## 1. Financial Intermediaries: Number and Total Assets

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### I. Overall stability assessment — summary findings
- The Eastern Caribbean Currency Union (ECCU) has sustained monetary and financial stability since 1976 when the Eastern Caribbean dollar was pegged to the US dollar at EC$2.70=US$1.
- A quasi-currency board arrangement has been in place since 1983 and is an important anchor for stability and economic development.
- The Eastern Caribbean Central Bank (ECCB) is central to confidence in the financial system but the FSAP identified several important areas where measures should be taken to preserve financial stability.
- Key systemic risks identified:
  - Buildup of sovereign borrowing and increase in domestic loan arrears.
  - High levels of nonperforming loans (NPLs) in the banking sector.
  - Important deficiencies in the supervisory regime.

### I.A. Strengths of the financial system
- Financial institutions provide a diversified range of services; banking sector relatively deep.
- Cooperative credit unions together with banks provide access to formal financial services for a very high share of the population.
- Monetization is high, limited dollarization.
- ECCB serves as mechanism for financial and economic cooperation and is supported by a dedicated and professional staff.
- ECCB is the regulator of all banks licensed to conduct business within the ECCU (both domestic and foreign owned, largely excluding offshore banks) and is well-respected.
- Historical presence of strong foreign banks; industry structure changing with entry of more aggressive regional banks.

### I.B. Threats to financial stability — credit quality and supervisory weaknesses
- High levels of NPLs; banks with NPL ratios of 10 percent or higher placed on ECCB watch list.
- Overstatement and uncertainty of capital quality at some indigenous banks due to:
  - High levels of unprovisioned NPLs.
  - Accrued interest income on nonperforming government loans.
  - Zero risk-weights applied to public sector debt in arrears.
- Government defaults would directly increase bank insolvency risk and indirectly cause private sector defaults.
- No assessment of capital adequacy on a group basis.
- Limited liquidity support scope by ECCB under the quasi-currency board; segmented short-term liquidity markets and little interbank lending.
- Limited fiscal capacity of governments to provide credible guarantees.
- Weaknesses in domestic banking supervision:
  - ECCB lacks necessary supervisory enforcement powers and follow-up action.
  - Offsite monitoring hampered by deficiencies in quality, timeliness, frequency, and availability of banking and financial data.
  - Infrequent on-site inspections and validation of prudential returns.
  - Need for more resources for onsite inspections, especially of weak institutions.
- Weak supervision of NBFIs and offshore banks; indications of under-capitalization relative to Basel norms.
- Insurance sector supervision needs enhancement; regional approach recommended.

### I.C. Addressing the immediate risks — overarching strategy
- A solvent and liquid domestic banking system is fundamental to the ECCB’s quasi-currency board arrangement and to sustaining growth.
- Lasting stability requires adopting and implementing risk-based capital standards, supported by fiscal sustainability.
- ECCU authorities broadly agreed with FSAP findings though sensitive to recommendations concerning enhanced ECCB powers.

### Box 1 — Main recommendations (high level)
- Immediate ECCB priorities:
  - Refocus on core mandate and be provided with adequate powers.
  - Reprioritize resources to regulation and supervision of systemically important institutions; realign resources to on-site inspections.
  - Develop structured, risk-focused supervision program (scope/frequency of on-site visits, resource allocation, remedial action plans).
  - Strengthen data integrity/collection to capture all on- and off-balance sheet exposures.
  - Strengthen prudential regulations: set minimum capital commensurate with risks; revise guidance on accruals of interest; provide regulations on market risk.
  - Address Union-wide government borrowing risks: assign risk-weights for minimum capitalization; suspend accrual of interest on nonperforming government debts; require provisioning on such debts.
  - Enhance ECCB powers for regulation and supervision of domestic banks, including transferring certain licensing and enforcement powers from national authorities to ECCB.
  - Improve financial sector governance (board composition, internal audit and control).
- Crisis management:
  - Strengthen crisis prevention via improved monitoring integrated with contingency plans.
  - Establish operational crisis containment plan recognizing limited ECCB LOLR resources and fiscal constraints.
  - ECCB emergency powers should reference administrative tools (deposit securitization, deposit freezes, maturity extensions).
- Refining regulatory architecture:
  - Consider transferring lead responsibility to ECCB for largest nearbanks (two credit unions) identified as systemically important.
  - National regulators to strengthen supervision of smaller credit unions and other nearbanks.
  - Strengthen insurance regulation via cross-border regulatory cooperation and cooperative arrangements with overseas supervisors.
  - Consider independent supervision for development banks.
- Offshore banks:
  - Align offshore prudential regimes with uniform domestic Banking Act; issue comprehensive prudential regulations and risk-based capital; establish uniform reporting; enforce consistently and timely.
  - Under-capitalized banks relative to Basel 8 percent minimum risk-weighted ratio should prepare capital contingency plans.
  - Realign ECCB’s role in offshore supervision according to resources; national authorities must resource offshore supervision or reassess offshore banking viability.
  - Ensure cooperation and information sharing where domestic banks are affiliated with offshore banks; agree on lead supervisor.
- Structural issues:
  - Continue ECCB efforts: build markets and infrastructures, foster competition through a single “financial space,” undertake educational efforts subject to resources, and improve legal/judicial systems supporting debt recovery.

### II. Overview of the financial system — key statistics and institutional structure
- Total licensed commercial banks: 39 (note: 26 are units of one of six international banking groups).
- Four locally-owned banks are fully or majority government-owned.
- Foreign-owned banks control over 55 percent of the Union-wide market (measured by bank loans).
- Government-owned institutions have 15 percent of the Union-wide market.
- Nearbanks manage assets equivalent to about 24 percent of GDP; the most important are 71 cooperative credit unions.
- Insurance sector:
  - One hundred forty six insurance company licenses in the region, representing eight life insurance groups and four composites, with a further 45 companies writing non-life business only.
  - Annual premium income in various jurisdictions ranges between 4 percent and 7 percent of GDP.
  - Insurance assets total about 12 percent of GDP.
- National insurance funds:
  - Total assets amounted to about 15 percent of GDP; projected to continue growing under present policies and demographic trends.
- Offshore financial services:
  - Assets reported by offshore banks in the four assessed jurisdictions total about US$5 billion.
  - One jurisdiction accounts for approximately 66 percent of that total; one institution accounts for nearly half of the total offshore assets.
  - Offshore sector decline: currently 53 offshore banks (ten under some form of supervisory intervention), about one-third of the number a couple of years earlier.
- Monetary indicator: M2 to GDP estimated at up to 95 percent.

- Selected data from Table 1 (financial intermediaries, number and total assets):
  - Banks, Dec. 97: Number 44; Assets EC$m 7,884.7; Assets percent GDP 121
  - Banks, Dec. 99: Number 43; Assets EC$m 9,525.6; Assets percent GDP 129
  - Banks, Dec. 01: Number 43; Assets EC$m 10,466.5; Assets percent GDP 136
  - Banks, Dec. 02: Number 41; Assets EC$m 12,256.0; Assets percent GDP 156
  - Banks by ownership, Dec. 02:
    - Domestic: Number 10; Assets EC$m 3,504.8; Assets percent GDP 45
    - Foreign: Number 27; Assets EC$m 6,805.0; Assets percent GDP 87
    - State-Owned: Number 4; Assets EC$m 1,946.2; Assets percent GDP 25
  - Other nonbank highlights:
    - Credit Unions: Dec. 97 Number 79; Assets EC$m 468.2; Assets percent GDP 7. Dec. 01 Number 73; Assets EC$m 688.8; Assets percent GDP 9. Dec. 02 Number 72; Assets percent GDP n.a.
    - Mortgage Institutions (supervised by ECCB): Dec. 97 Number 6; Assets EC$m 242.5; Assets percent GDP 4. Dec. 02 Number 6; Assets EC$m 348.2; Assets percent GDP 4.
    - Finance Companies: Dec. 97 Number 8; Assets EC$m 28.4; Assets percent GDP 0. Dec. 02 Number 8; Assets EC$m 358.9; Assets percent GDP 5.
    - Insurance companies: Dec. 01 Number 146; Assets EC$m 950e; Assets percent GDP 12 (e denotes staff estimate extrapolated from partial information).
  - Note: September 2003 = 39 (clarifying later bank count).

### Market structure and liquidity (ECSE and RGSM)
- Securities trading centralized in Eastern Caribbean Securities Exchange (ECSE) and Regional Government Securities Market (RGSM).
- Market capitalization "still very small" and trading "very light."
- "No funds have been raised through equity listings."
- Interbank money market "relatively small and inactive"; foreign banks lending to affiliates predominant.
- Organized interbank market open to all banks established in October 2001.

### Regulatory and supervisory framework
- Regulatory jurisdiction divided between ECCB and national authorities.
- ECCB governed by a Monetary Council of Ministers of Finance from each participating Government.
- Banking supervision:
  - Banks regulated under uniform Banking Act of 1983.
  - ECCB supervises private (domestic and foreign) and state-owned banks.
  - ECCB Act and uniform Banking Act being amended to "improve the ECCB’s capacity to supervise domestic banks and their affiliates."
  - Under uniform Banking Act, licensing and enforcement decisions taken by relevant Ministers of Finance "on recommendation from or after consultation with the ECCB."
- Securities supervision:
  - Uniform Securities Act of 2001 created Eastern Caribbean Securities Regulatory Commission (ECSC) and ECSE.
- Other institutions:
  - ECCB supervises NBFIs licensed under Banking Act (13 institutions).
  - Insurance intermediaries, cooperative credit unions, building societies and development banks under national authorities.
- Offshore financial services:
  - National supervisory agencies established in seven of eight ECCU territories supervise offshore banks, trust companies and other offshore service providers.

