## _cr15192

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### Macroeconomic context and financial system structure
- Population: 188 thousand; GDP per capita: around US$4,100.
- Economic structure: dependent on agriculture, tourism, and remittances; Australia and New Zealand are main export markets and remittance sources.
- Recent policy and macro environment:
  - Recovery from cyclone Evan in 2012; underlying inflation subdued.
  - Tala pegged within a ±2 percent band to a trade and payments weighted currency basket.
  - Most capital account transactions require Central Bank of Samoa (CBS) approval.
  - CBS policy rate (91-day bill rate): 0.2 percent (unchanged since the 2009 tsunami).
  - Bank lending rates: over 10 percent.
- Financial system size and composition:
  - Total financial system assets ≈ 120 percent of GDP.
  - Bank assets ≈ 60 percent of system assets or 70 percent of GDP.
  - Banks provide almost 60 percent of credit; key PFIs (SNPF, DBS) account for around 30 percent of credit.
  - Claims on central government: 1.3 percent of assets.
  - Claims on the public sector (including SOEs and PFIs): < 6 percent at June 2014.
- Banking sector structure:
  - Four commercial banks: ANZ (subsidiary), Westpac (subsidiary), Samoa Commercial Bank (local), National Bank of Samoa (local).
  - Market shares: ANZ 45 percent of banking assets; Westpac 21 percent; Samoa Commercial Bank 18 percent; National Bank of Samoa 16 percent.
  - Assets concentrated in lending to construction, trade, tourism.
- Non-bank PFIs and other sectors:
  - Main PFIs: Samoa National Provident Fund (SNPF), Development Bank of Samoa (DBS), Samoa Housing Corporation (SHC), Unit Trust of Samoa (UTOS).
  - UTOS and SHC expanding rapidly; SNPF and DBS largest by assets.
  - PFIs funded by members’ contributions/premiums, loans from CBS and IFIs, and investments—no retail deposits.
  - One MFI (SPBD) with SAT 10 million in assets; 13 credit unions licensed with total assets estimated at about SAT 20 million (data uncertain).
  - Offshore: seven offshore banks; offshore assets declined from US$112 million in 2005 to US$ 54.4 million mid-2014; offshore sector ≈ one tenth of on-shore sector.
  - Insurance sector assets ≈ 5 percent of GDP; premiums 1.2 per cent of GDP in 2013; five licensed insurers (four non-life, one life); non-life = 85 percent of premiums.
  - Money and capital markets: CBS securities outstanding ≈ SAT 9.5 million; no secondary trading; no Treasury bills outstanding; limited interbank activity.

### Risks and vulnerabilities
- Banking sector indicators and concerns:
  - System NPLs > 8 percent of total loans; all banks above 4 percent.
  - NPLs rising, particularly for local banks; loan-loss coverage increased (Res for Loan Loss to Tot Loans: 2014: 6.4).
  - Profitability declining; Net Interest Margin: 2014: 2.9; ROAA: 2014: 1.8; ROAE: 2014: 10.8.
  - Capitalization reported high but asset quality uncertainty creates vulnerability; Capital Adequacy Ratio: 2014: 28.9; Tier 1 Capital Ratio: 2014: 24.6.
  - Loan-to-Deposit Ratio: 2014: 105.4.
  - Dollarization limited: foreign currency loans ≈ 4 percent of total assets; foreign currency deposits ≈ 8 percent of total deposits.
- PFIs and fiscal links:
  - PFIs’ asset quality weak; strong linkages with SOEs; policy lending increased after natural disasters.
  - PFI credit to economy ≈ 33 percent of GDP.
  - Borrowings by SOEs with explicit government guarantees ≈ 6½ percent of GDP.
  - Most PFI liabilities likely implicitly guaranteed by government, posing fiscal vulnerability.
- Structural and external risks:
  - Main near-term economic risk: natural disasters.
  - Other risks: asset quality deterioration, loss of confidence, sharp exchange rate depreciation, rising interest rates.
- Data and assessment constraints:
  - Most detailed FI data used as of June, 2014.
  - Significant uncertainty in balance sheet quality, provisioning, and asset classification.

