemically important functions (functions to be continued in recapitalized bank, bridge bank or acquiring bank) is crucial to minimize adverse impacts. - Toolkit should set out generic critical functions and quantitative thresholds for continuity decisions. - Systemically important functions would generally include, as a minimum: - deposit facilities; - committed credit facilities; - payment system interface and payments execution functions; - inter-bank settlement functions; - settlement functions performed for other financial institutions on an agency basis; and - currency and interest rate derivatives functions. - Systemically important services would typically include: - IT support, risk management and other back-office arrangements required for systemically important functions; - systems needed to maintain deposit accounts and loan balances up to date; and - systems needed to enable the bank to manage its risks prudently and comply with regulatory requirements. ### Resolution options (indicative) - Option 1: Closure and pay-out of insured deposits, followed by liquidation. - Appointment of an administrator and withdrawal from payment channels. - Eligible deposit balances calculated on end-of-day positions. - DIC confirms amounts capped at deposit insurance cover per depositor/deposit category. - Payments made generally via a paying agent funded by the DIF. - Payments should be made as soon as practicable following closure, and desirably within seven days. - Appropriate if: - a. the bank is insolvent (i.e., negative equity) or very substantially below minimum capital requirements; - b. the bank cannot recover (no prospect of shareholder or external private sector support in required timeframe); - c. no other bank is prepared to acquire equity or assume deposit liabilities and acquire assets; - d. closure would not have significant adverse impact on stability of financial system or economy; and - e. closure and pay-out is a lower cost option than alternative closed resolution options (such as P&A). - Option 2: Closure and transfer of insured deposit accounts to a receiving bank (existing bank or bridge bank). - Appointment of an administrator and withdrawal from payment channels. - Eligible deposit balances calculated on end-of-day positions; DIC confirms amounts capped at deposit insurance cover. - Insured deposit accounts and legal right to operate associated IT systems transferred to acquiring bank or bridge bank. - Deposit accounts operate as usual, with no change of account numbers, once transferred. - Receiving bank may purchase assets at market value; net cost funded by deposit insurance agency. - Failed bank wound up through insolvency law; deposit insurance agency has subrogated claim on assets in liquidation. - Appropriate if: - a. the bank is insolvent or very substantially below minimum capital requirements; - b. the bank cannot recover; - c. no other bank is prepared to acquire equity; - d. one or more banks willing to assume deposits (funded by DIC or combination of DIC funding and assets transferred); and - e. closure and transfer is lower cost than alternative closed resolution options. - Option 3: Transfer of some or all of failed bank’s assets, liabilities and business functions to another bank or bridge bank. - More comprehensive than standard P&A; may include derivatives contracts, insurance business, ownership of key subsidiaries, etc. - Appointment of an administrator and withdrawal from payment systems. - Transfer involves valuation at assessed market value of business to be transferred (likely critical functions and performing assets). - If assets transferred at least equal liabilities assumed, no resolution funding required; surplus paid to bankruptcy estate. - If deficiency exists, funding from bail-in of uninsured/unsecured liabilities or deposit insurance agency; DIC funding capped at amount it would have paid under least-cost pay-out or insured deposit account transfer. - Any resolution funding beyond DIC is outside the Resolution Toolkit and considered by government under Contingency Plan. - Failed bank closed and residual business wound up under insolvency law; ex post compensation to shareholders and creditors if worse off than conventional winding up. - NPLs could be retained in failed bank or transferred to an asset management company or private purchaser. - Option 3 might be appropriate if: - a. the bank is still solvent (i.e., has positive equity), or insolvency can be addressed by resolution funding; - b. the bank cannot recover (no prospect of shareholder support in required timeframe); - c. closure would have significant adverse impact on stability; and - d. a suitably capitalized bank can acquire systemically important business or a bridge bank can be established to do so. - Option 4: Sale of the bank to another bank. - Place the bank into administration and sell a majority shareholding to an acquiring bank. - Mechanisms include cancelling existing shares with compensation to shareholders for assessed value, and issuing new shares to acquiring bank; or issuing new shares to acquiring bank and diluting existing shares to assessed market value. - Distressed bank would be recapitalized to the appropriate target level to exceed regulatory requirements, maintain acceptable credit rating and depositor/investor confidence. *Source: 1bhsea2023001 - 77. A bank’s recovery plan needs to be subject to comprehensive and regular review—* ### 29. Option 4 might be appropriate if: ### 29. Option 