### Macroeconomic context and implications for the financial system
- Real GDP:
  - Average annual growth in the 1990s: "3.5 percent."
  - Real GDP fell by "1.5 percent in 2001" and "stagnated in 2002."
  - Preliminary 2003 estimate: expansion of "about 2.4 percent."
- Fiscal and public debt:
  - Aggregate public sector debt rose from "78 percent of GDP at end-2000" to "103 percent of GDP at end 2003."
  - Four member countries had debt-to-GDP ratios "in excess of 100 percent at end 2003."
  - Combined central government deficit was "5.9 percent of GDP in 2003."
  - Some governments (Antigua and Barbuda and Dominica) accumulated arrears; Dominica entered a stand-by arrangement in August 2002 and a successor PRGF arrangement in December 2003.
- External and reserve position:
  - ECCB gross international reserves "stood at 20 percent of broad money at end 2003."
  - Reserves rose due to capital inflows, mainly financing direct investment for construction and public sector borrowing.
- Monetary and credit developments:
  - Bank credit growth declined relative to deposits; M2 continued to grow while net bank lending to public sector contracted.
  - Private sector credit growth has "fallen sharply."
  - Banks built up foreign assets and, to a lesser extent, deposits at the ECCB.
- Interest rate environment:
  - Mean deposit rates in ECCU fell by "only 70 basis points" over three years to end-2003 while U.S. rates fell by "over 500 basis points."
  - "3 percent minimum savings rate" applies to "about 20 percent of interest-bearing deposits."
  - Recommendation: "The floor rate should be kept under review and adjusted in line with wholesale market rates."

### ECCB institutional arrangements, monetary policy instruments and facilities
- Currency peg: "EC$2.70 to U.S$1.00."
- ECCB external reserves requirement: no less than 60 percent of demand liabilities; policy norm "80 percent"; cover maintained at over 95 percent for several years.
- Global limit on domestic assets: "currently 25 percent of demand liabilities," allocated "30 percent and 70 percent of the fiduciary issue, respectively" to credit to commercial banks and participating governments. "The global limit has not been exhausted."
- Monetary instruments:
  - Reserve requirement: "Set at 6 percent on all deposits." Reserves unremunerated, in local currency, based on average weekly deposits.
  - Rediscount facility for treasury bills; discount rate lowered in July 2003 to "6.5 percent."
  - Minimum savings deposit rate lowered in September 2002 from "4 percent to 3 percent."
  - Lombard facility: emergency liquidity for up to "90 percent of the face value of treasury bills or other securities"; used "very rarely."
  - ECCB can provide discretionary direct lending to member governments and to a systemically important bank in distress.
- Monetary Council reviews operation regularly.

### Banking sector strengths and vulnerabilities
- Strengths:
  - History of stability anchored in currency arrangement.
  - Deposit base stable; residents’ deposits "89 percent of total bank deposits"; private sector resident deposits "two-thirds of total deposits."
  - Foreign currency deposits average "15 percent of total deposits."
- Vulnerabilities:
  - NPLs "high for many domestic banks"; small proportion covered by loan loss provisions.
  - Unprovisioned unsatisfactory assets are a worrying share of portfolios.
  - Zero risk weight on loans to governments in arrears; some banks accrue interest on such loans.
  - Banks’ holdings of government obligations about "15 percent of total assets" on average; nonperforming government obligations do not attract provisioning charges.
  - Indication a large offshore bank with a domestic affiliate "would be undercapitalized on a risk-weighted capital basis."
  - Profitability weakened: net interest margins declined and expenses rose; profit figures may be overstated due to understated loan loss provisions and accrual of interest on delinquent debts.
  - Loan concentration high; average loan concentration to groups dipped just below regulatory norm of "25 percent."
  - Largest sectoral exposure is to household sector.
  - ECCB’s list for intensive monitoring represents "41 percent of ECCU banking assets," of which only "0.4 percent of assets is accounted for by a foreign bank branch." Indigenous banks that met benchmarks accounted for "2.8 percent of the system’s assets."

### Credit quality, accounting and supervisory concerns
- Causes of credit quality problems: poor loan approval processes, shareholder pressure, weak foreclosure mechanisms; loan recovery problems predate 2001–2002 downturn.
- Accounting and audit issues:
  - Scope and level of disclosures in audited financial statements "very mixed."
  - Banks must comply with ECCB accounting guidelines; audit approaches vary.
  - Some auditors do not rely on internal auditors due to perceived lack of independence and experience.
- ECCB does not require provisions for delinquent loans to government bodies; practice of accruing “interest earned but not collected” from nonperforming government debt adversely affects quality of reports.
- Recommendation: ECCB should not allow accruals of uncollected interest on nonperforming government debt; revise loan classification and accrual guidelines for nonperforming government/public sector debt and require risk-weight allocations and provisioning when delinquent.

### Macroprudential analyses — stress-testing framework and results
- Stress-test assumptions (Box 3):
  - 50 percent and 100 percent loss given default by four ECCU governments, individually and collectively.
  - Additional loss equivalent to 25 percent of banks’ loans to the personal sector.
  - Adjustment to capital for data deficiencies before tests.
- Results:
  - 50 percent loss given default:
    - Loss to banking system = 10.7 percent of assets (including consumer loan losses).
    - Locally incorporated banks accounting for 28 percent of system assets become insolvent.
  - 100 percent loss given default:
    - Loss = 16.6 percent of assets (including consumer loan losses).
    - Insolvent locally incorporated banks account for 37 percent of the system’s assets.
  - Interbank contagion:
    - Amounts owing to other ECCU banks by the banks most vulnerable are about one percent of system assets — little risk of direct contagion via interbank market.
  - Market risks:
    - Interest rate risks negligible.
    - Banks would gain from an exchange rate devaluation.
- Contagion channels and ECCB capacity:
  - Individual insolvencies unlikely to have large direct impact given low interbank balances.
  - Indirect effects remain a concern (confidence loss, deposit withdrawals, capital flight).
  - ECCB capacity to deal with capital outflows is limited.

### Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)
- ECCB increased supervision of banks’ AML/CFT compliance and found material deficiencies; banks requested to take corrective action.
- IMF AML/CFT assessments for Anguilla and Montserrat indicate legal frameworks relatively well-developed but institutional capacity and implementation gaps, particularly in offshore sectors.
- Few suspicious activity reports and negligible prosecutions/convictions in some jurisdictions.
- CFATF assessments for Dominica, Grenada, St. Lucia, St. Kitts and Nevis and Saint Vincent and the Grenadines conducted in September 2003; results not available at report time.
- Recommendation: increase depth and scope of onsite visits, incorporate AML/CFT in prudential supervision, and provide ongoing training.

### Review of supervisory and regulatory arrangements — domestic banking
- Strengths:
  - ECCB is well-respected and supported by well-qualified supervision professionals.
- Weaknesses relative to Basel Core Principles:
  - Independence, powers, and resources: need enhanced operational independence, enforcement powers (including administrative fines), and resources for timely on-site inspections.
  - Risk-based supervision: need strategies focused on high-risk institutions and tools to link inspection frequency to ECCB “watch list.”
  - Treatment of public sector obligations: revise guidelines; require risk-weight allocations and loss provisions when delinquent.
  - Capital adequacy: minimum capital adequacy risk ratio 8 percent on a non-statutory basis; reported ratios do not reflect all risks; recommendation to enhance guidelines and provisioning.
  - Consolidated supervision: ECCB should conduct consolidated supervision and obtain information on offshore affiliates; implement information sharing.
  - Data integrity: require bank auditors to validate regulatory returns; more frequent inspections; empower ECCB to request further audits and require external auditors to report matters of consequence.
  - Remedial actions and follow-up: establish effective, timely processes to monitor/enforce corrective measures; reliance on “moral suasion” insufficient.
  - Cooperation and information sharing: ECCB lacks legal authority; proposed Banking Act amendments to address this.
  - Governance: instances of lending to directors/shareholders contrary to regulations; need stronger board composition and internal controls.

### Supervision of other financial institutions
- Offshore banking:
  - Offshore BCP assessments focused on Anguilla, Montserrat, Antigua and Barbuda, and Saint Vincent and the Grenadines.
  - Offshore bank counts: Antigua and Barbuda 16, Montserrat 11, Saint Vincent and the Grenadines 10; numbers declined in recent years.
  - Each ECCU member has unique offshore legislation; supervision primarily national responsibility.
  - ECCB has supervisory arrangements with national authorities in six jurisdictions except Antigua and Barbuda and St. Lucia.
  - Weaknesses: prudential requirements, accounting standards, enforcement powers, repetitive regulatory forbearance, inadequate control over large exposures/connected lending, AML supervision gaps.
  - Capital adequacy:
    - Minimum capital requirements range from US$500,000 to US$5 million.
    - Indications several banks would not meet a minimum Basel eight percent risk-based capital ratio without additional capital.
    - Recommendation: adopt risk-based capital and request undercapitalized banks prepare capital contingency plans.
- Insurance:
  - Insurance regulation well below international standards.
  - Common insurance law drafted in 1995 not fully enacted; solvency requirements, inspection/intervention powers, and governance controls largely absent.
  - Supervision chronically under-resourced; upscaling independently in all jurisdictions may be impractical.
- Nearbanks (credit unions, building societies, development banks):
  - Supervision seriously deficient; regulatory forbearance common.
  - Two credit unions identified as systemically important; recommendation to transfer supervision responsibility to ECCB.
  - Little or no active supervision of building societies; no independent prudential supervision of development banks and foundations.
- Integrated supervision:
  - Proposal to establish national sectorally-integrated regulatory bodies to enhance supervision and exploit economies of scale.
  - ECCB should have primary responsibility for onshore depository institutions sufficiently large to present systemic risks.
  - National regulators to focus on consumer protection, smaller credit unions and nearbanks, offshore sector, and AML/CFT where appropriate.
  - Strengthen insurance regulation via cross-border cooperation and enhanced cooperation with overseas supervisors.

