## _cr1453 - 2013. The FSAP findings were discussed with the

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---

### FSAP team and scope
- Leadership and composition:
  - Led by Marco Piñon (IMF, Mission Chief) and Erik Feyen (World Bank, Mission Chief).
  - Team comprised of David Grigorian (IMF, Deputy Mission Chief), Steen Byskov (World Bank, Deputy Mission Chief), Claudio Visconti, Nobuyasu Sugimoto, Joonkyu Park, Yugo Koshima, Jiaqian Chen, Kalin Tintchev (all IMF), Craig Thorburn, Pierre-Laurent Chatain, Claire McGuire, Ines Gonzalez Del Mazo (all World Bank), Jonathan Katz, and Jose Tuya (external experts).
  - Kristine Vitola (IMF, WHD) participated in the first mission and supported the FSAP team on macro issues.
- Report preparation:
  - Prepared by Marco Piñon Farah and David Grigorian, with contributions from the rest of the FSAP Update team.
  - Date: January 24, 2014.
- Mandate and limitations:
  - FSAPs assess stability of the financial system as a whole, not individual institutions.
  - Intended to identify key sources of systemic risk and policies to enhance resilience to shocks and contagion.
  - Certain categories (operational, legal, fraud-related risks) are not covered.

### Macroeconomic background and outlook
- Recent performance:
  - GDP: contraction of 4 percent in 2009; lackluster growth in 2010–12; estimated decline of about 0.7 percent in 2013.
  - Unemployment: 114 percent in September (despite declining labor force participation).
  - Annual inflation: fell to 2 percent in September from nearly 11 percent a year earlier.
- Fiscal position and sovereign risk:
  - Central government fiscal deficit: high (between 8–9 percent) since 2009, except 2010 at 4½ percent.
  - Tax revenues: declined by 6.5 percent in FY2012/13 (April to March) and fell a further 11 percent in April-September 2013.
  - Public debt: increased to 128 percent of GDP at end-September 2013, from 55 percent at end-2007.
  - Debt composition: about 77 percent domestic currency denominated, mostly at fixed rates; external debt mostly long term with favorable amortization profile.
  - Sovereign ratings: downgraded to non-investment grade by Moody’s and Standard&Poor’s in 2012 and again by two notches (to Ba3 and BB-, respectively) in December 2013, both with negative outlook.
  - Market activity: a US$500 million Eurobond offering announced on September 30 was withdrawn in part; subsequently secured a loan commitment of up to $225 million from Credit Suisse.
- Liquidity and reserves:
  - CBB policy: April 2013 made 3-month T-bill rate benchmark and removed floor on deposit interest rate (except savings deposits).
  - CBB purchases: purchased about 44 percent of T-bills issued in first 11 months of 2013, causing yields to decline by nearly 50 basis points.
  - Lending margin: declined by 100 bps to below 6 percent since its peak in 2009.
  - Foreign reserves: dipped to US$468 million at end-October; estimated to represent 3.2 months of imports at year-end.
  - Current account: external current account deficit ballooned to 11½ percent of GDP in 2013 from 10 percent a year before.
- Capital and exchange controls:
  - Capital controls in place since the Exchange Control Act in November 1967; requirement to register large capital inflows at the CBB.
  - No restrictions on payments and transfers for current international transactions subject to approval under Article VIII.
  - CBB pegs the exchange rate to the U.S. dollar.

### Structure of the financial system and key vulnerabilities
- Composition:
  - Onshore system dominated by large, regionally active banks.
  - Credit union sector provides banking services to the population.
  - Mature but concentrated insurance sector with extensive international affiliates.
  - Offshore sector financially segregated and dominated by international banks mainly conducting treasury and wealth management operations.
- Emerging funding patterns:
  - Financial system increasingly funding the government and residential mortgages, reflecting fiscal pressures and capital controls limiting investments abroad.
- Systemic risk summary:
  - Macroeconomic vulnerabilities: deteriorating fiscal situation, large public debt, high fiscal deficits, and slow growth; policy options limited by fixed exchange rate.
  - Capital controls: provide some protection but likely to become less effective over time unless fiscal issues addressed.
  - Financial sector: not an immediate source of risk but deteriorating; credit quality of domestic banks and credit unions weakened considerably since global crisis and projected to deteriorate further with slow growth.
  - Potential amplification: weaker bank balance sheets could dampen credit supply, amplify economic decline, and exacerbate macro vulnerabilities.
- Stress test overview:
  - Onshore banks: capital and liquidity buffers allow withstanding moderate shocks.
  - Vulnerabilities under severe shocks: branch of a foreign bank and credit union sector.
  - Credit unions: vulnerable to medium-sized liquidity shocks.
  - Offshore sector: not a major source of risk given prohibition on transactions with domestic residents; monitor common ownership links and reputational risks.
- Insurance sector data gap:
  - Data limitations prevent quantitative analysis.
  - Vulnerabilities due to inadequate liability valuation standards and lack of data on foreign affiliates.
  - Presence of a major regional holding company with expanded non-insurance operations creates potential significant vulnerabilities.

### Supervision, regulation, and identified weaknesses
- Improvements since 2008:
  - Consolidated risk-based supervision introduced on banking side; formalized supervisory methodologies.
  - FSC established in April 2011 with adequate powers under the FSC Act; took over supervisory responsibilities for non-bank financial institutions and upgraded regulation and supervision.
- Remaining weaknesses:
  - Banking supervision: need to strengthen CBB independence, enforcement actions and loan loss provisioning.
  - Offshore sector: need to strengthen AML/CFT oversight.
  - FSC: supervision of credit unions and insurance sector, and data quality and reporting standards remain work in progress.
  - Insurance: need robust liability valuations, capital adequacy standards, cross-border group supervision, and risk management.
  - Credit unions: need a two-tiered supervisory approach, improved data collection, guidelines for classification and reporting of NPLs and restructured loans, and strengthened resolution procedures.

### Crisis management and financial safety nets
- Deposit insurance and payout:
  - BDIC fund small; need Strategic Plan, a target ratio, and improved payout procedures.
  - Judicial remedies challenging seizure decisions should be limited to enable timely resolution.
- Coverage and extension:
  - Credit unions fall outside the financial safety net; extension should follow establishment of adequate prudential oversight.
- Cross-border and group crisis preparedness:
  - Need to strengthen group supervision, cross-border coordination, and crisis management.
  - Priority: improve data on cross-border linkages and conglomerates and enhance supervisory colleges.
  - Finalize crisis management plans (including for internationally active nonbank groups).
  - Improve mandate and tools of Financial Oversight Management Committee (FOMC).
- Specific actions:
  - Ensure cost-effectiveness of resolution and safeguard financial condition of safety net entities.
  - Enter into agreements for back-up funding for safety net entities.
  - Develop Strategic Plan, target ratio, and test payout procedures for BDIC.
  - Amend various Acts to ensure consistency and align resolution powers and processes with international good practices.

### Key FSAP Update recommendations (selected items and timing)
- Bank supervision and regulation (Short Term — ST):
  - Review and update/adopt homogenous loan classification approach; amend substandard definition; revise provisioning requirements — ST — CBB.
  - Include in CBB Act a provision stipulating conditions under which the Governor can be removed; revise provisions that allow MoF to overrule CBB’s corrective measures — ST — CBB/MoF.
  - Amend the FIA and the CBB Act to further empower the CBB — ST — CBB/MoF.
  - Increase number of on-site examinations of on-shore banks — ST — CBB.
  - Perform on-site examinations of offshore banks not visited in past five years — ST — CBB.
- Insurance supervision:
  - Enhance supervisory colleges and engagement for systemic entities — ST — FSC.
  - Amend limitation in FSC Act re information sharing — ST — FSC.
  - Develop internal procedure manual for a financial crisis and require insurers with cross-border activities to establish contingency plans — ST — FSC.
  - Establish robust and enforceable valuation standards for technical provisions — Medium Term (MT) — FSC.
  - Accelerate implementation of risk-based capital adequacy requirements covering all insurers and insurance groups and promote ERM frameworks — MT — FSC.
- Credit unions and access to finance:
  - Consolidate risk-based dual approach to on-site credit union supervision and improve data collection — ST — FSC.
  - Issue guidelines for classification, monitoring, and reporting of NPLs and restructured loans — ST — FSC.
  - Establish level playing field for qualifying credit unions by lifting product restrictions, removing corporate tax exemption, and establishing appropriate prudential supervision — MT-LT — FSC, CBB, MoF.
  - Improve credit enforcement, establish credit information function, develop real estate price index, and introduce collateral registry — MT — CBB/FSC.
- Safety net and crisis management:
  - Establish national crisis management plan for insurance sector — ST — FSC.
  - Enter into agreements for back-up funding for safety net entities — ST — BDIC/CBB/MoF.
  - Develop Strategic Plan, target ratio, and test payout procedures for BDIC — MT — BDIC/CBB.
  - Amend Acts to align resolution powers with international good practices — MT-LT — CBB/BDIC/FSC.
- Macroprudential policy:
  - Develop real estate price index — MT — CBB.
  - Clarify mandate and tools of FOMC — MT — CBB/BDIC/FSC.

### Fiscal consolidation measures and risks
- Announced measures (August and December 2013):
  - Reduction in size of civil service by about 15 percent in 2014.
  - Wage cuts for elected and appointed officials.
  - A two year nominal wage freeze.
- Authorities committed to consolidation but “full efforts should be deployed to address considerable implementation risks.”

### Medium-term growth outlook and external vulnerabilities
- Growth drivers and constraints:
  - Sluggish medium-term growth reflecting moderate growth in traditional tourism markets (Canada, the U.K., the United States), growing competition from other offshore financial centers, and appreciation of the real effective exchange rate.
  - Recent tourism arrivals and growth in Barbados have lagged behind other Caribbean countries.
- Key risks:
  - Sharp increase in interest rates raising sovereign risk premiums and affecting banks’ capital and credit quality.
  - Severe slowdown in U.K., U.S., or Canada affecting tourism, employment, borrower repayment capacity, and loan quality.
  - Prolonged increase in world oil prices feeding into domestic inflation, raising travel costs, and eroding competitiveness.

### Financial sector overview and key statistics
- Onshore financial system composition (asset shares):
  - Six commercial banks (66 percent of total onshore financial system assets).
  - 12 trust and finance companies (Part 3 deposit-taking institutions; 9 percent).
  - 35 credit unions (9 percent).
  - 23 active insurance companies (17 percent).
- Selected counts and asset figures (2008–H1 2013 highlights):
  - Offshore banks: 50 (2008), 50 (2009), 50 (2010), 45 (2011), 44 (2012), 45 (H1 2013).
  - Banks assets (B$ millions): 11,500 (2008), 11,481 (2009), 10,993 (2010), 11,535 (2011), 11,878 (2012), 12,194 (H1 2013).
  - Offshore insurance assets (BD$ millions): 48,965.3 (2008), 125,500 (2010), 133,400 (2011), 142,600 (2012), 140,000 (H1 2013).
  - Mutual funds (net assets): 782.3 (2008), 1,015 (2009), 1,061 (2010), 2,213 (2011), 2,470 (2012), 2,470 (H1 2013).
  - Share of the 3 largest banks, percent: 73 (2008), 70 (2009), 69 (2010), 71 (2011), 71 (2012), 78 (H1 2013).
- Onshore commercial banking:
  - Assets at 140 percent of GDP (onshore commercial banking sector).
  - Ownership: three banks subsidiaries/branches of large Canadian banking groups; two from Trinidad and Tobago; one from the U.S.
  - Major shareholders are investment grade.
  - 2012 structural changes: First Citizens Bank acquired Butterfield Bank; Republic Bank took full ownership of Barbados National Bank (BNB).

### Banks’ balance-sheet indicators (selected series)
- Capital and asset indicators:
  - Capital adequacy ratio: 16.1 (2008), 17.5 (2009), 17.1 (2010), 19.3 (2011), 21.0 (2012), 21.5 (H1 2013).
  - Core capital adequacy ratio (Tier-I): 13.9 (2008), 16.3 (2009), 15.7 (2010), 18.1 (2011), 19.5 (2012), 19.6 (H1 2013).
  - Nonperforming loans net of provisions to capital (percent): 5.0 (2008), 21.0 (2009), 11.2 (2010), 11.8 (2011), 23.0 (2012), 21.4 (H1 2013).
  - Loan to deposit ratio (percent): 64.0 (2008), 66.0 (2009), 67.0 (2010), 79.2 (2011), 73.6 (2012), 71.9 (H1 2013).
  - Liquid assets, percent of total assets: 9.0 (2008), 10.8 (2009), 11.5 (2010), 12.0 (2011), 14.6 (2012), 17.0 (H1 2013).
  - Total assets, annual growth rate: 3.9 (2008), -5.4 (2009), -1.5 (2010), -4.7 (2011), 15.8* (2012), 2.6 (H1 2013). (2012 values include effect from mergers.)
  - Loans and advances growth rate (percent): 12.4 (2008), 0.9 (2009), 0.6 (2010), -0.5 (2011), 6.3* (2012), -3.6 (H1 2013).
  - Total mortgage loans, percent of loans and advances: 28.0 (2008), 29.0 (2009), 31.3 (2010), 33.7 (2011), 39.6 (2012), 41.2 (H1 2013).
  - Nonperforming loans, percent of total loans: 3.5 (2008), 7.9 (2009), 10.8 (2010), 11.1 (2011), 12.9 (2012), 13.9 (H1 2013).
  - Provisions to nonperforming loans, percent of NPL: 60.1 (2008), 43.6 (2009), 37.4 (2010), 32.9 (2011), 33.9 (2012), 36.2 (H1 2013).
  - Return on Assets (ROA): 1.4 (2008), 1.6 (2009), 1.2 (2010), 1.0 (2011), 1.1 (2012), 1.0 (H1 2013).
  - Return on equity (ROE): 17.3 (2008), 15.6 (2009), 11.3 (2010), 6.1 (2011), 4.9 (2012), 3.8 (H1 2013).
- NPLs concentration and provisioning:
  - NPL ratio rose from 3½ percent in 2008 to nearly 14 percent in June 2013.
  - NPLs concentrated in hotels and restaurants, personal loans, and commercial real estate.
  - Provisions declined from 63 percent to 36 percent of NPLs over the same period.
  - Banks’ ROA deteriorated from 1½ percent in 2008 to 1 percent in June 2013.

