## _cr0964 ## Source details **Canonical URL:** [_cr0964](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0964.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0964.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0964.pdf.json) --- ### Executive summary — macroeconomic background and risks - GDP per capita: US$12,400. - Economic growth: 4.1 percent for 2004–2007. - Unemployment: 8.5 percent in 2007. - Tourism, real estate and financial services: represent almost half of GDP and almost 80 percent of foreign currency receipts. - Exchange rate and monetary context: - Barbados dollar peg: BDS$2=US$1. - CARICOM monetary union planned in period 2010-15. - Inflation: declined from about 6.75 percent during 2005–06 to 4 percent in 2007; y-o-y inflation picked up again and is expected to reach 9 percent by the end of the year. - External vulnerability: economy vulnerable to a slowdown in Europe (especially U.K.) and the United States. ### Fiscal position and external balances - Central government fiscal deficit: widened from about 1.5 percent of GDP in 2006/07 to about 3.5 percent of GDP in 2007/08 (April to March). - Current account deficit: fell from 8.2 percent of GDP in 2006 to an estimated 6.6 percent of GDP in 2007. - Gross central government debt: 73 percent of GDP. - Official foreign exchange reserves at end-2007: about US$776 million or four months of imports. - Growth outlook: GDP growth expected to slow to about 2.3 percent in 2008. ### Banking sector soundness, structure and key statistics - Onshore bank assets: US$3.1 billion in 2002 to US$5 billion in 2007. - Bank assets: about 142 percent of GDP; about 80 percent of all deposit-taking institutions’ assets. - Investment portfolio: government bonds comprise 70 percent of investments, held to maturity. - Funding: almost 90 percent funded with local deposits. - System composition (2007): six foreign-owned banks (four subsidiaries, two branches); Canadian banks account for about 70 percent of system’s assets. - Canadian parent banks combined CAR: 11.5 percent; NPLs: 0.5 percent of loans. - Onshore banking sector CAR at end-September 2007: 10.8 percent (regulatory minimum: 8 percent). - Nonperforming loans: 8.2 percent in 2003 declining to 2.9 percent in 2007. - Short-term assets to short-term liabilities: close to 59 percent. - Net open position in foreign exchange for subsidiaries: 35.3 percent of their capital. - Loans and deposits in foreign currency: - Subsidiaries: 3 percent of total loans and 17 percent of total deposits. - Branches: 17 percent of total loans and 26 percent of total deposits. - Private non-financial credit growth in 2007: close to 8 percent. - Consumer and mortgage lending: up to 68 percent of total loans; mortgages growth in 2007: about 20 percent; many mortgages carry adjustable rates and up to 95 percent loan-to-value ratios. - Securities market capitalization: - December 2001: about US$1.8 billion or 71 percent of GDP. - End-2007: US$5.6 billion or close to 150 percent of GDP; with cross-listed shares: US$9.4 billion or 250 percent of GDP. - Mutual funds: 2003 total net assets BDS$298 million (12 funds); end-2007 total net assets BDS$759 million (14 funds). - Corporate debt issues 2003–2007: 28 public issues for BDS$1,370 million. - Yearly average total value of secondary market trades in government debentures and treasury bills (2003–2007): BDS$22.4 million; average transfers recorded: 188 per year. ### Onshore banking stress testing — methodology and results - Data adjustments for asset classification/provisioning: - provisions for “Special Mention” loans: 5 percent; - provisioning rate for “Substandard” loans increased from 10 percent to 20 percent; - 20 percent of “Pass” loans migrated to “Special Mention.” - Effective average CAR after adjustments: reduced from 10.8 percent to 10.2 percent (benchmark CAR for stress tests: 10.2 percent). - Credit risk scenarios and outcomes: - Baseline credit risk (WEO projections for 2008): - Official CAR: 10.8 - Adjusted CAR: 10.2 - Baseline CAR After Shock: 8.4 - Number of Banks CAR<8%: - - Number of Banks CAR<0%: 1 - Note: under baseline credit risk scenario one bank’s capitalization would fall below regulatory minimum. - 15 percent decline in tourist arrivals: system CAR from 10.2 percent to 6.7 percent. - 15 percent decline in construction sector: system CAR from 10.2 percent to 5.9 percent. - Credit Risk "Perfect Storm" (15 percent tourism decline; 15 percent construction decline; U.S. recession -3.0 percent of GDP; oil prices +50 percent): - CAR After Shock: 3.6 - Number of Banks CAR<8%: 4 - Number of Banks CAR<0%: 1 - Context: tourism shock ~30 percent larger than 2001 drop; construction shock much deeper than prior cycles; historical GDP falls referenced (4 percent in late 2001–2002; >6 percent early 1990s); 500 bps interest rate shock comparable to 460 bps rise March 1991–March 1992. - Market risk findings: - Interest rate +500bp: CAR After Shock 8.4; Number of Banks CAR<8%: 1. - Interest rate -500bp: CAR After Shock 11.9; Number of Banks CAR<8%: 0. - Exchange rate risk: - 10 percent depreciation: CAR After Shock 10.5; Number of Banks CAR<8%: 0. - 10 percent appreciation: CAR After Shock 9.9; Number of Banks CAR<8%: 0. - Extreme combined scenario (tourism + construction shocks; 500 bps interest rate increase; 50 percent oil price increase; U.S. recession): system CAR to 3.6 percent and all banks below regulatory minimum. - Liquidity stress tests: - Deposit run on subsidiaries: 30 percent in 30 days — no banks become illiquid; subsidiaries’ ratio of liquid assets to short-term liabilities declines from 57.3 percent to 31.6 percent; branches from 60.8 to 36.1; one foreign branch could become illiquid. - External funding dries up scenario: subsidiaries’ ratio declines to 50.4 percent; branches to 53.6 percent; no banks become illiquid. - Interbank lending: about 5 percent of total excess reserves; no formal contagion analysis due to data limits. - Funding from foreign parents: 10 percent of total funding, suggesting limited contagion from parents. ### Financial stability: supervisory capacity, Basel II and regulatory weaknesses - BSD progress since 2002 FSAP: - Moving toward risk-based supervision; increased staff and training; 12 guidelines issued as of April 2008 and 3 more expected. - Preparing Basel II implementation; plan to require Standardized Approach for credit and market risk and Basic Indicator or Standardized Approach for operational risk from 2009; possible transition to Advanced approaches after 2012. - Recommended Basel II actions: - Conduct full-scale Quantitative Impact Study (QIS) before final adoption. - Consider risk weightings for retail credit and residential mortgage loans. - Strengthen Pillar 2 framework. - Identified regulatory weaknesses (selected): - Outdated regulations (capital adequacy; asset classification and provisioning). - Deficient prudential rules on large exposures and related parties; no aggregate large exposure limit. - Incomplete supervisory framework for risk-based supervision (prompt corrective actions, comprehensive onsite inspection scope). - Weak legal framework for consolidated supervision of banking groups and financial conglomerates. - Insufficient cross-border home/host cooperation and MOUs (notably with Canada and Bermuda). ### Home–host cooperation and systemic foreign parents - Canadian banks’ systemic importance: Canadian dominance ~70 percent of system assets. - Existing multilateral regional MOU (March/May 2004/2006) among Caribbean jurisdictions; CBB lacks MOUs with Canada and Bermuda. - Recommended actions: - Conclude MOUs with OSFI (Canada) and Bermuda. - For regional groups (e.g., First Caribbean International Bank) pursue group-specific MOUs among all relevant supervisors. - Obtain comprehensive parent-bank risk profile information at least annually from home supervisors. ### Crisis management, deposit insurance and bank resolution - Crisis management improvements: - Compulsory deposit insurance scheme introduced mid-2007; DIC separate from CBB. - Deposit coverage: up to BDS$25,000 (US$12,500) per depositor per institution under the FIA. - Premium: flat 0.05 percent of yearly average deposit liabilities. - Initial fund size as of January 2008: about 0.2 percent of total deposits. - DIC authorized to issue securities and borrow from CBB and Ministry of Finance if needed. - Recommended deposit insurance actions: - Publicize features and coverage (including which institutions are excluded, e.g., credit unions). - Consider temporarily raising premiums to boost fund size. - Formalize early warning and prompt corrective action systems and a bank resolution process. - Bank resolution: - DIC can act as liquidator, but CBB would lead liquidation; 2006 FIA amendments grant CBB more intervention powers. - Need to design early warning systems, a Ladder of Intervention, prompt corrective action framework with cumulative restrictions tied to deteriorating capital ratios, and clearer resolution procedures. - Drafting of MOU between DIC and CBB underway to clarify cooperation and exchange of information. - Recommendation: regular crisis simulation (“fire drills”) with Caribbean and Canadian supervisors. ### Nonbank financial sectors — insurance, credit unions, securities - Insurance sector: - Insurance penetration 2006: 10.3 percent of GDP (3.3 percent life; 7 percent non life); highest non-life figure worldwide and 9th highest overall. - 2007 portfolio: Real Estate 2%; Equity 16%; Money Market 24%; Fixed Income 58%. - Over 63 percent of NIS assets invested directly or indirectly in Barbadian government instruments. - Regulatory improvements: Minimum Continuing Capital and Surplus Requirements for life companies; Minimum Capital Test for general companies; Branch Adequacy Test for foreign branches. - Supervisory shortcomings: incomplete/inadequate data; delayed returns; limited onsite inspections for offshore insurers; need for solvency standards, corporate governance, market conduct, internal controls, asset and liability valuation. - Investment constraints: nonlife companies 2006 cash balances >36 percent of invested assets; life companies cash 12.53 percent of portfolios in 2006. - Recommendation: adopt accounting/reporting standards under insurance law; enhance regional cooperation (notably Trinidad and Tobago) on supervision and reinsurance evaluation. - Credit unions: - 34 credit unions with combined assets ~14 percent of GDP (Sep-07). - Two largest credit unions: assets $252 million and $134 million; two largest account for 71 percent of assets and 73 percent of membership. - Sector indicators (Sep-03 to Sep-07): members increased from 107,417 to 148,864; share of 3 largest rose from 73 percent to 85 percent. - Official loan delinquency rate: 6 percent as of September 2007 (measure understates delinquencies due to 90 day past-due threshold). - Return on equity for largest credit union: 6 percent for 2007. - Loan-to-deposit ratio: 87 percent. - Recommendations: increase frequency of joint CBB-Cooperatives Department on-sight examinations; consider issuing specialized Credit Union Law (H). - Securities markets and BSE/CXN: - BSE listed entities: 26 (18 domestic companies, one domestic closed-end property fund, seven regional cross-border listings, one domestic company on Junior Market). - BSE index: +12 percent in 2007 (after -6 percent in 2006). - CXN linking Barbados, Jamaica and Trinidad and Tobago exchanges: Phase I (communications, common trading/clearing/settlement rules) pending regulatory approval; Phase II (consolidation of order books, automated order routing). - Securities Commission limitations: lacks rule-making authority and clear inspection/access powers; constrained ability to share information with foreign regulators; enforcement program nascent; fines may be too low. - Recommended securities actions (selected): grant statutory powers under MFA and SA to make legally binding rules and inspect firms; implement regular inspection program; update disclosure and takeover rules; require timely disclosure by mutual funds, public companies and insiders; consider raising penalties. ### Offshore financial sector and exchange controls - Offshore scale and concentration (2007): - Offshore banks total assets grew 15 percent first nine months of 2007 to BDS$94.78 billion (~1,285 percent of GDP). - 54 offshore banks; four largest (all Canadian group members) represent 75 percent of assets; ten largest represent 91 percent. - End-2006: 441 insurance companies registered for exempt/qualifying business; only 181 exempt and 61 qualifying companies active. - Activities: banks taking non-Barbadian third party deposits; treasury functions for related organizations; wealth managers; commodities broker. - Insulation: offshore banks prohibited from business with local residents; Chinese walls appear to exist between affiliated on- and off-shore banks. - Supervisory gaps: offshore insurance supervision almost nonexistent; filings limited; timely information problematic; no onsite inspections or offsite analysis for many offshore entities. - Cross-border coordination: MOUs limited; regional MOU signed May 2004; CBB lacks MOUs with Canada and Bermuda. - Recommendations: increase CBB staff with offshore expertise; establish closer working relationships with home supervisors (OSFI, Bermuda) and Trinidad insurance supervisors. ### National Insurance Scheme (NIS) — assets and investment strategy - NIS established 1967; actuarial review December 1999 indicated actuarial deficit; 2002 pension reform increased contributions and raised retirement age to 67 by 2018. - NIS assets as of February 2008: BDS$2.7 billion (about 30 percent of GDP), up from BDS$1.4 billion in 2002. - 2007 portfolio composition: Real Estate 2%; Equity 16%; Money Market 24%; Fixed Income 58%. - Over 63 percent of assets invested in Barbadian government instruments; 24 percent held in money market (mostly demand deposits); equity and real estate only 18 percent. - Recommendation: revisit NIS investment strategy to match longer liability horizon and diversify outside Barbados. ### Key FSAP Update recommendations (summary; H = Highest priority) - Banking: - Strengthen cross-border consolidated supervision, legal framework for consolidated supervision, and home/host cooperation (H). - Update regulations on capital adequacy, asset classification and loss provisioning (H). - Strengthen regulation and supervision of large exposures and related-party exposures. - Conduct QIS and adjust Basel II timetable and Pillar 2 as needed. - Financial Services Commission: - Resolve mandate and structure promptly to improve supervision of Credit Union and Insurance sectors (H). - Insurance: - Develop standards on corporate governance, market conduct, internal controls, asset/liability valuation and a solvency standard for life insurers (H). - Improve timeliness of supervisory returns and redesign onsite/offsite processes (H). - Collaborate with Trinidadian authorities for supervision of cross-border groups. - Credit Unions: - Increase frequency of joint on-sight examinations (H). - Consider a specialized Credit Union Law (H). - Securities Markets: - Provide Securities Commission statutory powers under MFA and SA to make binding rules, inspect firms and share information (H). - Develop and implement inspection program; require timely disclosures; consider raising penalties (H). - Deposit Insurance Scheme: - Formalize early warning and prompt corrective action systems (H). - Expand public awareness about deposit insurance characteristics. - Financial stability analysis: - Supplement CBB’s macro model with a banking credit-risk model. - Other: - Revisit the NIS’s investment strategy. ### Crisis resolution framework and recommended preparedness - Need for clear procedures for resolving financial crises based on least-cost criteria. - Required protocols include: - Circumstances for emergency lending to individual institutions. - Triggers/timing for shifting from emergency assistance to solvency-resolution measures. - Procedures for selection and implementation of alternative resolution options (e.g., asset management corporations, bridge banks). - Recommendation: establish protocols and conduct regular crisis “fire drills” with Caribbean and Canadian supervisors. ### Social and selected macro-financial indicators (most recent year / selected series) - Population (people in millions): 0.274 - Adult literacy rate: 99.4 - Per capita GDP (in US$): 12,426 - Population share below poverty line: 13.0 - Life expectancy at birth: 75.4 - Gini coefficient: 42.0 - UNDP Development Index Rank: 31 - Unemployment rate: 7.4 - Real GDP annual percent change: 2004 4.8; 2005 4.3; 2006 3.3; 2007 3.3; 2008 2.3; 2009 2.0 - CPI inflation (average): 2004 1.4; 2005 6.1; 2006 7.3; 2007 4.0; 2008 9.0; 2009 5.9 - Current account (percent of GDP): 2004 -12.4; 2005 -12.8; 2006 -8.7; 2007 -7.2; 2008 -8.5; 2009 -8.3 - Public sector debt (public sector percent of GDP, fiscal year): 2004 87.1; 2005 91.6; 2006 92.8; 2007 94.6; 2008 95.7; 2009 96.7 - Exchange rate (domestic currency/U.S. dollar): 2004 2.0; 2005 2.0; 2006 2.0; 2007 2.0; 2008 2.0; 2009 2.0 *IMF FSAP Update — Executive Summary and selected sections (Barbados), source: _cr0964.