4 might be appropriate if: ### Conditions for Option 4 - a. the bank is still solvent; i.e., has positive equity; - b. the bank cannot recover; i.e., there is no prospect of shareholder support in the required timeframe; - c. the closure of the bank would have a significant adverse impact on the stability of the financial system; - d. at least one suitably capitalized bank is able and willing to acquire either 100% or a majority shareholding in the bank, sufficient to recapitalize the bank to the required target level; and - e. the acquisition of the failed bank by the acquiring bank would not lead to excessive market concentration or systemic risk. --- ### 30–33. Option 5: Recapitalization of the bank through bail-in ### Description of bail-in (Option 5) - Appoint an administrator to the bank, assess the worst-case capital position of the bank (taking into account the need for any capital support to essential subsidiaries) and determine the amount of capital required to meet a target capital ratio sufficient to comply with capital requirements and maintain market confidence and credit ratings. - Bail-in could be implemented via write-down or conversion of applicable liabilities (contractual loss-absorbing debt issued as an additional tier 1 or tier 2 capital instrument or otherwise unsecured and uninsured liabilities) to an equity instrument that ranks equal to the diluted equity of existing shareholders or converted to preference shares that rank above existing equity and that would qualify for inclusion in CET1. - Liabilities would be bailed-in in the inverse order of their ranking in a winding-up; i.e., the lowest ranking liabilities (such as loss-absorbing capital-eligible debt instruments or subordinated debt) would be bailed-in first, followed by senior unsecured bonds, followed by uninsured deposits, etc. - Insured deposits would either be exempted from bail-in, or the deposit insurance agency would bear the bail-in cost if it were applied to insured deposits. - Some other liabilities might also be exempted from bail-in, potentially including liabilities payable to suppliers of essential services and liabilities in relation to derivatives required to maintain balance sheet hedges. - It is recognized that, for the time being, bail-in is unlikely to be a feasible option in The Bahamas. - Bail-in can be achieved through different mechanisms, as discussed later in this note. ### When Option 5 might be appropriate - a. the bank cannot recover; i.e., there is no prospect of shareholder support in the required timeframe; - b. the bank has sufficient loss-absorbing debt, subordinated debt and senior unsecured debt (excluding insured deposits) to be a source for recapitalization, either through conversion to equity or other eligible capital instrument or write-down, after first writing down existing equity; - c. the closure of the bank would have a significant adverse impact on the stability of the financial system; and - d. bail-in would not trigger contagion or other systemic disruption on a significant scale. Bail-in is more likely to be a viable solution for an idiosyncratic bank failure, where the other banks in the financial system are in a prudentially sound condition and market confidence in the banking system as a whole is reasonably strong. Bail-in is generally dependent on banks having a tranche of loss-absorbing capital in the form of senior or subordinated debt that can be contractually converted to equity or written down upon specified non-viability triggers but can also be applied using statutory bail-in powers (if they exist) to other forms of junior unsecured debt. Bail-in is less likely to be an attractive option in the case of multiple bank distress and where the bail-in of one bank could trigger a contagious run on other banks. --- ### 34. No creditor worse off - Apply the principle of ‘no creditor (or shareholder) left worse off’ than under liquidation, such that shareholders and creditors are compensated to the extent that the resolution option chosen left them worse off than had the bank been retained whole and liquidated under conventional insolvency law. - The toolbox should set out procedures for assessing the outcome (in net present value terms) for shareholders and each category of creditor under a conventional winding up to determine whether compensation is payable. - This involves undertaking a ‘counter-factual’ valuation of the estimated recoverable value of assets of the failed bank in a winding up through an independent valuation process. - The assessed valuation and any compensation should be subject to robust transparency and accountability arrangements, with scope for affected parties to challenge the valuation through court processes and where the courts have the capacity to impose alternative valuations if reasonable cause is found for doing so. --- ### 35. Aspects of resolution implementation ### Key implementation issues where recapitalization or bridge bank transfer is used - a. Nature of directions to the bank. CBOB may need to issue directions to undertake pre-positioning (e.g., preparation of specific documentation for capital issuance, IT changes to facilitate transfer). Directions may include removal of directors and management to the extent they are obstacles to resolution. - b. New directors and management. CBOB should pre-identify candidates for appointments, potentially including senior staff [from the CBOB or] from suitable foreign banks; replacement may be required to