### Credit unions: structure and vulnerabilities
- Coverage and membership:
  - 76 percent of the economically active population are members.
  - Institutions: 35 (2008–Q2 2013).
  - Members: 148,604 (2008), 129,476 (2009), 146,162 (2010), 157,198 (2011), 148,744 (2012), 150,527 (Q1 2013), 157,921 (Q2 2013).
- Assets and loans:
  - Assets (BD$ million): 1,202 (2008), 1,312 (2009), 1,439 (2010), 1,513 (2011), 1,579 (2012), 1,617 (Q1 2013), 1,639 (Q2 2013).
  - Loans (BD$ million): 965 (2008), 1,042 (2009), 1,132 (2010), 1,206 (2011), 1,245 (2012), 1,239 (Q1 2013), 1,246 (Q2 2013).
  - Two largest credit unions combined account for 73 percent of total assets, 78 percent of loans, and 75 percent of members.
- Financial soundness indicators:
  - Reserves to total Liabilities (percent): 10.3 (2008), 10.5 (2009), 10.4 (2010), 10.7 (2011), 11.4 (2012), 11.5 (Q1 2013), 11.4 (Q2 2013).
  - CAR: 8.8 (2008), 9.2 (2009), 9.2 (2010), 9.4 (2011), 11.6 (2012), 11.2 (Q1 2013), 11.2 (Q2 2013).
  - Return on Equity: 21.5 (2008), 16.9 (2009), 12.7 (2010), 12.4 (2011), 13.1 (2012), 2.3 (Q1 2013), 3.1 (Q2 2013).
  - Nonperforming loans, percent of total loans: 5.3 (2008), 6.5 (2009), 7.2 (2010), 6.9 (2011), 8.2 (2012), 8.3 (Q1 2013), 8.2 (Q2 2013).
- Prudential concerns:
  - CAR at 11¼ percent in June 2013, up from 8¾ percent at end-2008, above 10 percent regulatory minimum.
  - Prudential norms less strict than for banks: loan classification and provisioning materially less strict.
  - Unrecoverable loans not adequately provisioned and rarely written off; collateral values not updated.
  - Except for largest credit union, loans reclassified as performing immediately after restructurings.
  - A few small entities do not meet minimum CAR.

### Insurance sector: structure, performance, and challenges
- Sector composition and concentration:
  - 23 active companies: six life, 16 general, one both.
  - After CLICO collapse in 2009, second largest insurer accounts for 83 percent of life industry assets.
- Key indicators:
  - Total premium stood at BBD 643 million (US$322 million) in 2011.
  - Insurance premium to GDP: 7.2 percent.
  - Offshore sector: 223 (2010), 225 (2011), 223 (2012), 221 (Q1 2013).
  - Offshore assets (BD$ billion): 49.0 (2008), 125.5 (2010), 133.4 (2011), 142.6 (2012), 142.7 (Q1 2013), 140.4 (Q2 2013).
- Challenges:
  - Decline in life premiums (net of reinsurance ceded) due to weak regional economy and weakened public confidence.
  - Difficulty assessing soundness of general insurers owing to absence of robust liability valuation framework.
  - Increased risk for an insurance-based group due to expansion in non-insurance businesses and increased holdings of Caribbean government debt securities.
- Market structure:
  - Dominant products: life (traditional life products); non-life (motor and property).
  - Reinsurance: industry cedes up to 80 percent in property and 30 percent in motor.
  - Distribution: 22 insurance brokers, 38 insurance agents, 475 salespersons registered.
- Solvency and concentration risks:
  - Investment portfolios concentrated in Government Bonds of Barbados.
  - Admissible asset rules: limits on overseas investment (20 percent), real estate (20 percent), equities (25 percent).
  - Insurers hold 12.3 percent of total outstanding stock of government bonds.

### Offshore sector: scale, segregation, tax framework and risks
- Composition and role:
  - Offshore comprises banks, insurance companies, and IBCs; most parent companies in Canada and the United States.
  - Offshore transactions restricted to non-residents; offshore banks do not take resident deposits and mostly perform treasury and trust operations.
- Scale and concentration:
  - Third largest offshore banking center in the Caribbean and tenth globally.
  - Assets of 45 offshore banks amount to BD $89 billion, or over 1,000 percent of GDP.
  - Four largest banks hold 74 percent of sector assets; twelve large banks account for 91½ percent.
  - By end-2012: 222 offshore captive insurers and 39 others (16 holding companies, 23 management companies).
  - Some 3,945 IBCs licensed in Barbados.
- Tax framework and exemptions:
  - Offshore banks and companies pay corporate taxes on profits from 0.25 percent to 2.5 percent of taxable income.
  - Foreign tax credit can reduce total tax to minimum of 0.5 percent.
  - Offshore insurers: EICs fully exempt for first 15 years; thereafter taxed at 2 percent on first $125,000 of taxable income with amounts above exempt. QICs effectively taxed around 1.75 percent.
  - Exemptions: income tax, capital gains tax, withholding taxes, capital duties, and import duties on business equipment.
- International context:
  - Barbados has 33 DTAs and three TIEAs; others awaiting ratification or signature.
  - FATCA (enacted 2010) implementation in 2014 will require reporting; Barbados expected to enter into an IGA and has a working group under Invest Barbados and CBB.

### Interconnectedness, amplification, and stress-testing framework
- Interconnectedness:
  - Institutions interconnected through financial and ownership linkages inside and outside the country.
  - Domestic linkages relatively limited but growing; external linkages considerable in some cases.
  - Two Barbados-based financial conglomerates highlighted: one with group assets ~120 percent of Barbados GDP and operations in 22 countries; another owning a bank representing 35 percent of Barbadian banking sector and commercial banking activities in 17 Caribbean countries.
- Amplification:
  - Small linkages can amplify shocks and create second-round effects (e.g., sovereign shock affecting holders of government bonds).
  - Reputational contagion significant (example: CLICO collapse in 2009).
- Stress testing (2013–17):
  - Baseline and four adverse scenarios over 2013–17 using econometric, statistical, and balance sheet methods.
  - Shock magnitudes roughly correspond to one and two standard deviations of historical data for last 11 years.

### Baseline projections and adverse scenario outcomes (2017 and severe shocks)
- Baseline (2017):
  - System NPL ratio increases to 19½ percent by 2017 from 13.8 percent.
  - Aggregate CAR declines to 10.1 percent, from 16.6 percent at end-June 2013.
  - Potential Recapitalization Needs: 2.1 percent of GDP.
  - Assumes provisioning existing and new NPLs at cumulative rate of 50 percent.
- Severe adverse outcomes (selected):
  - Tourism severe:
    - System NPL ratio: 26 percent (26.5 in table).
    - CAR: 5.7.
    - Potential Recapitalization Needs: 3.2 percent of GDP.
  - Oil price severe:
    - System NPL ratio: 24 percent.
    - CAR: 6.9.
    - Potential Recapitalization Needs: 2.7 percent of GDP.
  - Geopolitical severe (oil + tourism):
    - System NPL ratio: 33 percent (33.4 in table).
    - CAR: 2.5.
    - Potential Recapitalization Needs: 4.8 percent of GDP (0.7 percent of GDP excluding branches).
  - Sovereign severe:
    - System NPL ratio: 27.1 percent.
    - CAR: 3.9.
    - Potential Recapitalization Needs: 3.6 percent of GDP.
- Notes on stress tests:
  - Existing and new NPLs provisioned at 50 percent; 25 and 30 percent of special mention loans transition to NPLs in medium and severe scenarios, respectively.

### Sensitivity, bottom-up, and liquidity tests
- Sensitivity and bottom-up:
  - Migration of adversely classified loans by one category could drive CAR of foreign branch below regulatory limit.
  - Severe downgrade of all NPLs to loss would produce fragilities in two other banks; three banks (59 percent of total assets) could fail capital requirement under severe downgrade.
  - Large corporate default episodes: most banks could withstand plausible defaults; foreign branch vulnerable if its largest borrower defaults.
  - Defaults of three largest exposures would lower system CAR by about 5 percentage points.
  - Sectoral NPL doubling in tourism, construction and real estate, or households would lower system CAR by about 4 percentage points (assuming 50 percent provisioning).
  - Interest rate shifts up to 500 bps have little impact on system CAR due to limited maturity mismatches.
  - Currency risk limited given tight foreign exchange controls and small net open positions.
- Liquidity risk:
  - Liquidity tests simulated cumulative outflows up to 25 percent of total deposits.
  - Findings:
    - Most banks could withstand medium liquidity shocks; severe deposit outflows would strain buffers.
    - Banks’ liquidity buffers can absorb outflows up to 15 percent of total deposits and remain above reserve requirement.
    - If banks use “broad” liquid assets (long-term government bonds after 25 percent haircut), they meet outflows and remain above 15 percent reserve requirement.
    - If allowed to use only “core” liquid assets, four banks would drop below requirement.
    - System liquidity ratio would drop below 15 percent under an outflow of 25 percent of total deposits.
    - Two credit unions’ liquidity buffers insufficient: a 15 percent outflow reduces average liquidity ratio to 7 percent (both below the 15 percent benchmark); a 25 percent outflow would drain their liquid assets entirely.

### Sovereign risk and bottom-up bank-level tests
- Sovereign revaluation:
  - Simulated sovereign risk premium increases up to 500 bps.
  - Impact: System CAR driven down by about 2½ percentage points, to 13¾ percent.
  - All banks remain above regulatory minimum due to relatively short maturity of bond holdings.
- Bottom-up sensitivity tests by five onshore banks confirm top-down results: risks concentrated in severe credit shocks and large exposures; market and liquidity risks more limited.

### Regulatory and supervisory capacity: CBB and FSC
- CBB (Bank Supervision Department — BSD):
  - Supervises offshore and onshore commercial banks and Part 3 institutions; self-funded and operationally independent.
  - Current BSD resources: 34 banking supervision professionals supervising 19 onshore and 46 offshore entities (36 assigned to supervisory activities with two vacancies noted elsewhere).
  - Transition to Basel II planned by 2015 may require higher headcount.
  - CBB has discretionary powers and has issued guidelines on operational risk, liquidity, AML/CFT, credit risk, corporate governance, and market risk capital.
  - Recommended legal improvements:
    - Approve amendments to CBB Act and FIA to provide explicit regulatory powers, administrative penalties, and remedial actions.
    - Strengthen independence: specify conditions for dismissal/removal of Governor and remove MoF overrule powers (FIA §50 (4) and CBB Act §49 (1)).
    - Take more forceful enforcement actions in serious breaches beyond moral suasion.
    - Strengthen AML/CFT supervision: inspect offshore banks from higher-risk countries and increase on-site examinations in onshore banks.
    - Review loan provisioning guidelines and develop real estate price index.
- FSC:
  - Regulates insurance and pensions, credit unions, and securities; established 2011.
  - Structure and capacity:
    - Insurance and Pensions: 15 staff; Credit Unions: four staff; Securities: four staff; Examinations Division: six staff; Policy & Research: two staff.
    - Examinations Division lacks sector-specific specialists; onsite supervisors assisted by offsite supervisors.
  - Findings and recommendations:
    - Act provides investigative and enforcement powers; budgetary independence and limits on ministerial authority exist but ministerial roles remain (e.g., approval for binding regulations).
    - FSC Act mandates both competition promotion and stability; recommendation to remove competition mandate as it conflicts with stability objective.
    - Insurance sector: no specified actuarial standard; current capital requirements too crude; need enforceable valuation standards, risk-based capital, group supervision, ERM, and crisis management procedures.
    - Credit unions: need revised guidelines for loan classification, monitoring and reporting; adopt two-tier supervisory approach; increase onsite supervision frequency for large credit unions.
    - Recommendation: expand public disclosure of regulations and statistical data.

### Loan provisioning, exposures, and supervisory recommendations
- CBB provisioning guideline (1998):
  - 100 percent for "loss"; 50 percent for "doubtful"; 10 percent for "substandard"; none for "especially mentioned"; no general provision for unclassified exposures; 1 percent for credits not reviewed in past 12 months.
- Issues and recommendations:
  - CBB requirements lower than comparable jurisdictions; lack common treatment for homogeneous portfolios to ensure timely write-offs.
  - Review provisioning requirements based on historical losses and loan migration since 1998.
  - Large exposures: current single/group exposure limits of 25 percent of stated capital and reserves; unsecured exposures 10 percent.
  - Draft large exposure guideline contemplates aggregate non-exempt large exposures not to exceed 600 percent of capital base; issue LE guideline urgently.
  - Related-party limits: unsecured lending or guarantee to each related party restricted up to $40,000 or 1 percent of stated capital (whichever greater); need stricter related-party definition, aggregate limits, and legal sanctions.
  - Market/IRR/OR: issue and expand guidance and work papers; complete horizontal operational risk examination; increase targeted onsite examinations.
  - AML/CFT: strengthen prudential response to serious breaches; increase on-site examinations in onshore banks and inspect international banks not visited in past five years.