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Macroeconomic background and risks - Barbados has "one of the highest levels of GDP per capita in the region, at about US$12,400." - Economic growth was "4.1 percent for 2004–2007" driven by increased tourism. - Unemployment "has fallen to a historical low" of "8.5 percent in 2007." - Tourism, real estate and financial services "represent almost half of GDP and almost 80 percent of foreign currency receipts." - Exchange rate and monetary context: - "The Barbados dollar is pegged to the U.S. dollar at BDS$2=US$1." - "Barbados is a member of the Caribbean Community (CARICOM), which is planning to institute a monetary union in the period 2010-15." - "Inflation has declined from about 6.75 percent during 2005–06 to 4 percent in 2007." - "In recent months, y-o-y inflation has picked up again ... and is expected to reach 9 percent by the end of the year." - External vulnerability: the economy "is vulnerable to a slowdown in Europe (especially in the United Kingdom) and the United States." ### Banking sector soundness and stress-testing - The domestic banking sector "appears sound and profitable and continues to dominate the financial system." - Credit expansion and improved asset quality: "The financial system has benefited from the strong economic expansion, which has boosted credit demand while contributing to a steady improvement in banks’ asset quality." - Capital adequacy and profitability: "Capital adequacy for locally incorporated banks remains above the minimum required, and profits remain at healthy levels." - Stress-test findings: - "Stress tests reveal an onshore banking sector that would be resilient to most market shocks, but capital levels may be at risk in the case of more extreme events." - "The system is vulnerable to credit quality shocks, and an extreme but plausible decline in tourism receipts, or in construction activity, would reduce banks’ capital to below the regulatory minimum." - "Even under a credit risk baseline scenario, one bank’s capitalization would fall below the regulatory minimum." ### Progress on previous FSAP recommendations and supervisory capacity - Progress noted since the 2002 FSAP: - "The Bank Supervision Department (BSD) of the Central Bank of Barbados (CBB) has been moving toward a risk-based supervisory framework, increased the number and training of its staff, and issued many guidelines on risk management." - "The Financial Institutions Act (FIA) was amended ... to facilitate the introduction of Deposit Insurance, to require auditors to be approved by the CBB, and to improve the procedures for winding up, restructuring and license revocation." - Remaining supervisory and regulatory weaknesses: - Need to "enhanc[e] supervisory capabilities, accelerat[e] the transition to risk-based banking supervision, tight[en] supervision of large exposures and exposures to related parties, improv[e] the criteria for asset classification and provisioning, improv[e] consolidated supervision for banking groups and regional financial conglomerates, and establish more active home-host supervisory cooperation arrangements." - Recommendation to "formalize a prompt corrective action system and bank resolution process." ### Crisis management and deposit insurance - Recent reform: "The crisis management framework was enhanced in mid-2007 with the introduction of a compulsory deposit insurance scheme in mid-2007." - Further steps recommended: - "Publicize more effectively the features of the deposit insurance and which institutions are covered." - "Consider, at least temporarily, raising premiums to boost the size of the fund, which is low compared with many international benchmarks." - "To complement the financial safety net, the authorities will need to formalize a prompt corrective action system and bank resolution process." - "There is also a need for closer consultation and coordination with overseas authorities, especially with Canadian supervisors ... including by engaging crisis simulation exercises." ### Nonbank financial sectors: insurance, credit unions, securities markets - Insurance sector weaknesses: - "The lack of adequate supervision of the insurance sector exposes the sector to material risks." - "Profitability and capital adequacy in this sector are difficult to assess due to incomplete and inadequate data." - Sector remains "largely self-regulated owing to continuing shortages of qualified staff, inadequate regulation, and out-of-date financial reporting." - Recommendation: "Develop standards on corporate governance, market conduct, internal controls (including asset and derivative controls, particularly in the case of the offshore market), asset and liability valuation, and a solvency standard for life insurers." - Need for "Greater cooperation and exchange of information, particularly with the authorities in Trinidad and Tobago." - Credit unions: - "The Registrar of the Cooperatives Department is slowly building capacity to adequately supervise credit unions." - Joint inspections with the CBB continue but "the number of inspections conducted has decreased sharply and the joint inspections are not yet being conducted with the recommended frequency." - Smaller banks "expressed frustration at the tax breaks and lower compliance costs afforded to the credit unions." - Recommendation: "Increase the frequency of joint (Cooperatives Department and Central Bank) on-sight examinations" and "Consider issuing a specialized Credit Union Law (H)." - Securities markets and capital market development: - "Capital markets remain underdeveloped." - Integration efforts: "Efforts to integrate the Barbados Stock Exchange with the Trinidad and Tobago and Jamaica exchanges through the Caribbean Exchange Network (CXN), pending regulatory approval, are in line with the 2002 FSAP recommendations." - Regulatory improvements recommended: empower the Securities Commission under the MFA and SA, implement inspection programs, update disclosure and takeover rules, and consider raising penalties for statutory offences. ### Offshore financial sector and exchange controls - Offshore sector insulation: "The offshore financial sector appears insulated from the onshore banking system, thus limiting the risk of contagion." - "Chinese walls exist between affiliated on- and off-shore banks, and there are strict legal prohibitions against transactions between the on-shore sector and off-shore banks." - Incentives for compliance: many offshore banks operate out of Barbados "to take advantage of tax treaties" and thus "have a strong incentive to comply with the prohibitions (lest they lose their license)." - Competitive pressures: "Barbados will continue to face competition from offshore financial centers in the region." - Capital account liberalization: "The new government is re-assessing the extent and timing of the capital account opening ... the authorities expressed a willingness to pursue a gradual liberalization of the exchange controls vis-à-vis the Organization of Eastern Caribbean States (OECS)." ### Public pension fund (NIS) investment strategy - Concern about portfolio concentration: "A shortage of permissible local investment opportunities has led to sizable holdings of money market instruments and government liabilities." - Recommendation: "The authorities should revisit the investment strategy of the government-sponsored national insurance scheme." ### Key FSAP Update Recommendations (summary) - Banking: - "Strengthen cross-border consolidated supervision, including establishing a clear legal framework for the consolidated supervision of banking groups and enhancing home/host cooperation (H)." - "Update regulations on capital adequacy, asset classification and loss provisioning ... (H)." - "Strengthen regulation and supervision for large exposures and related-party exposures ..." - "Based on a quantitative impact study, make adjustments to the timetable of adoption of Basel II ..." - Financial Services Commission: - "Resolve promptly the mandate and structure of the FSC so as to help advance the planned improvements in the supervision of both the Credit Union and Insurance sectors (H)." - Insurance: - "Develop standards on corporate governance, market conduct, internal controls ... and a solvency standard for life insurers ... (H)." - "Improve the timeliness of supervisory returns, and redesign processes for onsite inspection, and offsite analytical support. (H)" - "Collaborate with the Trinidadian authorities in the supervision of larger cross-border groups." - Credit Unions: - "Increase the frequency of joint (Cooperatives Department and Central Bank) on-sight examinations (H)." - "Consider issuing a specialized Credit Union Law (H)." - Securities Markets: - "Provide the Securities Commission with statutory power under the MFA and SA to make legally binding rules, inspect and access all information at regulated firms at any time, share information and otherwise cooperate with domestic and foreign supervisors (H)." - "Develop and implement a regular inspection program for regulated firms ... (H)." - "Require timely disclosure by mutual funds, public companies and insiders of public companies; consider raising penalties for statutory offences." - Deposit Insurance Scheme: - "Formalize early warning and prompt corrective action systems (H)." - "Expand and improve the level of public awareness about the characteristics of the new deposit insurance scheme." - Financial stability analysis: - "Consider enhancing the financial stability report by supplementing the CBB’s macro model with a banking credit-risk model." - Other: - "Revisit the NIS’s investment strategy." - Note: "H = Highest priority" *IMF FSAP Update — Executive Summary (Barbados).* ### 3. There has been a deterioration in public finances. The central government fiscal ### _cr0964 - 3. There has been a deterioration in public finances. The central government fiscal ### Fiscal position and external balances - Central government fiscal deficit widened from about 1.5 percent of GDP in 2006/07, to about 3.5 percent of GDP in 2007/08 (April to March), reflecting a rise in current expenditure relative to a moderate increase in tax revenue. - Deficit in the current account of the balance of payments fell from 8.2 percent of GDP in 2006, to an estimated 6.6 percent of GDP in 2007, as a result of robust growth in tourism receipts. - Stock of gross central government debt: 73 percent of GDP. - Official foreign exchange reserves held by the CBB at end-2007: about US$776 million or four months of imports. ### Capital account policy and monetary framework - New government (elected January 2008) favors a more gradual approach to capital account liberalization; will take more time to study potential costs and benefits before lifting capital controls vis-à-vis CARICOM neighbors. - Capital controls currently shield the domestic financial market from shocks to global markets and investor sentiment. - Exchange controls and multiple reserve requirements afford the CBB control over monetary policy despite the foreign exchange rate peg. - Policy rate behavior: - Minimum deposit interest rate lowered in April 2008 from 4.75 percent to 4.5 percent. - Average nominal deposit and lending rates were 4.75 percent and 10.5 percent, respectively, at end-January 2008. ### Reserve and reserve-like requirements - Onshore banks reserve requirements computed on a three-week average of deposits. - Cash reserve requirements (CRR): - 5 percent CRR on Barbados dollar deposits (unchanged since 2001). - 6 percent CRR (held in BDS) on foreign currency deposits (introduced April 2006). - “Stipulated” government securities (SGS) requirement: currently 10 percent of total local currency deposits (reduced by 2 percentage points in November 2007). ### Macroeconomic risks and growth outlook - GDP growth expected to slow to about 2.3 percent in 2008. - Tourism and currency effects: - Barbados benefits from tourism from U.K., U.S., and Canada; appreciation of Pound Sterling, Canadian dollar, and Euro against the U.S. dollar has boosted price competitiveness and helped maintain modest growth in tourism arrivals. - Exposures and shock channels: - Net importer of oil: increases in oil prices translate into higher domestic prices and a substantial negative terms-of-trade shock. - Higher fuel costs could adversely affect cruise ship arrivals; government subsidies of domestic gas prices and upscale tourism characteristics have so far mitigated material effects. - Protracted global liquidity squeeze could impact real estate and financial sector: foreign-financed real estate acquisitions have boomed; a sharp slowdown could raise unemployment and credit risk, and falls in real estate prices would reduce collateral values, increase provisions, contract credit, and weaken bank profits. ### Financial system: institutions and markets — key statistics - Onshore bank assets: increased from US$3.1 billion in 2002 to US$5 billion in 2007. - Bank assets equivalent to about 142 percent of GDP, and about 80 percent of all deposit-taking institutions’ assets. - Investment portfolio composition: government bonds comprise 70 percent of investments, held to maturity. - Funding: almost 90 percent of operations funded with local deposits. - Sector composition (2007): six foreign-owned banks (four subsidiaries, two branches); Canadian dominance about 70 percent of system’s assets. - Canadian parent banks combined CAR: 11.5 percent; NPLs: 0.5 percent