pre-position the bank for expected resolution. - c. Administration. CBOB should document the process to appoint an administrator and maintain a list of possible appointees. The administrator might be supported by advisers; the toolkit should include potential firms/individuals and draft terms of reference. - d. Directions to an administrator. Identify business functions to keep open (e.g., deposit-taking, payments functions, meeting commitments on derivatives, meeting commitments under committed credit facilities) and which to suspend; directions extend to keeping necessary subsidiaries functioning. Toolkit should specify pre-positioning directions for each type of resolution. - e. Public and other stakeholder communications. Toolkit should include guidance on communications for each type of resolution, announcing intended scope of business under administration, obligations continued/suspended, and identifying information to be conveyed by each agency to each stakeholder category and timing/channels. Key stakeholders include: - depositors of the bank being resolved; - depositors in other banks; - other creditors of the bank being resolved; - borrowers of the bank being resolved, especially those with overdraft and other committed credit facilities; - the management of other banks; - the financial institutions which meet their payment obligations through the bank being resolved; - foreign regulators (e.g., of the foreign banks operating in the country); and - the financial news media and general news media; - social media; and - the general public. - f. Determination of the capital requirement for the recapitalized bank or bridge bank. CBOB would need to determine an appropriate capital ratio and capital injection required to restore financial soundness or capitalize a bridge bank. The capital ratio would need, at the least, to be around the same level as for other banks in the peer group and sufficient to obtain a credit rating similar to the rating that applied before the bank became distressed. In order to restore market confidence and enable the bank to resume normal funding, the target capital ratio is likely to have be higher than it was pre-distress, based on a target credit rating (e.g., at least investment grade and likely higher for any major bank). - g. Establishment of a bridge bank. Contingency plan should identify steps required to establish the legal entity and include pre-prepared documentation (company constitution, governance structure, management structure). Maintain updated lists of potential directors and senior management; include guidance on fast-tracking bank licensing and other consent processes. - h. Business transfer to a bridge bank. Determine what assets and liabilities are transferred (systemically important business or entire business), and whether impaired assets are retained in the liquidation estate, transferred to the bridge bank or transferred to an asset management vehicle. Plan should provide for all systemically important business and performing assets to be transferred to the bridge bank, including deposit liabilities, payments functionality, committed credit facilities, risk hedges, relevant IT infrastructure to maintain all transferred functions and performing assets. Consider risks of counterparty defaults and how to avoid them (e.g., assurances or guarantees that contracts will continue to be met by the new bank). - i. Bail-in. To minimize government funding and taxpayer risk, consider bail-in of existing bank debt (e.g., subordinated debt and possibly senior unsecured bonds). Bail-in mechanisms could include: - Requiring banks, as part of recovery planning requirements, to have a tranche of debt capable of being contractually converted to eligible capital instruments or written down upon defined triggers (such as the capital ratio falling below a trigger level). - Using statutory powers to bail-in any unsecured debt instrument by converting it to an eligible capital instrument or write it down, applied in a manner consistent with the ranking of claims in a winding up. - Implementing a bail-in using business transfer powers, whereby a tranche of debt is retained in the failed bank so that the reduced level of debt transferred to a bridge bank provides funding for capital in the bridge bank, or transferring tranches of debt out of the failed bank to a special entity for recapitalization purposes. Creditors retained in the failed bank or transferred to the special entity would be compensated ex post to the extent they are left worse off than if the bank had been liquidated in its entirety (on the basis of the ranking of claims in winding up). --- ### 36. Communications and coordination - Communications and coordination are essential in a crisis. For each resolution strategy, the toolkit needs to identify communications to each category of stakeholder (including depositors, the wider public, banks, other financial institutions, foreign counterparties, foreign regulators, rating agencies, news media and social media). - The toolkit should identify the key information to be conveyed to each category of stakeholder and which agency has responsibility for each element. - Include development of checklists for issues to be considered by each agency in preparing media statements and other communications. --- ### 37. Cross-border coordination and cooperation - a. A clear delineation of resolution responsibilities between the parent authorities (the prudential supervisor/resolution authority