## _cr13101 ## Source details **Canonical URL:** [_cr13101](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13101.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13101.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13101.pdf.json) --- ### Executive Summary — Overall Assessment - The Bahamian financial system weathered the aftermath of the U.S. financial crisis well due to very high capitalization and profitability in the domestic banking system, and an improved regulatory framework. - Key vulnerabilities: - High dependence of the domestic economy on tourism; disruptions could arise from a weakening of the U.S. economy, a prolonged increase in oil prices, or a large-scale hurricane destroying key infrastructure. - Increase in public debt, which has led to recent ratings agency downgrades. - Fixed exchange rate with the U.S. dollar since 1970, but capital controls afford considerable scope for monetary policy independence. ### Size and Structure of the Financial System - System scale and segmentation: - Total gross assets of the financial system = 96 times GDP at end-2011. - Total assets of the offshore banking sector = 75 times GDP at end-2011. - At end-2011, there were 271 banks and trust companies with active licenses; 155 were restricted (mainly nominee trust companies). - Banks licensed in The Bahamas held US$595 billion in assets; offshore banks accounted for 98 percent of the total. - Offshore banking assets (aggregate) amounted to US$583 billion at end-2011 (March 2012 snapshot for largest entities listed). - Wholesale banking accounts for some 80 percent of assets of the total system. - Financial sector accounts for about 15 percent of GDP and some 9 percent of tax receipts; banking sector directly accounts for 2.5 percent of overall employment. - Offshore banking contributes less than 3 percent of GDP, employs ½ percent of the labor force, and contributes less than 1 percent of GDP to government revenues. - Onshore commercial banking: - Eight onshore commercial banks: three domestically owned, five foreign (four subsidiaries and one branch). - Three largest banks hold 68 percent of total onshore assets. - Funding structure: deposits 71 percent, equity 18 percent. - Banks’ assets comprised roughly 75 percent credit at end-2011; domestic residential mortgages accounted for 41 percent of total loans to residents at end-2011. - Exposure to the public sector increased to 14 percent of total assets in 2011 from 7 percent in 2006. ### Onshore Financial Sector: Risks, Resilience, and Asset Quality - Capitalization, profitability, liquidity: - Target CAR = 17 percent; trigger CAR = 14 percent. - Actual aggregate CAR ≈ 28 percent at end-2011; Tier 1 capitalization = 25 percent at end-2011. - Reported CAR (December 2011): All banks 27.7; 1/Domestic 21.9; Foreign 22.4; All banks (excluding one bank with 51 percent CAR) 29.5. - Ratio of liquid assets to total assets ≈ 20 percent at end-2011. - Net interest income steady at around 5 1/2 percent during 2007–11; ROE = 17 percent since mid-2007. - Asset quality: - NPL ratio rose from 3.8 percent in June 2007 to 12.8 percent in March 2012. - Mortgage NPL rate = 14.9 percent at March 2012. - Consumer loans NPL rate = 7.8 percent. - Commercial loans NPL ratio = 18 percent. - Mortgages account for over half of NPLs (55 percent of NPLs). - Delinquencies remain high at 19 percent of total loans; delinquencies > 180 days have increased. - Provisioning rates vary from 23 percent to 126 percent across banks. - Mitigants and monitoring: - CBoB meets regularly with banks and has improved credit risk monitoring, collateral valuation practices and provisioning in compliance with international standards. - Mortgage collateral values estimated to have fallen 20–30 percent. - Recommendation: develop real estate price indices to enhance monitoring. ### Stress Testing: Scope, Scenarios, and Outcomes - Scope: - Resilience assessed for seven of the eight onshore commercial banks using end-2011 data (top-down and bottom-up); offshore banks not stress-tested due to lack of bank-specific balance sheet data. - Macro scenarios (five): - Scenario 1: Baseline based on the April 2012 IMF World Economic Outlook. - Scenario 2: Global recession with spillovers via lower tourism receipts. - Scenario 3: Substantial and prolonged increase in oil prices (supply shock) causing slowdown in tourism receipts and independent negative effect on NPLs. - Scenario 4: Slowdown in FDI flows. - Scenario 5: Large-scale hurricane causing disruption in tourist arrivals. - Calibration and shock severity: - Macro shocks assumed to occur in the second half of 2012 with impacts gradually decreasing over the next several years. - Each scenario simulated light, medium and severe shocks (roughly one, one and a half, and two standard deviations from baseline). - Solvency outcomes: - System-wide: the combined shock to tourism revenues and oil prices is most severe. In the worst-case combined shock, aggregate NPLs reach 25 percent of total loans (aggregate NPLs increase by almost 100 percent) and the system’s CAR would remain above the regulatory trigger of 14 percent. - Bank-level: pockets of vulnerabilities exist; some banks with higher NPLs and lower capital, including a large bank, would breach the 14-percent regulatory benchmark under severe shocks. - Sensitivity: system’s CAR can absorb a 100 percent increase in NPLs; excluding one bank with a 51 percent CAR, the system’s post-shock CAR would be around 11.5 percent and under more severe shocks would fall below the 8 percent Basel minimum. - Mortgage concentration: mortgage NPLs ≈ 15 percent; a 100 percent increase in mortgage NPLs (100 percent provisioned, collateral/future profits abstracted) pushes only one bank below 14 percent CAR and none below 8 percent; system CAR = 21 percent (or 16.7 percent excluding 51 percent CAR outlier). - Market risk: - Modest interest-rate risk; currency and equity price risks are limited. - Liquidity stress tests: - System could cope with deposit outflows of 5–10 percent of total deposits, though some banks with lower liquidity buffers are sensitive. - Baseline liquidity ratios (December 2011): Liquid assets to total assets = 20.0; Liquid assets to total deposits = 24.9. - Selected deposit withdrawal impacts: - 5 percent withdrawal — All banks: liquid assets to total assets 16.6; to total deposits 20.8. - 10 percent withdrawal — All banks: liquid assets to total assets 13.2; to total deposits 16.8. - 20 percent withdrawal — All banks: liquid assets to total assets 4.7; to total deposits 6.1. - Wholesale funding withdrawal scenarios show smaller impacts (e.g., 20 percent wholesale withdrawal — All banks liquid assets to total assets 18.6; to total deposits 23.3). ### Offshore Financial Sector: Characteristics and Data Limitations - Scale and concentration: - Offshore sector assets = 75 times GDP at end-2011; branches account for well over 90 percent of offshore assets. - Nine branches of global banks collectively account for over 90 percent of the offshore sector. - Top five offshore entities assets (March 2012): 453,039 (US$ million); largest fifteen entities: 504,821 (US$ million). - Branch-level examples (March 2012): 282,002; 85,015; 43,239; 29,527; 13,256 (US$ million) across business models. - Business models and risks: - Sector dominated by branches/subsidiaries of global institutions; many act as booking centers for intra-group funding and do not rely on third-party funding. - Liquidity risks muted; solvency risk at jurisdiction level mitigated since assets are held by foreign parent branches. - Onshore–offshore segmentation: - Intra-group links minimal; only about ½ percent of domestic banking sector assets and liabilities are with offshore counterparties. - Offshore entities prohibited from holding Bahamian dollar balances except for local expenses and cannot invest in domestic securities. - Data limitations: - Lack of detailed data prevented stress testing of offshore entities or calculation of financial soundness indicators; limited assessment scope. ### Insurance, Pensions, and the CLICO Bahamas Liquidation - Insurance sector: - Sector relatively small and stagnated after the failure of CLICO Bahamas. - Top five nonlife insurers reinsure 60 percent to 80 percent of their risk. - More than 90 percent of reinsurers used are A rated by A.M. Best and belong to the top 25 reinsurers globally. - Long-term products priced with assumed long-term fixed interest rates of 3 percent to 11 percent. - ICB improvements: new Insurance Act (2009), ICB established, penalties introduced, quarterly supervisory meetings, annual stress testing for life insurers. - Remaining needs: fully implement RBS, standard valuation methodology for long-term liabilities, risk-sensitive solvency framework, on-site examinations, market conduct and consumer protection enhancements. - Pensions: - Components: social security benefit, separate public sector plan, occupational pension plans, individual retirement plans. - Approximately one fourth of the Bahamian workforce participates in occupational pension plans. - Pension fund assets > B$1.1 billion by 2007 but fell to under B$0.7 billion by 2011. - Private pension schemes managed conservatively; nearly half assets in public sector securities and bank deposits. - Private pension funds not currently regulated pending occupational pension legislation. - CLICO Bahamas Limited (CBL) liquidation (status and recommendations): - CBL under liquidation since 2009. - Actuarial liabilities = B$120 million with a significant shortfall in asset value. - CBL owns 100 percent of CLICO Enterprises Limited (CEL); 63 percent of CBL’s assets are a B$73 million loan to CEL. - CEL invested in Wellington Preserve Corporation (WPC); sales netted B$10 million after taxes and fees for 238 hectares sold. - Complex creditors’ claims include a B$52 million claim alleged by CLICO Trinidad against CEL; CBL holds a guarantee of B$58 million from CLF for the loan to CEL. - Government committed to issue a guarantee of B$30 million to support policyholders. - Current payments: health insurance claims paid in full; life claims up to B$10 thousand per policyholder paid, with outstanding balances accrued until liquidation finalized. - Recommendations: - Accelerate liquidation of CBL. - Once government guarantee issued, dispose immediately of life and annuities business to avoid increasing liabilities. - Dispose of health insurance activity independently due to shorter-term character and viability. - Update financial statements (none issued since 2009). ### Financial Sector Oversight, Infrastructure, and Regulatory Findings - Supervisory architecture: - Three prudential regulators: Central Bank of The Bahamas (CBoB), Securities Commission of The Bahamas (SCB), Insurance Commission of The Bahamas (ICB); Compliance Commission supervises AML/CFT for non-prudential businesses. - Supervisory coordination via Group of Financial Service Regulators (GFSR); GFSR meets at least quarterly. - Banking supervision: - Compliance with Basel Core Principles described as good; risk-based supervisory approach near full implementation. - Electronic reporting system in place from 2010; enhancements to include market risk reporting effective September (context year). - Capital ratios calculated under Basel I; CBoB to implement capital charges for market risks commencing the third quarter of 2012; Pillar III-Minimum Disclosures due before year-end 2012; Pillar I consultation/implementation by beginning of third quarter of 2013; consult on Basel III by end 2013. - Staffing: CBoB has well-trained and dedicated staff but should consider recruiting additional specialists. - Securities and capital markets: - New Securities Industry Act (SIA) addressed most issues from 2004 OFC assessment; current Investment Funds Act 2003 (IFA) and regulations need updating to meet IOSCO standards. - At end-2011: 713 investment funds; funds held B$86.6 billion AUM at end-2011 (down from B$298 billion in 2007); only three fund managers in The Bahamas managing twelve funds. - BISX: one exchange with 19 issuers and capitalization ~35 percent of GDP; average daily trading in 2011 = 11,451 shares; average daily trading value in 2011 = B$59,674; BISX All-Share Index decreased by 8.9 percent in 2011. - Payments and market infrastructure: - RTGS created in 2004; Bahamas Automated Clearing House (BACH) created in 2010. - Payment Systems Act brought into force in 2012; National Payment Committee created as advisory body. - AML/CFT: - Authorities committed to undergo an AML/CFT assessment within 18 months after the FSAP mission; assessment will judge compliance with new FATF standards in the context of CFATF evaluations. ### Crisis Management and Financial Safety Net - Current framework requires strengthening; authorities developing a National Financial Crisis Management Plan (NFCMP). - Financial safety net components: - CBoB authority to extend emergency liquidity assistance (ELA). - Deposit Insurance Corporation (DIC) with authority to provide financial assistance; DIC operations carried out by CBoB staff via secondment. - Safety net covers only the onshore banking sector; deposit insurance covers only Bahamian dollar deposits in onshore banks. - DIC coverage = B$50,000 protects approximately 96 percent of depositors by number. - Gaps and recommendations: - Supervision of credit unions to be added to CBoB duties by end of first quarter of 2013. - DIC equity capital target ratio and primary/secondary borrowing sources should be developed. - Legal and operational consolidation of receivership and resolution frameworks recommended (two frameworks exist under BTCRA and PDA). - NFCMP should define coordination body, roles of MoF/CBoB/DIC/non-bank supervisors, legal authority, mechanisms for assistance beyond DIC powers, and sequencing for capital support. - CBoB to update 1991 discount window guidelines and develop procedures to address system-wide liquidity crises. - DIC operational recommendations (Box 3): - Improve transparency and public awareness (update website, FAQ, laws, audited statements). - Determine required Fund balance via strategic planning and consider increasing annual premiums. - Shorten and codify payout timing (current legal timeframe: DIC has six months to initiate payment; operational intent is to pay within a month). - Identify backup funding sources and prearranged borrowing authority (central bank, MoF or private sources) since issuing five year bonds may not be feasible in a crisis. ### Capital Markets, IOSCO Implementation, and Recommended Actions - IOSCO findings: - Compliance generally high but weaknesses remain; SIA (effective December 30, 2011) reinforced SCB powers and independence. - IFA (2003) and IFR need updating; SCB lacks sufficient powers over fund managers/advisers/operators/custodians. - SCB to become full signatory to IOSCO MMoU (A-list expected December 2012 context). - Market structure and statistics: - Market capitalization in 2011 = B$2.875 billion (fell by one percent in 2011). - Six of the 19 equity issuers are banks; First Caribbean Bank accounts for 40 percent of market capitalization. - At end-2011: 132 licensees under SIA 1999; 65 entities licensed for dealing/arranging/managing/advising in securities; 713 investment funds; total funds under management B$86.81 billion. - Recommended actions (selected Annex Table 6 highlights): - Update IFA and IFR; delete exclusion permitting selling investment fund shares without a license where that is the only securities business undertaken. - Subject all locally resident related parties to full due diligence in licensing investment funds; subject managers/advisers, operators and custodians to ongoing oversight. - SCB should consider appointing a public interest oversight body for the auditing profession and BICA, possibly giving the role to the SCB. - Develop a plan, possibly as part of the NFCMP, to deal with the failure of a licensee. ### Macroeconomic Context and Key Quantitative Facts - Economic performance: - Economy declined by 5 percent in 2009 (5.4 percent decline in another reference); GDP expected to grow at about 2.5 percent in 2012. - External current account deficit expected to widen during 2012–14 due to FDI-related imports (notably the US$3.5 billion Baha Mar project). - Reserves = US$829 million at end-2012 (equivalent to two months of imports of goods and services; gross international reserves covered 100.4 percent of reserve money at end-2011; legal minimum 50 percent). - Central government debt expected to reach 54 percent of GDP by end of FY 2012/13. - Credit and public sector financing: - Domestic credit growth = 1 percent in 2011 (from a peak of 14.3 percent in 2006). - Holdings of government securities and loans to the public sector = 14 percent of total bank assets in 2011 (from 7 percent in 2006). - Stock of Bahamian government securities reached 45 percent of GDP in 2011; onshore commercial banks held 32 percent of outstanding volume at end-2011; commercial banks absorbed 58 percent of net issuance since 2007. - Government securities market average maturity ≈ 14 years. - Exchange rate and monetary policy: - Fixed exchange rate (Bahamian dollar at parity with U.S. dollar) since 1970. - CBoB lowered discount rate by 75 basis points to 4.5 percent in June 2011 after holding it steady for six years. - Reserve requirements unchanged for decades; CBoB has not used direct credit controls on banks since August 2004. - Other indicators: - Only about ½ percent of domestic banking sector assets and liabilities are with offshore counterparties. - Number of registered/licensed funds = 713 (down from 803 in 2008). - Funds AUM at end-2011 = B$86.6 billion (down from B$298 billion in 2007). - Credit unions: 10 institutions, B$272 million in assets and 27,700 members at end-2011; largest credit union 52 percent of assets. - Insurance expenditure already equivalent to over nine percent of GDP. ### Selected FSAP Key Recommendations (by sector and timeframe) — Selected entries preserved verbatim - Banking (Near term): - Recruit additional staff with particular emphasis on specialists. [CBoB] Near term - Amend legislation so that if Governor is removed, reasons would be publicly disclosed. [CBoB] Near term - Implement, as planned, draft guidance on bank responsibilities for managing operational, interest rate, and market risk. [CBoB] Near term - Develop guidelines on the scope and methods of consolidated supervision. [CBoB] Near term - Insurance and Pensions: - Introduce a standard methodology for the valuation of long term insurer liabilities. [ICB] Near term - Implement fully the 3 year plan towards risk-based supervision (RBS). In particular, onsite comprehensive examinations should be initiated without delay. [ICB] Medium term - Develop support for consumer complaint handling. Consider establishing ombudsman. [ICB] Medium term - Amend legislation to specifically require intermediaries to establish a premium payment trust account separate from the intermediary’s account. [ICB] Near term - Introduce staggered terms for Insurance Commission of The Bahamas (ICB) Board and publish reasons for removal of Board members or the Superintendent. [Government] Near term - Develop regulations for appropriate group supervision, corporate governance and risk management standards, processes and procedures and conduct onsite reviews in accordance with Insurance Core Principle (ICP) 23. [ICB] Near term - Promulgate regulation for new pension fund legislation without delay. [Government] Near term - Capital Markets: - Replace current IFA and its regulations. [Government] Near term - Delete the exclusion in the Securities Industry Act 2011 (SIA) which permits selling investment fund shares to clients without a license as long as that is the only securities business a person undertakes. [SCB] Near term - Subject all locally resident related parties to full due diligence check in licensing investment fund. Subject managers/advisers, operators and custodians to ongoing oversight. [SCB] Near term - Consider appointing a public interest oversight body for the auditing profession and The Bahamas Institute of Chartered Accountants (BICA), possibly giving the role to the Securities Commission of The Bahamas (SCB). [Government] Near term - Develop a plan, possibly as part of the NFCMP, to deal with the failure of a licensee. [SCB] Near term - Safety Net and Crisis Management: - Prepare crisis management plan draft for Ministry of Finance (MoF). [CBoB and other regulatory agencies] Near term - Implement crisis management plan. [CBoB jointly with other regulatory agencies] Medium term - Develop a category of ‘systemic banks’ narrowed to those eligible for solvency support or extraordinary intervention, consistent with international practice. [CBoB] Near term - Develop a target ratio for Deposit Insurance Corporation (DIC) equity capital and determine primary and secondary borrowing sources. [CBoB and DIC] Near term *Italic: IMF staff report excerpt.