of loans. - Onshore banking sector CAR at end-September 2007: 10.8 percent (minimum regulatory level: 8 percent). - Nonperforming loans: declined from 8.2 percent in 2003 to 2.9 percent in 2007. - Short-term assets to short-term liabilities: close to 59 percent. - Net open position in foreign exchange for subsidiaries: 35.3 percent of their capital. - Loans and deposits in foreign currency: - Subsidiaries: 3 percent of total loans and 17 percent of total deposits. - Branches: 17 percent of total loans and 26 percent of total deposits. - Private non-financial credit growth in 2007: close to 8 percent. - Consumer credit (including residential mortgages) contribution: consumer and mortgage lending represents as much as 68 percent of total loans. - Mortgages growth in 2007: about 20 percent; many carry adjustable interest rates and up to a 95 percent loan-to-value ratio. - Securities market capitalization: - As of December 2001: estimated around US$1.8 billion or 71 percent of GDP. - End-2007: market capitalization reached US$5.6 billion, or close to 150 percent of GDP. - If cross-listed shares included, market capitalization at end-2007: US$ 9.4 billion or 250 percent of GDP. - Mutual funds: - 2003: 12 funds, total net assets BDS$298 million. - End-2007: total net assets BDS$759 million in 14 mutual funds. - Corporate debt issues 2003–2007: 28 public issues for a total of BDS$1,370 million. - Yearly average total value of secondary market trades in government debentures and treasury bills (2003–2007): BDS$22.4 million; average number of transfers recorded: 188 per year. ### Market structure and initiatives - Barbados Stock Exchange (BSE): - 26 listed entities (as of report); 18 domestic Barbadian companies, one domestic closed-end property fund, seven regional cross-border listings, one domestic company on the Junior Market. - BSE index increased by 12 percent in 2007 (after a 6 percent loss in 2006). - Caribbean Exchange Network (CXN) linking Barbados, Jamaica, and Trinidad and Tobago stock exchanges: - Phase I: high speed communications network and common trading, clearing and settlement rules (regulatory approval pending); trades cleared and settled between central securities depositories; payments processed through a major regional bank. - Phase II: consolidation of the three order books with automated order routing. - Increased interconnections may create operational interdependences and coordination challenges for regulators across jurisdictions. ### Onshore banking stability analysis and stress testing - Adjustments applied to official data for stress testing (reflecting shortcomings in asset classification and provisioning standards): - Adjustments include: - provisions for “Special Mention” loans of 5 percent; - increasing the provisioning rate of “Substandard” loans from 10 percent to 20 percent; - “migrating” 20 percent of the loans in the “Pass” category to the “Special Mention” category. - Effective average CAR after adjustments: reduced from 10.8 percent to 10.2 percent (benchmark CAR for stress tests: 10.2 percent). All banks still complying with regulatory minimum of 8 percent. - Stress test findings: - Baseline credit risk scenario based on WEO projections: capitalization of on-shore system would remain above the minimum capital requirement, but one bank's CAR would fall below the minimum 8 percent. - A 15 percent decline in tourist arrivals would drive system CAR from 10.2 percent to 6.7 percent. - A 15 percent decline in the construction sector would drive system CAR from 10.2 percent to 5.9 percent. - Combined extreme but plausible shocks (15 percent decline in both tourism and construction; 500 bps increase in interest rates; 50 percent increase in oil prices; and a material recession in the U.S.) would reduce the system CAR to 3.6 percent, and all banks would be below the regulatory minimum. - Context on shock plausibility: - The tourism shock would be about 30 percent larger than the large tourism drop experienced in 2001. - The construction shock would be a sharp reversal relative to recent trends (about 9 percent growth on average per year) and much deeper than prior cycles. - Historical precedents: GDP fell by 4 percent from the last quarter of 2001 through the first half of 2002; in the early 1990s GDP fell by more than 6 percent. - A 500 bps increase in interest rates would be similar to the early 1990s increase when the treasury bill rate jumped by 460 bps from March 1991 to March 1992. - Market risk vulnerabilities: - Interest rate risk: an increase in interest rates of 5 percentage points would reduce system CAR to 8.4 percent, and the CAR of one bank with a sizable maturity gap would fall below the regulatory minimum. - Exchange rate risk: changes to the currency peg would have only moderate effects on banks’ capitalization. In the event of a currency depreciation, the negative effect of limited foreign currency–induced credit risk would be offset by the direct positive balance sheet effect from banks’ long net foreign currency positions; a depreciation would be positive for banking sector CARs. A 10 percent appreciation would slightly reduce the CAR from 10.2 percent to [value truncated in source]. *Source: _cr0964 - 3. There has been a deterioration in public finances. The central government fiscal (IMF PDF chapter/section).* ### 9.9 percent, without bringing any bank below the regulatory threshold. ### _cr0964 - 9.9 percent, without bringing any bank below the regulatory threshold. ### Liquidity Risk and Stress Testing: key findings - Liquidity stress test assumption: sudden deposit run on subsidiaries of foreign banks equivalent to a run on deposits of 30 percent in a 30-day period. - Result: No banks become illiquid under this scenario, although two banks would suffer significant strain: - Ratio of liquid assets to short term liabilities for subsidiaries: decline from 57.3 percent to 31.6 percent. - Ratio of liquid assets to short term liabilities for branches: decline from 60.8 to 36.1. - The same deposit run would potentially leave one foreign branch illiquid. - Scenario where external funding dries up: - Ratio of liquid assets to short-term liabilities for subsidiaries: decline to 50.4 percent. - Ratio of liquid assets to short-term liabilities for branches: decline to 53.6. - No banks would become illiquid (i.e. suffer negative cash flow). - Interbank contagion: no formal inter-bank contagion analysis due to lack of individual interbank lending activity data; interbank lending amounts to 5 percent of total excess reserves, suggesting interbank contagion is not a significant concern. - Contagion from foreign parent banks: funding from foreign parent banks amounts to only 10 percent of total funding, suggesting limited contagion risk from parents. ### Stress Testing: summary of results (selected outcomes) - Table 1 summary (as reported): - Baseline case (WEO projection of macroeconomic variables for 2008): - CAR Official Data: 10.8 - Adjusted CAR: 10.2 - Baseline CAR After Shock: 8.4 - Number of Banks CAR<8%: - - Number of Banks CAR<0%: 1 (baseline credit risk row shows 0 under CAR<0% in baseline but table rows vary; preserve presented table entries) - Credit Risk "Perfect Storm" Scenario (macroeconomic scenario includes a 15 percent decline in tourism, a 15 percent decline in the construction sector, a recession in the US of -3.0 percent of GDP, and an increase in oil prices of 50 percent): - Official CAR: 10.8 - Adjusted CAR: 10.2 - CAR After Shock: 3.6 - Number of Banks CAR<8%: 4 - Number of Banks CAR<0%: 1 - Interest Rate Risk: - +500bp shock: - Official CAR: 10.8 - Adjusted CAR: 10.2 - CAR After Shock: 8.4 - Number of Banks CAR<8%: 1 - Number of Banks CAR<0%: 0 - -500bp shock: - CAR After Shock: 11.9 - Number of Banks CAR<8%: 0 - Number of Banks CAR<0%: 0 - Exchange Rate Risk: - 10 percent depreciation: - CAR After Shock: 10.5 - Number of Banks CAR<8%: 0 - Number of Banks CAR<0%: 0 - 10 percent appreciation: - CAR After Shock: 9.9 - Number of Banks CAR<8%: 0 - Number of Banks CAR<0%: 0 - Notes on Adjusted CAR: corresponds to CAR after introducing a 5% provisioning rate for "Special Mention" loans, increasing the provisioning rate for "Substandard" loans to 20 percent, and migrating 20 percent of "Pass" loans to "Special Mention." ### Credit Unions: sector structure and risks - Sector size and concentration: - 34 credit unions with combined assets equivalent to about 14 percent of GDP (compared to 10 percent during the 2002 FSAP). - Two largest credit unions account for 71 percent of total assets and 73 percent of total membership. - Asset breakdown of largest/middle/small credit unions: - Largest two: $252 million and $134 million. - Eight “medium” credit unions: assets range from $34 million to $7.5 million. - Remaining 24 “small” credit unions: combined total assets of US$28 million. - Competition and regulatory concerns: - Smaller banks express frustration at tax breaks and lower compliance costs afforded to credit unions. - Asset quality and performance: - Official loan delinquency rate: 6 percent as of September 2007 (official measure counts late payment as past due only after 90 days; therefore actual delinquency rates are understated). - Return on equity for the largest credit union: 6 percent for 2007. - Loan-to-deposit ratio for the sector: 87 percent. - Loan origination policies for the largest two credit unions have improved since the 2002 FSAP. ### National Insurance Scheme (NIS): portfolio and investment challenges - Role and history: - NIS established by national legislation in 1967; governed by a tripartite board. - Actuarial review of December 1999 indicated an actuarial deficit with expectation fund exhausted by 2030 absent reforms. - 2002 pension reform increased contributions and adopted parametric reforms, including gradual increase in retirement age to 67 years by 2018. - Asset levels and projections: - As of February 2008, NIS assets valued at BDS$2.7 billion (about 30 percent of GDP), up from BDS$1.4 billion in 2002. - Current actuarial estimates indicate assets will continue to grow until around 2030, or longer under more optimistic assumptions. - Portfolio composition and concerns: - 2007 portfolio structure: - Real Estate: 2% - Equity: 16% - Money Market: 24% - Fixed Income: 58% - Over 63 percent of assets are directly or indirectly invested in Barbadian government instruments. - 24 percent is held in money market instruments (mostly demand deposits). - Equity and real estate represent only 18 percent of investments. - Liability profile has lengthened due to reforms, indicating a need for a larger share of longer term investments and likely increased investment outside Barbados. - Recommendation: - NIS’s investment strategy should be revisited to better match the longer horizon and to diversify investable opportunities. ### Insurance Sector: penetration, data gaps, and investment constraints - Market penetration and growth: - Insurance penetration rate (premiums to GDP) in 2006: 10.3 percent (3.3 percent life; 7 percent non life). - Noted as highest figure in the world with respect to non life insurance and 9th highest overall. - Real and nominal growth strong over the last five years; expectation of consolidation and regional expansion. - Regulatory and data issues: - Introduction of Minimum Continuing Capital and Surplus Requirements for life companies, Minimum Capital Test for general companies, and Branch Adequacy Test for branches of foreign companies—important achievements. - Effectiveness limited by lack of adequate data; profitability and capital adequacy difficult to assess due to incomplete and inadequate data. - Most companies voluntarily adhere to provisioning techniques based on Canadian systems. - Recommendation: adopt appropriate accounting and reporting standards under the insurance law to improve supervisory assessment. - Natural hazards and reinsurance: - Exposure to natural hazards is an important challenge; reinsurance programs increasingly arranged at group level due to regional diversification. - Continued diligence and regional cooperation between supervisors recommended to assess reinsurance program effectiveness. - Investment constraints: - Insurers face difficulty sourcing appropriate long-term investment vehicles in Barbados capital markets. - Nonlife companies in 2006 had more than 36 percent of invested assets in cash balances. - Life companies had cash representing 12.53 percent of investment portfolios in 2006 and were more active in mortgage and policy loan transactions. ### Offshore Financial Institutions: structure, concentration, and supervisory gaps - Scale and concentration (2007 data): - Total assets of offshore banks grew 15 percent in the first nine months of 2007 to BDS$94.78 billion and represented about 1,285 percent of GDP. - 54 offshore banks; four largest (all members of Canadian groups) represent 75 percent of the system’s assets; ten largest represent 91 percent. - End-2006: 441 insurance companies registered to carry on exempt or qualifying business; only 181 exempt and 61 qualifying companies were active. - Heterogeneity of activities: - Offshore service providers include: - Banks taking non-Barbadian third party deposits; - Treasury functions for related organizations; - Wealth managers for high-net worth individuals; - A commodities broker. - Insulation from domestic banking system: - Offshore banks are prohibited from doing business with local residents and operate only with international clients. - Effective “Chinese walls” appear to exist between affiliated on- and off-shore banks; domestic banks conduct operations only with residents. - Reputation and supervisory capacity: - Reputation risk considered a concern; foreign banks choose Barbados for tax advantages and reputation. - Recommendation: CBB should increase the number of staff qualified to deal with offshore complexities and establish closer working relationships with home supervisors of foreign banks. - Offshore insurance supervision: - Supervision of the offshore insurance sector is almost nonexistent; apart from filing financial statements with the SOIP little contact exists. - Timely information problematic (2006 financial data had not been compiled at assessment time); no onsite inspections or offsite analytical reviews due to resource constraints. - Cross-border coordination: - Need for greater cross-border supervisory coordination to avoid regulatory arbitrage and contagion risk. - Existing MOUs: a regional MOU signed May 2004 among most Caribbean jurisdictions; Eastern Caribbean Central Bank not yet signatory. - CBB lacks MOUs with Canada and Bermuda despite long presence of foreign banks in Barbados. - Recommendation: closer communication with OSFI (Canada) for banks and insurance supervisory staff in Trinidad for insurance to better understand risks. ### Financial System Supervision and Regulation: responsibilities and institutional structure - Ministry of Finance: - Responsible for regulating most of the financial system. - Grants and revokes licenses (other than under the Securities Act and Mutual Funds Act), and issues financial regulations. - The Ministry’s Office of the Supervisor of Insurance and Pensions is responsible for insurance sector supervision. - Delegated supervisory responsibilities: - CBB’s Bank Supervision Department: prudential supervision of: - i) commercial banks; - ii) trust and mortgage companies, finance companies and merchant banks (Part III companies under the Financial Institutions Act); - iii) offshore banks under the International Financial Services Act. - Securities Commission: licensing and supervision of securities companies, mutual funds and their administrators, the BSE, CSD and other market actors. - Registrar of Cooperatives and Friendly Societies (Ministry of Commerce, Consumer Affairs and Business Development): supervises credit unions. - Deposit Insurance Corporation: administers the deposit insurance fund. - Financial Intelligence Unit (under the Attorney-General): prevention and control of money laundering and financing of terrorism. - Note on intervention powers: - Although the MOF has general power to revoke licenses under most conditions established by the FIA, when the CBB decides to intervene in a bank, the CBB does not need approval but must notify the MOF before proceeding. *Source: authorities and staff estimates, as presented in the source document.