and ministry of finance in the home and host countries, including where The Bahamas is home jurisdiction). These should be documented in either a multilateral MOU (for all agencies) or bilateral MOUs. - b. Identification of information exchange arrangements between the respective agencies, based on the above-mentioned MOU(s). - c. Coordination of the development and enforcement of recovery plans, resolvability assessments, and resolution plans, such that the recovery plans and resolution plans for the subsidiary banks in the host country are informed by, and not materially inconsistent with, the parent bank’s recovery and resolution plans. - d. Processes for coordinating the solvency/capital assessment and liquidity assessment for the parent banking group and subsidiaries in the host country. - e. Process for coordinating the identification and assessment of resolution options, especially for recapitalization options for the subsidiary, drawing on two generic models for group-based recapitalization: Single Point of Entry (SPE) and Multiple Points of Entry (MPE): - Under an SPE model, the recapitalization of the subsidiary in a host country would be performed by the parent bank, either via bail-in of liabilities in the parent bank, bail-in of liabilities in the subsidiary (in exchange for shares in the parent bank) or external injection of capital into the parent bank, with the capital being cascaded to the subsidiary in the host country. Under an SPE approach, the parent bank remains the shareholder of the subsidiary. - Under an MPE model, the recapitalization of the subsidiary in the host country would be performed at the level of the subsidiary, either by bail-in of liabilities of the subsidiary or injection of capital into the subsidiary by the government or another party approved by the CBOB. Under the MPE approach, the subsidiary might cease to be a member of the parent banking group, reflecting its new shareholding arrangements. In that event, ensure contractual arrangements are entered into between the subsidiary and parent bank for all essential functional support provided by the parent bank to be continued (on commercial terms) until alternative arrangements can be made. --- ### APPENDIX III. CONTINGENCY PLAN—GUIDANCE ON PUBLIC FUNDING IN RESOLUTION ### General principles on public funding and recapitalization - 1. The use of public funding and/or guarantee is a last resort option and would only be used where the other Toolkit options are considered to be impracticable and that some form of government-funded bail-out is required for the purpose of meeting resolution objectives. It should be applied with robust safeguards, as discussed below. - Recapitalization of the bank through use of public funds: appoint an administrator, assess the worst-case capital position (taking into account need for capital support to essential subsidiaries) and determine amount of capital required to meet a target capital ratio sufficient to comply with capital requirements and maintain market confidence and credit ratings. Recapitalization would be implemented by issuance of shares to the government (either directly or via a government-owned entity) sufficient to achieve the target capital ratio. This is a last resort where all other options (including bail-in) have been assessed and found non-viable or systemically destabilizing. Government-funded recapitalization should occur only after existing shareholders have been fully bailed-in, such that their shares are either cancelled (if of no value or very little value) or diluted to the assessed market value. Subordinated debt should also be bailed-in. - 3. The government’s shareholding could either take the form of ordinary shares with full voting rights or preference shares with full or limited voting rights (where existing shareholders and bailed-in creditors hold a substantial proportion of total equity). The government should ensure it prices the shares it holds, and any other support it provides (e.g., guarantees or indemnities), at appropriate commercial pricing to ensure that taxpayers are compensated for the risks involved. It should also ensure sufficient control of the bank to manage all risks arising from its equity stake and other forms of support it provides. ### When public-funded recapitalization might be appropriate - 4. This option might be appropriate if: - a. the bank cannot recover; i.e., there is no prospect of shareholder support in the required timeframe; - b. the bank does not have sufficient subordinated debt and senior unsecured debt (excluding insured deposits) to be a source for full recapitalization, either through conversion to equity or other eligible capital instrument or write-down, after first writing down existing equity; - c. the closure of the bank would have a significant adverse impact on the stability of the financial system; - d. bail-in would likely trigger contagion or other systemic disruption on a significant scale; and - e. the government ensures that existing shareholders and subordinated creditors are required to absorb all losses to the extent of their holdings before any government-funded support is provided. - Determination of the capital requirement for the recapitalized bank or bridge bank (see earlier guidance under Aspects of resolution implementation). *Source: 1bhsea2023001 - 29. Option 4 might be appropriate if:* ### 5. In the case of recapitalization of an existing bank or transfer of business to a bridge ### 5. In the case of