### Stress testing and systemic analysis — findings and implications
- Coverage and approach:
  - PFIs excluded from stress tests due to lack of granular data.
  - Four commercial banks tested: top-down (TD) by FSAP team and bottom-up (BU) by banks.
  - Stress test horizon: 4 years (Bottom-Up), 4 years (Top-Down).
- Top-Down single-period sensitivity:
  - Banks appear relatively robust to a range of shocks given high initial capital buffers (well above minimum of 15 percent).
  - Example: impairment of five largest exposures with 100 percent provisioning of uncollateralized component → no bank fell below minimum capitalization.
  - With 20 percent haircut on collateral two local banks fell below minimum threshold by about 1 to 3 percentage points.
  - Material increases in ten industry sector NPLs would cause two local banks to fall below minimum capitalization by about 1-2½ percentage points.
- Multi-period multi-variable scenarios (Top-Down):
  - Scenarios defined: Baseline (WEO forecasts); Moderate shock (single class 4 cyclone → growth declines by around 3½ percentage points, recovers over four years); Severe shock (dual class 4 cyclones + recession in Australia/New Zealand → growth declines by 4½ percentage points in 2014/15 and further by 5 percentage points in 2015/16 relative to baseline).
  - Results: local banks less resilient. In very severe scenario accumulating charges could only be fully absorbed by less leveraged foreign banks. Two local banks approached Tier 1 threshold of 7.5 percent CAR in the third year; one continued deteriorating, the other began to recover.
- Bottom-Up solvency tests:
  - Banks’ own estimates showed minimal negative impacts on capital adequacy, likely reflecting optimistic profitability assumptions.
  - BU useful for discussion of accumulating shock effects.
- Liquidity stress testing (Top-Down):
  - Under Basel Liquidity Coverage Ratio all banks >100 percent; system >200 percent; lowest ratio was for one foreign bank.
  - Very severe “general run” scenario: one foreign bank depleted liquidity in 19 days assuming non-resident parent funding withdrawals and retention of government/SOE deposits; remaining banks had liquidity beyond 30 days.
  - General run could be triggered by perceived problems and aggravated by doubts about government liquidity back stop.

### Financial sector policies, regulation, and oversight — gaps and priority reforms
- Central Bank of Samoa (CBS):
  - CBS is main supervisor/regulator for domestic FIs; recent steps include on-site inspections, elements of risk-based supervision, expanded staff, initiation of PFI supervision, submission of new CBS Act (CBA), financial inclusion promotion, and AML/CFT progress.
  - Remaining needs: improve quality/coverage of financial data, upgrade legal/regulatory/supervisory frameworks, build capacity and staff.
- Banking supervision and regulation — priority reforms:
  - Stepped up regular on-site inspections and in-depth assessments, including asset quality reviews (ST).
  - Upgrade prudential data reporting; introduce parallel prudential data survey requiring granular electronic supervisory data (ST).
  - Strengthen prudential guidance and supervisory powers; modernize Financial Institutions Act (FIA) to grant CBS powers over Board/management, define “significant shareholder”, and remove court-involvement provisions that obstruct remedial measures (MT/ST).
  - Upgrade supervisory guidance on risk management and NPL write-offs (MT).
  - Over time, CBS to assume supervision/regulation of all financial intermediaries including credit unions and offshore banks (MT/ST).
- Non-bank supervision:
  - CBS off-site reviews must be intensified and should cover all PFIs (ST/MT).
  - Insurance market regulatory/supervisory architecture needs substantial improvement and enforcement; prepare supervisory framework and staff training (MT).
- Offshore banks and SIFA:
  - Enhance operational independence of SIFA; remove conflicts between promotional and supervisory roles; increase on-site inspections and supervisory guidance (MT/ST).
  - Move supervision/oversight of offshore banks to CBS over time.
- Legal and resolution framework:
  - Reform FIA to establish a special resolution regime with precise triggers for pre-insolvency resolution, powers to remove/replace management, transfer/sell assets and liabilities, establish bridge institutions, and apply special rules for systemic cases (ST).
  - CBA to include lender of last resort and ELA framework with safeguards; additional legal reform needed to empower CBS for preventive/corrective action and timely resolution (ST).
  - Consider a funded Deposit Insurance Scheme (DIS) in the medium-term once pre-conditions met; DIS to protect small depositors and apply least cost principle funding.
- Coordination and contingency planning:
  - Create financial stability and contingency planning committees at CBS and MOF (MT/ST); formalize cooperation via Memorandum of Understanding.
  - Develop stress testing and macro-financial mapping regularly (MT).
  - Establish contingency plans covering system and individual systemic institutions; test plans via “war games”.