* ### 41. The authorities are reviewing a blueprint to reform the regulatory architecture by ### _cr0964 - 41. The authorities are reviewing a blueprint to reform the regulatory architecture by ### Regulatory reform blueprint - Authorities are reviewing a blueprint to reform the regulatory architecture by establishing a Financial Services Commission (FSC). - The previous Administration recommended establishing an FSC to bring together: - Supervisor of Insurance and Pensions, - Securities Commission, - Cooperatives Department, - International Business Division of the Ministry of Economic Affairs and Development (MAED) under one roof. - Main motivations: economies of scale and strengthening supervision of the non-bank financial sector. - The current Administration is assessing how to best launch the initiative. ### Bank supervision, risk-based approach, and Basel II implementation - Bank Supervision Department (BSD) is shifting operations and office structure to more effectively conduct risk-based supervision; moving from a pure off-site/on-site model to a portfolio approach. - Responsibility for many institutions recently re-assigned; guidelines addressing existing risks are in various stages of development. - Since the 2002 FSAP, 12 guidelines have been issued as of April 2008 and 3 more guidelines are expected to be issued. - BSD is preparing to implement the Basel II capital accord. - Mission recommendations based on a CBB quantitative impact study: - Make adjustments to the timetable for adoption of Basel II, including by considering changing risk weights, delaying the implementation schedule, and strengthening the Pillar 2 framework. - BSD plans to implement Basel II from 2009 although it indicated a possible delay. - BSD plan specifics: - All licensees required to implement the Standardized Approach for credit risk and market risk, and the Basic Indicator Approach or Standardized Approach for operational risk from 2009. - BSD intends to consider a possible transition to the Advanced approaches for credit risk after 2012. - Recommendations for BSD in Basel II implementation: - Consider results of a full-scale qualitative impact study. - Consider risk weightings for retail credit and residential mortgage loans. - Strengthen Pillar 2 to prevent any undue reduction in the capital level of the Barbados banking system. ### Banking regulation weaknesses (BCP assessment) - Identified weaknesses include: - (i) outdated regulations (e.g., capital adequacy, asset classification and provisioning), - (ii) deficiency of prudential rules on large exposures and exposures to related parties, - (iii) incomplete state of the supervisory framework (e.g., risk assessment model, prompt corrective actions) for risk based supervision, - (iv) lack of a broader scope for onsite inspections to review banks’ risk management activities, - (v) weak legal framework for consolidated supervision of banking groups and financial conglomerates, - (vi) insufficiency of cross-border home/host cooperation. ### Non-bank financial sector supervision (FIA, IFSA, Securities, Cooperatives, Insurance) - All financial institutions under CBB supervision are subject to the same regulations, including capital to risk weighted assets ratio; many regulations and guidelines are bank-oriented. - Recommendation: further differentiation of regulations across FIA and IFSA intermediaries to better control diverse risk profiles. - Large exposures: - No aggregate limit on banks’ large exposures. - Exposures to a single person or group limited to 25 percent of a bank’s stated capital and reserves, and 10 percent of its stated capital and reserves for unsecured exposures. - CBB indicated it is working on introducing a regulation for an aggregate limit for such exposures. - CBB encouraged to expand guidelines on credit risk management to address concentration risk. - Securities sector: - 2001: new SA enacted leading to creation of the Securities Commission. - 2002: new MFA proclaimed, governing licensing and operation of mutual funds and mutual fund administrators. - Identified needs: improvements and harmonization of relevant legislation, gaps in Commission’s authority for on-site supervision and information sharing, lack of rule-making authority and general ability to grant exemptions. - BSE and CSD are self-regulatory organizations under oversight of the Securities Commission; CSD is a wholly owned subsidiary of the BSE and central depository—virtually all securities of listed companies held in dematerialized form at the CSD and all trades on the BSE must be settled at the CSD. - Licensing oversight gaps: Securities Commission does not perform an on-site visit prior to licensing; neither Securities Commission nor BSE impose a specific requirement that firms have adequate internal controls, risk management procedures, or a compliance function. - Recent takeover bid exposed gaps in takeover bid regulations under the 2002 Companies Act, cross-border regulatory harmonization issues, limits on Commission’s authority to obtain information, and questions on disclosure requirements for companies and insiders. - Cooperatives and credit unions: - Registrar of Cooperatives and Friendly Societies supervises credit unions and cooperatives; staff of five supervisors responsible for oversight of 34 institutions. - Joint Registrar-Cooperatives Department CBB inspections carried out annually for each of the largest credit unions between 2003–2007; no planned inspections for 2008. - December 2007: Cooperative Societies Act amended; January 2008: regulations updated. - Mission recommended issuance of a specialized credit unions law to better tailor prudential oversight; amendments unlikely to substitute for a dedicated Act. - Insurance sector: - Historically relied primarily on good faith of industry participants, exposing sector to risks. - Authorities have developed additional capital requirements based on risk assessment: - Introduction of Minimum Continuing Capital and Surplus Requirements for life companies, - Minimum Capital Test for general companies, - Branch Adequacy of Assets Test for branches of foreign companies operating in Barbados. - These provisions part of SOIP’s proposed amendments to the Insurance Act Cap 310 and are expected to be finalized this year. - Insurance supervision has added resources and commenced limited on-site inspections (on-site inspections commenced in 2004) but needs more resources and redesigned processes; off-site analysis needs to be more analytical than compliance oriented and requires better content and timeliness of information collection. - Supervisory independence should be enhanced by greater transparency and public reporting and through transition to the proposed FSC. - Standards and circulars to enhance observance of IAIS principles recommended: corporate governance, market conduct, internal controls (including asset and derivative controls), asset and liability valuation, solvency standard for life insurers. ### Banking safety net arrangements and deposit insurance - CBB is the Lender of Last Resort under the CBB Act; emergency lending channeled through the discount window, which has carried a 12 percent interest rate since 2006 (via collateralized short-term lending), and through purchase of government securities. - No explicit individual or aggregate limit on use of the facility. - Recommendation: CBB may want to modify the discount window interest rate according to market conditions and review collateral valuation policies. - Deposit Insurance Corporation (DIC): - Compulsory deposit insurance scheme introduced in mid-2007 for institutions licensed under the Financial Institutions Act (FIA). - DIC established as a distinct separate entity from the central bank; manages the deposit insurance fund. - Fund covers up to BDS$25,000 (US$12,500) per depositor and per institution registered under the FIA. - Membership in DIC is compulsory for these institutions. - Fund administered by a seven member Board of Directors appointed by the Minister of Finance; two members represent the Central Bank, and one represents the Minister of Finance. - Premium: flat 0.05 percent of the institutions’ yearly average deposit liabilities. - At opening, CBB provided a one-time contribution and matched total initial membership fees from members to the DIC. - As of January 2008, the DIC’s fund represented only about 0.2 percent of total deposits. - Deposit Insurance Act authorizes the DIC to issue securities and to borrow from the CBB and the Ministry of Finance if funds prove insufficient. - Authorities may want to assess possibility of temporarily raising premiums to boost fund size. - Market discipline note: information regarding characteristics of the deposit insurance scheme needs broader public transmission, including which institutions are not covered by the DIC (e.g., credit unions). ### Bank resolution and crisis management - Deposit Insurance Act gives powers to DIC to act as liquidator of failed institutions, but CBB would continue to lead the liquidation process. - 2006 FIA amendments grant the CBB more bank intervention and resolution powers. - Past reorganization and winding-up procedures subject to lengthy court rulings and predetermined timeframes. - DIC and CBB are drafting an MOU to clarify cooperation areas, relations, and procedures for exchange of information and data, including in case of an institution’s failure. - Further work needed: - Design of early warning systems, - Prompt corrective action framework (adequate set of prompt corrective actions imposing cumulative restrictions tied to deteriorating capital ratios below pre specified thresholds), - Resolution procedures to complete the safety net framework. - Coordination in resolution events: ensure DIC functions and objectives are taken into account in the CBB’s corrective action framework; ensure close cooperation among government, CBB, and DIC when determining identity of qualified covered depositors. - Crisis management: consultation and coordination with overseas authorities, especially from Canada, is important given presence of Canadian banks in Barbados; information exchange and clear understanding of roles, information needs, and coordination of actions between home and host authorities should be established. *Source: _cr0964* ### 65. Beyond the immediate steps required to diagnose and contain a financial crisis, the ### _cr0964 - 65. Beyond the immediate steps required to diagnose and contain a financial crisis, the ### Crisis resolution framework and crisis management - Authorities need clear procedures for resolving a financial crisis beyond diagnosis and containment, ideally relying on least-cost criteria. - Required understandings and protocols: - Circumstances for using emergency lending arrangements for individual institutions. - Triggers and timing for shifting from emergency assistance to solvency-resolution measures. - Selection and implementation procedures for alternative resolution options (e.g., asset management corporations, bridge banks). - Design and use of institutional arrangements such as asset management corporations and bridge banks in the resolution process. - Recommendation: Establish protocols based on regular “fire drills” with Caribbean and Canadian financial system supervisors on crisis management procedures and treatment of failures of internationally active financial institutions. ### Social and demographic snapshot (most recent year) - Population (people in millions): 0.274 - Adult literacy rate: 99.4 - Per capita GDP (in US$): 12,426 - Population share below poverty line: 13.0 - Life expectancy at birth in years: 75.4 - Gini coefficient: 42.0 - Rank in UNDP Development Index: 31 - Unemployment rate: 7.4 - Main products, services and exports: tourism, financial services, rum, sugar, and chemicals. ### Selected economic indicators (annual percentage change; macro aggregates) - Real GDP: 2004 4.8; 2005 4.3; 2006 3.3; 2007 3.3; 2008 2.3; 2009 2.0 - Deflator: 2004 -0.2; 2005 2.3; 2006 2.8; 2007 3.5; 2008 8.7; 2009 5.7 - Nominal GDP: 2004 4.5; 2005 6.7; 2006 6.2; 2007 6.8; 2008 11.2; 2009 7.8 - CPI inflation (average): 2004 1.4; 2005 6.1; 2006 7.3; 2007 4.0; 2008 9.0; 2009 5.9 - CPI inflation (end of period): 2004 4.3; 2005 7.3; 2006 5.7; 2007 4.8; 2008 8.6; 2009 3.2 - Domestic demand (contribution to growth): 2004 7.8; 2005 -2.8; 2006 -2.7; 2007 0.8; 2008 1.9; 2009 3.5 - Foreign demand (contribution to growth): 2004 -3.1; 2005 7.1; 2006 6.0; 2007 2.5; 2008 0.4; 2009 -1.5 ### External sector and balance of payments - Exports of goods and services: 2004 5.5; 2005 21.8; 2006 8.6; 2007 7.8; 2008 8.3; 2009 5.4 - Imports of goods and services: 2004 14.8; 2005 17.9; 2006 2.0; 2007 5.6; 2008 11.5; 2009 6.0 - Terms of trade: 2004 -3.4; 2005 -5.9; 2006 -3.8; 2007 -0.3; 2008 -3.5; 2009 0.8 - Current account (percent of GDP): 2004 -12.4; 2005 -12.8; 2006 -8.7; 2007 -7.2; 2008 -8.5; 2009 -8.3 - Capital and financial account: 2004 6.9; 2005 13.6; 2006 8.1; 2007 12.4; 2008 9.2; 2009 7.8 - Overall balance: 2004 -5.6; 2005 0.8; 2006 -0.7; 2007 5.2; 2008 0.7; 2009 -0.5 - Exchange rate (domestic currency/U.S. dollar): 2004 2.0; 2005 2.0; 2006 2.0; 2007 2.0; 2008 2.0; 2009 2.0 - Nominal GDP (in millions of Barbados dollars): 2004 5,634; 2005 6,010; 2006 6,382; 2007 6,818; 2008 7,582; 2009 8,173 ### Monetary and credit aggregates (end of period) - Net domestic assets: 2004 43.5; 2005 14.1; 2006 14.2; 2007 9.3; 2008 0.2; 2009 15.8 - Private sector credit (of which): 2004 16.7; 2005 21.7; 2006 13.2; 2007 6.4; 2008 2.5; 2009 7.8 - Broad money: 2004 17.4; 2005 6.9; 2006 11.3; 2007 13.2; 2008 2.8; 2009 13.7 - Interest rate on deposits (average in percent per annum): 2004 2.5; 2005 4.1; 2006 4.7; 2007 5.1; 2008 4.8; 2009 4.6 - Interest rate on loans (average in percent per annum): 2004 9.8; 2005 10.6; 2006 10.7; 2007 10.7; 2008 10.7; 2009 10.7 ### Fiscal accounts (percent of GDP unless otherwise indicated) - Nonfinancial public sector overall balance: 2004 1.4; 2005 -3.6; 2006 -3.7; 2007 -5.0; 2008 -4.0; 2009 -3.0 - Central Government revenue and grants: 2004 33.1; 2005 35.1; 2006 34.2; 2007 34.9; 2008 35.3; 2009 35.1 - Central Government expenditure: 2004 35.7; 2005 36.4; 2006 36.3; 2007 38.9; 2008 37.5; 2009 37.3 - Interest: 2004 4.6; 2005 4.8; 2006 5.0; 2007 4.9; 2008 5.2; 2009 5.1 - Central Government balance: 2004 -2.5; 2005 -1.3; 2006 -2.0; 2007 -4.0; 2008 -2.2; 2009 -2.2 - Public sector debt (fiscal year) total external debt 1/: 2004 39.5; 2005 41.3; 2006 43.4; 2007 39.6; 2008 41.2; 2009 42.6 - Public sector debt (fiscal year) public sector: 2004 87.1; 2005 91.6; 2006 92.8; 2007 94.6; 2008 95.7; 2009 96.7 - External/public and domestic breakdowns: - External: 2004 27.3; 2005 28.9; 2006 27.6; 2007 24.2; 2008 26.0; 2009 25.6 - Domestic: 2004 59.8; 2005 62.8; 2006 65.2; 2007 70.4; 2008 69.7; 2009 71.1 ### Savings and investment (percent of GDP) - Gross domestic investment: 2004 23.7; 2005 24.8; 2006 26.6; 2007 26.8; 2008 22.1; 2009 22.1 - National savings: 2004 11.2; 2005 12.0; 2006 17.9; 2007 19.6; 2008 13.6; 2009 13.8 - External savings: 2004 12.4; 2005 12.8; 2006 8.7; 2007 7.2; 2008 8.5; 2009 8.3 ### Financial Soundness Indicators — Onshore banking system (selected items) - Capital adequacy ratio 3/: 2003 14.5; 2004 13.0; 2005 12.0; 2006 10.8 - Core capital adequacy ratio 3/4/: 2003 13.7; 2004 11.5; 2005 10.7; 2006 10.1 - Nonperforming loans net of provisions to capital: 2003 16.3; 2004 21.2; 2005 21.1; 2006 17.4; 2007 10.1 - Loan to deposit ratio: 2003 53.0; 2004 54.7; 2005 58.3; 2006 64.2; 2007 57.5 - Demand deposits, percent of total deposits: 2003 37.9; 2004 39.1; 2005 38.5; 2006 36.6; 2007 35.3 - Liquid assets, percent of total assets 5/: 2003 15.3; 2004 13.3; 2005 9.0; 2006 4.6; 2007 7.2 - Nonperforming loans, percent of total loans: 2003 8.2; 2004 7.2; 2005 5.5; 2006 4.4; 2007 2.9 - Provisions to nonperforming loans, percent of NPL: 2003 30.1; 2004 26.1; 2005 25.7; 2006 31.4; 2007 37.0 - Total assets, annual growth rate: 2003 8.7; 2004 6.3; 2005 13.6; 2006 9.3; 2007 21.9 - Loans and advances, annual growth rate: 2003 -2.3; 2004 15.8; 2005 22.0; 2006 15.5; 2007 11.4 - ROA: 2003 2.1; 2004 2.4; 2005 2.1; 2006 2.6; 2007 2.3 - ROE: 2003 21.3; 2004 23.3; 2005 25.2; 2006 27.6; 2007 21.4 - Spread between lending rate and deposit rate 8/: 2003 7.6; 2004 7.3; 2005 6.5; 2006 5.8; 2007 5.6 Notes and memoranda: - Banks' mortgage loans (BDS$ millions): 2003 541.7; 2004 666.3; 2005 858.1; 2006 1,089.1; 2007 1,314.8 - Trust & mortgage companies' mortgage loans (BDS$ millions): 2003 598.6; 2004 607.5; 2005 624.3; 2006 692.4; 2007 741.9 ### Financial sector structure (selected) - Number of banks 2/: 2003 6; 2004 6; 2005 6; 2006 6; 2007 6 - Branches: 2003 2; 2004 2; 2005 2; 2006 2; 2007 2 - Subsidiaries: 2003 4; 2004 4; 2005 4; 2006 4; 2007 4 - Non-bank Financial Institutions: 2003 14; 2004 13; 2005 13; 2006 13; 2007 13 - Credit unions: 2003 39; 2004 38; 2005 37; 2006 37; 2007 34 - Offshore banks: 2003 52; 2004 55; 2005 54; 2006 52; 2007 57 - Assets (as percent of GDP): - Banks: 2003 126.4; 2004 129.3; 2005 134.2; 2006 132.2; 2007 141.8 - Offshore banks: 2003 1164.5; 2004 1102.4; 2005 1029.4; 2006 1202.6; 2007 1285.1 - Credit unions: 2003 11.5; 2004 12.9; 2005 13.6; 2006 13.9; 2007 14.7 ### Banking groups and ownership (snapshot) - Commercial banks incorporated in Barbados and affiliated parent headquarters include: - First Caribbean International Bank (Barbados) Ltd (FCIBB) — CIBC, Canada - Barbados National Bank Inc. (BNB) — Republic Bank of Trinidad and Tobago, Trinidad and Tobago - RBC Royal Bank of Canada (RBC) — RBC Royal Bank of Canada, Canada - Bank of Nova Scotia (BNS) — Scotiabank Canada - Royal Bank of Trinidad and Tobago Bank (Barbados) Ltd (RBTT) — RBTT Financial Holdings Ltd, Trinidad and Tobago - Butterfield Bank (Barbados) Ltd (BBL) — The Bank of N.T. Butterfield & Son Ltd, Bermuda - Note: FCIBB is owned by First Caribbean International Bank, a holding company that consolidates regional operations in Barbados. ### Credit union sector (selected indicators as of Sep-03 to Sep-07) - Number of institutions: Sep-03 39; Sep-04 38; Sep-05 37; Sep-06 37; Sep-07 34 - Number of members: Sep-03 107,417; Sep-04 118,472; Sep-05 129,129; Sep-06 139,639; Sep-07 148,864 - Share of the 3 largest credit unions, percent: Sep-03 73; Sep-04 83; Sep-05 84; Sep-06 84; Sep-07 85 - Assets (as percentage of GDP): Sep-03 11.5; Sep-04 12.9; Sep-05 13.6; Sep-06 13.9; Sep-07 14.7 - Loans (as percentage of GDP): Sep-03 8.0; Sep-04 9.5; Sep-05 10.6; Sep-06 10.9; Sep-07 11.5 - Solvency indicator — Reserves to total Liabilities 2/: Sep-03 12.4; Sep-04 12.1; Sep-05 11.6; Sep-06 12.3; Sep-07 12 ### Mutual funds and capital markets - Number of mutual funds: 2003 12; 2004 12; 2005 14; 2006 14; 2007 14 - Net Assets (millions BDS$): 2003 $298.3; 2005 $502.9 (as at October 31, 2005); 2006 $611.9; 2007 $758.9 - BSE main indicators: - Number of listed companies—Total: 2003 24; 2004 24; 2005 26; 2006 27; 2007 26 - Market Capitalization (millions BDS$): 2003 9,920.9; 2004 12,145.9; 2005 22,784.9; 2006 20,516.1; 2007 18,857.7 - Market Capitalization (% of GDP): 2003 184.1; 2004 215.0; 2005 368.5; 2006 299.0; 2007 255.7 - Total annual trading value (millions BDS$): 2003 394.8; 2004 190.1; 2005 100.6; 2006 2,072.9; 2007 597.3 - Annual turnover (%): 2003 3.25; 2004 2.21; 2005 0.85; 2006 10.10; 2007 3.17 ### Insurance sector (selected) - General insurance — Gross written premia BDS$ million: 2001 310.0; 2002 348.9; 2003 343.2; 2004 360.8; 2005 418.0; 2006 467.4 - As a percent of GDP: 2001 6.0; 2002 6.9; 2003 6.3; 2004 6.4; 2005 6.8; 2006 7.0 - Investment assets BDS$ million: 2001 280.0; 2002 331.2; 2003 354.9; 2004 400.2; 2005 413.8; 2006 481.4 - Life insurance — Gross written premia BDS$ million: 2001 141.6; 2002 172.0; 2003 179.1; 2004 186.9; 2005 213.6; 2006 224.3 - As a percent of GDP: 2001 2.8; 2002 3.4; 2003 3.3; 2004 3.3; 2005 3.5; 2006 3.3 - Investment assets BDS$ million: 2001 492.9; 2002 426.0; 2003 499.4; 2004 754.9; 2005 1,332.7; 2006 1,374.6 - Offshore sector net premiums (BDS$ billion): 2001 7.89; 2002 5.92; 2003 8.84; 2004 8.39; 2005 8.54; 2006 6.30 - Life insurance asset composition (percent): - Bonds and debentures: 2001 22.54; 2002 21.19; 2003 24.23; 2004 27.00; 2005 34.00; 2006 35.59 - Ordinary shares: 2001 14.43; 2002 26.03; 2003 26.19; 2004 23.00; 2005 21.00; 2006 16.54 - Mortgages and Loans: 2001 22.31; 2002 20.98; 2003 17.69; 2004 13.00; 2005 21.00; 2006 22.74 - Cash balances: 2001 15.35; 2002 21.76; 2003 18.40; 2004 20.00; 2005 11.00; 2006 12.53 - Non-life insurance asset composition (percent): - Bonds and debentures: 2001 24.05; 2002 24.17; 2003 29.31; 2004 32.70; 2005 35.63; 2006 34.17 - Cash balances: 2001 33.75; 2002 31.15; 2003 26.71; 2004 23.58; 2005 25.89; 2006 36.66 ### Observance of Financial Sector Standards and Codes — Appendix I (summary) - Two international standards and codes were reassessed to identify adequacy of supervisory and regulatory framework: - The Basel Core Principles for Effective Banking Supervision (BCP), assessed by Diane Mendoza and Joon Soo Lee. - The IOSCO Objectives, assessed by Tanis MacLaren. - Assessment sources: - Self-assessments by supervisory authorities. - Reviews of legislation, regulations, policy statements, and other documentation. - Detailed interviews with supervisory authorities and meetings with BCB, MoF, and other authorities. - Meetings with financial sector market participants. ### Basel Core Principles — summary observations - Assessment conducted against the BCP methodology issued in October 2006. Authorities conducted a self assessment but did not assign ratings. - Legal and institutional framework: - The Financial Institutions Act (FIA) governs regulation and supervision of all entities conducting banking business in Barbados. - The International Financial Services Act (IFSA) governs regulation and supervision of off-shore financial institutions. - Under both acts, the Minister of Finance (MoF) is charged with licensing. - Under the FIA, the MoF has authority to issue regulations; the IFSA grants the Central Bank of Barbados (CBB) authority to issue regulations. - The Bank Supervision Department (BSD) of the CBB is responsible for supervision of the institutions. - Scope of operations: - Domestic financial institutions include commercial banks and Part III licensees such as finance companies, trust companies, merchant banks and mortgage lending associations. - Off-shore service providers include banking (taking third party deposits), treasury functions for related organizations, wealth management companies (for high-net worth individuals) and a commodities brokerage. *Source: _cr0964 - 65. Beyond the immediate steps required to diagnose and contain a financial crisis, the (IMF PDF).* ### 4. The CBB has a single regulatory framework, which requires all financial ### 4. The CBB has a single regulatory framework, which requires all financial ### Main findings - The CBB requires all financial institutions to maintain the same percentage of capital to risk weighted assets; with some distinctions, all institutions technically have the same permissible activities. - Authorities make allowances for differences in activities, size and complexity, but further regulatory differentiation across FIA and IFSA intermediaries would aid in keeping their risk profile in check. - The domestic banking sector is insulated from the off-shore sector; primary inter-sector risk is reputational. Interviews established that “Chinese walls” existed between affiliated on- and off-shore banks. - Strict prohibitions exist on transactions between the on-shore sector and population and off-shore banks; off-shore banks operating out of Barbados have strong incentives to comply. - Liberalization of exchange and capital controls has slowed indefinitely due to change in government administration and global financial turmoil; BSD should continue preemptive review of guidelines/regulations regarding foreign exchange exposures. - Since the 2002 FSAP: - Legislative framework upgraded and BSD reorganized to facilitate risk-based monitoring. - A considerable number of guidelines have been issued; during the FSAP update, additional guidelines were finalized and one issued. - Frequent risk-focused inspections are being conducted; nearly half of the institutions have been inspected, but no institution has received a comprehensive risk-based inspection. - Each institution was inspected for AML/CFT compliance. - Training provided to supervisors; outreach and consultations held with on-shore and off-shore sectors and other stakeholders. - Supervisory operating procedures and guidance refer to international standards; practical application is based on home supervisors’ methodology. - BSD is in transition; too soon to evaluate effectiveness of some practices. ### Objectives, independence, powers, transparency, and cooperation (BCP 1) - Central Bank is primary authority for supervision; purpose implied in Central Bank of Barbados Act “to promote a sound financial structure.” - Regulation and supervision shared between the MoF and the CBB. - Governor and all members of the CBB’s Board of Directors are appointed by the Minister of Finance; operationally the CBB is independent. - CBB issues guidelines, conducts on-site inspections and monitors licensed financial institutions. - BSD resources strained: supervisors responsible for 6 large internationally active commercial banks, 14 Part III financial institutions and 54 off shore banks. - Off-site monitoring and analysis group merged with on-site supervisors to create three “streams” overseeing institutions on a “portfolio” basis; each supervisor charged with continuous monitoring, participation in on-site inspections, follow-up on supervisory issues and dialogue with management. - Since 2002 FSAP, amendments made to Central Bank of Barbados Act and Financial Institutions Act. - FIA and International Financial Services Act (FSA) should be updated; clarity required regarding applicability of regulations under the FIA to the off shore sector. - No regulations issued or upgraded since 1998; CBB and MoF encouraged to identify where additional regulations should be developed and to upgrade existing regulations (specifically FIA Institutions (Asset Classification and Provisioning) Regulation and FIA Institutions (Capital Adequacy) Regulation). - Guidelines jointly issued under the FIA and IFSA do not have the power of law; CBB lacks authority to enforce compliance. - CBB has entered into some MOUs for information sharing; a regional MOU signed March 2006 among most Caribbean jurisdictions, but Eastern Caribbean Central Bank and others not yet signatory. - CBB does not yet have an MOU with either Canada or Bermuda. ### Licensing and structure (BCPs 2–5) - MoF retains authority to grant and revoke licenses but in practice relies on CBB advice after CBB review of applications. - A standard application format and licensing criteria have been developed by the CBB but is not publicly available. - Home country supervisor consent required when proposed owner/parent is a foreign bank. - Permissible activities determined by license type: commercial bank, Part III institution and off-shore “licensee.” - Approval to expand permissible activities handled case-by-case; no notice provided to industry of “new permissible activities.” - Recommendation: formalize application process via regulation or guideline and notify all licensees when a permissible activity has been approved. - Use of the term “bank” is restricted; FIA provides fines and imprisonment for unauthorized use. - Legal provisions exist for transfer of significant ownership; approval of MoF required upon CBB recommendation; unauthorized excess acquisitions must be disposed of at CBB direction. - Barbados Fair Trading Commission (FTC) polices mergers; pre-approval required when merger would result in one company holding 40 percent or more of the market; definition of “market” for financial institutions not defined; FTC considers CBB views on financial institution mergers. - FIA limits a licensee’s investment in real estate—at market value, to the stated capital of the bank. - Approval of MoF or CBB required for certain specified acquisitions; outside narrow transactions, types/amounts of acquisitions or investments not clearly defined nor evaluation criteria provided. ### Prudential regulations and requirements (BCPs 6–18) - Capital Adequacy Regulation 1998 sets capital requirement at 8 percent of risk weighted assets (Basel I). CBB can impose higher minimum capital ratio based on potential risk exposure. - Capital requirements may vary by license type (commercial bank, Part III licensee or off-shore licensee taking third party deposits or nondeposit taking). - Currently, there are no capital requirements for market risk in the trading book. - BDS considering revisions to capital regulation in context of Basel II implementation. - BSD’s Basel II implementation plan requires all licensees to implement: - Standardized Approach for credit risk and market risks, and the Basic Indicator Approach or Standardized Approach for operational risk from 2009. (Footnote: Only licensees that meet the qualifying criteria will be allowed to use the Standardized Approach for operational risk.) - BSD intends to consider possible transition to Advanced approaches for credit risk after 2012. - BSD Basel II implementation survey findings: - Some institutions expected to realize a significant decrease in capital requirement due to improved risk weightings for some asset classes under the Standardized approach. - 75 percent of the banks do not foresee any significant changes in capital