recapitalization of an existing bank or transfer of business to a bridge bank using public funds or guarantee ### Key considerations for recapitalization or bridge bank capitalization - The CBOB would need to determine an appropriate capital ratio, and therefore capital injection, required to restore the distressed bank to financial soundness or to capitalize a bridge bank. - The capital ratio will be influenced by whether the government is providing an interim guarantee of the bank’s liabilities and, if so, the term of the guarantee. - If there is a guarantee, the required capital ratio would be lower than in the absence of a guarantee. - Given the desire to avoid open-ended commitments by the government, such as those arising under a guarantee, it would generally be better to set the capital ratio at a level where the bank can operate without a guarantee. ### Government capital support: conditions and safeguards - Recapitalization by the government or capitalization of a bridge bank by the government should be: - a last resort (i.e., failing any other sources of capital), and - on commercial terms. - Existing shareholders must either be removed from the recapitalized bank (e.g., by using a bridge bank and leaving shareholders in the failed bank) or diluted in accordance with the assessed value of shareholders’ funds immediately pre-resolution. - If the government provides capital support, the MOF will need to develop guidance on: - whether capital provided by the government is in the form of preference shares (which would rank ahead of ordinary shares and therefore reduce the risk of the government) or ordinary shares ranking equally with existing ordinary shares; - the pricing of the shares paid for by the government, based on a conservative valuation of the bank immediately pre-resolution; - the voting rights on preference shares if that form of capital is used; - the other forms of control which the government may wish to exercise (either via voting rights on shares or through another means, such as a deed poll entered into by the bank), such as: - the right to appoint directors, in proportion to the share of the capital the government holds; - veto rights over the appointment of directors by other shareholders (if they are minority shareholders); - the right to appoint (or veto the appointment of) the CEO, CFO and CRO; - the right to approve (or veto) key transactions, such as lending to related parties, large exposures, disposal of business, acquisition of new business, etc.; - the right to determine the risk appetite and nature of business strategy adopted by the bank; and - the nature of the exit arrangements, such as eventual sale of the government’s shares to another party (subject to the approval of the RA). ### Government guarantee of a bridge bank - A government guarantee of a resolved bank’s liabilities may be necessary for a period until the bank has been stabilized, but this should be avoided unless absolutely necessary. - If a guarantee is considered necessary: - the guarantee should be on commercial terms where practicable, such that the government charges a fee for the provision of the guarantee; - guarantee documentation may need to include covenants which confer specific powers on the government to control the bank while the guarantee is in place (for example, requiring specific business transactions to be approved by the government, or requiring director and management appointments and removals to be approved by the government). - The contingency plan should include preparation of an indicative terms sheet for a government guarantee, together with draft documentation. - Responsibility for these matters rests with the MOF. --- ### APPENDIX IV — COMMENTS ON THE 2020 DIC LEGISLATION ### Overview of the DIC and need for assessment - The Bahamas’ Deposit Insurance Corporation (DIC) is a public corporation established under the Protection of Depositors Act, 1999, amended in 2020. - DIC insures eligible deposits in case of bank failure. - Membership in the DIC is compulsory for every licensed bank with Bahamian dollar deposits; the DIC is financed by annual premiums levied on member institutions. - There remains scope for additional changes to bring the DIC Act into line with international principles as promulgated by IADI. - A complete review of needed strengthening is best carried out by a formal assessment of the IADI Core Principles. An assessment could be carried out with IADI’s assistance or under additional assistance from the IMF or the World Bank. ### Specific comments and recommended changes to by-laws and provisions - By-law 4A1: The DIC should not have the authority to cancel insurance unless the CBOB or the resolution authority intervenes in the institution and halts its participation in the market. - By-law 4A2 and related intervention timing: - The decision to intervene and close an institution should rest with the CBOB or the resolution unit. - The minister should not be able to reverse a supervisory determination that an institution is unsafe and non-viable. - Neither the DIC nor supervisory staff should be required to give an institution a 21-day notice prior to intervention and termination of insurance; once the decision is made, authorities should act quickly. - By-law 4A(8): The current provision that insured status continues for two years after cancellation is considered unnecessarily long; a period of 3 to 6 months is a more typical brief period for additional coverage. - By-law 