### Crisis management constraints and options
- Large-scale central bank lending to an illiquid bank would threaten the peg.
- Weak fiscal authorities constrain crisis-management options.
- Blanket guarantees could lack credibility given fiscal constraints.
- In a pegged system, containment tools limited to administrative measures:
  - deposit securitization,
  - forced maturity extensions,
  - deposit freezes.
- Legal framework for such administrative actions unclear; potential for major economic and political disruption.
- Emphasis on prevention and early warning:
  - Address fiscal unsustainability.
  - Ensure banking soundness by fixing regulatory/supervisory weaknesses.
  - Strengthen early-warning systems; full-scope examinations of systemically important institutions (including offshore affiliates and large credit unions).
- Crisis containment measures:
  - Establish operational crisis contingency framework endorsed by all ECCU members that addresses loss sharing and explicit responsibilities of depositors, shareholders, national governments, and limits on ECCB responsibilities.
  - ECCB draft contingency plan should include domestic banks and consider responses for systemically important offshore banks and credit unions.
  - Framework should be explicit about limited LOLR resources and ECCB balance sheet implications.

### Debt management and RGSM
- Debt management is national government responsibility; operations relatively unsophisticated and centralized in ministries of finance.
- Legislative frameworks vary: unitary overall frameworks or collection of instrument-specific laws; most jurisdictions have not moved to unified framework.
- Few jurisdictions have advanced debt management systems; some have national debt coordinating committees.
- RGSM:
  - Created to broaden market for ECCU governments’ treasury bills and bonds by facilitating cross-border issuance and secondary trading.
  - To date, eight security issues by three governments: St. Kitts and Nevis, Grenada, and Saint Vincent and the Grenadines.
  - Issuances generally used to retire more expensive domestic debts.
  - RDCC mandates prospectus for each issuance; ECCB appointed fiscal agent.
  - ECSE identified as facility for primary issuance and secondary trading.

### Longer-term development issues
- Access to financial services: relatively high for households and small businesses; credit unions provide bulk of microfinance but loans biased to middle-class borrowers.
- Competition and market structure: many banks and nearbanks but competition not strong; foreign banks may enjoy market power; entry of regional banks may strengthen competition.
- Insurance sector: national insurance schemes dominated by short-term assets and exposures to local governments; weak role as long-term providers of development funds; high premia due to weak competition.
- Securities markets: limited activity due to few securities and lack of active domestic institutional investors; enhanced international access important.
- Financial market integration: efforts to create a union-wide market underway (transparent securities exchange), but union market will remain small and international linkages remain important.

### Financial soundness indicators (selected figures, Dec. 98 to Sep. 03)
- Total Capital/Risk Weighted Assets (Locally Incorp. Banks): "16.3", "17.9", "16.6", "17.7", "18.9", "19.1" (in percent)
- Capital/Asset (Locally Incorp. Banks): "10.4", "10.5", "10.1", "10.7", "11.1", "10.8" (in percent)
- Unsatisfactory Assets/Total Loans (ECCU): "12.6", "14.9", "11.7", "13.5", "13.7", "11.9" (in percent)
- Unsatisfactory Assets/Total Loans (Locally Incorp. Banks): "18.0", "23.2", "16.7", "17.4", "17.4", "16.8" (in percent)
- Provision for Loan Losses/Unsatisfactory Assets: "26.6", "19.7", "28.0", "28.1", "29.7", "34.0" (in percent)
- Unsatisfactory Assets net of Provisions/Total Capital (Locally Incorp. Banks): "88.7", "119.0", "82.3", "74.6", "66.5", "60.2" (in percent)
- Amount Outstanding by Largest Group/Total Loans: "8.0", "7.8", "7.5", "6.4", "6.6", "6.0" (in percent)
- Amount Outstanding by Largest Sector/Total Loans: "45.1", "45.7", "45.9", "46.6", "46.4", "47.4" (in percent)
- Loans to Households/Total Loans: "45.1", "45.7", "45.9", "46.6", "46.4", "47.4" (in percent)
- Gross Government Claims/Total Assets: "13.3", "14.1", "15.2", "15.0", "15.1", "15.2" (in percent)
- Net Profit before Taxes/Average Assets: "2.0", "2.4", "2.2", "2.1", "1.6", "1.7" (in percent)
- Net Profit before Taxes/Average Equity (Locally Incorp. Banks): "13.8", "14.8", "14.9", "17.0", "12.9", "13.7" (in percent)
- Net Liquid Assets/Total Deposits: "19.7", "20.6", "19.6", "24.8", "27.3", "30.5" (in percent)
- Liquid Assets/Total Assets: "21.0", "21.9", "20.6", "24.3", "26.4", "29.0" (in percent)
- Foreign Currency Deposits/Total Deposits: "10.7", "14.0", "15.7", "15.0", "15.7", "15.3" (in percent)
- ECCB Reserve Cover: "90.9", "88.0", "88.3", "92.9", "97.1", "96.5" (in percent)
- ECCB Gross Reserves/M2: "19.8", "18.2", "17.4", "19.1", "20.2", "19.9" (in percent)
- Highest ECCU TB rate - US TB Rate: "2.2", "2.3", "1.2", "4.1", "5.9", "4.7" (difference)

### Capital adequacy and nonperforming loans (NPLs)
- Majority of banks exceed the 10 percent NPL threshold set by ECCB.
- In at least one case the ratio is 69 percent of total loans.
- ECCB requires banks to review (at least 70 percent of) portfolios annually and classify loans in arrears according to criteria.
- ECCB sets minimum provisioning requirements, but concerns about realizable value of real estate security cast doubt on adequacy of provisions and reported capital.
- Exposure to government/public sector significant in some indigenous banks; currently nonperforming Government obligations are classified but do not attract provisioning charge.
- Three banks visited indicated they were accruing interest on nonperforming public sector debt. (Footnote: Since the FSAP mission, ECCB indicated only one bank now has loan arrears from the public sector and another reduced overdraft exposure below approved limit.)
- Two indigenous banks recorded NPLs into special purpose vehicles; risk typically remains with the bank via intra-group funding.
- Recommendation: Provide additional guidance to banks and auditors to strengthen classification and provisioning for nonperforming assets, including government/public sector obligations in arrears.

### Loan classification, market, liquidity, and interest-rate risks
- No formal requirement for banks to have policies/procedures for market risks.
- ECCB received some banks’ policies but had not evaluated adequacy.
- Banks exposed to liquidity and interest-rate risk (maturity mismatches) and market risk in securities holdings.
- ECCB receives quarterly maturity analysis reports but has not defined specific guidelines for market, liquidity, and interest-rate risks or formal limits for foreign exchange exposure.
- ECCB presented preliminary drafts of risk management guidelines to BCP assessors.

### Supervision methods, consolidated supervision, and remedial powers
- ECCB lacks coherent formal risk-based supervisory approach for planning/executing on-site inspections.
- Some banks had not received full-scope on-site inspection in last five to seven years; others not in last two to three years.
- ECCB not permitted to monitor quality of external auditors' work for supervisory purposes; no requirement for auditors to check accuracy of prudential returns.
- ECCB enforces remedial action through Letters of Commitment (LOC) and Memoranda of Understanding (MOU); lacks legal sanction-backed enforcement for full range of remedial actions and penalties.
- Recommendation: strengthen enforcement, re-focus resources, make greater use of existing powers, introduce administrative fines/penalties.

### Recommended Action Plan (selected highlights)
- Further amend draft new uniform Banking Act to enhance ECCB autonomy and powers; accelerate MOUs with domestic and foreign supervisory agencies to begin consolidated supervision, including offshore affiliates.
- Adopt and implement risk-based approach to minimum capital ratios that accounts for all risks; adopt non-zero risk weight approach for government/public sector obligations.
- Provide additional guidance and more frequent on-site inspections to ensure proper classification and provisioning.
- Issue requirements/guidelines for risk management policies; adopt supervisory limits for market, liquidity, interest-rate and foreign exchange risks; provide training.
- Adopt legal provisions enabling information sharing and include terrorist financing in supervision; conduct consolidated supervision including AML compliance on a group-wide basis.
- Strengthen frequency of on-site inspections and integrate off-site review into supervisory planning.
- Implement prudential standards consistent with Basel risk-based capital standards and collect data for consolidated supervision.
- Strengthen enforcement and introduce administrative fines/penalties.
- Establish formal/informal arrangements with home supervisors for foreign bank establishments to assess global condition and consolidated supervision practices.

### Authorities’ response and measures taken
- Drafted new domestic Banking Act to address recommendations; some ECCU governments commenced parliamentary procedures for enactment.
- Draft regulations/guidelines prepared, including for risk-based capital, corporate governance, and loan valuation/provisioning. (Note: draft regulations do not risk-weight ECCU government obligations nor require provisions for nonperforming government debt as recommended.)
- Guidelines for Reporting of Suspicious Activity and Incidents of Fraud disseminated to commercial banks and licensed NBFIs.
- ECCB restructured Bank Supervision Department into six functional units; formed Compliance and Internal Review unit for supervisory follow up and enforcement; increased supervisory staff positions.
- ECCB enhancing prudential visits and dialogue with commercial banks and licensed institutions.
- Revised Contingency Plan for Weak Banks approved by ECCB Board; includes coordination mechanism and Financial Sector Crisis Management Committee formed.
- Three-member panel appointed to review and recommend terms for ECCB resolution of the Capital Bank issue in Grenada.

*Source: ECCB and IMF staff assessment as presented in the FSAP chapter "1. Financial Intermediaries: Number and Total Assets" from the provided PDF content.*

### 1. Financial Intermediaries: Number and Total Assets............................................................10

### 1. Financial Intermediaries: Number and Total Assets............................................................10

### I. Overall stability assessment — summary findings
- The Eastern Caribbean Currency Union (ECCU) has experienced sustained monetary and financial stability since 1976 when the Eastern Caribbean dollar was pegged to the US dollar at EC$2.70=US$1.
- A quasi-currency board arrangement has been in place since 1983 and is an important anchor for stability and economic development.
- The Eastern Caribbean Central Bank (ECCB) plays a central role in underpinning confidence in the financial system but the FSAP identified several important areas where measures should be taken to preserve financial stability.
- Key systemic risks identified:
  - Buildup of sovereign borrowing and increase in domestic loan arrears.
  - High levels of nonperforming loans (NPLs) in the banking sector.
  - Important deficiencies in the supervisory regime.