requirements. - Recommendation: CBB should conduct a full-scale quantitative impact study (QIS) of Basel II implementation on the banking system’s capital level; based on QIS results, consider adjustments to Pillar I or Pillar II schemes. - Special attention recommended to risk weighting for retail credit and residential mortgage loans as well as Pillar II. - Asset Classification and Provisioning Regulation is outdated; loss provisioning requirements should be reviewed: - No minimum provision requirement for “Pass,” “Special Mention,” and three to six months past due residential mortgage loans classified as “Substandard.” - 20 percent required for other “Substandard,” 50 percent for “Doubtful,” and 100 percent for “Loss.” - Recommendations on provisioning and data: - Consider raising required minimum loan loss provisions for “special mention” and “substandard” given widening loan loss reserves surplus. - Reconsider special treatment for three to six months past due residential mortgage loans. - Regulation should clearly state that all relevant Off Balance Sheet items are classified and provisioned. - Issue guidance on collectively assessed loan provisions or general provision in line with IFRS. - Collect more detailed asset quality data such as delinquency ratio, and past due loans over one month by the time bucket, among others. - Large exposures: - Exposures to a single person or group limited to 25 percent of the licensee’s stated capital and reserves, and 10 percent for unsecured exposures. - No explicit legal provision dealing with an aggregate large exposure limit; CBB indicated it is working on introducing a regulation for an aggregate limit. - CBB encouraged to issue guideline on credit risk management including concentration risk. - Related-party exposures: - FIA restricts unsecured lending/guarantee to related parties up to $40,000 or 1 percent of stated capital of the licensee (whichever is the greater). - FIA requires credit facilities to related parties not be on more favorable terms than generally applicable to borrowers. - No comprehensive definition of “related parties” in the FIA. - Recommendations: - Define “related parties” comprehensively (subsidiaries, affiliates, parties under control relationships, major shareholders, directors, senior management and key staff, their direct and related interests, close family members, corresponding persons in affiliated companies). - Place aggregate limit on total exposures to related parties. - Require exposures to related parties to be deducted from bank’s capital. ### Methods of ongoing supervision (BCPs 19–21) - Since second half of 2007 BSD moving toward risk-based supervision; provided guidance on risk management processes. - BSD reorganized into “Policy,” “Approval & Licensing,” and three “Supervision” units conducting off-site monitoring and on-site inspection for allocated institutions. - Responsibility re-assigned; supervisors are “learning their institutions.” - BSD developing and simulating risk assessment system (RAS) modeled after Canadian supervisory framework in consultation with OSFI. - Under new RAS risk template, CBB started assessing risk profile of some banks and banking groups on a quarterly basis. - CBB monitors and assesses trends, developments and risks for onshore and offshore banking sectors as a whole. - Recommendation: keep building supervisory capacity including highly skilled staff by risk type (credit risk, market risk, liquidity risk, IT risk, among others) and improve information systems for processing, monitoring and analysis of prudential information. - CBB emphasizes offsite monitoring and risk-focused targeted onsite inspection rather than full-scope comprehensive onsite inspection. - On-site inspections conducted in about half of on-shore and off-shore institutions using risk-based approach. - Supervisors assess strength of risk management processes on a “principles” basis; level of testing determined case-by-case. - BSD encouraged to include sufficient testing as part of risk-based supervision. - Considering developing stage of risk-based framework, sharp decrease of onsite inspection is not desirable; BSD recommended not to decrease onsite inspection too much until RAS is sound and to expedite transition process. - Regulatory reporting: - New reporting forms introduced recently; should be expanded to include more detailed information about banks’ risk profiles. - Current quarterly prudential returns mainly cover capital adequacy ratio, classified asset and provisions, large exposures and exposures to related parties. - Recommendation: require more information about overall risk profiles by risk type in line with RAS, especially detailed credit risk data (sectoral distribution, delinquency ratio, past due loans by time bucket, loan to value ratio, debt to income ratio, among others). ### Accounting and disclosure (BCP 22) - Audited financial statements prepared in accordance with International Financial Reporting Standard, published annually. - Auditor approved by the CBB by the amendment to the FIA 2006; CBB may appoint another auditor if not satisfied with annual report. - Recommendation: require financial institutions to disclose the quarterly financial returns including any statements that are to be re-filed. - Asset Classification and Provisioning Regulation (Part 2. 3) treats three to four months past due residential mortgage loans as not defined as nonaccrual loan, allowing interest to be accrued. - Recommendation: implement nonaccrual of interest on residential mortgage loans at three months’ delinquency. - CBB encouraged to publish aggregate information (e.g., capital ratio, income earning capacity, and risk profiles) on the banking system to facilitate public understanding and market discipline. ### Corrective and remedial powers of supervisors (BCP 23) - CBB has broad enforcement powers but needs more transparent and systematic framework for timely corrective and remedial actions. - CBB options include requesting behavioral changes, changes in management/Board, restricting activities, delaying approvals, suspension of license, and recommendation of revocation. - No criteria exist to determine adequate level of supervisory tools for each case; lack of transparency may allow lenient enforcement or court challenges. - Recommendation: CBB to develop more explicit framework for corrective and remedial actions. - CBB indicated it is drafting “a Ladder of Intervention” to document and improve transparency for corrective actions. - CBB should use monetary penalties and sanctions for directors, managers and other individuals as well as remedial measures and recommendations for institutions when deemed appropriate. ### Consolidated and cross-border banking supervision (BCPs 24–25) - No clear legal framework for group-wide consolidated supervision of banking groups and/or financial conglomerates. - Current FIA and relevant regulations lack explicit provisions on: - Legal definition of a banking group. - Consolidated supervision such as licensing of a bank holding company and applying consolidated prudential rules/limits to a banking group. - Explicit regulations, rules, guidance or instructions requiring larger exposure limits and related party exposure limits to be applied on a fully consolidated basis at whole (and sub) group level. - The parent bank or bank holding company being licensed under the FIA does not ensure all prudential rules and limits are applied on a consolidated basis. - Recommendations: - Amend FIA to explicitly require banking groups to comply with all prudential ratios on a fully consolidated basis. - Conduct more in-depth risk analysis and monitoring of banking groups' cross-border activities. - Pay special attention to potential double gearing, risk contagion from cross-border operations or non-financial activities, group-wide risk concentration, and group-wide internal control and risk management. - Consolidated prudential reports should include information on group-wide risks of the banking group. - Conduct joint onsite inspections every three to five years for significant foreign subsidiaries of local financial groups with host supervisors. *Source: Excerpt from IMF staff report content unit _cr0964.* ### 27. Given the systemic importance of Canadian banks in the Barbados financial ### _cr0964 - 27. Given the systemic importance of Canadian banks in the Barbados financial ### Home–host cooperation and supervisory MOUs - Given the systemic importance of Canadian banks in the Barbados financial system, the CBB is strongly recommended to be more proactive in home-host cooperation with the home supervisor. - The CBB has established a multilateral MOU with regional regulatory authorities (Barbados, Bahamas, Belize, Trinidad and Tobago, The Cayman Islands, BVI, Jamaica, Turks and Caicos, Nederlandse Antillen) for the exchange of information and cooperation and consultation. - The multilateral MOU appears to have led to on-going dialogue and discussions on common issues among home and host supervisors in the region. - However, the CBB hasn’t reached an MOU yet on cooperation in banking supervision with significant home supervisors, especially Canada and Bermuda. - Information exchange with the home and host supervisors does not seem to be active enough for the Canadian banks’ dominance in Barbados. - Recommended actions: - The CBB is encouraged to conclude MOUs on information exchange and cooperation with Canada and Bermuda. - For regional financial groups such as First Caribbean International Bank, a group specific MOU is strongly recommended among all relevant supervisors including OSFI (home supervisor), CBB (sub-home supervisor), and other significant host supervisors. - The CBB is encouraged to obtain information on the comprehensive risk profile of the parent banks at least annually from home supervisors including Canadian OSFI, the Central Bank of Trinidad and Tobago, and Bermuda bank supervisors to monitor soundness of the parent bank. - Note: According to the CBB, an MOU with the OSFI is in discussion as of now. ### Appendix II — Recommended Action Plan to Improve Compliance of the Basel Core Principles (select items) - Objectives, Autonomy, Powers, and Resources (BCP 1 (1) (2)) - CBB should pursue acquiring delegated authority from the MoF. - Keep building up supervisory capacity and resources. - Legal framework (BCP 1(3)) - Update and revise laws and regulations (including the capital adequacy and the asset classification and loan loss provisioning regulation) in a timely manner. - Cooperation (BCP 1(6)) - Engage in discussions proactively with foreign banking supervisors regarding the condition of the parent banks; and complete the negotiations of the MOUs with other supervisors. - Licensing Criteria (BCP 3) - Formalize the licensing requirements through regulation or guideline and make them publicly available. - Major acquisitions (BCP 5) - Identify the limits and the various types of exposures that require approval. - Capital Adequacy (BCP 6) - Introduce capital requirement for market risk. - Conduct full scale quantitative impact study of the Basel II implementation and make needed adjustment. - Risk Management Process (BCP 7) - Conduct a higher level of transaction testing to augment the principles-based assessment of risk management activities. - Credit Risk (BCP 8) - Conduct onsite inspection to be satisfied that the new guideline on credit risk management is complied by the banks. - Problem assets, provisions & reserves (BCP 9) - Update and strengthen asset classification and provisioning regulation including clear definitions of various terms and increase of required reserves. - Large exposure limits (BCP 10) - Establish an aggregate limit for large exposures. - Consider setting guideline on concentration risk management at the portfolio level. - Exposures to related parties (BCP 11) - Develop guideline for related party transactions, including comprehensive definition of related parties, setting an aggregate limit for related parties and providing for a deduction in the capital computation for exposures to related parties. - Country or transfer risk (BCP 12) - Reconsider the language in the guideline for country and transfer risk; the supervisor should be satisfied that the provision for credit risk is sufficient to cover both the credit and the country risk. - Conduct onsite inspection on this and increase banks’ risk awareness. - Market risk (BCP 13) - Introduce capital requirement for market risk. - Complete guideline on market risk measurement and increase banks’ risk awareness. - Operational Risk (BCP 15) - Conduct a higher level of transaction testing to augment the principles-based assessment of operational risk management. - Interest Rate Risk (BCP 16) - Issue a guideline addressing interest rate risk and increase risk awareness. - Supervisory approaches and techniques (BCP 19, 20) - Expedite the transition process to risk-based supervision. - Do not decrease onsite inspections too much until the transition is completed (e.g., reduce the time between the conduct of full scope inspections). - Supervisory reporting (BCP 21) - Expand prudential returns to cover more information on risk profiles of the licensee. - Accounting and disclosure (BCP 22) - Require nonaccrual of interest on residential mortgage loans at three months’ delinquency. - Require the publication of the quarterly financial returns including any statements that are to be re-filed. - Corrective and remedial powers of supervisors (BCP 23) - Establish the necessary framework to apply sanctions and penalties for statutory breaches. - Provide disclosure of corrective action taken. - Consolidated supervision (BCP 24) - Enhance the prudential returns for consolidated statements. - Establish clear legal framework for consolidated supervision. - Home, host relationships (BCP 25) - Develop institution-specific MOU to facilitate cross-border supervision; re-establish the coordinated inspections conducted on the banks. ### Authorities’ response (high-level) - Authorities commend the assessors on efforts to understand the regulatory framework in Barbados and view the suggestions as practical for enhancing supervision and regulation of banks. - Authorities intend to consider the recommendations in planned revisions to the legislation and the development of Regulations and Guidelines to industry. - Authorities consider that the assessors’ conclusions and ratings were flawed in some areas and argue that enhancements in Asset Classification and Provisioning Regulations, large exposures and consolidated supervision do not adequately reflect the circumstances in which banks are regulated in Barbados. - Authorities state their ability to achieve compliance in these areas is not impeded. ### IOSCO Objectives and Principles of Securities Regulation — assessment summary - Context - The IOSCO assessment was conducted as part of an update to the Financial Sector Assessment Program of Barbados. - The Securities Commission was created in 2001 when a new Securities Act (SA) was enacted. In 2002, the new Mutual Funds Act (MFA) was proclaimed. - An update of relevant securities legislation in Barbados is under consideration owing to regional initiatives and IOSCO developments. - Regulatory structure and SROs - The Securities Commission is a functional regulator; market