### Public Financial Institutions (PFIs) — governance, performance, and recommendations
- Structural issues:
  - PFIs important but lack coherent policy framework; activities deviated from mandates without cost-benefit assessment; overlapping functions.
  - Policy lending through PFIs (and through CBS) has degraded asset quality and created fiscal risk.
  - PFIs credit ≈ 33 percent of GDP; SOE borrowings with explicit guarantees ≈ 6½ percent of GDP.
- Institutional reforms and governance:
  - Government to reform PFI mandates and governance for defined socio-economic objectives; new Ministry of Public Enterprises to formulate coherent framework.
  - Restrict new lending where substantial adjustments needed.
  - Enhance oversight: improved data collection, on-site reviews, and inclusion of PFIs in CBS supervisory/regulatory framework.
  - Alternatives to direct ownership: credit guarantees, improved business environment, financial infrastructure, and financial capability initiatives.
- PFI-specific recommendations:
  - Development Bank of Samoa (DBS):
    - Urgent measures to address operational inefficiencies, political interference, and financial weaknesses.
    - Full asset quality review as soon as possible; limit new lending until management and balance sheet assessed.
  - Samoa National Provident Fund (SNPF):
    - Diversify investments including offshore investments as permitted.
    - Gradually reduce lending-against-contribution share; introduce multi-year budgets; strengthen credit/risk management.
  - Unit Trust of Samoa (UTOS):
    - Clarify mandate; fully disclose leveraged operations’ risks; screen and monitor lending/investments; improve accounting; government to decide on conversion to policy bank or deleveraging.
  - Samoa Housing Corporation (SHC):
    - Define target clientele; improve accounting and credit/risk management; ensure unfunded mandates are budget-compensated or reflected in SHC reporting.
  - Samoa Life Assurance Corporation (SLAC):
    - Reduce lending to insured as share of assets; diversify investments; strengthen supervision, accounting, and risk management.