### I.A. Strengths of the financial system
- Financial institutions are relatively well-developed and provide a diversified range of financial services.
- The banking sector is relatively deep and, together with cooperative credit unions, has provided access to formal financial services for a very high share of the population.
- Monetization is high, and there is limited dollarization.
- The ECCB serves as a mechanism for financial and economic cooperation among ECCU members and is supported by a dedicated and professional staff.
- The ECCB is the regulator of all banks licensed to conduct business within the ECCU (both domestic and foreign owned, largely excluding offshore banks) and is well-respected.
- Historical presence of strong foreign banks has been an important source of strength, although the industry structure is changing with entry of more aggressive regional banks.

### I.B. Threats to financial stability — credit quality and supervisory weaknesses
- High levels of nonperforming loans (NPLs) are a central concern; banks with NPL ratios of 10 percent or higher have been placed on the ECCB watch list.
- Overstatement and uncertainty of capital quality at some indigenous banks due to:
  - High levels of unprovisioned NPLs.
  - Accrued interest income on nonperforming government loans.
  - Zero risk-weights applied to public sector debt in arrears.
- Government defaults would directly increase the risk of bank insolvency or severe capital impairment; indirect effects include private sector defaults.
- No assessment of capital adequacy on a group basis.
- Limited scope for liquidity support by the ECCB under the quasi-currency board arrangement; segmented short-term liquidity markets and little interbank lending.
- Limited capacity of governments to provide resources or credible guarantees given fiscal positions.
- Weaknesses in domestic banking supervision:
  - ECCB lacks necessary supervisory enforcement powers and follow-up action.
  - Offsite monitoring hampered by deficiencies in quality, timeliness, frequency, and availability of key banking and financial data.
  - Infrequent on-site inspections and validation of prudential returns.
  - Need for more resources for onsite inspections, especially of weak institutions.
- Weak supervision of NBFIs and offshore banks (primary responsibility of national authorities); shortcomings similar to domestic banks but more acute for offshore banks with indications of under-capitalization relative to Basel norms.
- Supervision of the insurance sector needs enhancement to comply with current and emerging international standards; regional approach recommended given significant presence of foreign-controlled insurers.

### I.C. Addressing the immediate risks — overarching strategy
- A solvent and liquid domestic banking system is fundamental to maintenance of the ECCB’s quasi-currency board arrangement and to sustaining economic growth and development.
- Lasting financial stability requires enhanced preventive measures, in particular adopting and implementing risk-based capital standards, supported by fiscal sustainability.
- ECCU authorities broadly agreed with FSAP findings though sensitive to recommendations concerning enhanced powers for the ECCB.

### Box 1 — Main recommendations (high level)
- Immediate priorities for ECCB:
  - Refocus on core mandate to promote monetary and financial stability and be provided with adequate powers.
  - Reprioritize resources and work program to focus on regulation and supervision of systemically important institutions, especially domestic banks; realign resources to on-site inspections.
  - Develop structured, risk-focused supervision program determining scope/frequency of on-site visits, resource allocation, and remedial action plans for weak banks.
  - Strengthen data integrity and collection to improve accuracy and completeness of prudential returns, including capturing all on- and off-balance sheet exposures.
  - Strengthen prudential regulations: set minimum capital commensurate with risks of each institution; revise guidance on accruals of interest; provide regulations on market (e.g., foreign exchange) risk.
  - Address Union-wide risks from government borrowing by assigning risk-weights for minimum capitalization, suspending accrual of interest on nonperforming government debts, and requiring provisioning on such debts.
  - Enhance ECCB powers for greater effectiveness in regulation and supervision of domestic banks, including transferring certain licensing and enforcement powers from national authorities to the ECCB.
  - Improve financial sector governance, including composition of boards, internal audit and control.
- Crisis management:
  - Strengthen crisis prevention via improved monitoring integrated with contingency plans for early detection and intervention.
  - Establish operational crisis containment plan recognizing limited ECCB resources for LOLR operations and constraints on fiscal authorities.
  - ECCB emergency powers should reference administrative tools (e.g., deposit securitization, deposit freezes, maturity extensions) for effective implementation.
- Refining regulatory architecture:
  - Consider transferring lead responsibility to the ECCB for supervision of the largest nearbanks (two credit unions) identified as systemically important.
  - National regulators to strengthen supervision of smaller credit unions and other nearbanks.
  - Strengthen insurance regulation via increased cross-border regulatory cooperation and structured cooperative arrangements with overseas supervisors.
  - Consider independent supervision for development banks to enhance performance.
- Offshore banks:
  - Align prudential regimes of offshore banking laws with uniform domestic Banking Act; issue and enforce comprehensive prudential regulations and guidelines including risk-based capital; establish uniform reporting requirements; enforce legislation and guidelines consistently and timely.
  - Under-capitalized banks relative to the Basel 8 percent minimum risk-weighted ratio should prepare capital contingency plans.
  - Realign ECCB’s role in offshore banking supervision according to resources and priorities; national authorities must find resources to ensure effective compliance by offshore banks or reassess the future of offshore banking in their jurisdictions.
  - Where domestic banks are affiliated with offshore banks, ensure close cooperation and information sharing and agree on lead supervisor for the group.
- Structural issues:
  - Continue ECCB efforts in institutional development: build missing markets and infrastructures, foster competition through a single “financial space,” undertake educational efforts subject to resource availability, and improve legal and judicial systems supporting debt recovery.

### II. Overview of the financial system — key statistics and institutional structure
- Despite small size, the financial system is relatively deep and dominated by commercial banks. Key figures and observations:
  - Total licensed commercial banks: 39 (note: 26 are units of one of six international banking groups).
  - Four of the locally-owned banks are fully or majority government-owned.
  - Foreign-owned banks control over 55 percent of the Union-wide market (measured by bank loans).
  - Government-owned institutions have 15 percent of the Union-wide market.
  - Nearbanks manage assets equivalent to about 24 percent of GDP; the most important are 71 cooperative credit unions.
  - Insurance sector:
    - One hundred forty six insurance company licenses in the region, representing eight life insurance groups and four composites, with a further 45 companies writing non-life business only.
    - Annual premium income in various jurisdictions ranges between 4 percent and 7 percent of GDP.
    - Insurance assets total about 12 percent of GDP.
  - National insurance funds:
    - Total assets of national insurance funds amounted to about 15 percent of GDP; projected to continue growing under present policies and demographic trends.
  - Offshore financial services:
    - Assets reported by offshore banks in the four assessed jurisdictions total about US$5 billion.
    - One jurisdiction accounts for approximately 66 percent of that total; one institution accounts for nearly half of the total offshore assets.
    - The offshore sector has seen a sharp decline in the number of offshore banks: currently there are 53 offshore banks (ten of which are under some form of supervisory intervention), about one-third of the number of just a couple of years earlier.
  - Monetary indicator: The ratio of M2 to GDP is estimated at up to 95 percent.
- Selected data excerpt from Table 1 (financial intermediaries, number and total assets):
  - Banks, Dec. 97: Number 44; Assets EC$m 7,884.7; Assets percent GDP 121
  - Banks, Dec. 99: Number 43; Assets EC$m 9,525.6; Assets percent GDP 129
  - Banks, Dec. 01: Number 43; Assets EC$m 10,466.5; Assets percent GDP 136
  - Banks, Dec. 02: Number 41; Assets EC$m 12,256.0; Assets percent GDP 156
  - Banks by ownership, Dec. 02:
    - Domestic: Number 10; Assets EC$m 3,504.8; Assets percent GDP 45
    - Foreign: Number 27; Assets EC$m 6,805.0; Assets percent GDP 87
    - State-Owned: Number 4; Assets EC$m 1,946.2; Assets percent GDP 25
  - Other nonbank highlights from Table 1:
    - Credit Unions: Dec. 97 Number 79; Assets EC$m 468.2; Assets percent GDP 7. Dec. 01 Number 73; Assets EC$m 688.8; Assets percent GDP 9. Dec. 02 Number 72; Assets percent GDP n.a.
    - Mortgage Institutions (supervised by ECCB): Dec. 97 Number 6; Assets EC$m 242.5; Assets percent GDP 4. Dec. 02 Number 6; Assets EC$m 348.2; Assets percent GDP 4.
    - Finance Companies: Dec. 97 Number 8; Assets EC$m 28.4; Assets percent GDP 0. Dec. 02 Number 8; Assets EC$m 358.9; Assets percent GDP 5.
    - Insurance companies: Dec. 01 Number 146; Assets EC$m 950e; Assets percent GDP 12 (e denotes staff estimate extrapolated from partial information).
  - Notes from table:
    - e denotes staff estimate extrapolated from partial information.
    - March 2002 referenced for national insurance funds figure.
    - Mortgage Institutions are licensed under the Banking Act and supervised by the ECCB; Building Societies are established under national Building Societies Acts.
    - September 2003 = 39 (clarifying later bank count).

### II.A. Institutional composition and regulatory responsibilities
- The ECCB is the principal regulator for domestic banks; national authorities retain primary responsibility for supervision of NBFIs and offshore banks, though ECCB has agreed to assist six of eight member jurisdictions in offshore bank supervision in several cases.
- Supervision gaps exist where ECCB authority, responsibilities, and accountability are unclear; ECCB has not been involved in supervision of offshore banks affiliated with domestic banks in at least one jurisdiction, including a very large offshore bank.
- Regulatory shortcomings for offshore banks mirror those for domestic banks but are often more acute: deficiencies in data, absence of risk-based capital requirements, and inadequate inspection programs; indications of under-capitalization compared to Basel norms in some offshore banks.
- Insurance supervision should be enhanced and could benefit from regional cooperation with home country regulators from Barbados and Trinidad.