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overall Assessment - The Bahamian financial system weathered the aftermath of the U.S. financial crisis well due to very high capitalization and profitability in the domestic banking system, and an improved regulatory framework. - Key vulnerabilities: - High dependence of the domestic economy on tourism, which could be disrupted by a weakening of the U.S. economy; a prolonged increase in oil prices; or a large-scale hurricane, especially one that destroyed key infrastructure. - Increase in public debt, which has led to recent ratings agency downgrades. - Although a fixed exchange rate with the U.S. dollar has been in place since 1970, capital controls afford considerable scope for monetary policy independence. ### Size and Structure of the Financial System - The financial system is exceptionally large, reflecting the country’s role as a major offshore financial center (OFC). - Total gross assets of the financial system were equivalent to 96 times GDP at end-2011. - Total assets of the offshore banking sector were equivalent to 75 times GDP at end-2011. - The offshore sector consists mostly of branches or subsidiaries of global financial institutions pursuing a variety of business models; large treasury operations of global banks intermediated through the Bahamian offshore system are responsible for a significant portion of the sector’s balance sheet. - The onshore commercial banking sector is well insulated from the offshore sector and mainly conducts traditional banking activities. ### Onshore Financial Sector: Risks and Resilience - Banking sector findings: - No obvious near-term threat to bank stability. - Banks are very well capitalized (both in terms of quantity and quality of capital), profitable, and are not reliant on wholesale funding. - High nonperforming loan (NPL) ratios remain the key challenge, particularly on mortgages, which account for over half of NPLs. - Authorities have substantially improved credit risk monitoring. - Requirements and practices on provisioning and asset impairments are in compliance with international standards. - Stress tests confirm that the commercial banks can withstand severe shocks to solvency and liquidity, though banks are heterogeneous in their performance. - Contagion risks are contained due to extremely limited interlinkages among onshore commercial banks. - Insurance sector findings: - The insurance sector is relatively small and has stagnated as confidence was severely affected by the failure of CLICO Bahamas. - CLICO Bahamas Limited (CLICO) is being liquidated, but the liquidation needs to be accelerated. ### Offshore Sector: Impact and Data Limitations - The offshore sector, though large, has limited impact on the real economy given strict firewalls between onshore and offshore sectors. - Connections between onshore and offshore banks are largely confined to intra-group links and are minimal, with only about ½ percent of domestic banking sector assets and liabilities with offshore counterparties. - Risks in the offshore sector are mitigated because the vast majority of assets are held by branches of foreign institutions for which solvency risk does not apply at the level of the jurisdiction. - Liquidity risks are muted because the main business models do not entail third-party funding. - Lack of detailed data prevented a more complete assessment of this sector, including stress testing or the calculation of financial soundness indicators. ### Financial Sector Oversight and Infrastructure - Oversight has greatly improved since the 2004 OFC assessment, but further improvements are required and have been recognized by the authorities. - Supervisory authorities have implemented or are in the process of implementing a risk-based approach, which may require supporting regulatory changes. - Supervision of the offshore sector follows the same principles as the onshore sector, although this sector is dominated by branches that are not subject to local capital requirements. - Licensing and supervision of offshore entities is supported by effective information sharing with home supervisors and participation in regulatory colleges. - Specific sectoral assessments: - Banking supervision is strong. - In securities, the new Securities Industry Act has addressed most issues identified in the 2004 OFC assessment but the current Investment Funds Act 2003 (IFA) and its regulations need updating to give the Securities Commission of The Bahamas (SCB) the additional powers required to meet current IOSCO standards. - Insurance supervision has significantly improved in recent years but several supervisory and regulatory changes are required to bring regulation in line with international standards. ### AML/CFT - The authorities made a formal commitment to undergo an Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) assessment within 18 months after the FSAP mission. - The assessment will judge compliance with new Financial Action Task Force (FATF) standards in the context of the Caribbean Financial Action Task Force’s (CFATF) next round of evaluations. ### Crisis Management and Financial Safety Net - The current framework for financial crisis management and resolution requires strengthening. - The authorities are developing a National Financial Crisis Management Plan (NFCMP). - The mission recommended a variety of additional reforms to improve the capacity to respond to systemic financial shocks. ### Key Quantitative Facts and Indicators - Fixed exchange rate with the U.S. dollar since 1970. - Financial system total gross assets = 96 times GDP at end-2011. - Offshore banking sector assets = 75 times GDP at end-2011. - Only about ½ percent of domestic banking sector assets and liabilities are with offshore counterparties. - Mortgages account for over half of NPLs. ### Selected FSAP Key Recommendations (by sector and time frame) - Banking: - Recruit additional staff with particular emphasis on specialists. [CBoB] Near term - Amend legislation so that if Governor is removed, reasons would be publicly disclosed. [CBoB] Near term - Implement, as planned, draft guidance on bank responsibilities for managing operational, interest rate, and market risk. [CBoB] Near term - Develop guidelines on the scope and methods of consolidated supervision. [CBoB] Near term - Insurance and Pensions: - Introduce a standard methodology for the valuation of long term insurer liabilities. [ICB] Near term - Implement fully the 3 year plan towards risk-based supervision (RBS). In particular, onsite comprehensive examinations should be initiated without delay. [ICB] Medium term - Develop support for consumer complaint handling. Consider establishing ombudsman. [ICB] Medium term - Amend legislation to specifically require intermediaries to establish a premium payment trust account separate from the intermediary’s account. [ICB] Near term - Introduce staggered terms for Insurance Commission of The Bahamas (ICB) Board and publish reasons for removal of Board members or the Superintendent. [Government] Near term - Develop regulations for appropriate group supervision, corporate governance and risk management standards, processes and procedures and conduct onsite reviews in accordance with Insurance Core Principle (ICP) 23. [ICB] Near term - Promulgate regulation for new pension fund legislation without delay. [Government] Near term - Capital Markets: - Replace current IFA and its regulations. [Government] Near term - Delete the exclusion in the Securities Industry Act 2011 (SIA) which permits selling investment fund shares to clients without a license as long as that is the only securities business a person undertakes. [SCB] Near term - Subject all locally resident related parties to full due diligence check in licensing investment fund. Subject managers/advisers, operators and custodians to ongoing oversight. [SCB] Near term - Consider appointing a public interest oversight body for the auditing profession and The Bahamas Institute of Chartered Accountants (BICA), possibly giving the role to the Securities Commission of The Bahamas (SCB). [Government] Near term - Develop a plan, possibly as part of the NFCMP, to deal with the failure of a licensee. [SCB] Near term - Safety Net and Crisis Management: - Prepare crisis management plan draft for Ministry of Finance (MoF). [CBoB and other regulatory agencies] Near term - Implement crisis management plan. [CBoB jointly with other regulatory agencies] Medium term - Develop a category of ‘systemic banks’ narrowed to those eligible for solvency support or extraordinary intervention, consistent with international practice. [CBoB] Near term - Develop a target ratio for Deposit Insurance Corporation (DIC) equity capital and determine primary and secondary borrowing sources. [CBoB and DIC] Near term *IMF Financial Sector Assessment Program — Executive Summary* ### 8. The Bahamian economy has continued its recovery from the first wave of the ### 8. The Bahamian economy has continued its recovery from the first wave of the ### Economic recovery and external position - The economy declined by 5 percent in 2009 and "has gradually picked up" thereafter. - GDP is expected to grow at about 2.5 percent in 2012, driven by a rebound in tourism and large investment projects. - The external current account deficit is expected to widen further during 2012–14, mainly reflecting considerable FDI-related imports, notably in connection with the US$3.5 billion Baha Mar project. - Reserves remained reasonably strong at US$829 million at end-2012. - Footnote detail: reserves equivalent to two months of imports of goods and services; gross international reserves covered 100.4 percent of reserve money at end-2011 (legal minimum 50 percent). ### Downside risks and fiscal position - Key downside risks center on the tourism sector, which is highly dependent on: - a weakening of the U.S. economy, - a prolonged increase in oil prices, - or a large-scale hurricane that destroys key infrastructure. - Central government debt has recently increased and is expected to reach 54 percent of GDP by the end of FY 2012/13. - The government has expressed its commitment to fiscal consolidation. ### Monetary policy and controls - Monetary policy is centered on a fixed exchange rate with the U.S. dollar (the Bahamian dollar has been set at parity with the U.S. dollar since 1970). - Capital controls afford considerable scope for policy independence. - The Central Bank of the Bahamas (CBoB) held the discount rate steady for six years and then lowered it by 75 basis points to 4.5 percent in June 2011, against a background of subdued price pressures and an adequate reserves position, to support the recovery. - Reserve requirements have been unchanged for decades; the CBoB has not used direct credit controls on banks since August 2004. ### Credit developments and public sector financing - Domestic credit growth weakened to 1 percent in 2011 from a peak of 14.3 percent in 2006. - The composition of credit shifted toward the public sector as the government expanded securities issuance to fund fiscal needs. - Holdings of government securities and loans to the public sector increased to 14 percent of total bank assets in 2011 from 7 percent in 2006. - More than 80 percent of total public debt is domestic and it is largely held to maturity by commercial banks, public corporations, and pension funds. ### Financial system structure (size and segmentation) - The Bahamian financial system is large: total gross assets in the system were equivalent to 96 times GDP at end-2011. - There is one securities exchange with 19 issuers and capitalization of around 35 percent of GDP; there is no derivatives market. - At end-2011, there were 271 banks and trust companies with active licenses, of which 155 were restricted (mainly nominee trust companies). - Banks licensed in The Bahamas held US$595 billion in assets; offshore banks accounted for 98 percent of the total. - The overwhelming majority of assets are located outside The Bahamas, although some 80 percent of the assets of the onshore commercial banks are domestic. - The financial sector accounts for about 15 percent of GDP and some 9 percent of tax receipts; the banking sector directly accounts for 2.5 percent of overall employment. - Offshore banking contributes less than 3 percent of GDP, employs ½ percent of the labor force, and contributes less than 1 percent of GDP to government revenues. ### Onshore–offshore segmentation and prudential framework - The onshore (domestic) banking sector and the international (offshore) financial center are effectively segmented: - Intra-group lending operations are very modest. - Offshore entities are prohibited from holding balances in Bahamian dollars except to finance local expenses, cannot invest in domestic securities, and have limited exposure to domestic real estate markets due to strict capital controls. - Any lending facility offered to non-residents and secured by Bahamian dollar assets requires explicit authorization by the CBoB. - Onshore commercial banks may deal in B$, but their FX transactions with residents are restricted within limits established under delegated authority from the central bank. - Current limit on net FX open positions for onshore commercial banks is the lower of 5 percent of Tier 1 capital or US$5 million. - Prudential rules (capital adequacy, liquidity, large exposures) apply equally to onshore and offshore sectors, but: - Capital adequacy rules do not apply to the large majority (by assets) of the offshore sector because well over 90 percent of offshore assets are held in branches. - Offshore license requirements include verifying home country consolidated supervision and home supervisor concurrence; the CBoB maintains at least annual contact with home regulators. ### Onshore commercial banking sector characteristics - Of eight onshore commercial banks, three are domestically owned and five are foreign (four subsidiaries and one branch). - Foreign-owned banks account for over three quarters of onshore commercial banking assets. - The three largest banks hold 68 percent of total onshore assets (sector fairly concentrated). - Funding structure: deposits 71 percent, equity 18 percent; capital and interbank market funding negligible. - Banks’ assets comprised roughly 75 percent credit at end-2011, more than 90 percent of which was to the private sector. - Domestic residential mortgages accounted for 41 percent of total loans to residents at end-2011. - Exposure to the public sector increased to 14 percent of total assets, driven primarily by lending to the central government. - In the absence of a secondary market, two-thirds of government securities are held to maturity. - Evidence of rapid credit growth from credit unions and retailers exists, albeit from a very low base. ### Other financial subsectors and market features - There are 10 other local financial institutions focused on wealth management, holding B$2.9 billion in assets, 97 percent of which are offshore. - The Bahamas International Securities Exchange (BISX) issuers are mostly financial institutions; BISX averages only two trades per day with buy-and-hold investors dominating. - Credit unions: 10 institutions, B$272 million in assets and 27,700 members at end-2011; highly concentrated (largest institution 52 percent of assets). Supervision currently by Department of Cooperative Development; planned transfer to CBoB after consolidation actions for three small weaker credit unions with combined shortfall estimated at about B$0.5–1.0 million. - The stock of Bahamian government securities reached 45 percent of GDP in 2011. Onshore commercial banks were the largest holders with 32 