4A(10): If the certificate of deposit insurance is cancelled, the institution must be intervened and resolved; merely prohibiting new deposits is insufficient protection for the financial system. - By-law 8C2: While every institution must be able to produce SPV data, the law should include an enforcement clause compelling compliance. - By-law 11: In calculating sums to be paid to depositors, only past due claims should be deducted before the deposit payout; the phrase “as may be owed” could be misinterpreted to include any outstanding loan balance. - By-law 12: Depositors should not be required to submit a claim for reimbursement in typical P&A transactions, as such a requirement slows the payout process; adequate identification should suffice. - By-law 18 (appeal against cancellation): The minister should not have authority to reverse a supervisory determination that a financial institution is no longer viable; if the CBOB closes an institution in error, only monetary compensation should be paid. - By-law 19(2): A two-year coverage period for depositors of a surviving merged or amalgamated institution is too long; the recommended period is between three and six months. ### Missing elements in the DIC Act (identified gaps) - The Act should clarify the mandate of the DIC: state explicitly that the policy objective of the DIC is to preserve financial stability and protect depositors up to the maximum coverage. - The Act should permit the DIC to finance resolution measures proposed by the RU, while not providing funding for going-concern institutions. - Safeguards against excessive use of DIC funds: - The Act should limit the use of DIC funds to (i) the amount it would have paid to depositors in a liquidation. - Consideration could be given to setting a maximum, e.g., 50 percent of the existing fund, that could be used in resolution to ensure the DIC fund will not be exhausted. - The Act should authorize the DIC to analyze risks in the financial system and formalize information sharing and coordination with supervisors. - The DIC should not provide capital nor become a shareholder of a bridge bank. Capitalization and shareholder responsibilities are those of the Ministry of Finance or, if MOF financing is severely limited, the CBOB. Any resources provided by the CBOB for capitalization or support for resolution must be fully indemnified by the MOF. - The Act should provide for an emergency back-up funding facility so depositors believe their deposits are protected irrespective of the DIC Fund balance. - The DIC has a fiduciary responsibility to protect the resources of the DIF; it must be assured that resolution options meet least-cost requirements and that recipient institutions are viable. The DIC should have the authority to deny use of its funds in the absence of such assurances. - Standard powers that should be explicit in law include: - assessing and collecting premiums, levies or other charges; - transferring deposits to another bank; - reimbursing insured depositors; - obtaining timely, accurate and comprehensive information in the necessary format; - receiving and sharing timely, accurate and comprehensive information on the risk profile of member institutions from the supervisors; - compelling banks to comply with their obligations to provide access to depositor information; - setting operating budgets, policies, systems, and practices; and - entering into contracts. ### Governance and staffing recommendations - Current structure: DIC operates within the CBOB, with a Board of Directors composed of six members (four ex officio members and two external Directors). The DIC has no formal employees but is staffed by employees of the Bank Supervision Department. - Concerns: - The board is dominated by ex officio members; the Chair is the Governor of the CBOB, reducing the DIC’s independence from policy pressures. - The DIC must safeguard members’ contributions and ensure the appropriate and least-cost use of DIC resources. - Proposed changes: - Strengthen leadership, adequate skilled staff, and support from members. - Increase the DIC Board size from six to nine members, increasing external Directors from two to five. This change would give external Directors a majority on the board. - External Directors cannot be current staff or executives of any member institution. - The Chair of the DIC Board should be drawn from the external Directors. - Note: “In order to maintain operational independence, representatives of the other financial safety-net organizations that participate in the governing body do not serve as Chair or constitute a majority.” IADI, CP3, EC8. --- *Source: 1bhsea2023001 - 5. In the case of recapitalization of an existing bank or transfer of business to a bridge bank using public funds or guarantee* ### 7. Staffing of the DIC raises a number of critical policy decisions. Currently, the DIC ### 7. Staffing of the DIC raises a number of critical policy decisions. Currently, the DIC ### Staffing and capacity needs - The DIC has no employees and currently depends on staffing from the Supervision Department of the CBOB. - The DIC will be responsible for complex activities: working with member institutions on data preparation, testing IT arrangements, negotiating with possible paying agents for both commercial banks and credit unions, and ensuring appropriate use of DIC funds consistent with safeguard requirements. - These tasks are complex and require experience; there is a strong argument for having a full time