*Source: ECCB and IMF staff assessment as presented in the FSAP chapter "1. Financial Intermediaries: Number and Total Assets" from the provided PDF content.*

### 17.      Organized securities trading in the region is centralized in the recently established

### Organized securities trading in the region is centralized in the recently established Eastern Caribbean Securities Exchange (ECSE) and the Regional Government Securities Market (RGSM)

### Market structure and liquidity
- Securities trading is centralized in the Eastern Caribbean Securities Exchange (ECSE) and the Regional Government Securities Market (RGSM).
- Market capitalization is described as "still very small in comparison to the rest of the financial system" and trading is "very light."
- "No funds have been raised through equity listings."
- The interbank money market is "relatively small and inactive," notably involving foreign banks lending to their affiliates.
- An organized interbank market, open to all banks in the Union, was put in place in October 2001.

### Regulatory and supervisory framework
- Regulatory jurisdiction over financial institutions is divided between the ECCB and national authorities.
- The ECCB is governed by a Monetary Council comprising the Ministers of Finance from each participating Government.
- Banking supervision:
  - Banks are regulated and supervised under the uniform Banking Act of 1983.
  - The ECCB is the supervisor for all private (domestic and foreign) and state-owned banks.
  - The ECCB Act and the uniform Banking Act are being amended to "improve the ECCB’s capacity to supervise domestic banks and their affiliates."
  - Under the uniform Banking Act, key regulatory and supervisory decisions, including licensing and enforcement, are taken by the relevant Ministers of Finance "on recommendation from or after consultation with the ECCB."
- Securities supervision:
  - Supervised under the uniform Securities Act of 2001.
  - The Act created the Eastern Caribbean Securities Regulatory Commission (ECSC) and the Eastern Caribbean Securities Exchange (ECSE), the latter with Depository and Registry subsidiaries.
- Other financial institutions:
  - The ECCB supervises nonbank financial intermediaries licensed under the Banking Act (13 institutions: mortgage or finance companies, some subsidiaries of banks).
  - Insurance intermediaries and nonbank depository institutions (cooperative credit unions, building societies and development banks) are under national supervisory authorities, mainly within the Ministries of Finance.
- Offshore financial services:
  - National supervisory agencies (NSAs) established in seven of the eight ECCU territories supervise offshore banks, trust companies and other offshore services providers (including in some cases internet gaming) in accordance with national laws.

### Macroeconomic context and implications for the financial system
- Real GDP history and recent estimates:
  - Average annual growth in the 1990s: "3.5 percent."
  - Real GDP fell by "1.5 percent in 2001" and "stagnated in 2002."
  - Preliminary estimates for 2003 suggest an expansion of "about 2.4 percent."
- Fiscal and public debt situation:
  - Aggregate public sector debt increased from "78 percent of GDP at end-2000" to "103 percent of GDP at end 2003."
  - Four member countries had debt-to-GDP ratios "in excess of 100 percent at end 2003."
  - The combined central government deficit was "5.9 percent of GDP in 2003."
  - Some governments (Antigua and Barbuda and Dominica) accumulated arrears; Dominica entered a stand-by arrangement with the Fund in August 2002 and a successor PRGF arrangement in December 2003.
- External and reserve position:
  - Despite large current account deficits, ECCB gross international reserves rose and "stood at 20 percent of broad money at end 2003."
  - Reserves increased due to capital inflows, mainly financing direct investment for construction and public sector borrowing.
  - Capital account transactions are "fairly liberal."
- Monetary and credit developments:
  - Growth of bank credit has declined relative to deposits; M2 has continued to grow while net bank lending to the public sector contracted.
  - Private sector credit growth has "fallen sharply."
  - Banks have built up foreign assets and, to a lesser extent, deposits at the ECCB.
- Interest rate environment:
  - Nominal interest rates in the ECCU were "slow to adjust to declining U.S. interest rates," producing a significant widening of the EC/U.S. dollar interest differentials.
  - Over the three years to end-2003, mean deposit rates in the ECCU fell by "only 70 basis points" while U.S. rates fell by "over 500 basis points."
  - A "3 percent minimum savings rate" is in place; it currently applies to "about 20 percent of interest-bearing deposits" and is considered "somewhat high relative to wholesale deposits."
  - Recommendation: "The floor rate should be kept under review and adjusted in line with wholesale market rates."

### ECCB institutional arrangements, monetary policy instruments and facilities
- Currency peg and reserve cover:
  - The currency is pegged "at EC$2.70 to U.S$1.00."
  - The ECCB is required to hold external reserves "of no less than 60 percent of its demand liabilities"; the policy norm is "80 percent," and the cover has been "maintained at over 95 percent for several years."
- Global limit on domestic assets:
  - ECCB global limit on domestic assets is "currently 25 percent of demand liabilities," allocated at the beginning of each fiscal year to credit to commercial banks and participating governments ("30 percent and 70 percent of the fiduciary issue, respectively").
  - "The global limit has not been exhausted."
- Monetary instruments and facilities:
  - Reserve requirement: "Set at 6 percent on all deposits." Reserves are unremunerated, in local currency and based on the average weekly deposits.
  - Rediscount facility for treasury bills: ECCB sells to banks treasury bills it bought in the primary market, rediscountable before maturity.
  - Discount rate: Applicable rate at the discount window; was lowered in July 2003 to "6.5 percent."
  - Minimum savings deposit rate: The only remaining interest rate control; lowered in September 2002 from "4 percent to 3 percent."
  - Lombard facility (discount window): Emergency liquidity assistance for up to "90 percent of the face value of treasury bills or other securities"; used "very rarely."
  - ECCB can also provide discretionary direct lending to member governments and to a systemically important bank in distress.
- Monetary Council reviews operation of these instruments regularly.

### Banking sector strengths and vulnerabilities
- Strengths:
  - A history of financial stability anchored in the ECCB currency arrangement.
  - Presence of strong foreign banks historically; deposit base has grown steadily for several years.
  - Residents’ deposits have remained stable at "89 percent of total bank deposits"; private sector resident deposits remain at "two-thirds of total deposits."
  - Foreign currency deposits average "15 percent of total deposits," evidencing confidence in the system.
- Vulnerabilities and weaknesses:
  - Nonperforming loans (NPLs) are "high for many domestic banks," particularly locally incorporated banks; only a "small proportion of NPLs is covered by loan loss provisions."
  - Unprovisioned unsatisfactory assets are a worrying share of total portfolios.
  - Banks apply a zero risk weight on loans to governments in arrears and in some cases have accrued interest on such loans.
  - Banks’ holdings of government obligations are about "15 percent of total assets" on average; nonperforming government obligations do not attract provisioning charges.
  - Indications that a large offshore bank with a domestic bank affiliate "would be undercapitalized on a risk-weighted capital basis."
  - Profitability has weakened: net interest margins declined and expenses rose; profit figures may be overstated due to understated loan loss provisions and accrual of interest on delinquent debts.
  - Loan concentration has tended to be high; average loan concentration to groups has dipped just below the regulatory norm of "25 percent."
  - Largest sectoral exposure is to the household sector; public sector bodies (including social security funds) hold large deposit balances with banks.
  - ECCB supervisory analysis: the ECCB’s list of banks for intensive monitoring represents "41 percent of ECCU banking assets," of which only "0.4 percent of assets is accounted for by a foreign bank branch." Indigenous banks that met benchmarks accounted for just "2.8 percent of the system’s assets."

### Credit quality, accounting and supervisory concerns
- Origins of credit quality problems:
  - Poor loan approval processes, shareholder pressure for market share or leniency toward favored borrowers, and weak foreclosure mechanisms.
  - Loan recovery problems predate the 2001–2002 downturn in many cases.
- Accounting and audit issues:
  - Banks are required by law to maintain adequate records, but the scope of accountants’ work and the level of disclosures in audited financial statements is "very mixed."
  - All banks must comply with ECCB accounting guidelines; audit opinions state preparation "in accordance with international accounting standards," but the content and approach of audits vary.
  - Some audit reports express an opinion on compliance with the Banking Act while others do not.
  - Standard audit approaches often focus narrowly on the accuracy of regulatory returns.
  - Some accountants do not rely on internal auditors due to perceived lack of independence and experience across jurisdictions.