intermediaries, public companies, the BSE and the Central Securities Depository (CSD) are required to be authorized under the SA. - The BSE and CSD are self-regulatory organizations under the overall supervision of the Securities Commission. - The BSE has been delegated authority under the SA to approve listings, supervise market activity, regulate daily trading, register and license market actors and monitor market conduct. - The CSD is a wholly owned subsidiary of the BSE and has delegated authority to regulate clearance and settlement of transactions, approve new issues’ prospectuses for registration with the Securities Commission and issue certificates of approval for these prospectuses. - Market structure and key statistics - As of December 31, 2007, there were [seven] securities companies, seven brokers, two dealers, two investment advisers, two traders and five underwriters licensed and operating in Barbados. - The 25 registrations are held by just nine firms. - The BSE has 16 ordinary members and four designated members: the Barbados Bar Association, the Barbados Chamber of Commerce, the Barbados Institute of Banking and Finance and the CBB. - There were four licensed mutual fund administrators and 14 mutual funds with total net assets of BB$758.9 million. - The BSE was established in 1987 and reincorporated under the new Securities Act in August 2001. - As of December 2001, capitalization was estimated at around US$ 1.8 billion or 71 percent of GDP. - By end-2007, market capitalization reached US$ 5.6 billion, or close to 150 percent of GDP. - If cross-listed shares are included, the market capitalization at the end of 2007 reached US$ 9.4 billion or 250 percent of GDP. - Debt markets - From 2003 to 2007, there have been 28 public issues of corporate debt securities for a total of BB$ 1,369.6 million. - Slightly over 35 percent of the total was raised in 2006. - The average total value of secondary market trades in government debentures and treasury bills between 2003 and 2007 was BB$22.4 million, at an average of 188 trades per year. - Preconditions and regulatory capacity - General preconditions for effective securities regulation appear present, but the legislative framework governing commercial law is outdated; bankruptcy, insolvency and winding up laws are also very outdated. - The Securities Commission is operationally independent with clear responsibilities, but has significant gaps in powers in inspections, access to information at regulated firms, information sharing and cooperation with other regulators; it does not have rule making authority nor general authority to grant exemptions. - The Commission is publicly accountable through annual reports and judicial review; it does not publish its own bulletin or have a website to disseminate information; legislation and regulations are not easily obtainable outside the country. - Resources at the Commission have increased since 2002 but may still not be sufficient; staff are paid on the general government salary scale which complicates hiring and retention of necessary skills. - Enforcement, inspections and cooperation - The Commission has sufficient powers to investigate and take action on breaches, but the enforcement program is in early stages and fines in legislation may be too low to be effective deterrents. - Legal authority to inspect or obtain information from regulated entities outside investigations is severely constrained; human resource limitations have prevented an on-site inspection program, though this is under development. - The Commission has authority to share regulatory information with domestic counterparties and a domestic MOU is in place; ability to share information with foreign regulatory authorities and enforcement agencies is much less clear, limiting ability to become a signatory to the IOSCO Multi-lateral MOU. - Issuers and disclosure - Public issuers are subject to extensive initial and ongoing disclosure requirements; annual financial statements must be prepared in accordance with IFRS and auditing standards. - The BSE requires listed companies to prepare quarterly financial statements. - Public disclosure of material changes must be made within seven days of the change. - Requirements for insiders to disclose their securities holdings should be made clearer and more timely. - Disclosure rules, governance requirements and take over bid rules are spread across two statutes and the stock exchange rules; no single body has clear authority to interpret rules where conflicts or ambiguities arise. - Collective investment schemes - Mutual funds and their administrators must be licensed by the Securities Commission; the same registration requirements apply to foreign funds and foreign administrators. - Reputation, fit and proper qualifications for key individuals and minimum capital requirements for administrators are addressed. - The regime does not require mutual fund operators and administrators to have in place adequate internal control policies and procedures. - Funds’ assets must be held in trust by a custodian and registered in that custodian’s name; organizational form and overall risks must be disclosed in the offering document. *Source: _cr0964 - 27. Given the systemic importance of Canadian banks in the Barbados financial* ### 20. Full disclosure of all material facts required to make an informed decision must be ### 20. Full disclosure of all material facts required to make an informed decision must be ### Mutual funds: disclosure, valuation, redemption - Full disclosure of all material facts required to make an informed decision must be set out in the offering document and must include acceptable valuation and redemption provisions. - Valuation framework: - There are valuation rules in the legislation and the IFRS requirements for fair market valuation would also apply. - The portfolio statement of the fund, containing valuations of the securities, is audited as part of the annual financial statements. - Redemption and pricing: - There are no rules or procedures at the Securities Commission addressing pricing errors. - Suspensions of redemptions are only permitted in exceptional circumstances. ### Principles for market intermediaries (Pr. 21–24): licensing, conduct, capital, controls - Licensing and oversight: - All market intermediaries must apply to the Securities Commission and meet the minimum licensing standards for registration, even if they also carry a license issued by the CBB or Supervisor of Insurance. - The Commission has full authority to grant, refuse, withdraw or impose conditions on a license, subject to the right of the applicant/licensee to be heard. - Business conduct requirements: - Extensive requirements exist regarding many aspects of business conduct—such as know your client and the suitability obligation. - There are no specific requirements that a firm have in place adequate internal controls and risk management procedures. - There is no general requirement that client assets be segregated from the firm’s assets. - Capital and failure preparedness: - Minimum capital requirements do not vary with the risks undertaken by the firm, but appear to meet objectives of a capital requirement: provide a cushion to absorb losses and allow for an orderly liquidation of the business if the firm fails, without losses to clients or disruption to the markets. - Capital takes the form of liquid assets on deposit with an arm’s length financial institution that may be used for meeting claims against the firm, without notice to the Commission. The funds must be immediately repaid if drawn down. - There are no early warning mechanisms in place to alert the Commission to a licensee’s deteriorating financial position or contingency plan in place at the Commission to deal with a firm’s failure. ### Principles for the secondary market (Pr. 25–30): BSE oversight, market abuse, bankruptcy law, CSD - Barbados Stock Exchange (BSE) and surveillance: - The BSE is subject to a registration and oversight regime as a precondition to being permitted to operate as a stock exchange. - Its rules and any amendments must be approved by the Commission following a publication for comment process. - Trading on the BSE is subject to surveillance both at the Exchange and at the Commission. - There is real time transparency of trading data available to members and the timeliness of information available to the public will be improved with the launch of a new BSE website. - Market abuse and coordination: - Rules regarding market abuse transactions appear in the SA and the current BSE rules, with expanded provisions appearing in the common rules being adopted across the CXN exchanges. - Coordination mechanisms among the regulators do not set out clear lines of responsibility for pursuing these offences or how matters will be dealt with when they involve cross border activities. - The overall market abuse regime needs to be examined to ensure it is comprehensive. - Recommendation: Trading on insider information about any public company, not just a listed one, should be made an offence. - Legal framework risks: - Given the level of market activity and the way the business is conducted, the actual risk of a market disruption from a default is fairly slight, but dated bankruptcy and other commercial laws in Barbados are of concern. - The bankruptcy law is based on an English statute that dates from the early 20th century and does not recognize investment market needs such as orderly close out procedures. - Personal property laws may be outdated and may not recognize pledges or transfers of securities held in electronic form. - Central Securities Depository (CSD): - CSD, as a clearing agency, is subject to oversight by the Commission as an SRO. - The settlement cycle for securities is three business days after the trade date. - Listed securities are held in dematerialized form at CSD that also acts as registrar and transfer agent for listed companies. - Virtually all clients have an account at CSD and most positions are held in the name of that client as the beneficial owner. - CSD settles the securities on a gross basis with the brokers for their clients, while the cash is settled on a net basis, through CSD’s account at the CBB. ### Appendix III — Recommended Action Plan (selected recommendations) - Principles Relating to the Regulator (P. 1–5) - Give the Securities Commission legislative authority to grant exemptions and make legally binding rules under both the SA and MFA; eliminate the Minister’s exceptive power under the MFA to enhance the Commission’s independence. - Develop a website containing information about activities, securities laws, registered firms and public companies. - Provide the Commission comprehensive authority to inspect all firms registered under either the MFA or SA and to have full access to all information held by the firms at any time. - Additional resources may be needed, particularly in compliance and enforcement areas. - Principles of Self-Regulation (P. 6–7) - The Commission should consider doing on-site inspections of the SROs. - Principles for Enforcement (P. 8–10) - Establish an effective program for on-site supervision of firms registered under both the SA and MFA; where appropriate, coordinate with CBB and BSE inspections. - Require registered firms to have compliance programs in place. - Reassess levels of fines under the SA and MFA; consider raising fines to provide a greater deterrent. - Principles for Cooperation (P. 11–13) - Grant the Commission detailed and clear authority to share information and provide assistance to other regulators, domestic and foreign. - Finalize MOU among securities commissions involved in CXN and an MOU among the three exchanges. - Principles for Issuers (P. 14–16) - Amend public company disclosure requirements to provide for: - Public disclosure of material changes to be made immediately, with filing of the report with the regulator promptly thereafter; prompt confidential filings where sensitive and public disclosure as soon as possible. - At least semi-annual financial statements to be included in offering documents and made available to shareholders. - Consolidate public company disclosure, voting and takeover bid rules presently in the Companies Act into the SA. - Update and harmonize takeover bid rules across the region, particularly with Jamaica and Trinidad and Tobago, and import into the SA. - Require insiders of all public companies to make prompt public disclosure of their shareholdings and keep that information up to date. - Principles for Collective Investment Schemes (P. 17–20) - Amend the MFA to require mutual fund operators and administrators to have adequate internal control policies and procedures, to be tested on inspection by the Securities Commission. - Consider requiring the custodian to be completely at arm’s length to the fund and the administrator. - Introduce a comprehensive set of duties applicable to the mutual fund, its operator, administrator and portfolio manager owed to fund investors. - Principles for Market Intermediaries (P. 21–24) - Add requirements that all registered firms have adequate internal control policies and procedures; segregate client assets; have a duty of best execution; prohibit front running client orders. - Consider recommending firms establish a compliance function responsible for monitoring compliance. - Develop a contingency plan to address the failure of a registered firm. - Principles for Secondary Markets (P. 25–30) - Put in place an effective on-site examination program for both firms that trade on the BSE and for the BSE itself. - Review market abuse prohibitions in the BSE rules and securities legislation to ensure comprehensiveness; in particular, make trading on insider information about any public company an offence. - Modernize bankruptcy and insolvency laws to prevent outdated provisions from impeding market development. ### Authorities’ response (summary) - The Commission agrees with the assessment to some extent and had coordinated a Legislation Committee prior to the assessment to review the Securities Act and related legislation, with a view to completing application for signatory to the IOSCO MMOU (Appendix B). Work is in progress. - Committee progress and timelines: - The Committee has finished its review of the Securities Act and is reviewing the impact of amended securities legislation on the Companies Act (Division J). The Committee will also review the Mutual Funds legislation. - The Committee hopes all required updates and amendments will be completed by December 2010, which is also the deadline for application to IOSCO for signature to the MMOU. - Other deficiencies (e.g., absence of internal controls) will be addressed in the continuing legislative review. ### Appendix IV — Stress testing: procedures, assumptions, coverage, scenarios - Coverage: - Stress test covers the four subsidiaries of the on-shore banking system, based on data as of September 2007. - Two foreign branches of the on-shore system were not included because minimum capital requirements do not apply for them. - Risks assessed: - Economic activity, interest rate, exchange rate, liquidity, and shocks to macroeconomic variables for the world economy. - Credit risk methodology: - Tracked impact on commercial banks’ CAR of shocks to default rates of banks’ loans, via a one-year