### Deposit insurance, resolution, and safety-net specifics
- BDIC:
  - BDIC fund: BD$38.8 million; formed 2006 and began operations in 2007.
  - Members: thirteen (six banks and seven deposit taking NBFIs).
  - Annual premiums: 0.05 percent of average insured deposits.
  - BDIC is a paybox-plus; required to minimize exposure to loss but cannot provide financial support for purchase-and-assumption transactions.
  - Back-up funding to be borrowed from the CBB or government per DIA, but high public debt questions government’s ability to support BDIC.
  - At current level the fund is not sufficient to pay insured depositors at any member institution.
- Recommendations:
  - BDIC Board to adopt Strategic Plan.
  - Strengthen legal framework for prompt payout procedures.
  - Need explicit legal protection for persons acting on behalf of deposit insurer, including former employees.
- Resolution framework improvements:
  - Banking: strengthen FIA to limit judicial remedies, provide recapitalization powers under seizure, allow transfer of parts of banks’ business and establishment of bridge banks.
  - Credit unions: resolution under FSC Act; appeals process currently allows tribunals/courts to reverse FSC decisions.
  - Insurance: law lacks stipulation on bridge insurer terms and on recovery from industry of public funds used in resolution.
- Cross-border coordination:
  - Within Caribbean: legal framework and communication provide basis for coordination (example: CLICO resolution coordination).
  - Outside Caribbean: coordination with non-Caribbean jurisdictions not established; CBB participates in supervisory colleges for Canadian banks but not in cross-border RRP processes.
  - Recommendation: formalize coordination modalities in Financial Stability Management Plan (FSMP), including possible coordination with Office of the Superintendent of Financial Institutions of Canada and Canada Deposit Insurance Corporation.

### Risk assessment highlights (selected threats, likelihood, expected impact)
- Severe slowdown in tourism from recession in U.K., U.S., Canada:
  - Likelihood: MEDIUM/HIGH
  - Expected Impact: HIGH
- Global oil shock triggered by geopolitical events:
  - Likelihood: LOW
  - Expected Impact: MEDIUM
  - Example: price could reach $140 per barrel in such scenarios.
- Fiscal pressures and downside public debt risks:
  - Likelihood: MEDIUM
  - Expected Impact: MEDIUM
  - Government debt noted at about 125 percent of GDP and central government deficit nearly 8 percent of GDP (risk to banks holding domestic debt).
- Devaluation pressures and regional contagion:
  - Likelihood: MEDIUM
  - Expected Impact: MEDIUM

*Source: FSAP Update report prepared by Marco Piñon Farah and David Grigorian (IMF), January 24, 2014 (excerpts from _cr1453)._*

### 2013. The FSAP findings were discussed with the

### _cr1453 - 2013. The FSAP findings were discussed with the

### FSAP team and scope
- FSAP team leadership and composition:
  - Led by Marco Piñon (IMF, Mission Chief) and Erik Feyen (World Bank, Mission Chief).
  - Team comprised of David Grigorian (IMF, Deputy Mission Chief), Steen Byskov (World Bank, Deputy Mission Chief), Claudio Visconti, Nobuyasu Sugimoto, Joonkyu Park, Yugo Koshima, Jiaqian Chen, Kalin Tintchev (all IMF), Craig Thorburn, Pierre-Laurent Chatain, Claire McGuire, Ines Gonzalez Del Mazo (all World Bank), Jonathan Katz, and Jose Tuya (external experts).
  - Kristine Vitola (IMF, WHD) participated in the first mission and supported the FSAP team on macro issues.
- Report preparation:
  - This report was prepared by Marco Piñon Farah and David Grigorian, with contributions from the rest of the FSAP Update team.
  - Date: January 24, 2014.
- FSAP mandate and limitations:
  - FSAPs assess the stability of the financial system as a whole and not that of individual institutions.
  - Intended to help countries identify key sources of systemic risk and implement policies to enhance resilience to shocks and contagion.
  - Certain categories of risk, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.

### Macroeconomic background and outlook
- Recent macro performance:
  - GDP: contraction of 4 percent in 2009; lackluster growth in 2010–12; estimated decline of about 0.7 percent in 2013.
  - Unemployment: 114 percent in September (despite declining labor force participation).
  - Annual inflation: fell to 2 percent in September from nearly 11 percent a year earlier.
- Fiscal position and sovereign risk:
  - Central government fiscal deficit: high (between 8–9 percent) since 2009, with the exception of 2010 where it lowered to 4½ percent.
  - Tax revenues: declined by 6.5 percent in FY2012/13 (April to March) and fell a further 11 percent in the period April-September 2013.
  - Public debt: increased to 128 percent of GDP at end-September 2013, from 55 percent at end-2007.
  - Debt composition note: domestic currency denominated debt accounts for about 77 percent of public debt, mostly at fixed rates; external debt is mostly long term and with a favorable amortization profile.
  - Sovereign ratings: downgraded to non-investment grade by Moody’s and Standard&Poor’s in 2012 and again by two notches (to Ba3 and BB-, respectively) in December 2013, both currently with a negative outlook.
  - Market activity: A US$500 million Eurobond offering, announced on September 30, was withdrawn in part; subsequently secured a loan commitment of up to $225 million from Credit Suisse.
- Liquidity and reserve developments:
  - CBB policy: In April 2013, the CBB made the 3-month T-bill rate its benchmark and removed the floor on deposit interest rate (except for savings deposits).
  - CBB purchases: purchased about 44 percent of T-bills issued in the first 11 months of 2013 directly in the primary market causing yields to decline by nearly 50 basis points.
  - Lending margin: declined by 100 bps to below 6 percent since its peak in 2009.
  - Foreign reserves: dipped to US$468 million at end-October; estimated to represent 3.2 months of imports at year-end.
  - Current account: external current account deficit ballooned to 11½ percent of GDP in 2013 from 10 percent a year before.
- Capital and exchange controls:
  - Capital controls in place since the Exchange Control Act in November 1967; requirement to register large capital inflows (including FDI) at the CBB.
  - No restrictions on payments and transfers for current international transactions subject to approval under Article VIII.
  - CBB pegs the exchange rate to the U.S. dollar.

### Structure of the financial system and key vulnerabilities
- Financial system composition:
  - Onshore system dominated by large, regionally active banks.
  - Credit union sector provides banking services to the population.
  - Mature but concentrated insurance sector with extensive international affiliates.
  - Offshore sector: financially segregated from the domestic economy and dominated by international banks mainly conducting treasury and wealth management operations.
- Emerging funding patterns:
  - Financial system increasingly funding the government and residential mortgages, reflecting fiscal pressures and capital controls limiting investments abroad.
- Systemic risk summary:
  - Macroeconomic vulnerabilities: deteriorating fiscal situation, large public debt, high fiscal deficits, and slow growth; policy options limited by fixed exchange rate regime.
  - Capital controls: provide some protection against disorderly scenarios but likely to become less effective over time unless fiscal vulnerabilities are addressed.
  - Financial sector position: not an immediate source of risk but deteriorating; credit quality of domestic banks and credit unions weakened considerably since the global crisis and projected to deteriorate further with slow growth.
  - Potential amplification: weaker bank balance sheets could dampen credit supply, amplify economic decline, and exacerbate macro vulnerabilities.
- Stress test findings:
  - Onshore banks: relatively large capital and liquidity buffers allow withstanding moderate shocks without breaching regulatory requirements.
  - Vulnerabilities emerge under severe shocks: particularly in a branch of a strong foreign bank and in the credit union sector.
  - Credit unions: vulnerable to medium-sized liquidity shocks.
  - Offshore sector: does not appear to be a major source of risk given prohibition on transactions with domestic residents, but common ownership links and reputational risks should be monitored.
- Insurance sector data gap:
  - Data limitations prevent a quantitative analysis of the insurance sector.
  - Vulnerabilities are emerging owing to inadequate liability valuation standards and lack of data on foreign affiliates.
  - Presence of a major regional holding company based in Barbados and significant expansion of its non-insurance financial operations create potential for significant vulnerabilities.

### Supervision, regulation, and identified weaknesses
- Improvements since 2008 FSAP Update:
  - Consolidated risk-based supervision introduced on the banking side with several formalized supervisory methodologies.
  - Financial Services Commission (FSC) established in April 2011 with adequate powers under the FSC Act; took over supervisory responsibilities for non-bank financial institutions and upgraded regulation and supervision.
- Remaining weaknesses and priorities:
  - Banking supervision: need to strengthen CBB independence, enforcement actions and loan loss provisioning.
  - Offshore sector: need to strengthen AML/CFT oversight.
  - FSC as a recent agency: supervision of credit unions and insurance sector, and data quality and reporting standards remain work in progress.
  - Insurance sector: need robust liability valuations, capital adequacy standards, cross-border group supervision, and risk management.
  - Credit unions: need a two-tiered supervisory approach given significant heterogeneity, improved data collection, guidelines for classification and reporting of NPLs and restructured loans, and strengthened resolution procedures.

### Crisis management and financial safety nets
- Deposit insurance and payout procedures:
  - Deposit insurance fund remains small; need for a deposit insurer strategic plan, a target ratio, and improved payout procedures.
  - Judicial remedies for challenges to seizure decisions should be limited to enable timely resolution.
- Coverage and extension of safety net:
  - Credit unions currently fall outside the financial safety net; extension of the safety net should follow establishment of adequate prudential oversight.
- Cross-border and group crisis preparedness:
  - Need to strengthen group supervision, cross-border coordination, and crisis management given stress-testing vulnerabilities.
  - Priority: improve data on cross-border linkages and conglomerates and enhance supervisory colleges.
  - While legal basis and good cross-border communication exist within the Caribbean, crisis management plans (including for internationally active nonbank groups) should be finalized.
  - Mandate and tools of the Financial Oversight Management Committee (FOMC) should be improved.
- Specific safety-net actions recommended:
  - Ensure cost-effectiveness of resolution and safeguard financial condition of entities in the safety net.
  - Enter into agreements for back-up funding for safety net entities.
  - Develop a Strategic Plan, target ratio, and test payout procedures for Barbados Deposit Insurance Corporation (BDIC).
  - Amend various Acts to ensure consistency and align resolution powers and processes with international good practices.

### Key FSAP Update recommendations (selected items and timing)
- Bank supervision and regulation:
  - Review and update/adopt: homogenous loan classification approach; substandard definition in the classification regulation; and provisioning requirements — Short Term (ST) — Institution: CBB.
  - Include in the CBB Act a provision stipulating conditions under which the Governor can be removed. Revise provisions that allow Ministry of Finance (MoF) to overrule CBB’s corrective measures — ST — CBB/MoF.
  - Amend the Financial Institutions Act (FIA) and the CBB Act to further empower the CBB — ST — CBB/MoF.
  - Increase the number of on-site examinations of on-shore banks — ST — CBB.
  - Perform on-site examinations of offshore banks that have not been subject to visits in the past five years — ST — CBB.
- Insurance supervision:
  - Enhance supervisory colleges and maintain active engagement, particularly for systemic entities and entities where Barbados is a host supervisor. Improve crisis management coordination — ST — FSC.
  - Amend the limitation of FSC Act with regard to information sharing — ST — FSC.
  - Develop internal procedure manual for a financial crisis and require insurers with cross-border activities to establish contingency plans and procedures — ST — FSC.
  - Establish robust and enforceable valuation standards for technical provisions — Medium Term (MT) — FSC.
  - Accelerate implementation of risk-based capital adequacy requirements covering all insurers and insurance groups and promote ERM frameworks — MT — FSC.
- Access to finance and credit unions:
  - Consolidate current risk-based dual approach to on-site credit union supervision based on well-specified criteria and improve data collection — ST — FSC.
  - Issue guidelines for classification, monitoring, and reporting of non-performing and restructured loans, and write-offs for the credit union sector — ST — FSC.
  - Establish a level playing field for qualifying credit unions by lifting product restrictions, removing corporate tax exemption, and establishing appropriate prudential supervision — MT-LT — FSC, CBB, MoF.
  - Improve credit enforcement through a more effective bankruptcy system and effective mortgage foreclosure procedures — MT — Government, CBB.
  - Establish a credit information function, develop a real estate price index, and introduce a collateral registry for movable assets — MT — CBB/FSC.
- Safety net and crisis management:
  - Establish a national crisis management plan for insurance sector — ST — FSC.
  - Enter into agreements for back-up funding for safety net entities — ST — BDIC/CBB/MoF.
  - Continue to improve cooperation with other supervisors for crisis management, particularly in the insurance sector — ST-MT — CBB/FSC.
  - Develop a Strategic Plan, target ratio, and test payout procedures for BDIC — MT — BDIC/CBB.
  - Amend various Acts to ensure consistency and bring resolution powers and process more in line with international good practices and standards — MT-LT — CBB/BDIC/FSC.
- Macroprudential policy:
  - Develop a real estate price index — MT — CBB.
  - Clarify mandate and tools of the FOMC — MT — CBB/BDIC/FSC.

_Source: FSAP Update report prepared by Marco Piñon Farah and David Grigorian (IMF), January 24, 2014._

### 6.      A major fiscal adjustment package aimed at consolidating fiscal position is a step in

### _cr1453 - 6.      A major fiscal adjustment package aimed at consolidating fiscal position is a step in

### Fiscal consolidation measures and implementation risks
- Authorities announced consolidation measures in August and more drastic measures in December 2013 after consultation with social partners.
- Measures included:
  - a reduction in the size of the civil service by about 15 percent in 2014,
  - wage cuts for elected and appointed officials,
  - a two year nominal wage freeze.
- Authorities indicated commitment to fiscal consolidation, but “full efforts should be deployed to address considerable implementation risks.”