### Financial soundness indicators (selected figures)
- Regulatory and balance-sheet metrics (Dec. 98 to Sep. 03, as presented):
  - Total Capital/Risk Weighted Assets (Locally Incorp. Banks): "16.3", "17.9", "16.6", "17.7", "18.9", "19.1" (in percent)
  - Capital/Asset (Locally Incorp. Banks): "10.4", "10.5", "10.1", "10.7", "11.1", "10.8" (in percent)
  - Unsatisfactory Assets/Total Loans (ECCU): "12.6", "14.9", "11.7", "13.5", "13.7", "11.9" (in percent)
  - Unsatisfactory Assets/Total Loans (Locally Incorp. Banks): "18.0", "23.2", "16.7", "17.4", "17.4", "16.8" (in percent)
  - Provision for Loan Losses/Unsatisfactory Assets: "26.6", "19.7", "28.0", "28.1", "29.7", "34.0" (in percent)
  - Unsatisfactory Assets net of Provisions/Total Capital (Locally Incorp. Banks): "88.7", "119.0", "82.3", "74.6", "66.5", "60.2" (in percent)
  - Amount Outstanding by Largest Group/Total Loans: "8.0", "7.8", "7.5", "6.4", "6.6", "6.0" (in percent)
  - Amount Outstanding by Largest Sector/Total Loans: "45.1", "45.7", "45.9", "46.6", "46.4", "47.4" (in percent)
  - Loans to Households/Total Loans: "45.1", "45.7", "45.9", "46.6", "46.4", "47.4" (in percent)
  - Gross Government Claims/Total Assets: "13.3", "14.1", "15.2", "15.0", "15.1", "15.2" (in percent)
  - Net Profit before Taxes/Average Assets: "2.0", "2.4", "2.2", "2.1", "1.6", "1.7" (in percent)
  - Net Profit before Taxes/Average Equity (Locally Incorp. Banks): "13.8", "14.8", "14.9", "17.0", "12.9", "13.7" (in percent)
  - Net Liquid Assets/Total Deposits: "19.7", "20.6", "19.6", "24.8", "27.3", "30.5" (in percent)
  - Liquid Assets/Total Assets: "21.0", "21.9", "20.6", "24.3", "26.4", "29.0" (in percent)
  - Foreign Currency Deposits/Total Deposits: "10.7", "14.0", "15.7", "15.0", "15.7", "15.3" (in percent)
  - ECCB Reserve Cover: "90.9", "88.0", "88.3", "92.9", "97.1", "96.5" (in percent)
  - ECCB Gross Reserves/M2: "19.8", "18.2", "17.4", "19.1", "20.2", "19.9" (in percent)
  - Highest ECCU TB rate - US TB Rate: "2.2", "2.3", "1.2", "4.1", "5.9", "4.7" (difference)

- Table sources: "Data provided by the Eastern Caribbean Central Bank; and Fund staff estimates."

*Italic: Extracted from the IMF staff report content provided in the source PDF.*

### 41.      The quality and reliability of financial reports prepared by a few banks is also

### _cr04293 - 41.      The quality and reliability of financial reports prepared by a few banks is also

### Financial reporting and public-sector loan treatment
- The practice of recognizing “interest earned but not collected” from nonperforming government debt adversely affects the quality and reliability of financial reports prepared by a few banks.
- The ECCB does not require banks to make provisions for delinquent loans to government bodies.
- Recommendation: The ECCB should not allow banks to continue accruing uncollected interest on nonperforming government debt.
- Recommendation: The ECCB should revise existing guidelines for loan classification and accruals of interest with respect to nonperforming government/public sector debt; require risk-weight allocations for such debt and loss provisions when they become delinquent (see paragraph 52).

### Macroprudential analyses — framework and risks (Sections C, paras. 42–46)
- The ECCU framework: multiple sovereign jurisdictions, a single currency pegged under a quasi-currency board arrangement; mutual benefits of monetary stability but vulnerability to cross-jurisdiction spillovers (para. 42).
- Excessive government borrowing is identified as a potential source of instability. If national governments become unable to service obligations, private sector capacity to pay could be impaired; central bank liquidity support in such a scenario could pressure currency reserves and the currency board arrangement (para. 43).
- Channels to address excessive government borrowing:
  - Enact complementary fiscal rules that bind aspects of fiscal performance and borrowing.
  - Rely on market discipline.
- Current limitations: no binding agreement on fiscal rules and weak markets; government borrowing from banks attracts a zero risk-weight in capital requirement calculations (para. 44).

### Stress-testing methodology (Box 3, Macroprudential Analysis)
- A stress test examined implications of further deterioration in government fiscal positions on banking system solvency, including knock-on effects on private-sector debt-servicing capacity due to government arrears on wages and payments to suppliers (Box 3.1).
- Assumptions:
  - 50 percent and 100 percent loss given default by four ECCU governments, individually and collectively.
  - An additional loss to banks equivalent to 25 percent of their loans to the personal sector.
  - An adjustment to capital for data deficiencies (including possible underprovisioning of NPLs and other deficiencies) was undertaken before the stress test (Box 3.1).
- Additional analyses:
  - Spillover and contagion effects via interbank exposures, interest rate risk, and exchange rate risk were examined (Box 3.2).
  - No tests were performed on insurance companies or near banks because neither sector is large enough to be of systemic significance for the ECCU (Box 3.2).

### Stress-test results (Box 3, Results of stress test)
- 50 percent loss given default scenario:
  - The loss to the banking system as a whole is 10.7 percent of assets, including losses on consumer loan portfolios.
  - Locally incorporated banks accounting for 28 percent of system assets become insolvent.
- 100 percent loss given default scenario:
  - The loss amounts to 16.6 percent of assets, including losses on consumer loan portfolios.
  - Insolvent locally incorporated banks account for 37 percent of the system’s assets.
- Interbank contagion:
  - Amounts owing to other ECCU banks by the banks most vulnerable to insolvency because of government default are about one percent of the system’s assets, indicating little risk of direct contagion through the interbank market.
- Market risks:
  - Interest rate risks are negligible.
  - Banks would gain from an exchange rate devaluation.

### Contagion channels and ECCB capacity (para. 46)
- Individual bank insolvencies are unlikely to have a large direct impact on other banks due to low outstanding interbank balances within and between territories.
- Indirect effects remain a concern: insolvency could lead to loss of confidence, deposit withdrawals, and capital flight.
- The ECCB’s capacity to deal with capital outflows is limited (see Section VI).

### Anti-Money Laundering/Combating the Financing of Terrorism (para. 47 and Box continuation)
- The ECCB has increased supervision scope of domestic banks’ compliance with AML/CFT requirements and identified material deficiencies in banks’ AML/CFT controls; bank management was requested to take corrective action.
- IMF-conducted detailed AML/CFT assessments for Anguilla and Montserrat (as part of the OFC assessment program) indicate:
  - Jurisdictions have relatively well-developed legal frameworks but significant gaps in institutional capacity and implementation, particularly in the offshore bank and nonbank sectors.
  - Very few reports of suspicious activity filed in some jurisdictions and prosecutions/convictions for money laundering have generally been negligible.
- Assessments of Dominica, Grenada, St. Lucia, St. Kitts and Nevis and Saint Vincent and the Grenadines were conducted in September 2003 by the Caribbean Financial Action Task Force (CFATF); results were not yet available at the time of the report.

### Review of supervisory and regulatory arrangements — domestic banking (Section V.A, paras. 48–58)
- Strengths:
  - The ECCB is well-respected and supported by well-qualified banking supervision professionals (para. 48).
- Weaknesses relative to Basel Core Principles (BCP):
  - Independence, powers, and resources: need enhanced operational independence, enforcement powers (including ability to impose administrative fines), and resources for more timely and frequent on-site inspections (para. 50).
  - Risk-based supervision: need supervisory strategies focused on high-risk institutions and tools to link inspection frequency/intensity to ECCB “watch list” of weak banks (para. 51).
  - Treatment of public sector obligations: ECCB should revise guidelines for loan classification and accruals of interest for nonperforming government/public sector debt; require risk-weight allocations and loss provisions when delinquent (para. 52).
  - Capital adequacy: current minimum capital adequacy risk ratio is eight percent on a non-statutory basis; proposed revisions to the Banking Act will provide for statutory application. Reported risk-weighted ratios do not reflect all risks (foreign exchange, interest rate, market, and nonperforming public debt). Recommendation: enhance capital adequacy guidelines and strengthen loan loss provisioning requirements accordingly (para. 53).
  - Consolidated supervision: ECCB should conduct consolidated supervision and obtain comprehensive information on all offshore bank affiliates of domestic banks; fully implement information sharing with national supervisory authorities and assess capital adequacy on a group basis (para. 54).
  - Data integrity: require bank auditors to validate regulatory returns; more frequent ECCB inspections; proposed Banking Act amendments to empower ECCB to request further audits and require external auditors to report matters of significant consequence (para. 55).
  - Remedial actions and follow-up: establish effective and timely processes to monitor and enforce compliance with corrective measures; reliance on “moral suasion” has left some deficiencies uncorrected for several years (para. 56).
  - Cooperation and information sharing: ECCB lacks legal authority to cooperate/exchange information with other supervisors; proposed Banking Act amendments should largely address this limitation (para. 57).
  - Financial sector governance: instances of lending to directors and shareholders contrary to regulations; need stronger board composition, internal audit and control functions, and safeguards against political interference (para. 58).

### Securities markets (Section V.B, paras. 59–60)
- The 2001 uniform Securities Act provides a strong regulatory framework for regional securities markets.
- The Eastern Caribbean Securities Commission (ECSC) is an independent regulator and utilizes four skilled ECCB banking supervision staff under a letter of agreement (para. 59).
- Observations:
  - The Commission lacks a track record in implementation; few aspects of the law and regulations have been tested.
  - Disclosure standards could be strengthened.
  - Conflict of interest guidelines for staff should be developed.
  - The draft Takeover Regulations should be brought into effect.
  - Increased emphasis on investor education and public awareness is recommended (para. 60).