percent of outstanding volume at end-2011; commercial banks absorbed 58 percent of net issuance since 2007. The government securities market has an average maturity of around 14 years. ### Pensions and insurance - Pension system components: social security benefit, separate public sector plan, occupational pension plans, individual retirement plans. Approximately one fourth of the Bahamian workforce participates in occupational pension plans. - Pension fund assets exceeded B$1.1 billion by 2007 but fell to under B$0.7 billion by 2011 due to the crisis, mainly because of recaptures by unemployed contributors. - Private pension schemes are managed conservatively; nearly half their assets are in public sector securities and bank deposits. Private pension funds are not currently regulated pending occupational pension legislation. - Insurance sector is primarily domestic and stagnated after the crisis: - Dominated by five nonlife insurers and four life insurers writing between eighty to ninety percent of the business. - Insurance premium declined to around the level of five years ago; expenditure on insurance is already equivalent to over nine percent of GDP. - Confidence in the sector has been severely affected by the failure of CLICO. _Italic: IMF staff report excerpt._ ### 24. The Bahamas’ exposure to hurricanes requires high dependence on ### _cr13101 - 24. The Bahamas’ exposure to hurricanes requires high dependence on ### Reinsurance and insurance product exposures - The top five nonlife insurers reinsure 60 percent to 80 percent of their risk. - More than 90 percent of the reinsurers used are A rated by A.M. Best and belong to the top 25 reinsurers globally. - Insurers sell long-term products like whole life policies priced with assumed long-term fixed interest rates of 3 percent to 11 percent that will be difficult to achieve in the current environment. - Other savings products include annual return guarantees. - Only recently have products started to be linked to domestic interest rates, implying insurers could be affected by negative spreads. ### Investment fund industry: size, trends, and structure - There are 713 registered or licensed funds, down from 803 in 2008. - The funds held B$86.6 billion of assets under management (AUM) at end-2011, down sharply from B$298 billion in 2007. - There are only three fund managers located in The Bahamas, managing twelve funds; the main business activity in this industry is fund administration. - The only category registering an increase in the number of funds was SMART funds, which typically target a small number of investors. ### CLICO Bahamas Liquidation: status and recommendations (Box 1) - CLICO Bahamas Limited (CBL) has been under liquidation since 2009. - Actuarial calculations show liabilities of B$120 million with a significant shortfall in the value of the corresponding assets. - CBL owns 100 percent of CLICO Enterprises Limited (CEL) and some small non-financial entities. - 63 percent of CBL’s assets are a B$73 million loan to CEL. - CEL invested in Wellington Preserve Corporation (WPC), a Florida company that held 523 hectares of land in West Palm Beach, of which 238 hectares have been sold, netting B$10 million after taxes and fees. - Complex creditors’ claims include policyholders, banks, CLICO Suriname, CLICO Guyana, and a B$52 million claim alleged by CLICO Trinidad against CEL. - CBL holds a guarantee of B$58 million for the loan made to CEL from CLF; discussions are ongoing to offset such guarantee with the B$52 million claim. - The government of The Bahamas has committed to issue a guarantee of B$30 million to support policyholders. - Currently, CBL is paying all health insurance related claims and the life claims up to B$10 thousand per policyholder, with any outstanding balance being accrued until the liquidation is finalized. Concerns and recommendations (from the source) - The liquidation of CBL needs to be accelerated. - Once the government guarantee is issued, immediate disposal of the life and annuities business should be started to avoid continuing to increase the liabilities as policyholders keep their policies in place. - The disposal of the health insurance activity, due to its shorter-term character and viability as an ongoing concern, should be pursued independently of the life and annuities business. - CBL needs to update financial statements, which have not been issued since 2009. ### Offshore financial sector: scale and business models - There are 98 banks and trust companies operating under public licenses in the offshore sector, including 24 euro-currency branches of foreign banks and trust companies and 74 Bahamian incorporated subsidiaries (out of which 56 are foreign-owned). - Aggregate assets in the offshore banks amounted to US$583 billion at end-2011. - Wholesale banking accounts for some 80 percent of assets of the total system. - Some large entities act as a booking center for intra-group funding operations and do not receive deposits or other funding from external third-parties. - A significant private banking/wealth management industry caters to sophisticated high and ultra-high net worth individuals; revenues stem from fee-based income, with asset deterioration risks borne by clients. - The offshore sector is highly concentrated: branches account for the lion’s share of its assets. - Nine branches of global banks headquartered in Europe, the United States, and Brazil collectively account for over 90 percent of the offshore sector. - These branches do not operate under the host country’s regulations on capital, since there is no required delegated capital situated in the branches. Largest offshore entities (Table 5 figures) - Branch, Wholesale Banking, Assets, March 2012: 282,002 (US$ million) - Branch, Wholesale Banking, Assets, March 2012: 85,015 (US$ million) - Branch, Investment Banking, Assets, March 2012: 43,239 (US$ million) - Branch, Private Banking/Wealth Management, Assets, March 2012: 29,527 (US$ million) - Branch, Investment Banking, Assets, March 2012: 13,256 (US$ million) - Top five entities: 453,039 (US$ million) - Largest fifteen entities: 504,821 (US$ million) ### Offshore funding structure and recent performance - Offshore banks are primarily funded by intragroup cross-border funding, as well as non-resident deposits. - A 15.1 percent contraction in balance sheets and a 10 percent decline in fiduciary assets in 2009 were due to lower market valuations and the sale of business lines. - Total assets picked up by 12.6 percent in 2011. - Industry views on prospects are mixed: regulatory uncertainty may lead to outflows, while tax hikes on wealthy investors and heightened political risk in Europe could increase The Bahamas’ attractiveness. ### Liquidity management - Despite commercial banks’ holdings of substantial amounts of excess liquidity, the interbank market is inactive. - Lack of high yielding domestic instruments and strict controls on foreign currency net open positions limit banks’ ability to take risky positions, leading them primarily to park excess liquidity in non-remunerated deposits at the CBoB. - Banks have stopped actively bidding for fixed term deposits, and the consequent softening in deposit rates has led to a widening of interest margins since 2010. - The CBoB monitors monthly how excess reserves may affect banks’ behavior and feed into macroeconomic aggregates. - Recommendation: The CBoB should step up efforts to forecast developments in excess reserves to prepare for a future period in which such reserves could translate into import surges, necessitating pre-emptive corrective action. ### Onshore banking sector: strengths, vulnerabilities, and stress testing - The Bahamian onshore banking system is profitable, has an extremely strong and high-quality capital base and high liquidity, and virtually no exposure to cross-border funding or FX risk. - Commercial banks are subject to a target capital adequacy ratio (CAR) of 17 percent and a trigger CAR of 14 percent. - At end-2011, the actual aggregate CAR was at about 28 percent, with Tier 1 capitalization at 25 percent. - All banks reported CARs above the regulatory target of 17 percent at end-2011. - The ratio of liquid assets to total assets was around 20 percent at end-2011. - Banks benefit from high net interest income that remained steady at around 5 1/2 percent during 2007–11. - Return on equity (ROE) has been at 17 percent since mid-2007. Asset quality and provisioning - The NPL ratio rose from 3.8 percent in June 2007 to 12.8 percent in March 2012. - A sharp rise in NPLs is concentrated in mortgages (55 percent) and commercial loans (24 percent). - Delinquencies remain high at 19 percent of total loans; delinquencies greater than 180 days have increased. - Mortgage NPL rate: 14.9 percent at March 2012. - Consumer loans NPL rate: 7.8 percent. - Commercial loans NPL ratio: 18 percent. - Bank-level NPLs range from 4.3 percent to 17.7 percent. - Provisioning rates vary from 23 percent to 126 percent. Mitigants, monitoring, and stress testing - The CBoB meets regularly with the banks and closely monitors the evolution of problem loans and collateral. - The CBoB has pushed banks to be more aggressive in their collateral valuation practices, including accounting for the time cost of recovery. - The CBoB may require independent credit and collateral valuations for problem mortgages based on onsite examination reviews. - Mortgage collateral values are estimated to have fallen 20–30 percent. - Stress tests applied conservative haircuts of up to 60 percent and worst-case scenarios assume no offset from collateral. - Tests indicate banks’ very high capital ratios represent a significant buffer, although extreme credit shocks would pose challenges for banks with weaker capital positions. - Monitoring would be enhanced by the development of real estate price indices due to uncertainty in house price evolution and relatively few transactions. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 37. The resilience of seven of the eight onshore commercial banks was assessed ### _cr13101 - 37. The resilience of seven of the eight onshore commercial banks was assessed ### Stress tests: scope and approach - Seven of the eight onshore commercial banks were assessed through top-down (TD) and bottom-up (BU) stress tests using end-2011 data. - The offshore banking system was not stress-tested owing to a lack of bank-specific balance sheet data. - One onshore commercial bank is a foreign branch that operates mainly offshore and was excluded because as a branch it has no required delegated capital. ### Scenarios and methodologies (Box 2) - Solvency tests covered credit risk, credit concentration risk and market risk using single-factor, balance-sheet approaches; behavioral and regulatory responses (payout ratios, loan restructurings) were modeled; collateral could be used in some tests after conservative haircuts. - Macro stress tests assessed five scenarios: - Scenario 1: Baseline based on the April 2012 IMF World Economic Outlook. - Scenario 2: Global recession with spillovers to The Bahamas via lower tourism receipts. - Scenario 3: Substantial and prolonged increase in oil prices (supply shock) causing a slowdown in tourism receipts and an independent negative effect on NPLs via lower disposable income. - Scenario 4: Slowdown in FDI flows. - Scenario 5: Large-scale hurricane causing a disruption in tourist arrivals. - Calibration and transmission: - Macro scenarios calibrated using econometric and statistical methods. - Impact of tourism receipts, oil prices and FDI on GDP growth based on the CBoB macro model. - Hurricane impact calibrated on historical data. - Macro-financial projections from IMF staff regressions linking bank-level NPLs to lagged GDP growth, the real T-bill rate, and the oil price index. - Macro shocks assumed to occur in the second half of 2012 with impacts gradually decreasing over the next several years. - Each scenario simulated light, medium and severe shocks (roughly one, one and a half, and two standard deviations from baseline). - Collateral and assumptions: - Collateral considered in credit risk tests focused on entire credit portfolio, but breakdown by loan classification and sectoral exposures was unavailable; sectoral and loan migration tests abstracted from collateral. - Large-exposures tests often abstracted from collateral; when collateral was included in bottom-up large exposures tests, impact on capital was minimal. - Haircuts of up to 60 percent were applied on collateral in sensitivity tests; banks assumed to retain 50 percent of projected profits; regulatory restriction forbidding dividend payments assumed for medium and severe shocks. ### Solvency stress-test outcomes and key findings - System-wide resilience: - Solvency stress tests suggest the banking system as a whole is in a position to withstand a range of adverse scenarios. - Of five scenarios tested, the combined shock to tourism revenues and oil prices has the most severe impact. - In the worst-case outcome under that combined shock, aggregate NPLs reach 25 percent of total loans (aggregate NPLs increase by almost 100 percent) and the system’s CAR would remain above the regulatory trigger of 14 percent. - Bank-level vulnerabilities: - There are pockets of vulnerabilities: some banks with higher NPLs and lower capital, including a large bank, would breach the 14-percent regulatory benchmark. - The systemic potential of individual bank problems is contained by the low level of interbank exposures. - Disaster mitigation: - Risks from a large-scale hurricane appear significantly mitigated by reliance on reinsurance proceeds to quickly rebuild damaged infrastructure. ### Sensitivity analysis (credit risk focus) - Credit-risk sensitivity modeled NPL increases of up to 300 percent, with impacts on profitability and internal capital generation via reduced net interest income and higher provisioning. Tests adjusted the baseline CAR for a fraction of restructured loans likely to return to NPL status. - System-level outcomes: - The system’s CAR can absorb a 100 percent increase in NPLs, but this result is affected by a large outlier with a CAR of 51 percent. - Excluding the bank with a 51 percent CAR, the system’s post-shock CAR would be around 11.5 percent (Table 6) and under more severe shocks would fall below the 8 percent Basel minimum. - Note: increases of NPLs of 100 percent or greater are described as very severe given the initial high level. - Mortgage concentration: - Mortgage NPLs are around 15 percent. - Assuming new mortgage NPLs are 100 percent provisioned and abstracting from collateral and future profits, a 100 percent increase in mortgage NPLs: - Pushes only one bank below a 14 percent CAR. - Leaves none below 8 percent. - Leaves the system’s CAR at 21 percent, or 16.7 percent excluding the bank with an initial CAR of 51 percent. - More severe combined shocks to real estate and tourism-related loans would drive around one third of banks below the 14 percent regulatory trigger (collateral not taken into account). ### Market risk - Market risk is limited: - Modest interest-rate risk. - Currency and equity price risks are contained due to limited exposures. - Holdings of government securities generally held to maturity and both bank loans and government securities mainly issued at adjustable rates. ### Liquidity stress tests and findings - Liquidity positions are more sensitive to deposit outflows than to wholesale funding shocks because of dependence on customer deposits. - System capacity: - The system could cope with deposit outflows of 5–10 percent of total deposits, though some banks with lower liquidity buffers are sensitive to deposit-base shocks. - Larger deposit outflows may present challenges, though such scenarios have low probability. - Banks could tap official liquidity since the CBoB is committed to redeem all government securities at full value. - Reported baseline liquidity ratios as of December 2011: - Liquid assets to total assets: 20.0 (All banks reported baseline). - Liquid assets to total deposits: 24.9 (All banks reported baseline). - Domestically-Owned baseline: Liquid assets to total assets 20.8; to total deposits 26.3. - Foreign-Owned baseline: Liquid assets to total assets 19.8; to total deposits 24.5. - Deposit withdrawal scenarios (selected results): - 5 percent deposit withdrawal: - All banks: Liquid assets to total assets 16.6; to total deposits 20.8. - Domestically-Owned: 17.1; 21.8. - Foreign-Owned: 16.4; 20.5. - 10 percent deposit withdrawal: - All banks: Liquid assets to total assets 13.2; to total deposits 16.8. - Domestically-Owned: 13.4; 17.4. - Foreign-Owned: 13.2; 16.7. - 20 percent deposit withdrawal: - All banks: Liquid assets to total assets 4.7; to total deposits 6.1. - Domestically-Owned: 3.9; 5.3. - Foreign-Owned: 4.9; 6.4. - Wholesale funding withdrawal scenarios show smaller impacts on liquid-assets ratios (examples): - 5 percent wholesale funding withdrawal: All banks liquid assets to total assets 19.6; to total deposits 24.5. - 20 percent wholesale funding withdrawal: All banks liquid assets to total assets 18.6; to total deposits 23.3. ### Stress-test numerical summary (selected entries from Table 6) - Reported CAR (December 2011): - All banks: 27.7 - 1/Domestic: 21.9 - Foreign: 22.4 - All banks (excluding one bank with 51 percent CAR): 29.5 - Adjusted CAR: - All banks: 26.0 - 1/Domestic: 19.7 - Foreign: 19.3 - All banks (excl. outlier): 28.3 - Credit risk — NPL increase impacts (All banks / All banks 1 / Domestic / Foreign): - 100 percent: 16.8 / 11.5 / 13.3 / 18.1 - 150 percent: 12.5 / 7.8 / 10.9 / 13.1 - 200 percent: 7.2 / 2.9 / 6.8 / 7.3 - Credit downgrades: - 30-percent downward loan migration: 24.7 / 18.8 / 19.7 / 26.5 - 100-percent downgrade of all loans: 18.5 / 12.8 / 14.9 / 19.8 - Credit concentration risk — large exposures (without collateral): - Default of the single largest borrower: 21.2 / 14.5 / 18.4 / 22.2 - Default of the 3 largest borrowers: 17.8 / 11.7 / 16.9 / 18.1 - Default of the 5 largest borrowers: 15.4 / 9.4 / 15.7 / 15.3 - 100-percent increase in sectoral NPLs — 5 largest industries: 21.4 / 14.2 / 17.0 / 23.0 - Mortgages and tourism-related loans: 22.1 / 15.0 / 18.2 / 23.5 - Mortgage loans (conservative abstraction from future profits and collateral recoveries): 20.9 / 16.7 / 20.0 / 21.3 - Interest rate risk (parallel shifts of the yield curve — impact on capital): - +200 basis points: 24.3 / 17.7 / 16.9 / 26.9 - -200 basis points: 25.9 / 19.7 / 19.3 / 28.2 - +400 basis points: 22.3 / 15.1 / 14.0 / 25.2 - Steepening of the yield curve: 23.1 / 16.2 / 15.3 / 26.1 - Inversion of the yield curve: 26.0 / 19.7 / 19.3 / 28.3 - Table notes: - 1/ Excluding one bank with a 51 percent CAR. - 2/ The mortgage stress test conservatively abstracts from future profits and collateral recoveries. - 3/ Interest-rate impacts measured via duration gap analysis on domestic and foreign currency exposures. ### Spillovers, offshore sector and reputational risk - Interbank and spillover risk: - Domestic bank lending to other onshore financial institutions is negligible. - Default risk through interbank exposures is negligible given limited interconnectedness. - Financial stability concerns from potential distress in foreign parent banks likely muted because international banks transact with overseas counterparties with no material exposure to commercial entities within the jurisdiction; the financial safety net is restricted to the onshore banking sector. - Direct impact of the offshore financial sector on the real economy is limited. - Reputational and offshore-sector risks: - Potential reputational and other risks from offshore sector or foreign parent difficulties seem manageable. - Vulnerabilities mitigated for offshore institutions by the CBoB’s supervision of governance, data retention, and know-your-customer activities. - Risks from a foreign parent mitigated by high capitalization of onshore banks. - The forthcoming AML/CFT assessment will help authorities identify steps to contain domestically-sourced reputational risks from money laundering or terrorism financing activities. ### Financial sector oversight and infrastructure (selected supervisory findings) - Progress since the 2004 OFC assessment is described as clear and material in key areas of financial sector oversight, with a shift to risk-based approaches in regulation and supervision, including AML/CFT supervision. - Supervisory framework: - Three prudential regulators: the CBoB, the SCB, and the ICB. A Compliance Commission supervises AML/CFT for non-prudentially supervised financial sector businesses. - Supervisory coordination via the Group of Financial Service Regulators (GFSR); members and government representatives are signatories to a Memorandum of Understanding allowing information sharing and outlining arrangements for consolidated supervision of the single conglomerate/group in The Bahamas. - GFSR meets at least quarterly; ad-hoc working groups meet as required. - Banking supervision: - Compliance with the Basel Core Principles for Effective Banking Supervision is described as good. - The CBoB has enhanced supervisory processes and regulatory guidance since 2004, blending onsite, offsite, and quarterly supervisory discussions for systemic banks. - Guidelines establish benchmarks for classification of credits and for specific and general provisions. The CBoB requires a one percent general reserve in addition to specific provisions. - Areas for further guidance: finalize and implement draft guidance on interest rate, market, and operational risks; formal guidance on consolidated supervision would enhance transparency and aid examiners. - A risk-based supervisory approach is nearing full implementation, supporting Basel II Pillar II. Components include categorizing banking risks into four categories; categorizing banks into four impact categories; and risk rating individual risks on a scale of one to five. - An electronic reporting system to collect and compute financial indicator ratios has been in place from 2010 and is being enhanced to include market risk reporting effective September (year implied by context). - The CBoB supervises banks and trust companies; onshore and offshore supervision follow the same principles and supervision scope is adjusted to reflect sector and bank risk and systemic importance. Information sharing, including with foreign supervisors and regulatory colleges, supports CBoB supervision. *Source: National authorities and IMF staff estimates, as presented in the supplied content.* ### 54. The CBoB has well-trained and dedicated staff in its banking supervision ### _cr13101 - 54. The CBoB has well-trained and dedicated staff in its banking supervision ### Banking supervision - The CBoB has well-trained and dedicated staff in its banking supervision department. - Staffing complement needs review with particular emphasis on recruiting specialist staff where the CBoB currently lacks in-house expertise. ### Insurance - Recent developments and institutional setup - New insurance legislation enacted in 2009. - The ICB was established with a highly qualified staff and the power and independence to properly supervise the industry. - The ICB has an independent Board; a new board was appointed in July 2012. - Supervisory powers and actions - ICB has powers to make rules and to enforce and take regulatory action against insurers and intermediaries for violations of the Insurance Act and regulations. - ICB has undertaken a major clean up of non-active insurers. - ICB introduced penalties that dramatically lowered overdue premium receivables, financial requirements for insurers, brokers and agents, quarterly supervisory meetings with insurers, and annual stress testing for life insurers. - Remaining issues and recommendations - Need for recapitalization of one insurer. - Liquidation of CLICO and BAICO should be handled to maintain as much as possible the credibility of the ICB as supervisor of market solvency. - Any shortage of reinsurance capacity could limit local insurers’ ability to provide coverage; options to mitigate a shortfall could include issuance of catastrophe bonds. - Fully implementing a consistent risk-sensitive solvency framework should be a high priority; the current solvency regime uses a simple factor-based test and not risk-based capital. - For large insurers, the ICB has required independent actuaries to calculate the minimum capital requirement based on the Canadian solvency regime. - Risk-Based Supervision (RBS) is in initial stages; essential onsite and offsite supervisory tools need development. - ICB has only recently developed a standardized QRS and is making progress on ladders of intervention; comprehensive onsite examinations commenced in September 2012. - Market conduct enhancements are needed to improve consumer protection. ### Capital Markets - Institutional and legislative changes - Compliance with IOSCO Principles is generally high, although some weaknesses remain. - The new SIA has reinforced supervisory powers of the SCB, secured its independence, and the SCB is now better resourced. - Recent amendments to the SIA are intended to enable the SCB to become a full signatory to the IOSCO Multilateral Memorandum of Understanding (MMoU). - Supervisory practice and gaps - The SCB is converting powers into a practical regulatory methodology; full impact expected at the end of 2012 and into 2013 as initiatives are implemented. - Compliance and enforcement will create challenges for the SCB, licensed firms, the corporate sector, and the legal and accounting professions. - Supervision consists of a mix of off-site review and on-site inspections, periodic and “for cause”; on-site inspections are comprehensive and tailored. - Coverage of some categories of locally domiciled professionals in the investment funds industry (such as fund managers and custodians) is insufficient. - Regulation of the investment funds industry remains a disclosure-based regime and does not provide sufficiently for the SCB to set mandatory asset management standards. - The SCB could take a more proactive stance in due diligence and expand the scope of its inspections. ### Pension Funds - Current status and legislation - Occupational private pension funds are not yet regulated. - Pending high level legislation intends to regulate the fast growing industry with objectives to reduce abuses, lock-in retirement savings and allow for portability. - Occupational pensions will not be mandatory and the legislation does not prescribe the form of pension plans allowed. - Implementation priorities - Regulation will be urgently needed for proper implementation of the bill. - The bill addresses concentration, liquidity, and liability matching requirements for defined benefit plans. - Strict licensing procedures will be of paramount importance to create a sound system. ### Payments and Securities Settlement Systems - Major reforms and timeline - Creation of a large-value real-time gross settlement system (RTGS) in 2004. - Establishment of The Bahamas Automated Clearing House (BACH) in 2010 for check and direct credit/debit clearance. - A new Payment Systems Act (PSA) brought into force in 2012 providing the legal basis for the CBoB’s oversight and settlement finality. - Creation of the National Payment Committee as an advisory body to the CBoB; composition and responsibility currently under discussion. ### Crisis Management and Financial Safety Net (IV) - Overall assessment - The current framework for financial crisis management and resolution requires strengthening. - Authorities committed to filling gaps expeditiously by developing the NFCMP. - Financial safety net components and scope - The CBoB is the primary financial agency responsible for crisis management and the financial safety net. - Safety net consists of CBoB authority to extend emergency liquidity assistance (ELA); a DIC which has authority to provide financial assistance to troubled institutions; and access to the payment system. - DIC’s operations are carried out by CBoB employees via secondment of staff and provision of administrative services. - The CBoB’s licensing, supervision, and regulation support crisis management and safety net functions and act as an early warning system. - Supervision of credit unions planned to be added to the CBoB’s duties by the end of the first quarter of 2013. - Scope and exclusions - Breadth of the financial safety net is demarcated and covers only the onshore banking sector. - The deposit insurance system covers only Bahamian dollar deposits in onshore banks. - Lack of deposit insurance coverage for credit unions constitutes a gap and should be remedied after the sector is cleaned up and under CBoB supervision. - ELA facility appropriately confined to onshore banks; supervision resources properly targeted toward onshore financial institutions through more frequent examinations. - If offshore institutions become troubled, CBoB would work with home country supervisor to facilitate resolution; safety net support would have to be provided by the home country government. - There are as yet no explicit ex ante agreements with foreign supervisors to provide such support. - Continued exclusion of the offshore sector from the safety net is appropriate given its large size relative to domestic resources and very limited potential for spillovers to the domestic economy and financial system. #### A. Crisis Management - NFCMP and planning - Authorities committed to implementing an effective crisis management plan; no formalized plan currently in place. - CBoB has taken the lead in considering topics to make such a plan complete. - Development of an NFCMP has commenced. - The plan should create or task a body to facilitate coordination and communication during a crisis and define roles and responsibilities of main institutions (MoF, CBoB, DIC, and non-bank supervisors). - Legal framework needs review to ensure relevant officials have sufficient legal authority to undertake actions envisaged in the plan. - Plan should include an explicit mechanism for financial assistance beyond current DIC powers and make explicit sequencing of sources of capital support, with primacy on contributions by the parent company and, for foreign-owned subsidiaries, the home country government. - The CBoB should update its 1991 guidelines on the discount window to develop procedures specifically to address a system-wide liquidity crisis. - Procedures should be developed on communications among the authorities in case of a crisis. #### B. Systemic Risk Management - Institutional arrangements and reporting - A Systemic Risk Surveillance Committee (SRSC) has been constituted to monitor financial stability of the onshore banking sector and oversee system-wide stress testing. - SRSC is currently self-contained within the CBoB; a representative of the MoF should be more directly involved in an observer role on a periodic basis. - CBoB has begun development of an inaugural financial stability report on systemic risk; the first such report should be issued by the end of the first quarter of 2013. - Systemic designations and capacity - CBoB has designated all onshore commercial banks as systemic for the purpose of supervision. - There needs to be a more narrowly tailored definition to determine which banks would be eligible for solvency support or other extraordinary intervention; an impact analysis might classify only a small number, if any, of the eight onshore banks as systemic in this latter sense. - Powers to provide financial assistance under law need to be clarified and appropriately circumscribed. - Legal provision for financial assistance such as solvency support is granted to the DIC, with resources derived primarily from the DIC and the Government as deemed necessary. - The DIC does not currently appear to have the financial capacity to provide assistance for medium to large scale single institution resolutions or a systemic crisis; while it has powers to issue bonds, it is not clear it could do so successfully in a systemic crisis. - The ability of the DIC to draw upon government resources should be made both more concrete and appropriately circumscribed. - Consideration should be given to how failure of a systemically important financial institution not currently insured under the DIC would be addressed. #### C. Deposit Insurance - System characteristics and suggested operational changes - A system of deposit insurance has been in existence since 1999. - Level of coverage at B$50,000 is in line with similar jurisdictions and protects approximately 96 percent of depositors by number. - The system would benefit from operational changes including: strengthen transparency and disclosure; undertake a deeper examination of the level of equity capital; reconsider the time allowed for payment of depositors; develop a strategic planning process; and identify backup sources of funding. #### D. Receivership, Resolution, and Liquidation - Legal and operational framework - Legal provisions for receivership and resolution would benefit from consolidation to clarify boundaries of specific resolution powers available to the CBoB and DIC. - Two separate legal frameworks exist for receivership and resolution of commercial banks in the domestic market: one under the BTCRA and one under the Protection of Depositors Act (PDA). - Overlap risk is ameliorated by PDA provision that the DIC must comply with directions of the CBoB and act on its advice, but consolidation into a single framework would minimize confusion. - Operational procedures should be in place beyond general statutory language. - Winding-up procedures are court-based under the Companies Act and not specific to financial institutions; administrative procedures specific to complexities of bank operations should replace those under the Companies Act. *Source: _cr13101 - 54. The CBoB has well-trained and dedicated staff in its banking supervision* ### Box 3. Deposit Insurance Corporation Operational Recommendations ### Box 3. Deposit Insurance Corporation Operational Recommendations ### Transparency and public awareness - The operations of the DIC do not currently demonstrate a strong model of transparency and disclosure. - The coverage of deposits and the DIC’s role in assuring the safety of deposits is not widely known. - Planned public awareness strategy: - Update the DIC’s website to provide the public with a FAQ tab, relevant laws and regulations, financial audited statements, examples of claims that can be made and payable by the DIC and other related information. ### Fund adequacy and premiums - Although the deposit insurance system is structured to operate as an ex-ante or pre-funded system, the DIC seems unlikely to have sufficient equity capital to absorb losses in the case of a significant bank failure. - Recommendation: - Determine the required balance of the Fund through a strategic planning exercise that would analyze the impact of a failure of a singular bank or multiple banks. - Following this strategic exercise, bolster the Fund balance through an increase in the annual premium paid by banks. - Footnote definition preserved: - "An ex ante funding system involves the advance accumulation and maintenance of a fund to cover deposit insurance claims. The fund consists primarily of premiums collected from the members of the deposit insurance system." ### Payout timing for depositors - Current legal timeframe: - The DIC has six months to initiate payment of depositors and there is no deadline for completion. - Stated operational intention: - If there was a bank failure in the future, the intention of the DIC would be to pay depositors within a month. - Recommendation: - Codify a shorter compensation period in law, in keeping with the recent international trend toward reducing payout delays. - Reference preserved: - For relevant European Union standards on timely payment of depositors see Directive 2009/14/EC of the European Parliament and of the Council of March 11, 2009 amending Directive 94/19/EC on deposit guarantee schemes as regards the coverage level and the payout delay. ### Backup funding and borrowing authority - The DIC has been granted operational authority to borrow, but backup sources of funding have not been identified. - Past funding practice: - In the past, the DIC issued five year bonds to fund the payment of depositors. - Recommendation: - In a crisis, issuance of five year bonds may not be feasible; prearranged access to backup sources of borrowing is desirable, whether from the central bank, MoF or private sources. *Source: Box 3. Deposit Insurance Corporation Operational Recommendations* ### 4. The