### Medium-term growth outlook and external vulnerabilities
- Growth is projected to be sluggish over the medium term, reflecting:
  - moderate growth in Barbados’ traditional tourism markets, including Canada, the U.K. and the United States;
  - growing competition from other offshore financial centers;
  - appreciation of the real effective exchange rate in recent years.
- Recent performance: “In recent years, tourism arrivals and growth performance in Barbados have lagged behind those in other countries in the Caribbean.”
- Important further risks to the outlook:
  - A sharp increase in interest rates (driven, inter alia, by fiscal pressures or public debt sustainability concerns) that could raise sovereign risk premiums and adversely affect banks’ capital positions and credit quality.
  - A severe slowdown in Barbados’ main partners, the U.K., the United States, and Canada, with adverse effects on tourism, employment, borrowers’ repayment capacity, and loan quality.
  - A prolonged increase in world oil prices, feeding into domestic inflation, raising travel costs, and eroding price competitiveness.

### Overview of the financial sector
- Barbados has:
  - a well-developed onshore financial system and a large, segregated offshore financial system.
  - a well-developed insurance sector and a network of credit unions.
- Both onshore and offshore sectors are dominated by international institutions and are financially separated for prudential purposes.

### Financial system structure (key counts and asset shares)
- Onshore financial system composition:
  - six commercial banks (66 percent of total onshore financial system assets),
  - 12 trust and finance companies (Part 3 deposit-taking institutions; 9 percent),
  - 35 credit unions (9 percent),
  - 23 active insurance companies (17 percent).
- Table highlights (selected figures across 2008–H1 2013):
  - Domestic banks (foreign owned): 6 (2008), 6 (2009), 6 (2010), 7 (2011), 6 (2012), 6 (H1 2013).
  - Offshore banks: 50 (2008), 50 (2009), 50 (2010), 45 (2011), 44 (2012), 45 (H1 2013).
  - Banks assets (B$ millions): 11,500 (2008), 11,481 (2009), 10,993 (2010), 11,535 (2011), 11,878 (2012), 12,194 (H1 2013).
  - Offshore insurance assets (BD$ millions): 48,965.3 (2008), ... , 125,500 (2010), 133,400 (2011), 142,600 (2012), 140,000 (H1 2013).
  - Mutual funds (net assets): 782.3 (2008), 1,015 (2009), 1,061 (2010), 2,213 (2011), 2,470 (2012), 2,470 (H1 2013).
  - Share of the 3 largest banks, percent: 73 (2008), 70 (2009), 69 (2010), 71 (2011), 71 (2012), 78 (H1 2013).

### Onshore commercial banking sector: size and ownership
- Assets at 140 percent of GDP (onshore commercial banking sector).
- Ownership mix:
  - Three banks are subsidiaries/branches of large Canadian banking groups.
  - Two banks are from Trinidad and Tobago.
  - One bank is from the U.S.
- Major shareholders of all banks are investment grade.
- 2012 structural changes: First Citizens Bank acquired Butterfield Bank, and Republic Bank took full ownership of Barbados National Bank (BNB).

### Banks’ balance-sheet and sectoral exposure (selected indicators)
- Banks’ Financial Soundness Indicators (selected series):
  - Capital adequacy ratio: 16.1 (2008), 17.5 (2009), 17.1 (2010), 19.3 (2011), 21.0 (2012), 21.5 (H1 2013).
  - Core capital adequacy ratio (Tier-I capital): 13.9 (2008), 16.3 (2009), 15.7 (2010), 18.1 (2011), 19.5 (2012), 19.6 (H1 2013).
  - Nonperforming loans net of provisions to capital (percent): 5.0 (2008), 21.0 (2009), 11.2 (2010), 11.8 (2011), 23.0 (2012), 21.4 (H1 2013).
  - Loan to deposit ratio (percent): 64.0 (2008), 66.0 (2009), 67.0 (2010), 79.2 (2011), 73.6 (2012), 71.9 (H1 2013).
  - Liquid assets, percent of total assets: 9.0 (2008), 10.8 (2009), 11.5 (2010), 12.0 (2011), 14.6 (2012), 17.0 (H1 2013).
  - Total assets, annual growth rate: 3.9 (2008), -5.4 (2009), -1.5 (2010), -4.7 (2011), 15.8* (2012), 2.6 (H1 2013). (Values for 2012 include effect from merger between financial companies.)
  - Loans and advances growth rate (percent): 12.4 (2008), 0.9 (2009), 0.6 (2010), -0.5 (2011), 6.3* (2012), -3.6 (H1 2013).
  - Total mortgage loans, percent of loans and advances: 28.0 (2008), 29.0 (2009), 31.3 (2010), 33.7 (2011), 39.6 (2012), 41.2 (H1 2013).
  - Nonperforming loans, percent of total loans: 3.5 (2008), 7.9 (2009), 10.8 (2010), 11.1 (2011), 12.9 (2012), 13.9 (H1 2013).
  - Provisions to nonperforming loans, percent of NPL: 60.1 (2008), 43.6 (2009), 37.4 (2010), 32.9 (2011), 33.9 (2012), 36.2 (H1 2013).
  - Return on Assets (ROA): 1.4 (2008), 1.6 (2009), 1.2 (2010), 1.0 (2011), 1.1 (2012), 1.0 (H1 2013).
  - Return on equity (ROE): 17.3 (2008), 15.6 (2009), 11.3 (2010), 6.1 (2011), 4.9 (2012), 3.8 (H1 2013).
- NPLs concentration and provisioning:
  - NPL ratio rose from 3½ percent in 2008 to nearly 14 percent in June 2013.
  - NPLs are concentrated in hotels and restaurants, personal loans, and commercial real estate.
  - Provisions declined from 63 percent to 36 percent of NPLs during the same period.
  - Banks’ ROA deteriorated from 1½ percent in 2008 to 1 percent in June 2013, reflecting reduced share of loans in assets, increased provisioning costs, and lower spread between average lending and deposit rates.

### Credit unions: role, structure, and vulnerabilities
- Coverage and membership:
  - 76 percent of the economically active population are members.
  - Number of institutions: 35 (2008–Q2 2013).
  - Number of members: 148,604 (2008), 129,476 (2009), 146,162 (2010), 157,198 (2011), 148,744 (2012), 150,527 (Q1 2013), 157,921 (Q2 2013).
- Asset and loan shares:
  - Assets (BD$ million): 1,202 (2008), 1,312 (2009), 1,439 (2010), 1,513 (2011), 1,579 (2012), 1,617 (Q1 2013), 1,639 (Q2 2013).
  - Loans (BD$ million): 965 (2008), 1,042 (2009), 1,132 (2010), 1,206 (2011), 1,245 (2012), 1,239 (Q1 2013), 1,246 (Q2 2013).
  - The two largest credit unions combined account for 73 percent of total assets, 78 percent of loans, and 75 percent of members.
- Financial soundness indicators:
  - Reserves to total Liabilities (percent): 10.3 (2008), 10.5 (2009), 10.4 (2010), 10.7 (2011), 11.4 (2012), 11.5 (Q1 2013), 11.4 (Q2 2013).
  - CAR: 8.8 (2008), 9.2 (2009), 9.2 (2010), 9.4 (2011), 11.6 (2012), 11.2 (Q1 2013), 11.2 (Q2 2013).
  - Return on Equity: 21.5 (2008), 16.9 (2009), 12.7 (2010), 12.4 (2011), 13.1 (2012), 2.3 (Q1 2013), 3.1 (Q2 2013).
  - Nonperforming loans, percent of total loans: 5.3 (2008), 6.5 (2009), 7.2 (2010), 6.9 (2011), 8.2 (2012), 8.3 (Q1 2013), 8.2 (Q2 2013).
- Prudential concerns:
  - Most institutions meet capital requirements, CAR at 11¼ percent in June 2013, up from 8¾ percent at end-2008, above the 10 percent regulatory minimum.
  - Prudential norms are less strict than for banks: loan classification and provisioning are materially less strict.
  - Unrecoverable loans are not adequately provisioned and rarely written off; collateral values are not updated.
  - With the exception of the largest credit union, they reclassify loans as performing immediately after restructurings.
  - A few small entities do not meet the minimum CAR.

### Insurance sector: structure and challenges
- Sector composition:
  - 23 active companies: six providing life and related health insurance policies, 16 offering general insurance, and one conducting both businesses.
- Concentration:
  - After collapse of Colonial Life Insurance Company (CLICO) in 2009, the second largest insurer accounts for 83 percent of the total assets of the life insurance industry.
- Selected indicators (domestic and offshore):
  - General insurance gross written premia (BD$ million): 478.7 (2008), ... , 515.2, 499.5, 512.6, 117.2 (Q1 2013), 121.5 (Q2 2013).
  - General insurance investment assets (BD$ million): 266.5 (2008), ... , 675.6, 718.6, 726.3, 725.1 (Q1 2013), 725.7 (Q2 2013).
  - Life insurance gross written premia (BD$ million): 135.5 (2008), ... , 170.3, 163.7, 190.8, 43.8 (Q1 2013), 39.0 (Q2 2013).
  - Life insurance investment assets (BD$ million): 868.9 (2008), ... , 1,387.0, 1,345.0, 1,391.0, 1,434.0 (Q1 2013), 1,431.0 (Q2 2013).
  - Offshore sector: Number of active companies: ... , 223 (2010), 225 (2011), 223 (2012), 221 (Q1 2013). Net premiums (BD$ billion): 9.0 (2008), ... , 31.2, 56.2, 61.3, 16.8 (Q1 2013), 16.8 (Q2 2013). Assets (BD$ billion): 49.0 (2008), ... , 125.5, 133.4, 142.6, 142.7 (Q1 2013), 140.4 (Q2 2013).
- Key challenges:
  - Decline in premiums (net of reinsurance ceded) of life insurers due to weak regional economy and weakened public confidence.
  - Difficulty in assessing soundness of general insurers owing to absence of a robust liability valuation framework.
  - Increased risk for an insurance-based group due to expansion in non-insurance businesses and increased holdings of Caribbean government debt securities.

### Offshore financial sector: scale, segregation, and risks
- Offshore sector composition and role:
  - Comprises banks, insurance companies, and International Business Companies (IBCs).
  - Most institutions have parent companies in Canada and the United States.
  - Offshore financial transactions are restricted to non-residents; offshore banks do not take resident deposits and mostly perform treasury and trust management operations.
- Competitive strengths and challenges:
  - Attractive environment features: legal framework for tax incentives, low corporate taxation, double tax treaties, relatively few regulatory restrictions, quality professional services, reputation as a stable financial center.
  - Challenges: maintaining competitive edge vs. other jurisdictions, especially in efficiency and timeliness of procedures.
- Scale and concentration:
  - Barbados has the third largest offshore banking center in the Caribbean and the tenth largest globally.
  - Assets of the 45 offshore banks licensed in Barbados amount to BD $89 billion, or over 1,000 percent of GDP.
  - The four largest banks hold 74 percent of the assets of the sector, while the twelve large banks account for 91½ percent of the total.
  - By end-2012, there were 222 offshore captive insurers and 39 others (including 16 holding companies and 23 management companies).
- Legal segregation and main risk:
  - IFSA provisions aim to establish an effective “Chinese wall” by restricting offshore institutions’ financial services to non-residents.
  - Existing ties between on- and offshore sectors mainly through common parent institutions and in some cases shared infrastructure.
  - Offshore banks can lend to non-residents for projects in Barbados, but such transactions require CBB approval.
  - “As a result the main risk to the onshore sector appears to be reputational.”
  - The sector contributes 20 percent of tax revenue (as of 2010), of which 11 percent originated in offshore banks. Employment in offshore banks represents 1 percent of the labor force (as of 2009). Some 3,945 IBCs are licensed in Barbados.

*Source: IMF staff report text (extracted content).*

### 22.      Financial institutions in Barbados are interconnected through both financial and

### Financial institutions in Barbados are interconnected through both financial and ownership linkages inside and outside the country.

### Interconnectedness and ownership
- Financial institutions are interconnected through both financial and ownership linkages inside and outside the country.
- Domestic financial linkages are relatively limited but growing as the system becomes more sophisticated.
- External linkages can be considerable in some cases.
- Common ownership linkages exist among both domestic and foreign-owned institutions.
- Example: Two Barbados-based financial conglomerates have substantial external linkages:
  - One entity: largest insurer in the Caribbean with operations in 22 countries (including the U.S. and Europe); group assets equivalent to about 120 percent of GDP of Barbados; operations include life and non-life insurance companies, commercial banks, asset management, and broker dealers.
  - The other entity: owns a bank representing 35 percent of the Barbadian banking sector (in addition to owning an offshore bank and a Part 3 bank in Barbados); conducts commercial banking activities in 17 countries in the Caribbean via subsidiaries.

### Amplification of shocks and past episodes
- Even small linkages can amplify shocks and create second-round effects (e.g., sovereign shock affecting institutions holding government bonds and via inter-sectoral exposure).
- Reputational contagion can be significant (example cited: collapse of CLICO in 2009 spreading from a troubled parent to a healthy subsidiary).

### Stress testing framework (2013–17)
- Projections and macro stress tests assessed resilience of the banking system under the baseline and four adverse scenarios during 2013–17.
- Baseline: assesses likely evolution of banks’ key financial indicators under the current outlook.
- Adverse scenarios: illustrate impact of negative shocks using econometric, statistical, and balance sheet methods; shock calibration based on Barbados data and informed by past FSAPs and research (e.g., Hardy and Schmieder, 2013).
- Medium and severe shock magnitudes roughly correspond to one and two standard deviations of historical data for the last 11 years, respectively, and are in line with shocks experienced during the 2007-09 crisis.