staff in the DIC. - As the DIC begins to finance resolution measures, it will need new skills for funding P&A transactions, financing bridge banks, or recapitalizing failing but viable institutions. - The DIC should develop adequate analytical capacity to: - Complement the work of the RU in analyzing resolution options. - Contribute to analysis (without making final decisions) to ensure DIC funds are appropriately used and the least cost option is chosen. - A major concern is “double dipping” where the deposit insurer funds a resolution and the restructured bank subsequently fails, exhausting the fund. ### Strengthening the reimbursement framework — key objectives - Essential objective: ability to pay out depositors expeditiously to avoid runs and systemic liquidity/solvency difficulties. - Preconditions for effective reimbursement: adequate resources, necessary data, and appropriate payout mechanisms. - IADI Core Principles target payout period: seven working days for most insured depositors; minor exceptions permitted; transition period allowed up to two years. ### Conditions for effective reimbursement — factors and DIC progress - Factors for effective reimbursement include: - (i) adequate human resources; - (ii) information sharing arrangements with other safety net participants; - (iii) early warning arrangements; - (vi) advance access to data on depositors, including qualitative review of data; - (iv) access to adequate funding sources, including pre-arranged backup funding; - (v) management information system; and - (vi) pre-arranged contracts with outsourcing partners such as paying agents, call centers, and legal services. - The DIC has access to supervisory data and judgments as members of the CBOB, a DIF, regular premium payments from members, and information about supervisory actions. Nonetheless, further reforms are useful. ### Human resources capacities — recommendations and sizing - Recommendation: The DIC should have a dedicated, full time staff knowledgeable and experienced in reimbursement processes. - Interim staffing flexibility: DIC should be allowed to acquire temporary staff (short-term experts, legal support, other expertise) from the CBOB as needed and identify such staff in advance. - Suggested minimum staff in normal times: 3-4. - Roles could include: a CEO; one staff person for funding issues (managing the fund and member contributions); and one–two staff for reimbursement and data evaluation. ### Advance access and data quality - The DIC has advance access to depositors’ data prior to bank closure but banks do not provide customer data in Single Customer View (SCV) format. - Section 8C of the amended Protection of Depositors Act contains provisions for such a data requirement. - The DIC needs to ensure data are in SCV format, that banks can: - produce depositor data in SCV format; - identify excluded deposits; and - identify past-due loans for each depositor (past-due loans should be deducted from deposit payout). ### Emergency funding — structure and recommendations - The DIC should have a dedicated, pre-arranged backup funding arrangement sufficient and immediately available to meet liquidity requirements; typically provided by the MOF. - CBOB may provide funding within a formal agreement that credits to the DIC are indemnified by the MOF. - Any use of emergency funding will be repaid from asset recoveries or levies on members; the government provides bridge financing but does not absorb bank failure losses. ### Management information system (MIS) and outsourcing partners - The DIC should have technology-based MIS that supports insured deposit determination and the depositor reimbursement process from data submission to payout through paying agents. - Outsourcing partners (paying agents, call centers, legal/printing services) are critical and should be: - Identified early; - Pre-arranged on standby contracts for simulations and failures; - Selected subject to prudential, organizational, and technical criteria; and - Approved by supervisors where appropriate. ### Regulatory framework supporting reimbursement — required regulations - Regulations should cover procedures, templates, and risk management policies. - Regulation on submission of depositor data: - Specify data for insured deposit determination and submission deadlines. - Define SCV determination and netting obligations against past-due loans. - Regulation on criteria and selection of paying agent: - Define characteristics, organizational and technical requirements, and prudential qualifications; supervisors may approve paying agents. - Regulation on selection of outsourcing partners: - Outline criteria and selection process for specialized service providers. - Regulation on guidance to depositors: - Provide robust public awareness procedures on timing, process, communication channels, reimbursement methods, and claiming procedures. ### The reimbursement process — phases and key activities - Preparation phase (starts on CBOB notification of imminent risk): - a) Early warning and notification by CBOB on classification as high risk; strong coordination with supervisory staff. - b) Onsite review of depositors’ data quality and submission timeframe; DIC to coordinate with CBOB. - c) Review sufficiency/readiness of DIC human resources and outsourcing partners; build specialist knowledge and contingency plans. - d) Review financial standing of the DIF and ensure backup funding arrangements are immediately available. - e) Review draft