### Access to finance and payment systems — constraints and policy priorities
- Structural constraints:
  - High collateralization of loans (over 200 percent on average).
  - Customary land ≈ 80 percent of land area and largely not usable as collateral.
  - Absence of credit bureau and (in process) movable collateral registry.
  - High market concentration (HHI above 0.3); largest bank 45 percent of assets.
  - Interest rate spreads: average 2013: 4 percent; largest bank: 6.2 percent; overheads and provisions main drivers.
- Reforms underway:
  - Credit bureau and personal property (movable collateral) registry being set up; law establishing movable collateral registry approved; implementation procedures to be initiated.
  - Changes to Alienation of Customary Land Act permit capital improvements on leased customary land to be used as collateral.
- Policy priorities:
  - Focus on indirect measures: establish credit bureau, complete personal property registry, and promote economic use of customary land.
  - Collect better data on financial inclusion of households and SMEs; improve financial business education.
  - Review and reform Small Business Loan Guarantee Scheme (SBEC) to strengthen risk sharing, clarify eligibility, and improve reporting.
- Small Business Loan Guarantee Scheme specifics:
  - Guarantee: 100 percent for loans ≤ SAT 10,000; 80 percent for loans SAT 10-50,000.
  - Guarantee fund: SAT 8.5 million.
  - Majority of portfolio with DBS; banks responsible for credit assessment and set interest rates freely; no additional collateral provided.
  - Reform recommended due to lack of clear eligibility, coverage up to 100 percent, and favorable payout conditions for banks.
- Payment systems:
  - National payment system early stage; no RTGS or electronic clearing; interbank payment via cheque clearing and manual settlement.
  - National Payment Systems Act adopted April 2014; CBS to procure new ATS+ system; several regulations remain to be issued.
- Remittances:
  - In FY2014 inflows through about 525,000 transactions represented about 21 percent of GDP.
  - Main channels: 15 licensed MTOs (78 percent) and four banks (22 percent).
  - Cost of remittances: about 10 percent of average transaction value.
  - Reforms: transparency on costs, consumer protection/education, code of conduct, AML/CFT cooperation.

### Institutional framework, legal reform, and capacity building
- Key deficiencies identified:
  - No dedicated financial stability unit in CBS.
  - No formal CBS-MOF cooperation on financial stability.
  - Significant data gaps on banks and non-banks.
  - Limited public financial stability reporting; audit firms not subject to quality assurance reviews.
- Recommended institutional measures:
  - Create high- and operational-level financial stability committees (CBS and MOF) via MoU.
  - Establish a financial stability unit in CBS to conduct regular assessments and support committees.
  - Improve quality, coverage, and granularity of supervisory data for banks and non-banks; consider collecting business and household financial data.
  - Publish a basic Financial Stability Report.
  - Build research capacity including simple stress testing.
- Legal and governance recommendations:
  - Finalize CBA with stronger safeguards (credit ceiling, maturity limit, market-based remuneration); specify terms of nonexecutive directors.
  - Amend FIA to give CBS specific powers (waive large exposure limits, authority over Boards and senior management, define related-party exposures) and remove obstructive court provisions.
  - Develop ELA framework with MOF concurrence and safeguards; CBS to develop operational ELA procedures.
  - Improve legal basis for resolution actions and depositor preference; enable resolution tools pre-insolvency.

### Near-term priorities and technical assistance
- Near-term priorities (best use limited capacity):
  - Strengthen on-site and off-site supervision of banks and PFIs (ST).
  - Upgrade prudential requirements for banks and PFIs; review relevant legislation (ST/MT).
  - Establish contingency planning and financial stability coordination committees (ST/MT).
  - Enhance data collection, verification, and analysis (ST).
  - Conduct targeted asset quality reviews for vulnerable institutions (ST).
- Authorities’ stance:
  - Authorities broadly accepted FSAP recommendations and are implementing reforms.
  - Technical assistance requested and in progress to support near-term priorities.