assessors appreciated the collaboration and hospitality of the CBoB. The ### _cr13101 - 4. The assessors appreciated the collaboration and hospitality of the CBoB. The ### Background - Financial system composition: - Comprises domestic and offshore banks and trust companies, insurance companies (both domestic and external), pension funds, credit unions, and other nonbank intermediaries. - At end-2011, there were 271 banks and trust companies with active licenses, of which, 155 are restricted (mainly nominee trust companies). - Banks licensed in the Bahamas hold B$595 billion in assets (76 times GDP). - Offshore banks account for some 98 percent of the total. - The CBoB is the home country supervisor and responsible for consolidated supervision of, three indigenous, deposit-taking commercial banks. - Position in OFC landscape: - The Bahamas is the fourth largest OFC (after the Cayman Islands, Hong Kong SAR, and Singapore). - At end-2011, Bahamian banks held 12 percent of all foreign assets held by banks in OFCs worldwide. - In March 2012, the foreign assets of offshore banks registered in The Bahamas amounted to US$501.2 billion. - Segmentation and restrictions: - Domestic (commercial/onshore) banking sector and the international (offshore) financial center are essentially fully segmented, with claims limited to a very modest amount of intra-group lending operations. - Offshore entities are prohibited from holding balances in Bahamian dollars except to finance local expenses and cannot invest in domestic securities. - Offshore entities have extremely limited exposure to domestic real estate markets amid strict capital controls enacted by the CBoB, although occasionally they may assist high net worth individual clients in acquiring real estate in The Bahamas. - Funding and asset composition: - Commercial banks are primarily funded by deposits and equity (71 percent and 18 percent respectively). - Capital market and interbank market funding is currently negligible. - The share of equity funding has increased since 2003, partly due to conversion of foreign branches into subsidiaries. - Domestic residential mortgages account for about 23 percent of the banks’ assets. - Other loans, including consumer, commercial and non-resident loans, accounted for about 36 percent of the total assets in March 2012. - Exposure of the commercial banks to the public sector has increased significantly since 2008 to 14 percent of total assets, as the commercial banks have absorbed a large part of government securities issued since then. - Supervisory architecture: - Financial supervision is performed by three separate institutions: the CBoB, the Insurance Commission of The Bahamas (ICB), and the SCB. - Supervisory coordination takes place through regular meetings of the GFSR, consisting of the CBoB, the SCB, the ICB, the Inspector of Financial and Corporate Services, and the Compliance Commission. - The GFSR is chaired by the CBoB and has been working towards greater harmonization of the regulatory system. - Macroeconomic context: - The Bahamian economy experienced a 5.4 percent decline in output in 2009 due to a collapse in tourism. - GDP is expected to grow about 2.5 percent in 2012, driven by a rebound in tourism and large foreign and public investment projects (including the US$3.5 billion Baha Mar project). - Substantial FDI-related imports and higher oil prices will widen the external current account deficit in 2012, but reserves are expected to remain reasonably strong. - Downside risks include dependence on tourism, potential weakening of the U.S. economy, a prolonged increase in oil prices, or a large-scale hurricane. - Legal and infrastructural notes: - The Bahamas has a well-developed legal framework that provides adequate support for banking supervision. - The CBoB can operate independently and has the authority to impose sanctions, take preventive corrective action and resolve weak banks, including revocation of the license. - A deposit insurance system is in place to protect Bahamian dollar deposits. - A credit bureau system is not operational; a draft Credit Reporting Bill, 2012 has been prepared and is currently under review by the authorities. ### Findings - Recent regulatory and supervisory changes: - Amendments to the CBoB Act, 2000 (CBBA) and the Bank and Trust Companies Regulation Act (BTCRA) broadened the CBoB information sharing authority and strengthened supervisory enforcement powers. - A risk assessment process was introduced in the last quarter of 2010 which reviews all risk areas and assigns ratings to aid in establishing supervisory priorities. - Shell banks are no longer permitted to operate in The Bahamas. - Onshore banking soundness and risks: - The onshore banking system is well capitalized, liquid, and profitable. - Credit risk should continue to be monitored closely; high NPL ratios remain the key challenge for the onshore banking system, particularly for mortgages, which constitute over half of NPLs. - Requirements and practices on provisioning and asset impairments are in compliance with international standards. - Some uncertainty exists on the overall evolution of house prices since reliable house price indices are not available and there are relatively few transactions on which to base firm judgments, although independent valuations are required for problem mortgages. - Stability and stress testing: - There is no obvious near-term threat to bank stability since banks are very well capitalized (both in terms of quantity and quality of capital), profitable, and highly reliant on deposits and equity. - Stress tests confirm that the commercial banks can withstand severe shocks in terms of both solvency and liquidity, though banks are heterogeneous in their performance. - Capital framework and Basel implementation: - Capital ratios are calculated in accordance with Basel I. - Since 2005 the Central Bank has been steadily and progressively working on completing the requirements for compliance with Basel II Pillar II—Supervisory Review. - As of last quarter of 2010, the commencement of the roll-out of the enhanced risk based framework (incorporating the comprehensive risk assessment tool) formalized the CBoB’s approach with Pillar II expectations. - There have been significant enhancements to risk management guidance and supervision, but because capital ratios are calculated in accordance with Basel I, there is no specific capital cover for specific risks, e.g., market risk, operational risk, etc. - CBoB will be implementing the capital charges for market risks commencing the third quarter of 2012, thus completing the requirements for full compliance with Basel I. - Pillar III-Minimum Disclosures is due to be implemented before year-end 2012. - Focused efforts will be given to consulting and implementing Pillar I requirements by the beginning of the third quarter of 2013. - Regarding Basel III, banks have been sensitized to the requirements and CBoB intends to consult the stakeholders regarding its positions on same by end 2013. - Staffing and capacity: - CBoB has a cohort of knowledgeable and dedicated staff in place. - CBoB should consider recruiting additional staff, particularly specialist staff. ### Annex: Summary Compliance Highlights and Recommended Actions (selected) - Observations and suggested measures (excerpts): - CP 1.2: CBoB should consider recruiting more staff, including specialists. The reasons for the removal of the Governor should be publicly disclosed. - CP 2: In publishing the quarterly list of banks, CBoB should have two sections, one listing only banks (including banks that carry on trust business) and the other listing trust companies. - CP 3: While noting that no ‘restricted banking licenses’ have been issued in recent years, CBoB should avoid issuing any such licenses in the future. - Capital adequacy: Capital ratios calculated under Basel I; no specific capital cover for market risk, operational risk, etc.; CBoB to implement capital charges for market risks commencing the third quarter of 2012; Pillar III due before year end 2012; Pillar I consultation and implementation by beginning of third quarter of 2013; consult on Basel III by end 2013. - CPs 7, 13 and 16: Issue and implement draft guidance on bank responsibilities for managing interest and market risk. - CP 15: Hire IT expertise to provide support for examiners; issue and implement draft operational risk guidelines. - CP 19: Develop benchmarks to aid examiners in gauging adequacy of bank policies. - CP 24: Develop guidelines on scope and methods of consolidated supervision; use The Supervision of Financial Conglomerates in the Bahamas consultation paper as foundation. - CP 1(2): Recruit additional staff with emphasis on specialists; amend legislation so reasons for removal of the Governor would be publicly disclosed. - CP 6: Adopt Basel III as a matter of urgency so that risks such as market risk and operational risk would be specifically supported by capital. - CP 11: As a matter of urgency include in the supervisory process examination of compliance with recently introduced requirements on related party transactions, board conflicts, and prevention of beneficiaries influencing exposure decisions. - CPs 2 and 3: Distinguish between banks and trust companies in public listings; consider stopping issuance of restricted banking licenses. ### Authorities’ Response to the Assessment - CBoB acknowledgements and planned actions: - The CBoB conveys appreciation for the comprehensive and balanced assessment and notes that the assessors broadly recognize a very strong legal and regulatory framework for banking supervision. - The CBoB intends to have the draft Banks and Trust Companies Regulation (Amendment) Bill, 2012 enacted and to bring the draft Banks and Trust Companies (Administrative Monetary Penalties) Regulations, 2012 into force in the near future, given industry consultation on the drafts is now complete. - Proposed amendments include enhanced fit and proper requirements, new provisions relating to controllers of licensees, and provisions empowering the Central Bank to impose prohibition orders against persons performing regulated functions who do not meet fit and proper requirements. - When enacted, the draft Bill and Regulations will enhance the Central Bank’s compliance with Basel Core Principles. - The CBoB has worked aggressively on the Risk Based Supervisory Framework establishing the foundation for Pillar II requirements; next step is alignment with the Basel II-ICAAP program. - CBoB has piloted market risk reporting forms and guidance notes with licensees meeting the de minimis threshold; guidance on Interest Rate Risk is at an advanced stage following industry consultation. - The Central Bank will commence industry consultation on Market Risk, Operational Risk and Minimum Disclosures guidance in the immediate future. - CBoB is assessing supervisory resource requirements and leveraging technology to achieve efficiency savings. ### IAIS Insurance Core Principles (Introductory note) - Scope of IAIS assessment: - This report is a full assessment of The Bahamas’s compliance with the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS), as adopted in October 2011. - The review was carried out as part of the 2012 FSAP assessment of The Bahamas, based on the regulatory framework, supervisory practices, and other conditions as they existed in July 2012. - The assessment was carried out by Mr. Rodolfo Wehrhahn, Technical Assistance Advisor, IMF, and Ms. Christina Urias, former Insurance Commissioner, Consultant. - Regulation and supervision of the insurance industry in The Bahamas is the responsibility of the newly established Insurance Commission of The Bahamas (ICB), which is the ultimate supervisory authority for insurers, brokers, agents, salesmen, underwriting managers and external insurers (see External Insurance Act 2009). *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13101.pdf* ### 29. The assessment is based solely on the laws, regulations, and other supervisory ### _cr13101 - 29. The assessment is based solely on the laws, regulations, and other supervisory ### Executive Summary - Insurance supervision in The Bahamas has significantly improved following the enactment of insurance legislation in 2009 and the creation of the ICB with highly qualified staff and authority and independence to supervise the industry. - Notable actions taken by the ICB: - A major clean up of non active insurers. - Overdue premium receivables have dropped dramatically with the introduction of a penalty for receivables beyond 30 days. - Financial requirements for insurers, brokers and agents have been put in place and have been enforced. - Quarterly supervisory meetings with insurers are taking place. - Annual stress testing is required for life insurers. - Risk-based supervision (RBS) is in initial stages; essential onsite and offsite supervisory tools need development and a standardized risk sensitive solvency framework needs full implementation. - For large life insurers, the ICB has required independent consultant actuaries to calculate the minimum capital requirement (MCR) based on the Canadian solvency regime. - The ICB is developing ladders of intervention within its solvency framework for progressive escalation of regulatory and remedial intervention. - Market conduct supervision and consumer protection need enhancement; disclosure requirements and complaint tracking are under development. Insurers must establish procedures for disclosure and complaint handling, but there are no specific requirements for claims handling practices. ### Summary of Observance of the Insurance Core Principles (ICPs) - ICP 1 — Objectives, Powers and Responsibilities of the Supervisor: - The ICB is the authority responsible for insurance supervision as stated in the law; responsibilities and objectives are well defined. - ICP 2 — Supervisor: - ICB governance structure is strong with an active independent board; not all operational decisions delegated to the Superintendent which can cause delays. - Appointment timing of Board members coinciding with the election cycle creates governance discontinuity and could affect independence. - Reasons for removal of Board members or Superintendent are not published. - The ICB operates as an autonomous statutory corporation with full operational autonomy over expenditure including staff remuneration. - ICP 3 — Information Exchange and Confidentiality Requirements: - ICB can obtain and share information with other supervisors subject to confidentiality, purpose and use requirements. - Current legislation does not provide authority to obtain information from unregulated entities within an insurance or financial group. - ICP 4 — Licensing: - No entity may carry on insurance business without registration and proper license from the ICB. - ICP 5 — Suitability of Persons: - Regulations outline fit and proper requirements for beneficial owners and senior management; other key functionaries (auditors, actuaries, underwriting, claims, agency, investment, accounting) also required to meet fit and proper requirements. - ICP 6 — Changes in Control and Portfolio Transfers: - Insurers must obtain ICB approval before changes in beneficial ownership or persons eligible to exercise control. - ICB may require capital commensurate with the company’s business plan despite statutory minimums. - ICP 7 — Corporate Governance: - No explicit legislative requirement for Boards to set and oversee business objectives, strategies, or risk management. - ICB does not require an internal audit function; regulation does not address ICB authority to appoint and dismiss board members. - ICP 8 — Risk Management and Internal Controls: - No regulations or formal policies requiring effective risk management or independent control functions with necessary authority and resources. - ICP 9 — Supervisory Review and Reporting: - In the later part of 2010 the ICB commenced Phase 1 of a 3 year implementation plan for its RBS framework focused on enhancing offsite monitoring. - Materials and steps are recent and effectiveness cannot yet be assessed. - Legislation does not specifically grant authority to examine an insurer’s outsourcing function. - ICP 10 — Preventive and Corrective Measures: - ICB has cease and desist powers and can impose fines and penalties, but lacks express power to investigate unlicensed activity by unlicensed individuals or entities. - ICB resources are limited and ability to take timely preventive actions could be improved. - ICP 11 — Enforcement: - ICB has used powers: more frequent reporting and monitoring, requiring additional capital, asset diversification, orders to cease writing new business, placing companies under statutory administration. - ICP 12 — Winding-up and Exit from the Market: - Companies Act provides general winding up requirements; Insurance Act takes priority unless specified. - Policyholders get first priority in liquidation and are protected ahead of other creditors. - ICP 13 — Reinsurance and Other Forms of Risk Transfer: - ICB engaged in reinsurance supervision and conducted a market-wide analysis of reinsurance programs. - Reinsurance market operates with cash call events; liquidity has not been a problem in recent catastrophic events. - ICP 14 — Valuation: - Long-term insurer liabilities must be actuarially determined consistent with best practices; majority use Canadian actuaries applying the gross premium methodology, while others use actuaries from other jurisdictions. - Lack of a common standard creates valuation uncertainty and impedes market comparisons. - Regulatory requirements for general insurers’ policyholder liabilities are not in line with modern actuarial practices and could underestimate real liabilities. - ICP 15 — Investment: - ICB requires investments managed under a prudent person approach, responsibility assigned to the board. - Regulatory investment requirements indirectly address security and liquidity through reductions in value of admissible and qualifying assets for solvency purposes. - ICP 16 — Enterprise Risk Management for Solvency Purposes: - ICB is beginning development of its RBS framework and lacks regulatory authority, policies and practices for enterprise risk management oversight as required under ICP 16. - ICP 17 — Capital Adequacy: - Current solvency regime uses