engagement letters for paying agents and outsourcing partners. - Reimbursement phase (principal activities; 7-day payout target funded by DIC fund): - a) CBOB notification on license revocation to start reimbursement. - b) Communication to the public using website, toll-free number, radio, press; draft template announcements. - c) Convene board meeting promptly with draft agenda/supporting documents. - d) Data submission by failed institution coordinated with CBOB to ensure accuracy and timeliness. - e) Engage paying agent and outsourcing partners via pre-arranged stand-by contracts; consult CBOB on paying agent standing and risk profile. - f) Insured deposit determination and verification of excluded deposits. - g) Transfer funds to paying agent in advance per terms of reference; reporting framework determined in stand-by agreement. - h) Reimbursement announcements: when/where depositors can get insured deposits and required identification documents. - i) Regular DIC reporting on reimbursement progress to board, CBOB, and MOF using templates. - j) Customer service: provide channels for information, complaints, and reclamations; formalize processes and templates. - Closure and archiving phase: - a) Submit payment documents by the paying agent. - b) Back up payout data per applicable regulation. - c) Produce final payout report for DIC Board, CBOB, and MOF. - d) Develop an action plan to implement recommendations from the final report. ### Funding — current status, adequacy, and premium policy - Funding sources: contributions from the private sector (premiums) and interest from investments. Member banks and credit unions pay premiums biannually (at end-March and end-September). - The single fund protects depositors in member institutions, including credit unions. - If shortfall: Protection of Depositors Act does not envision funding by the CBOB or placing funds in the market; DIC may request a loan from government or levy extra contributions on members if fund is at risk. - Current fund level: B$69.1 million or approximately 0.9 percent of insurable deposits and 2.7 percent of insured deposits. - This level could cover only three of the smallest credit unions and four of the smallest banks; it would not cover the largest credit union nor any medium-sized banks in the Bahamian financial system. - Suggested assessment: DIC should analyze adequacy using probability of default and loss-given-default metrics. - Back-of-the-envelope target example: increasing from 2 percent of insured deposits to 4 percent — would allow coverage of small and two medium-sized credit unions, the largest credit union, or small banks and one medium-sized bank; risk-profile assessment warranted. - Premium structure considerations: - CBOB is examining premium increases in a scaled approach by 5.5 bps, 6 bps, 7.5 bps, and 10 bps. - DIC should evaluate the impact to determine if fund targets can be met within five years. - Caution against applying risk-based premiums at this stage: priority is strengthening the fund; risk-based premiums could be counterproductive by pressuring weaker banks and causing “flight to safety.” - Emergency back-up liquidity facility: - An emergency facility should be immediately available from the MOF or the CBOB for depositor payout or financing resolution measures. - The DIC would repay such credits over time from asset recoveries and premiums. - If MOF cannot provide the facility, CBOB could provide protection with credits indemnified by the MOF. ### Public awareness — objectives and recommended program elements - Public awareness is essential to maintain depositor confidence by clarifying benefits and limitations of the insurance program, reducing preemptive runs. - Key information to disseminate: (i) scope of insurance; (ii) membership list and how members are identified; (iii) deposit insurance coverage level; and (iv) financing of the program. - Recommended public awareness framework elements: a. Board-approved public awareness document covering policy decisions and DIC activities, including: - Identification of what deposit insurance information should be distributed. - Identification of communication tools/channels: (i) website; (ii) mass media: newspapers, magazines, television, radio; (iii) online and social media; (iv) events; and (v) educational activities. - Defined target audiences to tailor outreach. - A plan and monitoring methodology to evaluate program effectiveness. b. Regulations mandating content and methods for disclosure by member institutions, including: - Procedure for supply of depositor information leaflets/brochures. - Key content to be presented in leaflets/brochures. c. Clearly identify institutions that are DIC members; display membership information at bank premises. d. Produce a depositor information leaflet in clear language; make available in branches and provide when opening accounts. e. Keep the DIC website up-to-date as a key communication channel. f. Define information to give depositors in event of bank failure; coordinate public awareness with reimbursement function and develop draft announcements to respond immediately and reinforce confidence. g. Conduct independent evaluations (e.g., public surveys) to measure effectiveness and awareness levels (deposit insurance limit, coverage rules, effective channels). *Source: 1bhsea2023001 - 7. Staffing of the DIC raises a number of critical policy decisions. Currently, the DIC* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1bhsea2023001.pdf_