### Supervision of other financial institutions (Section V.C, paras. 61–68)
- Offshore banking:
  - Offshore BCP assessments focused on Anguilla, Montserrat, Antigua and Barbuda, and Saint Vincent and the Grenadines (para. 61).
  - Offshore bank counts: Antigua and Barbuda 16, Montserrat 11, Saint Vincent and the Grenadines 10; numbers have declined in recent years (para. 61).
  - Each ECCU member has unique offshore banking legislation distinct from the domestic Banking Act; supervision of offshore banks is primarily the responsibility of national regulators (para. 61).
  - ECCB has supervisory arrangements with national authorities in six ECCU jurisdictions except Antigua and Barbuda and St. Lucia; ECCB provides support mainly in licensing due diligence and onsite inspections (para. 62).
  - Recommendation: ECCB should coordinate closely with national authorities where offshore banks have domestic affiliates; agree on lead supervisor for group supervision; consider capacity and mandate trade-offs if assisting offshore supervision (para. 63).
  - Identified weaknesses: prudential requirements and accounting standards, enforcement powers, repetitive regulatory forbearance, inadequate control over large exposures and connected lending, and AML supervision gaps (para. 64).
  - Capital adequacy in offshore jurisdictions:
    - Minimum capital requirements range from US$500,000 to US$5 million.
    - Indications exist that several banks would not meet a minimum Basel eight percent risk-based capital ratio without additional capital.
    - Recommendation: adopt risk-based capital requirements and request undercapitalized banks to prepare capital contingency plans (para. 65).
- Insurance:
  - Insurance regulation in OECS jurisdictions is well below international standards.
  - A common insurance law drafted in 1995 has not been fully enacted; solvency requirements, inspection and intervention powers, corporate governance controls, and internal controls are largely absent from the draft law (para. 66).
  - Insurance supervision is chronically under-resourced; upscaling supervisory resources independently in all jurisdictions may not be practical or cost effective (para. 66).
- Nearbanks (nonbank depository institutions):
  - Supervision is seriously deficient and constrained by resources.
  - For cooperative credit unions, regulatory forbearance on legal ratios is common even for larger societies.
  - Two credit unions identified as of sufficient scale to be considered systemically important and warrant transfer of supervision responsibility to the ECCB (para. 67).
  - Little or no active supervision of building societies; no independent prudential supervision of development banks and foundations (para. 67).
- Integrated financial supervision:
  - Proposal: establish national sectorally-integrated regulatory bodies to enhance supervision of insurance, nearbanks, and offshore finance; exploit economies of scale at national level (para. 68).
  - As regional domestic bank regulator, ECCB should have primary responsibility for onshore depository institutions sufficiently large to present systemic risks, including the largest credit unions and building societies.
  - National regulators should focus on consumer protection, smaller credit unions and nearbanks, offshore sector, and AML/CFT issues where appropriate.
  - Recommendation: strengthen insurance regulation via increased cross-border regulatory cooperation and enhanced cooperation with overseas supervisors (para. 68).

*Source: _cr04293 - 41.      The quality and reliability of financial reports prepared by a few banks is also (IMF report content provided).*

### 69.      The range of crisis management options available to any monetary authority in a

### The range of crisis management options available to any monetary authority in a pegged exchange rate system

### Crisis management constraints and options
- Large-scale central bank lending to an illiquid bank would clearly threaten the peg.
- Weaknesses in the balance sheets of the fiscal authorities further constrain crisis-management options.
- Under the current fiscal conditions, a blanket guarantee to boost deposit and creditor confidence runs the risk of being ineffective due to a lack of credibility.
- Given the peg, the only tools available for containment of bank runs would be administrative measures, such as:
  - deposit securitization,
  - forced maturity extensions,
  - deposit freezes.
- Making public the measures to be taken to prevent a crisis could help bolster public confidence.
- It is not clear that a secure legal framework exists to underpin such drastic administrative actions, which could cause major economic and political disruption.

### Emphasis on prevention and early warning
- Focus must be on crisis prevention, early warning systems, and ensuring preconditions of a sustainable currency board arrangement are in place.
- Crisis prevention measures:
  - Address fiscal unsustainability in the ECCU.
  - Ensure banking system soundness by addressing weaknesses in the regulatory and supervisory framework as identified in Sections IV and V.
  - Strengthen early-warning systems to allow supervisors to identify emerging problems and take remedial actions earlier.
  - Carry out full-scope examinations of systemically important institutions early to identify vulnerabilities; this entails receiving information on all such institutions, including offshore bank affiliates and large credit unions.
- Crisis containment measures:
  - Establish an operational crisis contingency framework endorsed by all ECCU members that explicitly addresses loss sharing in the event of banking failures—responsibilities of depositors and shareholders, national governments, and limitations on the responsibilities of the ECCB.
  - ECCB’s draft contingency plan should include domestic banks and consider national authorities’ and the ECCB’s responses in the event of difficulties in systemically important offshore banks and credit unions.
  - The framework should be explicit about the limited resources available for lender-of-the-last-resort support and the implications for the ECCB’s balance sheet.

### Debt management arrangements
- Debt management in the ECCU is the responsibility of national governments and is directed towards satisfying governments’ financing needs.
- Operations have been relatively unsophisticated and centralized in ministries of finance.
- Legislative frameworks fall into two categories:
  - a unitary overall framework to consolidate all legislative borrowing authorities (example: Financial Administration Act, 1997 of St. Lucia),
  - or a collection of instrument-specific laws (Loans Act, Treasury Bills Act, and specific acts for borrowings from international institutions).
- Most jurisdictions have not moved to the unified framework; result: no overall debt ceiling but rather sub-ceilings for individual debt instruments.
- Few jurisdictions have advanced debt management systems.
- Some jurisdictions have set up a high-level national debt coordinating committee for regular monitoring and policy direction on debt.

### Regional Government Securities Market (RGSM)
- RGSM created to broaden the market for ECCU governments’ treasury bills and bonds by facilitating cross-border issuance and secondary trading to integrate existing government securities markets into a single regional market.
- Expected benefits:
  - lower overall borrowing costs for governments,
  - integration of financial markets via the free flow of capital,
  - deepening of capital markets to foster private debt and equity market development.
- To date, a total of eight security issues have been made by three governments: St. Kitts and Nevis, Grenada, and Saint Vincent and the Grenadines.
- Issuances have generally been used to retire more expensive domestic debts.
- RDCC mandates each issuance be supported by a prospectus prepared by the issuing government, providing relevant information including an overview of economic performance and on debt.
- RDCC appointed the ECCB as fiscal agent to the governments (issuance facilitation, collection/payment, clearance/settlement, registration).
- Eastern Caribbean Stock Exchange (ECSE) identified as facility for primary issuance and secondary trading; ECSE disseminates information, provides market access, administers auctions, and supports secondary trading.

### Longer-term development issues
- Access to financial services:
  - Access by households and small businesses is relatively high; a majority of households have at least one institutional account.
  - High penetration of credit unions, which provide bulk of microfinance services though much loanable funds go to relatively well-off middle-class borrowers.
- Competition and market structure:
  - Despite many banks and nearbanks, competition within the banking sector is not very strong.
  - Foreign-owned banks appear to enjoy some market power; little cross-border competition between islands.
  - Recent entry of aggressive regional banks may strengthen competition.
  - Local banks will need to seek scale efficiencies, including cross-border cooperation, to remain contributors to long-term growth.
- Insurance sector:
  - Investments of national insurance schemes dominated by short-term assets in banks, exposures to local governments and statutory authorities, and are socially-oriented rather than optimized for risk and return.
  - This undermines their potential role as providers of long-term, venture, and development funds on commercial terms.
  - Weak competition in private insurance sector reflected in high premia.
- Securities markets:
  - Limited activity reflects the small number of securities available and lack of active domestic institutional investors.
  - To achieve cost effectiveness access to such investors is important, including enhanced access to international markets.
- Financial market integration:
  - Development and integration of a union-wide financial market has been central to ECCB activities and is beginning to bear fruit (emergence of a transparent securities exchange).
  - Even when more fully integrated, the union market will remain very small in absolute terms; international linkages will remain important.

### Appendix — ROSC: Basel Core Principles (summary findings)
- Assessment purpose: Identify adequacy of regulatory and supervisory frameworks to address system risks and form basis for recommendations.
- Key observations:
  - Need to strengthen legislative framework to enhance ECCB powers and autonomy and to beef up enforcement.
  - More frequent and comprehensive on-site examinations required given high levels of nonperforming loans and perceived gaps in data integrity.
  - Implementation of a risk-based capital framework that adequately reflects the risk of public sector loans should be a priority.
  - Supervisory practices should move toward risk-focused supervision, including ongoing communication with external auditors and overseas supervisors.
  - Establishment of a more formal information exchange mechanism with home supervisors identified as a priority for consolidated supervision of significant regional banking groups.
  - Draft legislative changes are proposed to address some concerns.

### Institutional and market structure statistics and facts
- ECCU membership: eight members—Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and Saint Vincent and the Grenadines.
- Number of banking licenses granted to domestic banks in the region: 39 banking licenses (some represent separate licenses for the same bank in different territories).
  - 13 licenses to locally owned and incorporated entities.
  - 7 licenses to locally incorporated but foreign owned entities.
  - 19 licenses to branches of foreign incorporated banks.
- Licensed mortgage and finance companies under ECCB supervision: 11.
- Many nonbank financial institutions (mainly credit unions and insurance intermediaries) operate outside ECCB regulatory framework and are largely unsupervised.
- Liquidity and balance-sheet facts:
  - Banks are currently very liquid due to shortage of good quality lending opportunities and enjoy a plentiful supply of deposits.
  - ECCB does not have a well-defined contingency plan for managing banking crises.
  - ECCB’s total banking assets at end-2002: EC$12,256 Million.
  - Financial services sector is mainly concentrated in 11 banks which together account for more that 52 percent of total banking assets.
  - Loan interest rates range from 9 percent to 13 percent.
- No deposit insurance arrangements exist.
- ECCB provides intraday liquidity support to commercial banks using its Globus Real Time Platform.
- No formal interbank market; interbank lending is occasional and fragmented with no lending between indigenous and foreign banks.