a simple factors based test. - For large life insurers ICB has required independent actuaries to calculate the MCR based on the Canadian solvency regime. - ICB is developing a risk-sensitive solvency framework. - ICP 18 — Intermediaries: - Thorough supervisory review processes for intermediaries under new legislation. - ICB closed an intermediary and revoked a license on breach of trust grounds. - Regulations do not allow intermediaries to serve on boards of directors, though they can be owners. - ICP 19 — Conduct of Business: - Regulation 16(i) requires insurers to establish procedures for customer disclosure and complaint handling. - ICB has no staff for complaint handling; legislation allows arbitration but it is not used at this stage. - ICP 20 — Public Disclosure: - Majority of insurers’ annual reports, financial statements and balance sheets are published. - ICB does not require publication of solvency position, claims, complaints, auditor management statements, nor off balance sheet information. - ICP 21 — Countering Fraud in Insurance: - Legislation addresses fraud; Penal Code mentions insurance fraud. - Specific documented requirements for combating fraud are necessary; legislation may be needed to assure qualified immunity protection to the ICB because of confidential information. - ICP 22 — Anti-Money Laundering and Combating the Financing of Terrorism: - The Financial Action Task Force (FATF) representative made 40 recommendations in its last review. - ICB/Bahamas is due for its next assessment within 18 months of the conclusion of the FSAP mission. - ICP 23 — Group-wide Supervision: - Regulatory framework for group supervision requires further development. - ICB lacks regulatory authority for group supervision or to impose group solvency requirements. - ICP 24 — Macroprudential Surveillance and Insurance Supervision: - ICB in initial development stage of RBS and beginning to collect standardized data to identify trends and market impacts. - Ad hoc insurer reports assist evaluation but are limited in scale. - ICP 25 — Supervisory Cooperation and Coordination: - ICB has informal cross-border arrangements; formal group-wide supervision processes are not fully developed. - ICB recently took on lead supervisor role for the college for one of its largest financial conglomerates/groups and acts as chairman of the supervisory college. - ICP 26 — Cross-border Cooperation and Coordination on Crisis Management: - Insurance Act requires insurers to keep and make books and records available to ICB on request. - No requirements for contingency planning to guarantee information availability under severe circumstances. - Regulation should require comprehensive contingency planning for insurers and brokers. ### Recommendations to Improve Observance of ICPs - ICP 1: - Attorney General consultations should be reserved for major regulatory changes. - Consider combining the Acts to avoid gaps in regulatory authority. - ICP 2: - ICB Board members should serve staggered terms; reasons for removal of Board members or Superintendent should be published. - Delegate substantial operational authority to the Superintendent to improve efficiency and responsiveness. - ICP 3: - Extend powers to obtain information to relevant non regulated entities, in particular the holding company of the group. - ICP 4: - Include time frames for license application. - ICP 5: - Modify statutory language to clarify fit and proper review scope to all key management personnel and develop a formal process for continuous monitoring. - ICP 6: - Publish capital assessment guidelines and create an internal operational manual detailing factors and reasons for prudential capital assessments. - ICP 7: - Develop corporate governance and risk management standards, processes and procedures; conduct ad hoc onsite reviews and examinations. - ICP 8: - Amend regulations to impose effective risk management requirements and publish standards and best practice guidance for risk management programs and internal controls. - ICP 9: - Fully implement the 3 year RBS plan; initiate onsite examinations without delay. - ICP 10: - Improve ability to take timely preventive actions; establish ladders of intervention authority. - Develop and publish fine and penalty standards and guidelines to assure consistency and fairness. - ICP 11: - Develop and publish fine and penalty standards and guidelines and maintain a schedule and parameters of potential sanctions for particular offences. - ICP 12: - Include life insurers under voluntary liquidation procedures valid for nonlife insurers. - ICP 13: - Allow life insurers to have reinsurance credit under the same conditions as nonlife insurers. - ICP 14: - Introduce a standard methodology for valuation of long-term insurer liabilities that complies with IAIS valuation principle requirements. - Adopt a more sophisticated methodology for valuation of general insurer liabilities. - ICP 15: - Draft and publish guidelines to spell out ICB expectations of a prudent person. - Consider relaxing limits on investments in foreign assets to improve diversification and asset-liability matching. - ICP 16: - Develop policies and practices for oversight of enterprise risk management for solvency purposes. - ICP 17: - Prioritize development of a risk-sensitive solvency framework. - Interim: include a reference factor to claims paid and a liquidity test based on availability of liquid funds to pay the average of the last three years claims for general insurance. - Develop a ladder of supervisory actions linked to solvency levels alongside the risk-sensitive regime. - ICP 18: - Consider removing limitation on board membership for brokers and agents and rely on fit and proper requirements. - Revise and update sales persons’ licensing tests and consider an independent testing entity. - Amend legislation to require intermediaries to establish a premium payment trust account separate from operating accounts. - ICP 19: - Further develop ICB consumer protection supervision in line with international best practice, including establishing an ombudsman for claims disputes and consumer advice. - ICP 20: - Require publication in the public registry of insurer solvency position, claims, complaints, auditor management statements, financial highlights, solvency ratios, premium information and other highlights. - ICP 21: - Amend regulation to add specific fraud oversight responsibilities and enact qualified immunity protections for ICB anti-fraud activity. - ICP 22: - Close collaboration with the Compliance Commission is recommended in the coming months to avoid supervisory gaps. - ICP 23: - Develop regulations for appropriate group supervision in accordance with ICP 23. - ICP 24: - Establish policies and processes for macroprudential surveillance following ICP 24 standards. - ICP 25: - Formalize the supervisory college process by establishing best practices for key functions and coordination mechanisms while maintaining operational flexibility. - ICP 26: - Require comprehensive contingency planning for insurers and brokers and start coordination of crisis management with relevant foreign supervisors. ### Authorities’ Response - The ICB welcomes the detailed assessment of IAIS Insurance Core Principles observance conducted by the IMF through the FSAP mission. - The ICB views the assessment as validation of significant progress in insurance supervision over the last three years. - The ICB regards the findings as an important benchmark for continuing development of a robust supervisory and regulatory framework consistent with international standards and best practices. - The assessors specifically commended enactment of insurance legislation and establishment of the ICB with qualified staff, authority and autonomy, and recognized significant improvements in supervisory infrastructure and processes. *Source: Excerpt from the IMF FSAP assessment as presented in the supplied content unit.* ### 34. Many of the recommendations of the FSAP have already been under consideration by ### 34. Many of the recommendations of the FSAP have already been under consideration by ### Principles on the Supervisor and Cooperation (ICPs 1–3, 25–26) - Majority of recommendations already incorporated into the ICB’s three year work plan. - Actions underway: - Formalize internal processes, develop guidelines and improve systems. - Strengthen relationships with local and regional regulators; ICB elected to position of Vice‑President of the Caribbean Association of Insurance Regulators. - Reviewing a draft MOU with a fellow regulator in the region; intend to enter into MOUs with home regulators of major foreign insurers over the next eighteen months. - With assistance of the Toronto Centre, and in cooperation with the Central Bank and the Securities Commission, embarking on a programme to develop a Crisis Management framework; the first phase of this initiative will be completed in November 2012. - Intended outcome: At conclusion of programme all regulators will agree on a Crisis Management protocol and develop consistent frameworks. ### Principles on Operational Requirements (ICPs 4–8) - Three year plan addresses licensing, change in control, corporate governance, risk management and internal controls. - Near- and medium-term deliverables: - Develop comprehensive best practices for the industry. - Drafted assessment criteria for corporate governance and risk management incorporating best practices (roles and responsibilities, performance and risk indicators for key risk management functions). - Release for industry consultation in January 2013: Risk Based Supervision Methodology and Framework; Ladders of Supervisory Intervention. - Interim and ongoing activities: - Ad hoc onsite examinations addressing corporate governance. - Commenced a more integrated onsite examination programme consistent with supervisory framework. ### Principles on Supervisory Practices (ICPs 9–12, 23–24) - Continued implementation of Risked Based Supervision Framework with enhanced off‑site monitoring and focused on‑site examinations. - Planned consultations with industry early in 2013 on: - The framework, Ladders of Intervention and the Risk Assessment Criteria. - Operational readiness: - Much planning/preparation for onsite examinations completed; two examinations scheduled for early September 2012. - Legislation grants authority to conduct onsite examinations as often as needed and not required to give notice to insurer, though notice may be given as appropriate. - ICB may require production of any information from an insurer and related parties even where activities are outsourced. - Group-wide supervision: - Consolidated supervision measures to be incorporated into Risk Based Supervision Framework. - Continue participation and more proactive engagement in local and regional colleges of regulators for supervision of group entities. - Macroprudential supervision: - Acknowledge additional work required. - Anticipate enhanced capabilities with implementation and continued development of quarterly reporting system. - ICB has undertaken horizontal / cross-system reviews in key areas including actuarial valuations, early warning indicators, reinsurance and solvency. - Required life insurers to perform stress testing and will review these on a cross-sector basis. - Following onsite examination for investments and investment management processes, will undertake a horizontal review and develop best practice guidelines. ### Principles on Prudential Requirements (13–22) - Commitment to develop a Risk Based Capital Framework in the medium term. - Risk Based Supervision Framework considered a first step because it facilitates assessment of capital adequacy based on insurer risk profile. - Will build recommended interim measures (modify capital test to adopt a total balance sheet approach) into supervisory plans in the very near term. - Priorities and initiatives: - Investments, valuation, intermediaries, market conduct, and fraud are priorities with several initiatives scheduled. - Recommendations will be incorporated as appropriate for the market. - Valuation of investments for solvency: - Investment instruments are not rated in the market. - Commission evaluated credit quality and liquidity of categories of instruments based on market knowledge; discount rates applied to the category are published in the Regulations. - This area reviewed and discussed with industry participants; changes were adopted following consultations. - Exchange control constraints: - Current exchange control requirements limit insurers’ ability to diversify portfolios and match long-term liabilities. - Any relaxation of exchange controls must be considered by the Government given their role in The Bahamas’ economic stability; ICB will engage in dialogue with Government regarding this recommendation. - Anti‑Money Laundering (AML): - ICB took over AML functions from the Compliance Commission of The Bahamas (CCB) in 2010. - Staff has undergone a number of training activities hosted by the CCB and continue to work closely with CCB staff. - Law does not require general insurers to undergo an AML examination and implement AML systems; ICB has encouraged general insurers to implement such systems to the extent appropriate given their associated risks. - Overall stance: - Assessment affirmed ICB’s plans and progress. - ICB committed to completing implementation of Risk Based Supervisory Framework, formalizing and publishing supervisory processes, ongoing development of policies, guidelines and best practices, promoting fair market conduct, and enhancing people, processes and systems. ### Implementation of the IOSCO Objectives and Principles of Securities Regulation (Annex III) — Key findings - Compliance with IOSCO Principles is generally high though some weaknesses remain. - The new SIA has addressed many issues from the 2004 assessment; it reinforced SCB powers, secured SCB independence from Government, and improved resourcing. - Full impact of SIA on licensees and public issuers expected towards end of 2012 and into 2013. - Investment funds regulation: - Regulation has not kept pace with global developments; IFA does not provide sufficiently for SCB to set mandatory standards for fund asset management and protection. - Government, SCB and industry recognize need to update IFA; initial consultations underway. - SCB could be more proactive by expanding inspections beyond fund administrators to fund managers, operators and custodians with a physical presence in the jurisdiction. - Information sharing and cooperation: - SIA provides effective framework for information sharing and cooperation domestically and internationally. - Recent SIA amendments at IOSCO’s request intended to enable SCB to become a full signatory to the IOSCO MMoU. - SCB and Office of the Attorney General have dedicated resources to respond to requests for information from overseas regulators. ### Introduction, Methodology, and Regulatory Framework — Notable points - IOSCO assessment conducted during July, 2012 as part of the FSAP; initial assessment in 2002. - Assessment benchmarked against the original 30 IOSCO Principles (rather than the new 38), though SCB prepared a self-assessment based on the 38 Principles and the new Methodology. - Methodology focuses on legal/regulatory framework and implementation in practice, including inspection programs, cycle, scope and quality of inspections, and enforcement follow-up. - SCB is the sole regulator for securities laws: SIA (brought into force on December 30, 2011), IFA, and administers FCSPA (role not part of assessment). - SIA effective December 30, 2011; Securities Industry Regulations effective January 9, 2012; some changes subject to transition periods of 6 or 12 months; Act to become fully effective on December 31, 2012. - SCB responsibilities include formulation of principles, surveillance, promoting orderly growth, recommending regulations, issuing regulatory tools, and authorizing licensees. ### Market structure — licensees, funds, intermediaries, and BISX statistics - At end-2011: - 132 licensees under the SIA 1999 (now repealed), up 13.8 percent year-on-year. - 18 “full service” broker dealer licensees; 11 of these are bank and trust companies. - 65 entities licensed for dealing in securities, arranging deals in securities, managing securities and advising on securities. - Notes: - Under SIA 1999 boundaries between types of license were not sufficiently clear; new SIA corrected this and function-based licenses are being issued. - Data on securities business done with Bahamians in The Bahamas is presently not tracked, nor the degree of business conducted with clients outside of the jurisdiction. - Collective Investment Schemes: - At end 2011 there were 713 investment funds licensed by or registered with the SCB. - Total funds under management were B$ 86.81 billion. - Number of investment funds has declined significantly, particularly Recognized Foreign Funds (RFF); exception is Specific Mandate Alternative Regulatory Test Fund (SMART) category. - SMART fund structure enabled in 2003 following passage of the IFA. - No money market funds; SCB has not defined hedge funds; resident and non-resident ownership of funds not tracked. - Currently, all RFFs are registered in the United States. - Only three fund managers located in The Bahamas; they manage twelve funds. - Main business is fund administration; 65 firms licensed to carry out fund administration functions. - Markets and BISX: - Securities trading is extremely thin and has been declining since 2008. - Exchange control regulations have restricted the scope of BISX largely to domestic issuers and domestic investors. - According to BISX: - Retail investor base is no more than 20,000 (the population in The Bahamas is 345,000). - Maximum number of potentially active investors is no more than 5,000. - BISX lists 25 securities: 19 common shares, 2 preference shares, and 4 debt issues. - BISX also lists 20 investment funds. - BISX is 46 percent owned by the Government of The Bahamas and has 5 broker-dealer members. - In The Bahamas all transactions in BISX listed securities must be put through the exchange. - Average daily trading volume in 2011 was 11,451 shares. - Average daily trading value in 2011 was B$59,674. - The benchmark BISX All-Share Index decreased by 8.9 percent in 2011. *Source: _cr13101 - 34. Many of the recommendations of the FSAP have already been under consideration by* ### 4.2 percent decline and 2009’s decline of 8.58 percent. In 2011market capitalization fell by ### _cr13101 - 4.2 percent decline and 2009’s decline of 8.58 percent. In 2011market capitalization fell by ### Market capitalization and market structure - In 2011 market capitalization fell by one percent to B$2.875 billion. - Six of the 19 equity issuers are banks. - One bank, First Caribbean Bank, accounts for 40 percent of market capitalization. - The shares of five companies trade in the over-the-counter (OTC) market. - There is an active private placement market for preference shares, including perpetuals (preference shares with no end date), estimated at B$15–20 million per annum. - There is a similar bilaterally negotiated market for commercial paper out to one year maturity. ### VI. Preconditions for effective securities regulations (paragraph 60) - The Bahamas is a stable democracy with an independent judiciary and a legal system based on English common law principles. - Court judgments are decided primarily by precedents set by previous cases. - There are well qualified and professional legal and accountancy professionals. - Accountants are required to use and comply with IFRS and International Standards on Auditing (ISA), although enforcement appears weak. - Extensive case law has been developed on directors’ liabilities in recent years. - The impact of bankruptcy law on the protection of segregated client assets in the event of a bankruptcy of a licensed firm or custodian is untested. - The SCB has published for consultation a Code of Corporate Governance based on the OECD Principles. - The CBoB has established Corporate Governance Guidelines for banks. - The State encourages new entrants to its securities and investment fund industries and is committed to meeting internationally recognized standards of regulation in banking, securities and insurance. - The State seeks to ensure that regulatory costs are proportionate and are fairly distributed. ### VII. Main findings (paragraphs 61–68) Regulator (paragraph 61) - The SCB has sole responsibility for regulation of securities markets and the investment fund industry in The Bahamas. - Banks are able to carry on investment business without subsidiarization on the basis of a license issued by the SCB. - SCB will take into account the views of the CBoB when considering an application but the decision to grant or reject is for the SCB alone. - As an administrative policy the SCB permits banks with securities licenses to operate under the regulatory capital rules of the CBoB. - Cooperative arrangements between the SCB and the CBoB include the carrying out of joint inspections. - Cooperation and communication are facilitated via the GFSR which comprises the CBoB, the SCB, the Inspector of Financial and Corporate Services (the functions of which are carried out by the SCB), the ICB and the Compliance Commission. - The SCB is independent of Government under the law, although its current reliance to a considerable degree on government funding has resulted in some volatility in income; this is being addressed. - The SCB has a wide set of powers and is properly accountable. - The SCB is undertaking an extensive program of public consultation on numerous initiatives to translate SIA powers into practical regulatory methodology and to improve standards. - The SCB is at an early stage in developing an approach to deal with systemic risk and is participating in the work of the CBoB in this area. - No organization has formal Self Regulatory Organization (SRO) status in The Bahamas. - The BISX is licensed by and subject to the oversight of the SCB. Enforcement of securities regulation (paragraph 62) - The SCB has broad powers of inspection, investigation and surveillance under the SIA. - These sections of the SIA came into force in December 2011 and also apply to licensees under the IFA. - The equivalent sections of the IFA and the Investment Funds Regulations 2003 (IFR) have been disapplied. - The SCB’s administrative and civil powers and sanctions as set out in the SIA are effective, proportionate and dissuasive. - Weaknesses exist in the supervision of participants in the investment funds sector. Cooperation in regulation (paragraph 63) - The SIA gives the SCB broad authority to assist both domestic and foreign regulatory authorities in the performance of their regulatory functions. - The SCB appears able and willing to offer effective and timely assistance to foreign regulators in obtaining information and in responding to other requests, based on its internal organization and stated commitment to prioritize requests for information from foreign regulators. - As of October 2012 the SCB is a B-list signatory to the MMoU but expects to become an A-list signatory in December 2012. Principles for issuers (paragraph 64) - The imposition of the draft Takeover Code by the SCB, as enabled by the SIA, will close a significant gap in corporate legislation in The Bahamas. - The introduction and enforcement of the Corporate Governance Code by the SCB should make a positive contribution to shareholder rights and increase awareness of directors as to their duties and liabilities. - IFRS are used unmodified and de facto are updated as the IASB produces changes without the need for intervention by BICA. Auditors, credit rating agencies and other information service providers (paragraph 65) - The principles in this area were not benchmarked. - Auditors are required to adhere to IFAC standards, but there is no body acting in the public interest which oversees the work of auditors or their professional body, BICA. - There is no peer preview process (though BICA has one in the planning stage). - BICA’s powers to discipline its members are limited. - No Credit Rating Agencies (CRAs) are located in The Bahamas. - Banks are able to use external ratings when calculating capital charges under the CBoB’s market and credit risk rules. - SCB proposes to permit the use of external ratings by non-banks in the Specific Risk Factor of the Market Risk Requirement as set out in its draft regulatory capital rule. - There are very limited analytical or evaluative services offered to investors and the current level of oversight is probably appropriate. Collective investment schemes (paragraph 66) - The current governing Act, the IFA, introduced in 2003, is no longer sufficient to match good practice as set out in the IOSCO Principles. - The IFA does not give the SCB sufficient powers to mandate certain actions and to encourage high standards among managers, operators and custodians. - Under the existing law the SCB could be more proactive in supervising fund managers, operators and custodians that are located in The Bahamas. Market intermediaries (paragraph 67) - The SIA provides a function-based approach to licensing, removing ambiguities in the previous Act about permitted activities under particular classes of license. - The draft regulatory capital rule will bring consistency of treatment between banks and non-banks licensed to carry on securities business. - Periodic on-site examinations appear to be comprehensive, tailored to business models of particular categories of licensees, and require the exercise of judgment by examiners. - The SCB has begun to develop a risk based approach to prioritize its inspection program. Secondary markets (paragraph 68) - The securities market is small, non-complex, and illiquid. - Short selling does not appear to take place. - Settlement of securities takes place at the Bahamas Central Securities Depository, which is the register of listed corporate shares, in a dematerialized manner. - Settlement of funds is achieved bilaterally by brokers providing cheques in the offices of BISX. - The SCB has adequate powers over the exchange and the licensing process appears comprehensive and sufficient. - The transparency of trading on BISX should be improved. - The number of cases of market manipulation and similar abuses are very low. - The SCB appears willing to take administrative action and the Office of the Attorney General appears willing to take criminal action when wrongdoing is suspected. *Source: Excerpt from IMF staff report content unit _cr13101* ### Annex Table 5. The Bahamas: Summary Implementation of the IOSCO ### _cr13101 - Annex Table 5. The Bahamas: Summary Implementation of the IOSCO Principles ### Regulatory framework and independence - Principle 1: The responsibilities and purposes of the SCB are clearly set out in the relevant Acts and there do not appear to be any gaps. Cooperation between the SCB, the CBoB and the Insurance SCB appears to be good at a senior level (in the GFSR) and at an operational level, as in the joint inspection program operated by the SCB and the CBoB for dually licensed banks. Products with equity type features are not offered by banks and insurance intermediaries. - Principle 2: The volatility of the government subvention to provide operating funds for the SCB in 2010–12 is of concern. Going forward the decision to empower the SCB to raise more fees from its licensees should contribute to a pattern of more stable funding. The new SIA has remedied the problem of the old law regarding the operational independence of the SCB from Government while ensuring that it remains properly and publicly accountable for its performance. - Principle 3: There do not appear to be any obvious weaknesses as regards powers, resources and capacity. Head count rose by 18 percent in the last two years and staff are well-qualified and appear to be well-motivated. - Principle 4: The implementation by the SCB of its obligations under the SIA appears considered, comprehensive and transparent. - Principle 5: There are no apparent gaps in the SCB’s internal processes to ensure that staff observe the highest professional standards including appropriate standards of confidentiality. ### Systemic risk, perimeter, conflicts of interest and cooperation - Principle 6 (New Principle—not benchmarked): The SCB is at an early stage in developing an approach to deal with systemic risk. It is participating in the work of the CBoB in this area. The GFSR appears to provide an effective forum for discussing issues concerning systemic risk between sectoral regulators at a senior management level. - Principle 7 (New Principle—not benchmarked): The recently established New Projects / Service Evaluation Committee appears to be organized and staffed in a way which will make a more coherent and comprehensive contribution to perimeter matters than the previous ad hoc arrangements. - Principle 8 (New principle—not benchmarked): The SIA and SIR provide for a sufficient regulatory framework within which SCB can exercise appropriate supervisory powers to seek to ensure that satisfactory outcomes are achieved as regards conflicts of interest among licensees under the SIA and the IFA. - Principle 13: The SIA gives the SCB broad authority to exercise its powers to assist both domestic and foreign regulatory authorities in the performance of their regulatory functions. - Principle 14: Unless the screening group of IOSCO determines that, despite the recent legislative changes intended to achieve compliance, the SCB has not satisfied the criteria to become a full signatory to the MMoU and the reasons impact negatively on this assessment, it appears that the SCB and the legislative framework in The Bahamas merit a fully implemented rating. - Principle 15: It appears that the SCB is able and willing to offer effective and timely assistance to foreign regulators in obtaining the various types of information and other requests for assistance set out in the Principle. ### Powers, inspections, enforcement and compliance - Principle 9: No organization has formal SRO status in The Bahamas. The BISX performs certain functions which have certain public interest elements embedded in them in respect of the operation of the securities market, continuous disclosure by listed companies and the clearing and settlement process. BISX is licensed by and subject to the oversight of the SCB. There is no independent director on the BISX board. - Principle 10: The SCB has the broad powers of inspection, investigation and surveillance under the SIA required by this Principle. These sections of the SIA, which came into force in December 2011, also apply to licensees under the IFA. The equivalent sections of the IFA and the IFR have been disapplied. - Principle 11: The SCB’s administrative powers and sanctions as set out in the SIA are effective, proportionate and dissuasive. - Principle 12: In the securities market sector the SCB makes effective use of its extensive powers under the SIA. Licensees under the SIA and the IFA are required to have effective compliance programs and on-site and off-site monitoring is comprehensive and requires examiners to exercise judgment. However, within the investment funds sector, which is significantly larger than the securities market sector, only funds and the fund administrators are licensed. The SCB does not subject managers/advisers, operators or custodians to the level of ongoing oversight (including on-site examinations) it applies to investment fund administrators. - Principle 31: Periodic on-site examinations of securities market licensees are carried out according to a detailed Inspections Procedures Manual and Inspection Program Questionnaire. Examinations appear to be comprehensive, tailored to match the business models of particular categories of licensees and require the exercise of judgment by examiners. The SCB has begun to develop a risk based approach to prioritize its inspection program. - Principle 32: The SCB has not developed an operational plan to deal with the failure of a licensee as required by the Principle. A National Crisis Management Plan is being drawn up which will include securities firms and markets and will become effective in the course of 2013. Furthermore, the absence of a specific liquidation procedure for market intermediaries may cause legal uncertainty in returning clients’ assets in custody. ### Information disclosure, issuers and takeovers - Principle 16: The Bahamas legislation sets out in comprehensive detail what information is to be provided and when and to whom, prescribed notifications are to be made. The timeliness of these requirements is also set out appropriately and is consistent with international/IOSCO standards. - Principle 17: As of October 2012, there is no regulation of takeovers although the SIA has set out an enabling provision with the SCB as the regulator. Corporate governance standards are also weak. These deficiencies will be addressed when the takeover and corporate governance codes are implemented. - Principle 35: The absence of a mechanism to provide pre- and post-trade information on a real time base to investors generally is a significant weakness in the BISX trading platform given that the market is accessible to retail investors and some listed companies have reasonably significant numbers of retail shareholders. ### Accounting, audit and related oversight - Principle 18: IFRS are used unmodified and de facto are updated as the IASB produces changes without the need for intervention by the accountants’ professional body, BICA. BICA does not, apparently, provide interpretations of IFRS. BICA is not required to work cooperatively with, or be subject to oversight by, the SCB or another body that acts in the public interest as is required by the Principle. - Principle 19 (New principle - not benchmarked): The explanatory notes to this Principle, while recognizing that structures may differ between jurisdictions, stresses that “the auditor oversight framework should not be based exclusively or predominantly on self-regulation.” Unfortunately that is the position in The Bahamas. The SCB appears to be stretching the use of its limited powers in this area as far as it can but that is not sufficient. - Principle 20 (New principle—not benchmarked): Auditors are required by the SIA to comply with the IFAC International Code of Ethics for Professional Accountants. This is helpful but not sufficient. There are no rotation requirements on auditors. BICA does not conduct peer review analysis of the work of its members but does respond to complaints. - Principle 21 (New Principle—not benchmarked): Auditing standards are high as a result of the requirement that auditors comply with the ISA issued by IFAC through the International Auditing and Assurance Standards Board (IAASB). The enforcement mechanism is not adequate. ### Collective investment schemes, funds, custodians and related market conduct - Principle 24: There are several deficiencies in the IFA and SIA and their enforcement by the SCB. Although shares or units of investment funds are defined as securities, there is a licensing exemption when a person deals in (i.e., sells or markets) only such securities. Only funds and the fund administrators are licensed and only the fund administrator, but not the, operator, manager or other related parties, is subject to a full assessment of its governance, organization and operational conduct. The SCB has begun work, in consultation with the investment funds industry, on a project to update the IFA and IFR to a level which meets the standards of regulation of investment funds as currently established by IOSCO. - Principle 25: There are no specific requirements in the IFA concerning the segregation of client assets and the operational conduct of the custodian. In the event of losses or insolvency of the investment fund operator the absence of specific requirements for the segregation of client assets is likely to be problematic. - Principle 26: The IFA is a disclosure based Act. As such it is effective in mandating that the information required by this Principle is provided to investors and potential investors. Some requirements do not set out that information has to comply with the level of specificity as required by IOSCO. - Principle 27: The current IFA and IFR do not meet the IOSCO requirements that the regulatory framework imposes obligations on fund managers, operators and administrators to act in certain ways as regards valuation, pricing and redemption. - Principle 28 (New Principle—not benchmarked): While hedge funds fall