### Baseline projections (2017)
- System NPL ratio increases to 19½ percent by 2017 from 13.8 percent (current level).
- Aggregate CAR declines to 10.1 percent, from 16.6 percent at end-June 2013.
- All institutions see capitalization decline markedly under the baseline; one (a foreign branch) would drop below the (notional) requirement.
- These estimates assume provisioning the existing and new NPLs at a cumulative rate of 50 percent.

### Adverse scenarios — key outcomes (severe shocks)
- Tourism shock (severe):
  - System NPL ratio: 26 percent.
  - CARs of two banks (39 percent of total assets) fall below the regulatory benchmark (8 percent).
- Oil price shock (severe):
  - System NPL ratio: 24 percent.
  - One bank’s CAR (21 percent of total assets) falls below the requirement.
- Geopolitical tensions (severe; combines oil and tourism shocks):
  - System NPL ratio: 33 percent.
  - Three banks (59 percent of total assets) become undercapitalized by some 4.8 percent of GDP.
  - Excluding the foreign branch, recapitalization needs drop to 0.7 percent of GDP.
- Sovereign risk shock (severe):
  - Sharp increase in sovereign risk premium leading to higher interest rates, lower economic value of bond holdings, and higher NPLs.
  - Two banks (39 percent of total assets) fall below the capital requirement.

### Macro stress test table highlights (maximum deterioration over 2013–17)
- Initial position (June 2013): Banking System NPL Ratio 13.8; Banking System CAR 16.6.
- Baseline (2017): Banking System NPL Ratio 19.6; Banking System CAR 10.1; Potential Recapitalization Needs 2.1 percent of GDP.
- Tourism severe: NPL Ratio 26.5; CAR 5.7; Potential Recapitalization Needs 3.2 percent of GDP.
- Oil price severe: NPL Ratio 24.0; CAR 6.9; Potential Recapitalization Needs 2.7 percent of GDP.
- Geopolitical severe: NPL Ratio 33.4; CAR 2.5; Potential Recapitalization Needs 4.8 percent of GDP (0.7 percent of GDP excluding branches).
- Sovereign severe: NPL Ratio 27.1; CAR 3.9; Potential Recapitalization Needs 3.6 percent of GDP.
- Note: Existing and new NPLs are provisioned at 50 percent; 25 and 30 percent of special mention loans transition to NPLs in the medium and severe shock scenarios, respectively.

### Sensitivity and bottom-up tests
- Migration of adversely classified loans by one category could drive the CAR of the foreign branch below the regulatory limit; a severe downgrade of all NPLs to loss would produce fragilities in two other banks; three banks (59 percent of total assets) could fail capital requirement under severe downgrade.
- Large corporate default episodes:
  - Most banks could withstand plausible defaults; foreign branch vulnerable if its largest borrower defaults.
  - Defaults of the three largest exposures would lower system CAR by about 5 percentage points, but most banks would remain above the required minimum.
- Sectoral NPL doubling:
  - Doubling of NPLs in tourism, construction and real estate, or households would lower system CAR by about 4 percentage points (assuming a 50 percent provisioning rate).
- Interest rate and currency risks:
  - Interest rate shifts of up to 500 bps have little impact on system CAR due to limited maturity mismatches.
  - Currency risk limited given tight foreign exchange controls and small net open positions; gross exposure to unhedged borrowers is limited.
  - Regression analysis indicates loan quality is indirectly sensitive to shifts in interest rates.
- Credit unions:
  - Two largest credit unions (representing approximately 75 percent of total assets) have less solid capital buffers; their CARs would fall below requirement after a 50 percent increase in NPLs (tests used a 10 percent requirement on the unweighted capital to asset ratio).

### Liquidity risk
- Liquidity tests simulated cumulative outflows up to 25 percent of total deposits; banks could use “core” liquid assets (cash, reserves, and T-bills) or “broad” liquid assets (long-term government bonds after a 25 percent haircut).
- Findings:
  - Most banks could withstand medium liquidity shocks; severe deposit outflows would strain liquidity buffers.
  - Banks’ liquidity buffers can absorb outflows up to 15 percent of total deposits and remain above the reserve requirement.
  - If banks use “broad” liquid assets, they will meet outflows and still remain above the 15 percent reserve requirement.
  - If allowed to use only “core” liquid assets, four banks would drop below the requirement.
  - System liquidity ratio would drop below 15 percent under an outflow of 25 percent of total deposits.
  - The two credit unions’ liquidity buffers would be insufficient for medium-sized shocks: a 15 percent outflow reduces average liquidity ratio to 7 percent with both below the 15 percent benchmark; a 25 percent outflow would drain their liquid assets entirely.

### Sovereign risk — bottom-up bank-level tests
- Simulated revaluation of domestic government bond holdings for increases in the sovereign risk premium up to 500 bps.
- Impact:
  - System CAR would be driven down by about 2½ percentage points, to 13¾ percent.
  - All banks remain above the regulatory minimum due to relatively short maturity of bond holdings.
- Bottom-up sensitivity tests by five onshore banks confirm top-down results: risks concentrated in severe credit shocks and large exposures; market and liquidity risks more limited.

### Mitigation of risk — Regulatory and supervisory framework
- Since the 2008 FSAP Update, Barbados improved legal, regulatory and supervisory frameworks across financial sectors; significant scope for further improvement remains.

Banking sector — supervisory capacity and gaps
- Bank Supervision Department (BSD) of the CBB supervises offshore and onshore commercial banks and Part 3 institutions; CBB is self-funded and operationally independent.
- Current BSD resources: 34 banking supervision professionals supervising 19 onshore and 46 offshore entities.
- Transition to Basel II planned by 2015 may require higher headcount.
- CBB has sufficient discretionary powers to address weaknesses; has issued or updated guidelines on operational risk management, liquidity, AML/CFT, credit risk, corporate governance, and market risk capital.
- CBB conducts consolidated supervision and has expanded information sharing; participates in supervisory colleges and signed an MOU with the Canadian supervisor in 2009.
- Recommended legal and supervisory improvements:
  - Approval of amendments to the CBB Act and the FIA (expected by end-2013) important to provide CBB explicit powers to issue regulations and give guidelines force of law, broaden scope of supervisory powers, impose specific target capital ratios and administrative penalties, and expand remedial actions.
  - Strengthen CBB independence: specify exact conditions for dismissal/removal of the Governor in the CBB Act; remove provisions that empower the Minister of Finance to overrule CBB policies or corrective measures (FIA §50 (4) and CBB Act §49 (1)) to assuage independence concerns.
  - CBB should take more forceful enforcement actions in cases of serious deficiencies or breaches beyond moral suasion; current practice relies on corrective action plans but stronger measures advisable in serious breaches.
  - Supervision of AML/CFT compliance should be strengthened: not all offshore banks have been examined; urgent need to inspect offshore banks from higher-risk countries not inspected over the past five years; increase number of onsite examinations in onshore banks (since 2008, only 2 onshore banks out of total 6 visited for AML/CFT).
  - Ensure ML/TF risk issues are adequately integrated into the risk-based supervisory framework.
  - Review CBB loan provisioning guidelines and develop a real estate price index; CBB provisioning requirements lower than in comparable jurisdictions and do not ensure timely write-offs; review real estate values to determine net realizable value of collateral.

The Financial Services Commission (FSC)
- FSC regulates and supervises insurance and pensions, credit union, and securities sectors; functions previously discharged by Supervisor of Insurance and Pensions, Co-operatives Department, and Securities Commission.
- FSC governance: seven-person Commission appointed by the Minister of Finance; members appointed for fixed three-year terms (or remainder of a term); members may be reappointed and may be dismissed by the Minister for good cause.
- FSC is managed by a Chief Executive Officer selected by the Commission and approved by the Minister.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1453.pdf*

### 46.      The FSC Act provides the FSC with appropriate investigative and enforcement powers

### _cr1453 - 46.      The FSC Act provides the FSC with appropriate investigative and enforcement powers

### Supervisory powers and independence
- The FSC Act provides the FSC with appropriate investigative and enforcement powers and has improved supervisory independence.
- The Act provides the FSC with budgetary independence and limits ministerial authority over supervisory functions, although room for improvement remains.
- The Act offers powers for onsite investigation and intervention, to reorganize or wind-up an insurer or credit union, guarantees the enforceability of guidelines through compliance directives, and provides current staff and agents with general protection in the good faith performance of their duties.
- The FSC Act includes a mandate to promote competition in the financial services sector; this mandate conflicts with its stability objective and should be removed.
- Ministerial roles: Ministerial roles are limited to those in the FSC Act. The role of the minister in the Insurance Act and the Exempt Insurance Act have been superseded by the FSC (FSC Act §57). However, the FSC may only adopt a binding regulation with the approval of the Minister (FSC Act §54). The Minister may, after consultation with the FSC Chairman, provide general policy direction to the Commission, which it must follow (FSC Act §30). The Minister may set limits on hiring and on salaries and retain final approval authority for personnel appointed to senior positions.

### Onsite supervision, structure, and capacity
- Current FSC structure:
  - Insurance and Pensions: 15 staff
  - Credit Unions: four staff
  - Securities: four staff
  - Examinations Division: six staff
  - Policy & Research: two staff
- The Examinations Division does not have specialists assigned to specific sectors and conducts onsite supervision across all sectors under the FSC’s purview.
- Onsite supervisors are often assisted by specialized offsite supervisors during onsite examinations to offset lack of specialization.
- As a relatively new agency, the FSC’s supervisory effectiveness remains largely untested; further capacity building is necessary.
- Progress noted: issuance of various guidelines across all sectors.
- Capacity gaps and challenges:
  - Developing staff capacity and internal processes.
  - Building a clear supervisory approach for regulated entities.
  - Heterogeneity and vulnerability of the credit union sector.
  - Need for significantly more sophisticated regulatory requirements in the insurance sector.
  - Increasingly complex cross-border linkages of domestic and international insurance groups.
- Recommendation: The FSC should expand the information it provides to the public by making all applicable regulations available in addition to laws and recent Guidelines, and improve publication of statistical data.

### Insurance sector — findings and recommendations
- The regulatory and supervisory framework for the insurance sector has improved with the creation of the FSC, which oversees onshore and offshore insurers and reinsurers, and insurance distributors.
- The FSC Act allows the FSC to determine reporting requirements, request information, and carry out offsite and onsite inspections, enhancing independence and capacity of the insurance supervisor.
- The Act and new guidelines have eliminated important regulatory gaps between offshore and onshore sectors.
- Remaining needs:
  - Hiring and training of staff.
  - Further elaboration of practical application of high-level guidelines (including specifying when and what remedial actions the FSC should take).
  - Institutionalize the new onsite inspection program and take appropriate enforcement actions.
- Prudential standards gaps:
  - No specified actuarial standard leading to inconsistent valuations among insurers.
  - Current capital requirements are too crude to capture relevant risks (credit, market, underwriting).
  - Risk management requirements are not comprehensive nor proportionate to risks such as group and catastrophic risks.
- Recommendations:
  - Establish robust and enforceable valuation standards for technical provisions.
  - Introduce risk-based capital requirements.
  - Expand risk management requirements to ensure the industry manages its material risks.
  - Implement group supervision and crisis management given regionally active and systemically relevant groups.
  - Enhance regulatory framework and supervisory practice for group-wide solvency assessment, risk management and governance, and develop effective group resolution plans.
- Progress note: FSC is in the process of hiring and training new staff, improving reporting frameworks and requirements, and introducing risk-based supervision and onsite examinations from 2012 including the largest insurance group in Barbados.

### Credit unions — findings and recommendations
- Recent issuance of guidelines (governance, market risk, credit risk) is an important step, but these guidelines are general and need further specification.
- Loan loss provisioning guideline is still pending.
- Recommendations:
  - Revise guidelines for loan classification, monitoring and reporting (especially for restructured loans).
  - Define rules to write off loans more precisely.
  - Harmonize classification of liquidity, equity and other accounts.
  - Consider issuing a dedicated Credit Union Act to avoid inconsistencies between different Acts.
- Onsite supervision:
  - Only two onsite inspections have been carried out since FSC inception in 2011; both were in the second largest credit union.
  - There is currently no schedule for regular onsite inspections of credit unions.
  - FSC has introduced additional reports and increased reporting frequency for the two largest credit unions and some medium-sized credit unions.
  - Weaknesses in oversight, particularly of larger entities, could represent vulnerability in the context of ML/FT risks.
- Role of auditors:
  - Auditors assigned an auxiliary role, particularly for onsite supervision of small and medium-sized credit unions.
  - FSC intervenes if irregularities are reported and has issued directives to five small credit unions.
  - Audit reports revealed problems: insufficient liquidity or capital, high delinquency, failure to convene annual general meetings.
  - FSC suspended the license of one entity and communicated remedial measures to four others.
  - Auditing firms must be accredited yearly at the FSC, allowing close monitoring.
- Sector heterogeneity and supervisory approach:
  - Recommendation to adopt a two-tiered approach:
    - Two large credit unions merit “bank-like” supervision in frequency and detail, requiring strengthening of onsite supervision.
    - Medium- and small-sized entities to receive less frequent onsite supervision with greater reliance on offsite reports and qualified auditor reports.