horizon, 95 percent confidence level simplified value at risk (VaR) for each bank. - Assumptions and parameters: - Loss given default (LGD) assumed the same for all loans, at about 25 percent (based on discussion with commercial banks indicating a 0-40 percent range). - The unsecured share of bank assets assumed about 20 percent of total assets across banks; an 80 percent ratio of secured assets is a conservative assumption. - Loan default probabilities (PD) assumed homogeneous and independent, approximated using evolution of NPLs and expected levels after each shock; expected NPLs projected based on historical relationships with GDP growth, nominal interest rates and inflation. - Effective loan portfolio concentration estimated via a Herfindahl-Hirschman index using the most disaggregated loan category available. - Also compared results with the 2002 FSAP stress test by tracking impact on each bank’s CAR of increases in provisioning associated with hypothetical increases in NPLs. - Interest rate risk: - Considered changes in the nominal interest rate in Barbadian dollars; assessed impact of an upward parallel move in the yield curve on bank capitalization over a one-year horizon. - Combined direct balance-sheet effects for interest bearing assets and liabilities (gap method) and mark-to-market losses on holdings of fixed rate government papers (duration model), noting authorities’ estimate that most of the portfolio—90 percent approximately—is held to maturity. - Exchange rate risk: - Considered depreciation/appreciation of the Barbadian dollar with: - Direct effect on the balance sheet from any currency mismatch. - Indirect effect on banks’ portfolio quality; CBB discussions suggested that an x percent depreciation would lead to an x/20 percent of new NPL of foreign currency loans. - Liquidity risk: - Assessed banks’ ability to survive liquidity drains without resorting to CBB. Scenarios included: - A dry-up of up to 50/100 percent of the funding from parent institutions. - Deposits run of up to 50 percent in a 30-day period. - Scenario analysis: - System subjected to shocks to tourism and construction domestic sectors, and shocks to the U.S. economy and international oil prices. - Data note: - Shocks and scenarios chosen in collaboration with the CBB; the CBB provided individual bank data as of September 2007. - Scenario analysis is bottom-up and not general equilibrium analysis; it is an imperfect guide if macro policy framework and/or the financial system diverge fundamentally. ### Appendix V — Follow-up on key recommendations of the 2002 FSAP (status as of April 2008): selected items and outcomes - Banking sector: - Financial Institutions Act (FIA) amendments (2006) did not address independence of CBB, aggregate limits on large exposure and connected lending, and license revocation; distressed bank resolution and CBB’s prior approval of external auditor were addressed. Outstanding items are in a proposed amendment by CBB. - On-site examinations: BSD supervisory staff increased from 28 at 2002 to 32 at March 2008. Regular on-site examination cycle has lengthened due to increased mandates. - Deposit insurance scheme introduced mid-2007 for institutions licensed under the FIA; covers up to BDS$25,000 per depositor and per institution; fund represents about 0.2 percent of total deposits. Organization, MOU with Central Bank, and staffing are in progress. - Credit unions: - Joint CBB-assisted inspections shifted focus from the largest five to the largest two credit unions; the two largest are not inspected on an annual basis. Consider adding the third largest to the joint inspection process. - Cooperative Societies Act amended in December 2007 and regulations updated in January 2008; amendments unlikely to substitute for a dedicated Credit Union Act. Plans considered to establish a Financial Services Commission to supervise nonbank institutions. - Insurance sector: - On-site inspections commenced in 2004 but need stronger analytical off-site review and more timely information collection. Staff has increased since last assessment, but four positions created in 2006 remain unfilled. - Proposed solvency margin and capital requirement amendments drafted but not implemented. - Only one circular (covering segregated cell companies) distributed in October 2007; other recommended circulars not issued. - Supervisor transparency limited: returns delinquent; Supervisor of Insurance’s 2005 Report still in draft; 2006 information not compiled. - Proposed Financial Services Commission could increase independence and transparency if approved. - Capital markets: - Securities Commission: new legislation and regulatory efforts reflected in IOSCO assessment, but full implementation requires effective exercise of SC powers in practice; SC not yet fully staffed or operational at the time. - Inspection and enforcement of the Securities Act improved since 2003; three new inspection/compliance examiners to be added in 2008 and an own inspection program to commence. BSE establishing own inspection program for member brokers. - Public company reporting: no change on need for immediate disclosure of material events and insider transactions. - Securities settlement period: effective January 1st 2006, clearing and settlement cycle reduced to T+3 (three business days after trade day). *IMF staff report content from _cr0964 - 20. Full disclosure of all material facts required to make an informed decision must be* ### Appendix VI. Barbados—Detailed Recommendations of FSAP Update ### Appendix VI. Barbados—Detailed Recommendations of FSAP Update ### BANKING — Legal and regulatory framework - Short-term - Update existing regulations (capital adequacy regulation, classification of assets and loss provision) and issue new regulations (large exposures; related party transactions; licensing activities—to include holding companies). - Increase transparency by sharing with the industry licensing requirements and permissible activities. - Medium-Term - Amend Financial Institutions Act (to grant CBB authority to issue regulations, similar to text in the International Financial Services Act, and to get clear, delegated authority from the MoF). - Develop methodology for imposing sanctions and penalties. ### BANKING — Off-site and on-site supervision - Short-term - Accelerate development of risk assessment model. This would include identifying the criteria for evaluating the inherent risks; and the risk management and mitigation activities; determining the frequency and timing of the risk assessments; the definitions and level of risks to be assigned, and the impact the assessment will have on an institution’s supervisory strategy. - Maintain a proper level of a broader scope onsite inspections (resume inspection frequency, reduce the current “exam cycle” of 18–30 months). - Conduct higher level of transaction testing to support assessment of risk management activities. - Develop program to document significant changes that arise between the completion of the inspection to the issuance of the report of inspection (primarily the changes of asset classification, changes to the loan loss provision). - Develop mechanism for notifying the FIU when inspections determine that a licensee should have filed a suspicious transaction report but failed to do so. - Medium-Term - Keep building up supervisory framework to assess, monitor, address risks in the banks and banking system. - Improve data gathering and analysis to identify incipient system-wide vulnerabilities. ### BANKING — Basel II implementation - Short-term - Conduct full-scale Quantitative Impact Study to assess the impact on capital level of banking system as well as macro-economy and financial markets. - Based on the result of the QIS, make any needed adjustments including changes in risk weights, delay of implementation schedule, and strengthening Pillar 2 framework, among others. ### BANKING — Cross-border consolidated supervision and home/host cooperation - Short-term - Complete MOUs with OSFI, Bermuda and other jurisdictions. - Expand and document home/host information sharing on risk profiles of parents and subsidiaries to assess the impact of parent/related party on Barbados banks. - Conduct comprehensive scope, coordinated cross-border inspections of Barbados-based bank. - Medium-term - Establish clear legal framework for consolidated supervision of banking groups or financial conglomerates including explicit provisions on legal definition of a bank group and consolidated prudential rules or limits. - Strengthen surveillance of regional cross-border financial groups through more frequent and comprehensive group-wide risk assessment taking account .of risk contagion across the region. - Develop multilateral MOU for specific holding company or group. ### SECURITIES — Powers, supervision, and market conduct (Securities Commission / Commission) - Short-term - Provide the Securities Commission with statutory power under the MFA and SA to: - make legally binding rules and give exemptions; - inspect and access all information at regulated firms at any time; and - share information and otherwise cooperate with domestic and foreign supervisors. - Develop and implement regular inspection program for regulated firms under both Acts and require all registered firms to have adequate internal control and risk management policies and procedures. Where appropriate, these reviews could be coordinated with the inspection activities of the CBB and the BSE. - The Securities Commission should consider requiring the custodian of mutual fund assets to be completely at arm’s length to both the fund and the administrator. - The authority should consider recommending that firms registered under either Act establish a compliance function: someone responsible for monitoring the compliance of the firm with all applicable requirements. - The market abuse prohibitions rules in the BSE rules and securities legislation should be reviewed to ensure they are comprehensive. In particular, trading on insider information about any public company, not just a listed one, should be made an offence. - Require (i) immediate public disclosure of material changes regarding mutual funds and public companies; and (ii) insiders of public companies to make prompt public disclosure of their shareholdings and keep that information up to date. - All registered firms should be required to have adequate internal control policies and procedures in place; be required to segregate client assets; have a duty of best execution; and not front run client orders. - The levels of fines that may be imposed under the SA and MFA should be reassessed. Consideration should be given to raising these to provide a greater deterrent. - Medium-term - Elimination of the Minister’s exemptive power under the MFA would enhance the Securities Commission’s independence. - The Commission should develop a website that would contain information about its activities, the securities laws, registered firms and public companies. Increased visibility benefits investors and the markets. - The Commission should consider doing an on-site inspection of the SROs. - Consider obtaining technical assistance to identify and propose recommendations to address limitations on capital market development. - Study ways (including offering higher salaries) to attract additional staff with the required specialized skills in the compliance and enforcement areas. - A comprehensive set of duties should be introduced that would apply to the mutual fund, its operator, administrator and portfolio manager and be owed to the fund investors. - Update and harmonize takeover bid rules across the region (particularly with Jamaica and Trinidad and Tobago) at the exchange and statutory levels; consider importing the takeover bid rules into the SA. - The disclosure requirements for public companies should be amended to provide for the most recently released financial statements (including semi-annual statements) to be included in offering documents and made available to shareholders. ### FINANCIAL SECTOR AUTHORITIES (including the BSE) - Short-term - Develop a contingency plan to address the failure of a registered firm. - The MOU among the securities commissions involved in CXN should be finalized and the three exchanges should have clear arrangements in place (via an MOU or contract) to govern their relationship. - Medium-term - The rules governing public company disclosure (annual reporting, management reporting, financial statements, proxy requirements), voting (proxies etc,) and take over bids, presently in the Companies Act, should be consolidated in the SA. - Some significant modernization of bankruptcy and insolvency laws is needed to prevent the outdated provisions from being a significant impediment to development of the markets. ### INSURANCE - Short-term - Efforts to improve the timeliness and usefulness of supervisory returns should have a high priority. - Bring regulation of the insurance sector in line with best international practices to protect the reputation and the charter value of the insurance business in Barbados from negative shocks. - Develop standards and circulars to enhance the observance of the IAIS principles. In particular, standards on corporate governance, market conduct, internal controls (including asset and derivative controls, particularly in the case of the offshore market), asset and liability valuation, and a solvency standard for life insurers would lead to a considerable improvement in the observance of the principles. - Study ways to increase enforcement resources. On site inspections need to be supported by a more analytical rather than compliance oriented off site effort. This, in turn, will require better content and more timely information collection. - Pursue practical collaboration with respect to the supervision of larger groups in Barbados with the authorities in Trinidad and Tobago. Effective supervision of the sector can only be done by supplementing the solo approach with a group wide assessment. ### CREDIT UNIONS - Short-term - Consider issuing a specialized Credit Union Law. The amendments to the Cooperative Societies Act are not a substitute to a separate Act. The legislative changes have not kept pace with the accelerated growth of the sector and the risks associated with the high degree of concentration in the largest two to three credit unions in terms of total assets and membership base. In addition, loan delinquency rates need to be measured accurately. - Increase the on-site examination of the systemically important credit unions by undertaking joint inspections (Cooperatives Department and Central Bank) on an annual basis and consider adding the third largest to the joint inspection process. - Increase the number of inspections conducted by the Cooperatives Department such that an annual inspection is conducted on all 34 credit unions. Increase the number of examiners and continue to provide training on risk based supervision. ### DEPOSIT INSURANCE - Short-term - Expand and improve the level of public awareness about the characteristics of the new deposit insurance scheme. - Complete the process of organization, the MOU with the Central Bank; staffing, and necessary systems. *Appendix VI. Barbados—Detailed Recommendations of FSAP Update* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0964.pdf_