### Main ROSC assessments and recommendations (selected)
- Overall compliance with Basel Core Principles: fair and in need of strengthening.
- Objectives, Autonomy, Powers, and Resources (CP 1):
  - ECCB Banking Act should be strengthened to provide more effective supervision and enhanced autonomy.
  - Regulatory functions (authorization and enforcement) are exercisable by the relevant Minister of Finance acting on ECCB recommendation or consultation, which undermines independence.
  - Draft new ECCB Act would strengthen regulatory and supervisory authority but Ministerial involvement still limits independence.
  - ECCB currently lacks power to share prudential information with national regulators or foreign authorities.
- Licensing and Structure (CPs 2–5):
  - Permissible activities defined in the uniform Banking Act, but political involvement in licensing and revocation (Ministerial role) conflicts with Basel principles.
  - Draft new uniform Banking Act (Section 5(2)(d) and Section 27) proposes explicit requirements for ECCB investigations of applicants and fit-and-proper assessments of significant shareholders, directors, and management.
  - Recommendation: further enhance draft Act to grant ECCB authority over issue and revocation of domestic banking licenses and enhanced enforcement powers.
- Prudential Regulations and Requirements (CPs 6–15):
  - ECCB applies the Basel Capital Accord on a non-statutory basis with a minimum ratio set for all banks of 8 percent.
  - Recommendation: increase minimum capital ratio to reflect perceived risk of individual institutions.
  - Under Section 15(2) of the draft new uniform Banking Act, a bank failing to meet its capital ratio must present a plan to ECCB to comply within six months; recommendation that this period be shortened and shareholders asked to inject new capital as soon as possible.
  - Recommendation: ECCB should apply non-zero weights to government/public sector obligations in arrears to adequately reflect risk and degree of uncollectability given weak regional economic performance and level of government obligations in arrears.

*Source: IMF staff report text provided in the content unit.*

### 94.      Another factor directly impacting the adequacy of capital is the high levels of

### _cr04293 - 94.      Another factor directly impacting the adequacy of capital is the high levels of

### Capital adequacy and nonperforming loans (NPLs)
- The majority of banks exceed the 10 percent NPL threshold set by ECCB.
- In at least one case the ratio is 69 percent of total loans.
- ECCB requires banks to review (at least 70 percent of) their portfolios annually on this basis and classify loans in arrears according to specific criteria.
- ECCB sets minimum provisioning requirements, but concerns over the extent to which (real estate) security can be realized cast doubt on the adequacy of many provisions and the level of reported capital.
- Exposure to government and/or public sector is significant in some indigenous banks; under ECCB guidelines, currently nonperforming Government obligations are classified but do not attract a provisioning charge.
- Three of the banks visited indicated that they were accruing interest on nonperforming public sector debt. (Footnote: Since the FSAP mission, the ECCB has indicated that only one of the banks now has loan arrears from the public sector and that another has reduced the overdraft exposure below the approved limit.)

### Loan removal and special purpose vehicles
- Two indigenous banks under pressure to reduce NPLs recorded nonperforming loans into special purpose vehicles.
- These arrangements provide limited prudential comfort because the risk typically remains with the bank through intra-group funding.

### Loan classification, provisioning, and auditors
- ECCB’s requirements for loan classification and provisioning are used by external auditors as the principal benchmark for their assessment of provisioning adequacy.
- Recommendation (from text): Provide additional guidance to banks and auditors to strengthen classification and provisioning for nonperforming assets, including government/public sector obligations in arrears, so diminution of value is fully recognized.
- Specific recommendation: Government obligations in arrears should reflect the degree of uncollectability, default, and level of risk as is the case for private sector debt.

### Market, liquidity, and interest-rate risks
- There is no formal requirement for banks to have policies and procedures for market risks.
- ECCB had received some banks’ policies and procedures but had not evaluated their adequacy and suitability.
- Banks are exposed to liquidity and interest-rate risk (maturity mismatches), and market risk in the holding of securities.
- ECCB receives quarterly maturity analysis reports but has not defined specific guidelines for market, liquidity, and interest-rate risks, and has not set formal limits or guidance for controlling foreign exchange exposure.
- ECCB management presented preliminary drafts of risk management guidelines to BCP assessors during the Mission.

### Anti-money laundering (AML) supervision
- ECCB has begun to integrate AML supervision within its broader prudential oversight, particularly onsite inspections.
- In March 1995, ECCB issued basic anti-money laundering guidance notes as part of a wider AML initiative by the Caribbean Group of Banking Supervisors.
- These guidance notes did not have a legal basis and were generally not enforced.
- Since then, all ECCB member jurisdictions, except for St. Lucia, have enacted their own AML guidelines that supersede the ECCB Guidance Notes.
- ECCB recently conducted targeted AML examinations of most banks.
- Changes to legislation are needed to allow ECCB to share information on AML with other regulators within and outside the ECCB area.
- Banks must be required to report to the ECCB and AML supervisory authority cases of suspicious activity.
- Terrorist financing elements have not yet been specifically incorporated in examination procedures.
- Recommendation (from text): Increase depth and scope of onsite visits, incorporate visits within prudential supervisory cycle, and provide ongoing training to supervision staff.

### Methods of ongoing supervision and on-site inspections (CPs16–20)
- ECCB does not have a coherent and formal risk-based supervisory approach for planning and executing on-site inspections based on institution risk profiles and the approved supervisory strategy.
- At least two banks had not received a full-scope on-site inspection by ECCB in the last five to seven years; other banks had not received one in the last two to three years.
- ECCB does not have authority to monitor the quality of work done by external auditors for supervisory purposes; there are no requirements for external auditors to check the accuracy of prudential returns.
- Because on-site inspections are conducted infrequently, ECCB does not carry out regular annual prudential meetings with bank management and boards nor periodic discussions with external auditors relating to bank operations.
- ECCB management stated that during the third quarter of 2002, ECCB initiated a program of meetings with auditors and that a number of contacts have taken place since then.
- Recommendation (from text): Strengthen frequency of on-site inspections; develop mechanism to include off-site review and surveillance results into risk profile, supervisory strategy, and on-site inspection planning.

### Consolidated supervision and cross-border banking (CPs 20, 23–25)
- ECCB currently conducts supervision on a solo basis and lacks formal measures for consolidated supervision or formal liaison with regulators of other domestic financial service businesses.
- In at least one jurisdiction, ECCB is not involved in supervision of offshore banks licensed in the ECCU that are affiliates of domestic banks.
- Under Sections 16(2), 31(1), and 35(5) of the Uniform Banking Act, ECCB is not permitted to share information with other supervisory bodies.
- Recommendation (from text): Further amend the draft new uniform Banking Act to ensure ECCB has powers to extend channels of communication and exchange information with other supervisory bodies and competent authorities on all types of supervisory issues.
- Recommendation (from text): Implement prudential standards and collect relevant data to perform consolidated supervision and evaluate capital adequacy consistent with risk-based capital standards set out by Basel.

### Formal powers of supervisors and remedial measures (CP 21–22)
- Presently, ECCB enforces remedial action through Letters of Commitment (LOC) and Memoranda of Understanding (MOU).
- The Banking Supervision Manual contains guidance on grading supervisory response.
- ECCB has yet to fully enforce authority backed by legal sanctions to take a full range of remedial actions and impose penalties depending on severity.
- ECCB does not perform periodic and timely follow-up on onsite examination results and compliance with LOCs and MOUs.
- Some banks reported lack of feedback from ECCB on policy manuals; banks assumed “no response from ECCB” means an adequate policy manual.
- Recommendation (from text): Strengthen enforcement process, re-focus resources, and make greater use of existing powers, including those proposed in the new draft uniform Banking Act; introduce law provisions and implement administrative fines/penalties for noncompliance.

### Recommended Action Plan (selected highlights from Appendix Table 1)
- Objectives, autonomy, powers, and resources (CP-1): Further amend draft new uniform banking Act to enhance autonomy and powers of ECCB; accelerate memoranda of understanding with domestic and foreign supervisory agencies to begin consolidated supervision, including offshore affiliates.
- Capital Adequacy (CP 6): Adopt and implement a risk-based approach to setting minimum capital ratios that takes into account all risks and validate in on-site inspections; adopt a non-zero risk weight approach for government/public sector obligations.
- Loan evaluation and loan loss provisioning (CP 8): Provide additional guidance to banks and auditors; conduct more frequent and timely on-site inspections to ensure proper classification and provisioning.
- Market risks (CP 12)/Other risks (CP 13): Issue requirements/guidelines for risk management policies and procedures; adopt supervisory limits for market risk, liquidity risk management, interest rate risk, and foreign exchange risk; provide training to supervision staff.
- Internal controls (CP 15): Adopt legal provisions enabling information sharing and include countering of terrorist financing; conduct consolidated supervision including AML compliance on a group-wide basis; provide AML/CTF training.
- On-site and off-site supervision (CP 16): Strengthen frequency of on-site inspections and integrate off-site review results into supervisory planning.
- Validation of supervisory information (CP 19): Develop a comprehensive supervisory plan including more frequent on-site inspections, off-site prudential meetings, and formalized communication with external auditors.
- Consolidated supervision (CP 20): Implement prudential standards to evaluate capital adequacy consistent with Basel risk-based capital standards and collect relevant data for consolidated supervision.
- Remedial measures (CP 22): Strengthen enforcement and introduce administrative fines/penalties.
- Supervision over foreign bank’s establishments (CP 25): Establish formal and informal arrangements with home supervisors to assess global condition and home supervisor’s consolidated supervision practices.

### Authorities’ response and measures taken
- Drafted a new domestic Banking Act to address a number of recommendations; some ECCU governments have commenced parliamentary procedures for its enactment.
- Draft regulations and guidelines prepared, including for risk-based capital, corporate governance, and loan valuation and provisioning. (Note: the draft regulations do not risk-weight ECCU government obligations and do not require provisions for nonperforming government debt as recommended.)
- Guidelines for Reporting of Suspicious Activity and Incidents of Fraud for Institutions licensed under the Banking Act have been disseminated to commercial banks and licensed nonbank financial institutions.
- ECCB restructured the Bank Supervision Department into six functional units; formed a Compliance and Internal Review unit charged with supervisory follow up and enforcement; increased number of supervisory staff positions.
- ECCB is enhancing its program of prudential visits and dialogue with commercial banks and other licensed institutions.
- A revised Contingency Plan for Weak Banks has been approved by the ECCB’s Board; the plan includes a coordination mechanism for dealing with banking crises and a Financial Sector Crisis Management Committee has been formed.
- A three-member panel has been appointed to review and recommend terms for the bank’s resolution of the Capital Bank issue in Grenada.

*Source: IMF staff report content provided in the supplied PDF extract.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04293.pdf_