### Financial safety nets and crisis preparedness — overview
- Recovery and Resolution Plans (RRPs) for the banking sector and other systemically important sectors (e.g., insurance) are in the pipeline; plans should identify core functions and critical shared services and involve home and significant host authorities.
- Need to rationalize and ensure consistency among various laws addressing different parts of the financial sector; differing provisions (e.g., legal protection in Deposit Insurance, Central Bank and FSC Acts) could create gaps in legal protection for safety-net actors during a crisis.
- Cross-border cooperation among regulators and deposit insurers remains a work in progress:
  - Ongoing discussions about a Caribbean Region Financial Crisis Management Plan for banking but no agreement reached.
  - No advanced planning for a crisis in the nonbank sector.
  - Discussions on a regional crisis plan have not included Canadian authorities, who would be important in any regional crisis response.
  - There is a regional group of deposit insurers, but no crisis management plan has been drafted for the group.
  - The BDIC has not entered into sharing agreements with any other deposit insurer to allow coordinated communication in the event of a regional crisis.

### Deposit insurance and consumer protection
- BDIC characteristics:
  - BDIC is a paybox-plus with responsibility of paying depositors in winding-up and liquidating or managing member institutions under the FIA.
  - BDIC formed in 2006 and began operations in 2007 and has a fund of BD$38.8 million.
  - There are thirteen members of the Fund including six banks and seven deposit taking NBFIs.
  - Annual premiums are 0.05 percent of average insured deposits.
  - BDIC is required to minimize its exposure to loss but does not have power to provide financial support for a purchase and assumption transaction.
  - Back-up funding is to be borrowed from the CBB or the government, as per the Deposit Insurance Act (DIA), although the high level of public debt now leaves in question the government’s ability to support the BDIC and the financial sector.
  - At its current level the fund is not sufficient to pay insured depositors at any of its member institutions.
- Recommendations to strengthen deposit insurance framework:
  - BDIC Board needs to adopt a Strategic Plan to guide operations and decision-making.
  - Legal framework for payout procedure needs strengthening to enable prompt payouts of insured depositors.
  - Need for explicit legal protection for persons acting on behalf of the deposit insurer, including former employees.

### Policyholder protection and credit unions access
- Consideration should be given to establishing a policyholder protection scheme (PPS) for insurance:
  - A privately-financed PPS could secure continuity of insurance coverage and payments by transferring policies to a bridge insurer or third party and compensate policyholders in liquidation.
  - Establishing a PPS requires discussion on governance, coverage level, funding arrangements, and position within the resolution framework.
- Credit unions currently do not have deposit insurance or access to central bank liquidity.
  - Ongoing effort by credit unions to join the deposit insurance system; authorities and staff view such joining should follow establishment of a robust regulatory framework.

### Resolution framework — banking, credit unions, insurers
- Banking sector:
  - Bank resolution regime contemplates going-concern and gone-concern procedures under the FIA and DIA, including seizure procedure and winding-up with BDIC as liquidator.
  - Suggested legal improvements:
    - Limit judicial remedy for aggrieved parties to monetary compensation and establish ex-post compensation procedures with a “no worse off than in liquidation” safeguard; under FIA courts can reverse CBB’s seizure, set aside MoF license revocation, and alter re-organization plans.
    - Strengthen FIA to provide powers for recapitalization under seizure (including cancellation of existing shares and overriding pre-emptive rights), for transfer of part of banks’ business (current law provides only for amalgamation or merger), and for establishment of bridge banks.
- Credit unions:
  - Resolution procedures addressed under the FSC Act; FSC can revoke licenses, seize management and control, reorganize or wind-up institutions.
  - Any person aggrieved by an FSC decision can appeal to an administrative tribunal and then to the court of appeals; either can reverse the FSC’s decision.
- Insurance companies:
  - Existing legislation provides basic elements of a resolution regime for systemically significant insurers but needs to address bridge insurer terms and public funding recovery.
  - Gaps:
    - Laws do not stipulate terms and conditions for establishing a bridge insurer (including time limit).
    - Laws are silent on the power and process for recovery from the insurance industry of any public funding used to resolve an insurer.

### Cross-border coordination of resolution
- Within the Caribbean:
  - Legal framework and close communication among Caribbean authorities provide a solid basis for cross-border coordination (example: coordination arrangements for resolution of CLICO (Barbados) involved regional advisory committee, appointment of same office holders in different jurisdictions, and foreign court recognition of Barbadian court decisions).
- With non-Caribbean jurisdictions:
  - Coordination with non-Caribbean jurisdictions for resolution planning and crisis management is yet to be established.
  - CBB participates in supervisory colleges regarding Canadian banks operating in Barbados, but coordination with Canadian authorities focuses on supervisory issues and Barbados has not been involved in the RRP for Canadian banks.
  - Insufficient coordination outside the Caribbean for insurance companies with extra-regional operations.
- Recommendation:
  - Formalize modalities of coordination for resolution planning and crisis management, including with non-Caribbean jurisdictions, in the Financial Stability Management Plan (FSMP).
  - FSMP should spell out possible coordination options with the Office of the Superintendent of Financial Institutions of Canada and Canada Deposit Insurance Corporation for resolution of Canadian banks.
  - FSMP for insurance could formalize procedures for cross-border coordination for resolution.

### Appendix I: Macro scenarios for stress testing
- Baseline:
  - Based on the September 2013 World Economic Outlook (WEO).
  - Projects a domestic contraction during 2013–15 between 0.8-1.8 percent annually, and a sluggish recovery in 2016.
  - Inflation is forecast to decline to 2½ percent in 2013 and to remain broadly in that range through the end of the period.
  - The T-bill rate is expected to stay between 3.4–3.7 percent.
- Four negative scenarios (broadly follow risks in the risk-assessment matrix):
  - Tourism scenario:
    - Permanent decline in tourism revenues of 15 percent (medium shock) and 30 percent (severe shock) relative to the baseline.
    - The drop in output is between 3.4–7.3 percent more severe than in the baseline; inflation and interest rates remain the same.
  - Oil price scenario:
    - Oil prices increase by 25 percent (medium shock) and 50 percent (severe shock).
    - Inflation is 1.6–2½ percent higher and GDP growth is by 0.4–0.8 percent lower than in the baseline.
    - The shock pushes up inflation and interest rates, hurting competitiveness and tourism.
  - Geopolitical risks scenario:
    - Deterioration in international oil markets triggered by geopolitical tensions; sharp increase in oil prices leads to a global slowdown, pushing up domestic prices and hurting tourism and income.
    - This combines shocks to tourism and oil prices and is the most adverse scenario.
  - Sovereign risk scenario:
    - Sharp increase in the sovereign risk premium of 350–500 bps relative to the baseline with negative impact on the economic value of banks’ sovereign bond holdings and credit quality.

*International Monetary Fund — Barbados staff report excerpt*

### 73.      The impact of the scenarios on banks’ NPLs and capital was assessed using

### _cr1453 - 73.      The impact of the scenarios on banks’ NPLs and capital was assessed using

### Stress test methodology
- The impact of the scenarios on banks’ NPLs and capital was assessed using econometric, statistical and balance sheet methods.
- Existing and projected NPLs were provisioned at 50 percent.
- Tests assumed that between 30–35 percent of special mention loans transition to NPLs in the medium and adverse scenarios, respectively.
- The impact of the tourism shock on output was gauged using econometric and statistical analysis performed by the mission.

### Immediate macro and sectoral impacts (scenario assumptions and outcomes)
- Shocks result in lower GDP growth in 2014, which afterward reverts to the rates in the baseline.
- Tourism revenues and GDP do not catch up to the baseline levels over the stress test horizon.

### Appendix II — Follow-Up on Key Recommendations of the 2008 FSAP (selected progress highlights)
- Banking
  - Consolidated supervision guidelines have been issued and implemented; MOUs signed with key regulators and active collaboration is taking place.
  - Credit risk management guidelines have been implemented; asset classification/provisioning procedures for inspectors adopted. Further enhancements recommended in CP18, including updating the provisioning regulation.
  - Progress underway on large exposure regulation; CBB Guideline on large exposure limits is still in draft and contains an aggregated limit on the sum of large exposures exceeding 600 percent.
  - Barbados planning transition towards Basel II by 2015 with a submitted Basel II Implementation Roadmap (3-phased approach).
- Financial Services Commission (FSC)
  - Regulatory and supervisory framework improved after establishment of the FSC.
- Insurance
  - Legally binding guidelines for corporate governance, market conduct, risk management, and valuation of assets have been issued and implemented; liability valuation and solvency requirements for life insurers have not yet progressed.
  - Quarterly reporting format with more granular financial information issued; late submission to be enforced by monetary penalty.
  - Negotiations on MOUs with regional supervisors ongoing; FSC proposed amending the Act to enhance information exchange.
- Credit Unions
  - Increase frequency of joint on-site examinations: Not done.
  - Consider issuing a specialized Credit Union Law: Not done, although some progress in FSC Act and issuance of guidelines.
- Securities Markets
  - FSC law empowers issuance of guidelines/directives, inspections, information demands, and information sharing.
  - FSC plans to begin on-site inspections in 2013; Guideline requires internal control programs.
  - Mutual funds and public companies must publicly disclose material events within 24 hours.
  - FSC provides penalties for violations, including fines up to $100,000.
- Deposit Insurance Scheme
  - Early warning and prompt corrective action systems provided by the Intervention Policy Framework; recommendation that license suspension be a Stage 4 measure rather than Stage 3.
  - No public awareness strategy in place for the deposit insurer.
- Financial Stability Report
  - A model for credit risk has been developed and is referenced in the financial stability report.
- Other
  - Revisit the NIS’ investment strategy: No progress.

### Appendix III — Detailed Recommendations of FSAP Update (selected recommendations, term, priority, institution)
- Bank Supervision and Regulation (selected items)
  - Amend credit guidelines to include managing risk of borrowers’ unhedged foreign exchange exposures; issue the Large Exposure Guideline — ST, H, CBB.
  - Review and update/adopt homogenous loan classification approach; amend the substandard definition in the 1998 classification regulation; revise provisioning requirements; determine haircuts to real estate collateral — ST, H, CBB.
  - Include in the CBB Act a provision on conditions for removal of the Governor; revise MoF powers to give written orders or overrule corrective measures — ST, H, CBB/MoF.
  - Amend the FIA and the CBB Act to further empower the CBB — ST, H, CBB/MoF.
  - Increase the number of on-site examinations in on-shore banks — ST, H, CBB.
  - Issue the Large Exposure guideline, including aggregated limit on the sum of large exposures exceeding 600 percent — ST, H, CBB.
- Insurance Supervision (selected items)
  - Develop an internal procedure manual for a financial crisis and require insurers with cross-border activities to establish contingency plans — ST, M, FSC.
  - Establish a PPS for insurance — ST, M, FSC.
  - Amend the limitation of FSC Act with regard to information sharing — ST, H, FSC.
  - Accelerate implementation of risk-based capital adequacy requirements covering all insurers and insurance groups and promote ERM frameworks — MT, H, FSC.
- Access to Finance and Credit Unions (selected items)
  - Consolidate risk-based dual approach to on-site credit union supervision — ST, H, FSC.
  - Issue guidelines for classification, monitoring and reporting of NPLs, restructured loans, and write-offs — ST, H, FSC.
  - Consider establishing a credit information function — MT, H, CBB/FSC.
- Safety Net and Crisis Management (selected items)
  - Develop and adopt a Strategic Plan for BDIC — MT, H, BDIC.
  - Enter into agreements for back-up funding with the Central Bank and the MoF — ST, H, BDIC.
  - Develop a target fund ratio for the deposit insurance fund — MT, H, BDIC.
- Capital Market Development (selected items)
  - Require mutual funds to provide the FSC with periodic information on portfolio holdings and expand information to investors on fund performance and core holdings — ST, H, FSC.
  - Enable public electronic access to listed company annual reports and other filings — ST, H, FSC.
- Macroprudential Policy (selected items)
  - Develop a real estate price index — MT, H, CBB.
  - Clarify mandate and tools of the FOMC — MT, H, CBB/BDIC/FSC.

### Appendix IV — Risk Assessment Matrix (selected threats, likelihood, and expected impact)
- A severe slowdown in tourism triggered by a protracted recession in Barbados’ main partners (the United Kingdom, the United States and Canada).
  - Likelihood: MEDIUM/HIGH
  - Expected Impact: HIGH
  - Key points:
    - Barbados’ growth and employment prospects are heavily dependent on tourism revenues, which will be depressed in a prolonged global recession.
    - As the U.K., U.S., and Canada account for the bulk of tourist arrivals, a prolonged slowdown in these countries would have a considerable impact on tourism and employment in Barbados and lead to a deterioration in borrowers’ repayment capacity and loan quality.
- A global oil shock triggered by geopolitical events.
  - Likelihood: LOW
  - Expected Impact: MEDIUM
  - Key points:
    - Developments in the Middle East could sharply reduce global oil supply, leading to a price of $140 per barrel.
    - Barbados is highly dependent on oil imports; higher oil prices will feed into domestic inflation and weaken the external balances and growth.
    - Tourism and growth would be affected through increased travel costs, further erosion of price competitiveness, and reduced consumer confidence of major partners.
- Fiscal pressures and downside risks to public debt.
  - Likelihood: MEDIUM
  - Expected Impact: MEDIUM
  - Key points:
    - Government debt is high at about 125 percent of GDP, and the central government runs a deficit of nearly 8 percent of GDP.
    - Government debt is held mainly locally by the domestic banking sector and the NIS; higher sovereign risk premiums would depress market value of government securities and adversely affect banks’ capital positions.
    - Rollover risk is mitigated by favorable funding structure: domestic debt accounts for about 70 percent of public debt, mostly at fixed rates. External debt is mostly long term and with a favorable amortization profile.
- A devaluation triggered by increased competitiveness pressures or the need to reduce sovereign debt overhang.
  - Likelihood: MEDIUM
  - Expected Impact: MEDIUM
  - Key points:
    - Reduced price competitiveness would depress tourism revenues and lead to devaluation pressures.
    - Balance sheet impact on banking system mitigated by relatively low foreign currency exposure; indirect effects via increased sovereign risk and reduced repayment capacity of private borrowers.
- Regional contagion with implications for both assets and liabilities of the financial sector.
  - Likelihood: MEDIUM
  - Expected Impact: MEDIUM
  - Key points:
    - Regional developments may result in investors leaving Caribbean region, resulting in asset price drops and large-scale deposit withdrawals in Barbados.
    - A confidence-induced simultaneous impact on asset prices and a deposit run may have sizable implications for the banking sector.