within the definition of investment funds under the IFA and are regulated accordingly, the SCB has not developed an oversight regime which seeks to define specific funds or specific categories of funds as hedge funds. It has not established whether any domestic funds would meet the broad and unquantified indicators for being considered a hedge fund such as “high risk,” “highly leveraged” “potentially systemically significant” as used by IOSCO in the assessment methodology. ### Market intermediaries, capital requirements and market integrity - Principle 29: The SIA provides a function-based approach to licensing which removes the ambiguities in the previous Act as to which activities a firm was legally able to carry on under a particular class of license and the related entry criteria. - Principle 30: Although the current regulatory capital does not meet the IOSCO requirements in several ways, this deficiency will be addressed when the new regulatory capital rule is introduced. It is intended that this will be a version of Basel II based on the requirements of the CBoB for banks. - Principle 31: See above under Powers, inspections, enforcement and compliance. - Principle 32: See above under Powers, inspections, enforcement and compliance. - Principle 33: There have been no applications to operate an exchange or trading systems since BISX was set up in 1999. However, the licensing procedure appears comprehensive and sufficient and includes written internal review criteria and processes. - Principle 34: The decision taken last year to carry out the first formal on-site inspection of BISX was an important extension of the SCB’s supervisory activities. The inspection appears to have been thorough and to have covered the key elements of the exchanges operations. - Principle 36: While the number of cases of market manipulation and similar abuses are very low, this may be related to the opportunities for abusive behavior in a market which is as small and illiquid as this (2–3 trades a day) are very limited and unusual transactions are easily detectable. There appears to be no reluctance on the part of the SCB to take administrative action or on the part of the Office of the Attorney General to take criminal action when wrong-doing is suspected. Sanctions for violations appear effective, proportionate and dissuasive. - Principle 37: There is currently no large exposure monitoring system with appropriate trigger points. This deficiency will be addressed by end 2012. There is no evidence that short selling is undertaken in the equity market. ### Market infrastructure, settlement systems and ancillary entities - Principle 38 (Not assessed): Currently there is no securities settlement system or central counterparty as contemplated by this Principle. Settlement of securities traded on BISX takes place at the Bahamas Central Securities Depository, which is the register of corporate shares, and payment is settled by delivery of cheques bilaterally between brokers at the BISCX offices. - Principle 22 (New principle—not benchmarked): Banks may use external ratings when calculating market and credit risk under the CBoB’s market and credit risk rules; No CRAs are present in The Bahamas and the SCB does not have a regime for licensing and ongoing supervision of CRAs. It has not made a reasonable judgment that the CRAs whose ratings are permitted for use are subject to registration and oversight. - Principle 23 (New principle—not benchmarked): At the current stage of development of the securities market the present high level approach of the SCB is probably sufficient. The level of granularity contemplated by IOSCO and as set out in the key questions to this Principle is lacking. *Annex Table 5. The Bahamas: Summary Implementation of the IOSCO Principles (extracted content).* ### Annex Table 6. The Bahamas: Recommended Action Plan to Improve ### Annex Table 6. The Bahamas: Recommended Action Plan to Improve Implementation of the IOSCO Principles ### Recommended actions by principle - Principle 2 - The decision to empower the SCB to raise more fees from its licensees appears to be an appropriate and proportionate response to the likely ongoing requirements of the SCB and should be pursued by the SCB to an effective conclusion. - Principle 8 - The SCB should keep under review the degree to which licensees and public issuers are effective in managing conflicts of interest and in particular should remain alert for the growth of misaligned incentives as have proved damaging to investors’ interests in other jurisdictions especially in light of market composition. - Principle 9 - Given the systemic role BISX plays as the only stock exchange in The Bahamas, and given its gatekeeper role in that trading in securities listed on BISX can only take place through its systems, SCB should consider here, or under Principle 34, whether the new SIA can be interpreted to impose standards of behavior on BISX which go beyond those that are required of licensees generally, and more closely replicate those expected of the SCB including governance, transparency and fairness. - Principle 12 - In the course of licensing an investment fund all related parties should be subject by the SCB to a full due diligence check and not just a “fit and proper” assessment. - Managers/advisers, operators and custodians should be subject to an ongoing level of oversight (including on-site examinations) as is currently applied to investment fund administrators. - Principle 16 - The SCB should keep the issue of resources under review in case pressures arise as a result of enactment of the corporate governance code and the takeover code in 2013 since these will require public issuers to comply with (and to be assessed against) additional obligations under the SIA as discussed under Principles 16 and 17. - Principle 18 - BICA should consider developing an interpretive function in order to assist auditors when questions specific to the situation in The Bahamas arise. - Principle 19 - The Government should consider appointing a public interest oversight body for the auditing profession and BICA. In a small jurisdiction such as The Bahamas it is probably unnecessary, and inefficient, to create such a body specifically for this task. Consideration should be given to assigning the role to the SCB. - Principle 22 - Currently the SCB does not need to develop a regime for licensing and the ongoing supervision of credit rating agencies. However, in order to be fully compliant with this Principle the SCB needs to demonstrate that in permitting the use of external credit ratings it has made a reasonable judgment that the CRAs whose ratings are permitted for use are subject to registration and oversight. - Principle 23 - Although at the current stage of development of the securities market the present high level approach is probably sufficient, the SCB may wish to consider, once the current round of consultations has been completed and the resulting rules and guidance have been introduced, developing guidance at the level of granularity contemplated by IOSCO and as set out in the key questions to this Principle. - Principle 24 - As part of the investment fund licensing process the SCB should extend its “fit and proper” check on managers/advisers, promoters, operators and custodians to an examination of their governance, organization and operational conduct. - The SCB should subject related parties present in the jurisdiction to the level of ongoing oversight it applies to investment fund administrators. - The exclusion in the SIA which permits dealing in investment fund shares for clients without a license as long as that is the only securities dealing a person undertakes should be deleted. - Since 98 percent of funds are structured as companies the SCB might wish to consider adding funds to the entities to be subject to the Corporate Governance Code. - The SCB should complete its work on updating the IFA and IFR, taking account of the standards of regulation of investment funds and their related parties as currently established by IOSCO and should seek to secure the necessary legislative amendments as soon as possible. - Principle 25 - See recommendation to Principle 24 regarding updating the investment funds legislation and regulations. - Principle 26 - See recommendation to Principle 24 regarding updating the investment funds legislation and regulations. - Principle 27 - Among the amendments to be secured in the IFA and IFR as referred to under Principle 24 should be requirements that fund operators have and disclose mechanisms and processes for asset valuation and the pricing and the redemption of units which can be verified by the SCB and for deficiencies in which the SCB is able to impose sanctions. - Principle 28 - SCB should keep the size, asset composition and trading strategies of its professional and SMART funds under review with the objective of determining whether, by virtue of size, leverage etc. any would fall within the broad category of hedge fund for which enhanced supervision is required. - Principle 32 - The SCB should develop a plan to deal with the failure of a licensee as part of the National Crisis Management Plan currently being developed. - The authorities might consider introducing a broad-based investor compensation scheme to supplement the BISX scheme. - Principle 34 - SCB should ensure that, going forward, it maintains its new approach to supervising BISX with a regular program of on-site inspections. - Principle 35 - SCB should require BISX to make public the details of trades (other than block trades) as they occur rather than at the end of day. ### Authorities' response and implementation progress - General position - The SCB is satisfied with the quality of the review undertaken by the Assessors and is in agreement with the overall assessment. - Actions taken since the assessment - Starting August 1, 2012, the SCB has instituted onsite inspections of domestic mangers/advisors and custodians (response to Principle 12, 24, and 25). - The corporate governance paper, out for consultation, has been amended to set governance standards for CISs. - The SCB has directed the BISX to have trade details publicly available within 15 minutes of the trade (response to Principle 35). - The SCB has begun talks with key stakeholders to advance weaknesses noted with respect to principles 18, 19, and 21. - In August, the SCB established an IFA review team, comprised of industry participants, to provide input and guidance on required changes to funds legislation. - Work has continued on BISX oversight program, guidance on asset valuation and the crisis management plan for SCB constituents. - Implementation horizon - The SCB has reviewed the recommendations and have embarked on a two-to-three year project to implement changes which should lead to full compliance with all of IOSCO’s principles. ### Key projects and scheduled actions - Finalizing all rules, guidelines and surveillance programs required for the full implementation of the SIA 2011, including disciplinary rules, takeover codes, corporate governance, regulatory capital, fees, liquidity and large and related party exposures rules, re-categorization of licenses and revamping of internal procedures. - Working with other regulators, the Ministry of Finance and the Office of the Attorney General (OAG) to develop a crisis management plan for the jurisdiction. A crisis management seminar with a simulation exercise is scheduled for October 31, 2012. - Developing a full oversight program for BISX with detailed requirements which exceed those required of other licensees and ensures that the confidentiality requirements are in line with what would be required of a regulatory institution. - Establishing an oversight body for the Accounting community. - Repealing and replacing the legislation governing the investment funds industry and implementing the relevant oversight programs. - Finalizing database projects targeted to improve efficiency and effectiveness with respect to the oversight of licensees/registrants. - Working with the CBoB with respect to the creation of systems for clearing and settlements that are congruous, so that the requirements for securities settlements are met. - Formally recognize those credit rating agencies to be used for the calculation of market risk in the regulatory capital methodology, identifying the underlying standards required for their recognition. ### Exchange and capital controls (Annex IV) — key features and limits - General - Bona fide current account transactions in The Bahamas are liberalized and largely delegated to be transacted, within generous limits, by commercial banks against proper documentation. - The CBoB maintains restrictions on capital flows to ensure monetary and financial stability and manage pressures on the peg. - Exchange markets and premiums - There are two exchange markets: the official exchange market and the investment currency market. - The investment currency market currently requires a premium of 12.5 percent over the official exchange rate for outward payments and provides a premium of 10 percent for the repatriation of the originally approved capital investment. - The repatriation back to The Bahamas of income and capital gains over and above the initial investment amount must be converted at the official rate. - Footnote: The current so-called premium bid and offer rates of 12.5 percent and 10 percent have been in effect since January 2006, when they were reduced from their previous levels of 25 percent and 20 percent, respectively. - Capital and money market instruments - All outward capital transfers require exchange control approval, and outflows of resident-owned capital are restricted. - Inward transfers by non-residents must be processed through the exchange control approval procedure. - Shares or other securities - Outward investments by residents require permission from the CBoB, and they are normally processed through the investment currency market. - Pension funds, including the National Insurance Board (NIB), require CBoB approval to invest in securities issued by non-residents or in an investment portfolio held abroad. - Inward investment by non-residents is unrestricted in size, but CBoB approval is required for the issue or transfer of shares or control in a Bahamian company to a nonresident. - Investments in equities of companies listed on The BISX are restricted to a limit of 10 percent of the issue or offering for each investing entity. - Cross listing of Bahamian and foreign companies on CARICOM stock exchanges is allowed, subject to specified limits. - Controls of credit operations - Resident banks and other lenders must have permission to extend loans in Bahamian dollars to any corporate body controlled by non-residents. - Resident companies wholly owned by non-residents are not allowed to raise fixed capital in Bahamian dollars, although those partially owned by residents may borrow in Bahamian dollars for fixed capital purposes to the extent of their resident ownership. - Residents other than authorized banks must obtain permission to borrow foreign currency from non-residents or to service foreign currency loans by converting Bahamian dollars. Exchange control approval is required if local real estate is offered as collateral. - Commercial banks and other credit institutions require exchange control approval to make loans to residents in foreign currency, or to extend loans to non-residents using local real estate as collateral. - Direct investment limits and approvals - Inward direct investment requires CBoB approval. - For outward direct investments for residents, the use of the official exchange market is limited to US$1 million per person or entity, with an overall limit of US$5 million per transaction, every three years, in cases judged as special criterion. - The Central Bank may, at its discretion, grant approval for amounts in excess of the allowable limit; all other outward direct investments must be funded through the Investment Currency Market or combination of funding. - The NIB is permitted to make overseas investments of up to US$25 million per year at the official exchange rate. - Bahamian employees of foreign-owned institutions in The Bahamas may invest up to US$25,000 per year at the official exchange rate in the shares of their employer as part of an employer-provided benefits program (“employee stock options”), subject to CBoB approval. Amounts above this limit would need to be transacted through the investment currency market. - Real estate - Residents require approval from the CBoB to buy property abroad and face the premium of 12.5 percent on approved purchases. - Residents are permitted, once every ten years, to make an investment of US$25,000 at the official exchange rate for the purposes of purchasing a timeshare real estate property interest. Amounts above US$25,000 would need to be transacted through the investment currency market. - Non-residents intending to purchase land for commercial purposes or property larger than five acres must obtain a permit from the Investments Board. - Non-residents intending to buy properties for residential purposes need to obtain a certificate of registration from the Investments Board on completion of the transaction. - Remittance abroad of the proceeds of sale of properties in The Bahamas by non-residents requires approval from the CBoB. On completion of the real estate transaction and on presentation of the required permits and registration documents, the CBoB issues an “Approved Investment Status” certificate to non-residents for their real estate investment in The Bahamas, which provides them with the assurance that when they wish to sell their property, they will be able to repatriate all the funds (including capital gains) at the official exchange rate. - Emigration - Bahamians taking permanent residency abroad are allowed to transfer abroad US$250,000 per family per year at the official exchange rate, subject to CBoB approval. Amounts above these annual limits would need to be transacted through the investment currency market or may otherwise be permitted at the Bank’s discretion. *Annex Table 6. The Bahamas: Recommended Action Plan to Improve Implementation of the IOSCO Principles (content unit _cr13101).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13101.pdf_