*Source: _cr1453 - 73. The impact of the scenarios on banks’ NPLs and capital was assessed using (PDF).*

### Appendix V: Offshore Sector: Tax Benefits and Regulatory

### Appendix V: Offshore Sector: Tax Benefits and Regulatory Threats

### Offshore sector tax framework and exemptions
- The offshore sector is important for Barbados, supported by tax exemptions, reduced local taxes, and tax treaties with major jurisdictions. Most offshore entities are affiliated with parent companies domiciled in Canada or the United States.
- Offshore banks and companies pay corporate taxes on profits from 0.25 percent to 2.5 percent of taxable income.
- Exemptions include income tax, capital gains tax or other direct taxes, withholding taxes on dividends, interest, royalties and fees, and foreign exchange controls.
- A foreign tax credit for taxes paid outside Barbados can be used to reduce the total tax payable to a minimum of 0.5 percent.
- Offshore companies are exempted from taxes and import duties on materials, machinery, plant and equipment used by the business.
- Offshore insurers:
  - EICs are fully exempt from taxes for the first 15 years of operation. After that, they are taxed at a rate of 2 percent on the first $125,000 of taxable income with any amounts earned above that amount remaining exempt.
  - QICs are taxed on all income at the corporate tax rate, but receive a foreign income tax rebate that effectively reduces the overall tax rate to around 1.75 percent of all income.
  - There are no withholding tax on dividends, interest or management fees. Capital gains are also tax exempt.

### Tax treaties, TIEAs, and international challenges
- Barbados currently has 33 double taxation agreements (DTAs), including 10 with the CARICOM area countries; several agreements with other countries are waiting for either ratification or signature.
- Barbados has three tax information exchange agreements (TIEAs); others are waiting for either ratification or signature.
- DTAs provide relief from double taxation through tax credits in Barbados or exemptions elsewhere on income taxed in Barbados.
- Under Canadian tax law, countries signing TIEAs with Canada receive a similar tax benefit. Canada first signed a TIEA in 2009.
- Jurisdictions offering low-tax or no-tax regimes that do not have DTAs with Canada but have signed TIEAs (e.g., the Bahamas, Bermuda, and the Cayman Islands) could pose a direct challenge to Barbados as potential locations for Canadian offshore holding companies. The long-term impact is not clear and depends on experience with repatriation of profits to Canada and Canada Revenue Agency determinations.

### FATCA and compliance implications
- The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by the U.S. Congress to target non-compliant taxpayers using foreign accounts.
- When implemented (in 2014), FATCA will require foreign financial institutions to report to the IRS on financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
- Jurisdictions entering into an intergovernmental agreement (IGA) with the U.S. to implement FATCA may have reporting and other compliance burdens on financial institutions simplified.
- Barbados is expected to enter into an IGA and has established a working group under the joint leadership of Invest Barbados and the CBB to follow up on related issues.

### Central Bank of Barbados (CBB): responsibility, powers, and resources (CPs 1–3)
- The CBB is the primary authority for supervision of financial institutions; its purpose in the CBB Act is “to promote a sound financial structure.” The MoF retains the authority to licence banks.
- The CBB can fully access banks and banking group information for supervisory purposes irrespective of status (international or domestic). Responsibilities and objectives are disclosed on its website.
- The CBB holds discretionary powers to address weaknesses or non-compliance; conditions for exercising these powers were clarified in the Intervention Policy Framework dated April 2012.
- In recent years, the CBB instructed two banks to raise their CAR above the minimum threshold of 8 percent or required banks to cease certain activities or stop paying dividends. In a few instances the CBB has not always utilized its full legal powers, particularly in AML/CFT.
- The CBB can issue guidelines enforceable on general provisions in laws; proposed amendments will elevate CBB’s guidelines to the status of “subsidiary laws” and permit administrative penalties.
- The CBB is self-funded. BSD staffing and budget:
  - 36 people are assigned to supervisory activities but two positions are still vacant.
  - 34 staff for supervising on-site and off-site 6 domestic banks; 46 international banks and 12 Part III companies.
- Market concentration:
  - The three largest on-shore banks account for about 71 percent of the sector’s assets and are branches or subsidiaries of Canadian banks.
  - The international sector is dominated by Canadian institutions, four of which represent over 70 percent of the assets of the international banking sector.
- Conflicts of interest are covered by the CBB Act, but there is no sanction specified in case of breach.

### Institutional independence and crisis arrangements
- CBB independence concerns:
  - Conditions for removal of the Governor (e.g., misconduct or incapacity) are not stipulated in the law.
  - The MoF can overrule corrective measures taken by the CBB.
  - The MoF can issue written orders to the CBB if it considers CBB policies not adequate for achieving the CBB’s purposes.
- There is a need for explicit arrangements for handling a system-wide banking crisis, including a formal financial sector contingency plan.
- Authorities are establishing a National Crisis Management Plan with resolution options including: (i) private sector purchase, (ii) bridge bank, and (iii) temporary public ownership involving Government taking control and ownership through share transfers.

### Licensing, ownership, and structure (CPs 4–7)
- Licensing improvements:
  - In February 2013, the CBB published the “Framework for Licensing of Financial Institutions (FLFI)” setting out the licensing process and assessment conditions; documented and posted to the CBB‘s website.
- Major acquisitions:
  - The FIA stipulates that a Barbados bank shall not, without written approval of the MoF, purchase or acquire the business of any other licensee.
  - CBB assesses nature of business, ownership structure, and feasibility of business plan and financial projections.

### Supervision methodology and practices (CPs 8–10)
- Transition to risk-based supervision since 2008; previously the approach was compliance-based.
- BSD reorganization into five examination teams; each team supervises a portfolio of onshore/international banks with onsite/offsite reviews based on bank risk profiles.
- Supervisory documentation:
  - Onsite work produces work papers (WP) that reflect extent of review, deficiencies, and follow-up.
  - Offsite process produces notes on quarterly review for follow-up and condition updates.
- Relationship officers consolidate offsite and onsite supervision for a seamless supervisory process. Risk assessment summaries (RAS) are discussed within BSD for consistency.
- Ongoing revisions include an Internal Supervisory Guide compendium; 2013 internal guidance issued on assessing effectiveness of Boards of Directors and senior management. Further guidance under consideration for market/IRR.

### Corrective and sanctioning powers (CP 11)
- The CBB has discretionary intervention powers under FIA (Section 50) and IFSA (Section 57), though provisions are broad and rely on regulator interpretation.
- Proposed legislative amendments aim to broaden enforcement powers to:
  - Impose specific target capital ratios,
  - Specify remedial action,
  - Impose non-financial penalties for non-compliance,
  - Provide explicit power to issue guidelines.
- Current practice for serious deficiencies typically involves advisory letters requesting corrective action plans, quarterly reporting, and follow-up; assessors recommend more forceful actions in cases of serious breaches to mitigate moral hazard.

### Consolidated and cross-border supervision (CPs 12–13)
- The CBB conducts supervision on a consolidated basis and has issued detailed supervisory guidelines; pending FIA amendments will enhance the legal framework for consolidated supervision by expanding definitions of control and associate.
- Information sharing network expanded since 2008; CBB has close relations with the CGBS and sponsors a regional college acting as consolidating supervisor.
- Given Canadian banks hold over 75 percent of banking assets in Barbados, the CBB participates in supervisory colleges for those banks and meets the Canadian supervisor annually; an MoU with Canada exists.
- Supervisory colleges have improved information for consolidated supervision, including presentations by banks, Q&A, and inter-meeting conference calls and joint activities.
- Processes for collaboration in a systemic crisis and resolution and recovery planning (RRP) have not been finalized. The CBB has not participated in RRP on a cross-border basis.

### Corporate governance and prudential framework (CPs 14–29)
- Corporate governance:
  - CBB issued a Corporate Governance Guideline in 2006, amended in February 2013 to reflect enhanced international requirements.
  - Corporate governance is reviewed onsite and offsite; intervention letters often focus on governance deficiencies with thorough follow-up.
- Risk management guidance:
  - CBB developed a comprehensive compendium of risk management guidance for domestic/international banks with accompanying WPs.
- Capital adequacy:
  - Under the Capital Adequacy Regulation 1998, minimum capital requirement is 8 percent of risk-weighted assets (Basel I standard).
  - The CBB can impose a higher minimum capital ratio and has done so in two occurrences.
  - Commercial banks have consistently surpassed the regulatory requirement. As of September 2012, the average CAR was calculated at 19.6 percent compared to 19.3 percent recorded one year earlier.
- Basel II transition:
  - Barbados is planning to transition to Basel II by 2015 via a Basel II Implementation Roadmap submitted in February 2012.
  - Phase 1 focuses on strengthening compliance with Pillar 2; Phase 2 on Market Risk Amendment; Phase 3 on Pillars 1 and 3.
  - Basel II compliance will use standardized approach for credit and market risk and the basic and standardized approach for operational risk.
- Country risk management:
  - The CBB Country Risk Management Guideline 2008–13 requires banks to have policies and processes to identify, monitor, and report country and transfer risks.
  - CBB perceives bank exposure to country risks as low but recommends adjusting the guideline to fully integrate country risk into overall risk management and updating staff methodology to ensure accurate aggregation, monitoring, and timely reporting of country exposures.
- Credit risk monitoring:
  - CBB closely monitors banks’ credit risk management and has issued detailed guidelines.
  - Systemic enhancements recommended include instituting credit bureaus and a real estate price index.
  - Banks survey each other to determine credit outstanding for prospective borrowers; independent real estate appraisers value collateral, but lack of a national price index hinders systemic valuation assessment.

*IMF staff report excerpt.*

### 106.      Loan provisioning by banks can be effected using IFRS rules or CBB guidelines;

### _cr1453 - 106.      Loan provisioning by banks can be effected using IFRS rules or CBB guidelines;

### Loan provisioning: current rules and issues
- The CBB provisioning guideline (issued in 1998) prescribes:
  - 100 percent provision for "loss"
  - 50 percent provision for "doubtful"
  - 10 percent provision for "substandard"
  - none for "especially mentioned"
  - no general provision for unclassified exposures
  - 1 percent provision for credits that have not been reviewed in the past 12 months
- Observed issues:
  - The CBB requirements are lower than observed in countries using the same framework.
  - The CBB guidelines do not include a common treatment for homogeneous portfolios to ensure timely write-offs.
  - A review of provisioning requirements is recommended to update the guideline based on historical losses for the various classification categories and migration of loans between categories since 1998.

### Large exposures and concentration limits
- Single person or group exposure limits under current rules:
  - 25 percent of the licensee’s stated capital and reserves for exposures to a single person or group
  - 10 percent of the licensee’s stated capital and reserves for unsecured exposures
- Proposed/ draft measures:
  - CBB draft guideline on Large Exposure (2012) and proposed FIA amendment contemplate that the aggregate of all non-exempt large exposures (i.e., exposures to a person or group which are equal to or exceed 10 percent of the capital base) may not exceed 600 percent of the capital base.
- Recommendation:
  - Authorities are encouraged to issue the Large Exposure guideline as soon as possible.

### Related-party lending and limits
- Current FIA restriction:
  - Unsecured lending or guarantee to each related party (including a bank’s directors, holding company, subsidiary, or affiliate or any director thereof) is restricted up to $40,000 or 1 percent of the stated capital of the licensee (whichever is the greater).
  - Credit facilities to related parties should not be granted on more favorable terms and conditions generally applicable to borrowers.
- Observed shortcomings:
  - No comprehensive and detailed definition of “related parties” in the FIA.
  - No aggregate limit on the total exposures to related parties (current unsecured limit applies only to each person or company).
- Recommendation:
  - Authorities are encouraged to pass the draft amendments to the FIA to better prevent abuses arising from exposures (both on balance sheet and off balance sheet) to related parties.

### Market risk, interest rate risk (IRR), and operational risk (OR)
- Market risk:
  - Guidelines to monitor market risk were recently enhanced by the issuance of the measuring capital adequacy for market risk guidelines; examiner guidance has not been issued.
  - The existing work program (WP) for market risk must be expanded to include guidance on measuring compliance with the new bank guideline on capital adequacy for market risk.
- Interest rate risk (IRR):
  - IRR guidelines have been drafted.
  - Additional guidance for examiners and expanded bank reporting will be needed to monitor compliance.
  - Currently, the CBB reviews bank stress test results and banks’ internal risk measurement and limit reporting but lacks granular information to conduct offsite monitoring independently of bank internal reports.
- Operational risk (OR):
  - The OR management regime appears comprehensive; CBB has detailed guidelines and WPs for OR.
  - Authorities are encouraged to better monitor concentration risk from outsourcing activities.
  - Recommendations include completing a horizontal examination of OR to obtain better knowledge of OR exposure distribution across sectors and performing more on-site targeted examinations, particularly in on-shore banks.

### Accounting standards and disclosure
- Banks in Barbados follow IFRS and disclose based on international accounting standards (IAS).
- Banks publish their audited annual statements and quarterly condensed information.

### AML/CFT supervision
- The CBB is the primary authority overseeing AML/CFT in the banking industry.
- A comprehensive AML/CFT guideline has been issued in cooperation with the AML Act.
- The ML/TF Act provides the CBB tools to enforce compliance, including warning, reprimand, pecuniary sanctions and revocation of the licence.
- Observed shortcomings and recommendations:
  - Prudential response when serious breaches are detected could be strengthened to instill better market discipline.
  - Main focus of AML on-site surveillance has been on international banks, primarily from Canada.
  - Recommendations: perform on-site visits in international banks from countries with higher risk profiles and increase the number of on-site examinations in domestic banks.

### Key recommendations extracted from Annex Table 1 (selected items relevant to provisioning, exposures, related parties, market/IRR/OR, and AML/CFT)
- Principle 18 (Credit classification and provisioning):
  - Review and update/adopt: the homogenous loan classification approach referred to in EC-5.
  - Amend the substandard definition in the 1998 classification regulation to remove or amend the statement “several renewals with capitalization of interest”.
  - Provisioning requirements should be reviewed as they are lower than those observed internationally for countries using the same system.
  - Determine whether there should be haircuts to the value of real estate collateral; consider developing an index for real estate valuation.
- Principle 19 (Large exposures / concentration risk):
  - Issue the LE guideline so principles can be implemented, particularly the aggregated limit on the sum of large exposures exceeding 600 percent.
  - Change the title of the guideline to include the concept of Concentration Risk.
  - Amend instructions for prudential quarterly returns so banks can include off-balance sheet exposures in LEL reporting.
- Principle 20 (Related parties):
  - Amend the law to promote a stricter definition of related parties.
  - Set up an aggregate limit on total exposures to related parties (current limit of $40,000 or 1 percent of stated capital applies only per person/company).
  - Define "more favorable terms" criteria and include prior board approval requirements for related-party transactions exceeding specified amounts.
  - Include in law sanctions applicable to directors and management on a personal basis for violations related to lending to related parties.
- Principle 22 (Market risk supervision):
  - Update work paper to aid examiners in monitoring implementation and compliance with recently issued capital requirements for market risk.
- Principle 23 (IRR supervision):
  - Issue the draft IRR guideline and enhance the existing work program to aid examiners in monitoring implementation and compliance.
- Principle 25 (Operational risk):
  - Complete a horizontal examination of operational risks to obtain better knowledge of OR exposure distribution.
  - Perform more on-site targeted examinations, particularly in on-shore banks.
  - Review and update ORM self-assessment questionnaires and ensure regular production.
- Principle 29 (AML/CFT enforcement):
  - Take more forceful action in case of serious breaches with AML/CFT obligations.
  - Increase number of on-site examinations in on-shore banks.
  - Perform on-site examinations in international banks that have not had on-site visits over the past five years.
- Cross-cutting:
  - Adopt and implement the FIA/IFSA amendments as planned.

*Source: IMF FSAP mission report excerpts (Barbados): loan provisioning, large exposures, related-party limits, market/IRR/OR guidance, and AML/CFT supervision.*

### 123.      The insurance sector in Barbados has long been one of significance in the financial

### The insurance sector in Barbados has long been one of significance in the financial sector in the country.

### Overview
- Total premium stood at BBD 643 million (US$322 million) in 2011.
- Insurance premium, compared to GDP, stood at 7.2 percent.
- There are total of 285 insurers operating in Barbados market as of the end 2012, comprising:
  - 9 domestic life insurers
  - 16 domestic non-life insurers
  - 222 offshore captive insurers
  - 22 offshore holding companies
  - 16 other offshore insurers
- Only one insurer entered the market in 2012 which is owned by a banking or securities group; no insurer has a stake in a local banking operation.

### Market structure and concentration
- Market concentration is high and increased sharply after the collapse of the regional CLICO group.
- Life sector concentration:
  - One life insurer accounts for 83 percent of the total assets of the life industry.
- Non-life sector concentration:
  - Four large insurers account for more than 60 percent of premium incomes; individual market shares range from 21 percent to 11 percent.
- One insurance group (Sagicor) dominates:
  - Its local operations account for more than 80 percent assets in the life industry and 10 percent of premium in the non-life industry.
  - The international operations of Sagicor represent 72 percent (34 percent in Jamaica, 13 percent in Europe and 20 percent in the U.S., measured by assets held in the subsidiaries) at the end 2011.

### Products, distribution, and reinsurance
- Dominant products:
  - Life: traditional life products (non-participating term insurance, endowment and whole-life insurances).
  - Non-life: motor and property insurance.
- Reinsurance usage:
  - Industry cedes as much as 80 percent of premium in property and 30 percent in motor.
- Distribution channels and intermediaries:
  - Policies distributed mainly through agents, salespersons, and brokers, all licensed at company and individual levels.
  - Direct sales: small share of life insurance; sizable share in non-life insurance.
  - No bancassurance activity in the market.
  - Registered intermediaries: 22 insurance brokers, 38 insurance agents, and 475 salespersons registered to sell on behalf of insurers.

### Operating performance, assets and liabilities, and solvency position
- Data limitations:
  - Lack of disclosure requirements and incomplete submission of regulatory returns have historically limited available industry statistics.
- Premiums and profitability:
  - Available data suggests premiums (net of reinsurance ceded) of life insurers have declined in recent years due to weak regional economy and challenges to public confidence.
  - Non-life sector: low and stable claim ratio of 32 percent in non-life sector in 2012 supports general profitability, though soundness is difficult to judge due to absence of robust liability valuation framework.
- Business models and product risks:
  - Domestic insurers’ entity-level business models appear conservative, but riskier/unconventional products are entering the market and insurers are increasingly complex as they expand operations outside Barbados.
- Investment concentration and limits:
  - Investment portfolios concentrated in the Government Bonds of Barbados.
  - Statutory fund investment limits: 20 percent limit on overseas investment, 20 percent limit on real estate, and 25 percent limit on equities.
  - No requirement on diversification or counterparty concentration.
  - Capital markets are not mature and liquid; long-term investments are limited; available market values for valuation are limited.
  - Industry vulnerabilities: concentration risk, sovereign credit risk, ALM mismatch, and liquidity risks.
- Solvency and capital requirements:
  - Onshore life insurers: admissible assets must exceed liabilities.
  - Onshore non-life insurers: asset minus liabilities must exceed the greater of BD$500,000 or 25 percent of net premiums written.
  - Offshore non-life insurers: asset minus liabilities must exceed the greater of BD$250,000.
  - Capital positions of onshore industry are well above minimum regulatory requirement, but requirements do not appropriately capture insurers’ risks, especially underwriting risks.

### Risks and vulnerabilities
- Historical failures and confidence effects:
  - Two insurer failures in the past five years: CLICO International Life Insurance Company and British American Insurance Company; both remain under active judicial management processes.
  - Premiums and persistency negatively influenced by drop in public confidence; recovery, particularly in life sector, will take time.
  - Domestic insurers’ main products are pure insurance (e.g., non-participating term policy) and differ significantly from the failed companies’ saving-type product profiles.
- Group and cross-border risks:
  - Sagicor group has expanded to international and cross-sector operations including life and non-life insurance in the Caribbean and the U.S., participation in a Lloyds syndicate in the U.K., and banking and broker-dealer business in Jamaica.
- Natural catastrophe exposure:
  - Most probable catastrophic event is a hurricane; tsunami, earthquake and volcanic eruptions are possible but more remote.
  - Industry manages catastrophic risk via reinsurance and catastrophic reserves; FSC monitors arrangements through offsite monitoring and onsite examinations.
- Systemic and macro-financial vulnerabilities:
  - Domestic capital markets underdeveloped, causing concentrated investments in Government Bonds of Barbados.
  - Financial markets under stress due to low economic growth, widening fiscal and external imbalances, and growing public debt.
  - Economic activity estimated to have contracted by a cumulative 5 percent between 2008 and 2010.
  - Public debt to GDP ratio reached nearly 115 percent of GDP in 2012.
  - Recent government securities placements have relied heavily on non-market methods and Central Bank interventions.
  - Insurers hold 12.3 percent of the total outstanding stock of government bonds.

### Regulatory development since the previous FSAP
- Supervision and regulator capacity:
  - Financial Services Commission (FSC) established in 2011; supervision processes and capacity are developing.
  - FSC oversees domestic and offshore insurers and reinsurers, insurance distributors, credit unions, capital markets and other non-bank financial sector oversight.
  - FSC has increased capacity by hiring and training staff and developed binding guidelines, circulars, examination manuals, reporting forms, and a risk based supervision framework.
  - Recently issued guidelines for corporate governance, internal control and risk management.
- Outstanding supervisory items:
  - Some 2008 FSAP recommendations, including introduction of risk based solvency requirements, have not yet been advanced by the FSC.
  - No reinsurers in Barbados licensed to serve the domestic market.

### Preconditions for effective insurance supervision
- Macro-financial context:
  - Slowdown in economic growth in Barbados and the Caribbean poses challenges to the insurance industry.
  - Recent absence of natural disasters has helped the industry remain generally sound and profitable.
- Legal, accounting, and actuarial frameworks:
  - Barbados legal framework generally sound and continuously improving; no significant deficiencies noted.
  - Barbados has adopted IFRS and IFRS for SMEs; ICAB promotes high accounting standards and conducts ongoing monitoring of auditors.
  - No actuarial association in Barbados, but actuarial experts are reasonably available by relying on actuaries with major foreign qualifications.
- Consumer protection and resolution:
  - Consumer protection mechanisms are early stage: no ADR regime convenient for policyholders, FSC’s arbitrator capacity limited, no policyholder protection fund and no plan to establish one at this time.
  - Policyholder benefits of failed insurers are subject to judicial resolution outcomes and may have limited priority.
- Market development constraints:
  - Domestic capital markets underdeveloped, restricting insurers’ ability to diversify investments and increasing asset concentration exposure.
- Supervisory monitoring and valuation:
  - Guidelines on Valuation require insurers to use a market valuation, though market values are limited by lack of liquidity in domestic capital markets.

### Annex: Key recommendations to improve observance of Insurance Core Principles (ICP) — summary of highlights
- Governance and mandate:
  - Adopt proposed amendment to the FSC Act to delete the objective relating to increasing competitiveness of the financial sector and delete limited references to ministerial approval.
- Supervisory capacity and procedures:
  - Continue to develop and detail operating procedures, enhance technical capacity, build supervisory reputation, finalize fee revision to cover costs, enhance public consultation, clarify legal protection for staff and commissioners, and reduce or eliminate ministerial roles regarding remuneration.
- Information exchange and confidentiality:
  - Implement broader information exchange powers without requirement for prior consent or strict reciprocity; finalize MoUs avoiding strict reciprocity clauses.
- Suitability, changes in control, and governance:
  - Enact proposed amendments to include significant owners under suitability scope; extend assessments to significant owners, actuaries and collective board capacity; require monitoring and reporting of suitability changes.
  - Introduce requirements for approval of change of control.
  - Deepen corporate governance guidelines following supervisory reviews.
- Risk management, valuations, and capital adequacy:
  - Deepen guidelines on internal control and risk management; follow up surveys via offsite monitoring and onsite exams.
  - Work with Caribbean Association of Actuaries to establish robust, enforceable valuation standards for technical provisions and strengthen offsite/onsite verification.
  - Improve investment requirements to address concentration and extend coverage to all insurers and activities; consider risk based capital requirements to supplement investment rules.
  - Educate industry on ERM, expand guidelines to include risk tolerance, feedback loops and ORSA requirements, and ensure management of group and catastrophic risks.
  - Continue and accelerate development and implementation of risk based capital adequacy requirements covering all insurers and groups; engage industry in impact assessments and surveys.
- Intermediaries, conduct, and disclosure:
  - Impose requirements to ensure integrity of intermediaries; develop effective reporting requirements.
  - Deepen market conduct guidelines and encourage improved practices via offsite monitoring and surveys.
  - Expand disclosure requirements in coverage and detail; make disclosures readily available to policyholders and market participants (insurers’ websites and FSC’s website).
- Fraud, AML/CFT, and supervision of groups:
  - Amend FSC Act to allow exchange of confidential information with competent agencies; deepen guidance on money laundering and increase offsite monitoring for compliance.
  - Enhance supervisory college engagement for group-wide supervision (notably for Sagicor), develop defined understanding of group structures, ensure effective communication protocols, and examine group-wide solvency, governance, risk management and internal control.
- Macroprudential surveillance and crisis management:
  - Develop deliberate macroprudential assessment beyond sector aggregates, publish more detailed sector data, identify potentially systemically important insurers, and manage supervisory colleges proactively.
  - Improve cross-border cooperation and crisis management protocols, require insurers to establish contingency plans for going- and gone-concern situations, and develop internal procedure manual for a financial crisis.
- Enforcement and winding-up:
  - Ensure prompt enforcement actions to protect policyholders; introduce late filing fees.
  - Introduce risk based capital requirements for all insurers and specify a point where continuation of business is no longer permissible; consider legislative amendment to provide legal priority to policyholders in winding-up or alternatively establish a policyholder protection fund.
- Reinsurance and documentation:
  - Require prompt documentation of reinsurance transactions and consider home supervisor quality when assessing reinsurance arrangements.

*Source: IMF staff report text on Barbados insurance sector (excerpts).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1453.pdf_