### Key numeric financial soundness indicators (selected, fiscal year ending in June)
- Asset quality:
  - NPL to Total Loans: 2010: 6.1; 2011: 4.4; 2012: 4.7; 2013: 7.5; 2014: 8.3.
  - Res for Loan Loss to Tot Loans: 2010: 4.0; 2011: 4.0; 2012: 4.4; 2013: 5.7; 2014: 6.4.
  - Res for Loan Loss to NPLs (Coverage): 2010: 65.8; 2011: 89.2; 2012: 93.3; 2013: 75.9; 2014: 77.3.
  - NPLs net of s/ Provisions to Regulatory Capital: 2010: 18.8; 2011: 10.4; 2012: 11.2; 2013: 19.9; 2014: 15.5.
  - Annualized Loan Growth: 2010: 3.8; 2011: 8.1; 2012: -1.7; 2013: 1.5; 2014: -4.4.
- Profitability and efficiency:
  - Net Interest Margin: 2010: 3.5; 2011: 3.4; 2012: 3.4; 2013: 3.5; 2014: 2.9.
  - Efficiency (Cost/Income): 2010: 44.1; 2011: 44.5; 2012: 48.2; 2013: 54.4; 2014: 47.6.
  - ROAA: 2010: 2.0; 2011: 2.2; 2012: 2.0; 2013: 1.6; 2014: 1.8.
  - ROAE: 2010: 11.7; 2011: 13.3; 2012: 11.5; 2013: 9.3; 2014: 10.8.
- Liquidity and funding:
  - Loan-to-Deposit Ratio: 2010: 104.6; 2011: 113.4; 2012: 115.2; 2013: 118.1; 2014: 105.4.
  - Liquid Assets / Liquid Liabilities: 2010: 76.6; 2011: 44.7; 2012: 54.8; 2013: 54.8; 2014: 56.3.
  - Wholesale Funds / Total Liab.: 2010: 10.6; 2011: 11.5; 2012: 11.0; 2013: 10.0; 2014: 10.1.
- Capital adequacy & leverage:
  - Capital Adequacy Ratio: 2010: 27.2; 2011: 27.1; 2012: 30.0; 2013: 27.4; 2014: 28.9.
  - Tier 1 Capital Ratio: 2010: 22.8; 2011: 22.3; 2012: 25.4; 2013: 23.6; 2014: 24.6.
  - Financial Leverage (times): 2010: 6.3; 2011: 6.0; 2012: 5.7; 2013: 5.9; 2014: 6.4.

*Source: IMF FSAP—Executive Summary and Key Recommendations and selected excerpts from IMF staff report (content unit: _cr15192).*

### EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS _______________________________________ 4

### EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS

### Macroeconomic context and financial system structure
- Samoa is a small island economy with a population of 188 thousand and a GDP per capita of around US$4,100.
- Economic structure: dependent on agriculture, tourism, and remittances; Australia and New Zealand are main export markets and remittance sources.
- Recent history and policy:
  - Economy is slowly recovering from cyclone Evan in 2012; underlying inflation remains subdued.
  - The Tala is pegged within a ±2 percent band to a trade and payments weighted currency basket.
  - Most capital account transactions require approval from the Central Bank of Samoa (CBS).
  - CBS policy rate (91-day bill rate) has remained largely unchanged, at 0.2 percent, since the 2009 tsunami.
  - Bank lending rates have stayed high at over 10 percent.
- Financial system size and composition:
  - Total financial system assets correspond to about 120 percent of GDP.
  - Bank assets account for almost 60 percent of system assets or 70 percent of GDP.
  - Banks provide almost 60 percent of credit to the economy; the most important PFIs (Samoa National Provident Fund, Development Bank of Samoa) account for around 30 percent.
  - Claims on the central government are very small: 1.3 percent of assets.
  - Claims on the public sector, including SOEs and PFIs, were less than 6 percent at June 2014.
- Banking sector structure:
  - Four commercial banks: two subsidiaries of foreign banks (ANZ and Westpac) and two local banks (Samoa Commercial Bank and National Bank of Samoa).
  - Subsidiaries of Australian banks ANZ and Westpac hold 45 and 21 percent of total banking assets, respectively.
  - Locally owned banks: Samoa Commercial Bank and National Bank of Samoa have shares of 18 and 16 percent, respectively.
  - Assets concentrated in lending (construction, trade, tourism).
- Non-bank PFIs:
  - Main PFIs: Samoa National Provident Fund (SNPF), Development Bank of Samoa (DBS), Samoa Housing Corporation (SHC), Unit Trust of Samoa (UTOS).
  - SNPF and DBS are largest by assets; UTOS and SHC expanding rapidly.
  - PFIs fund via members’ contributions/premiums, loans from CBS and IFIs, and investments—no retail deposits.

### Risks and vulnerabilities
- Key system vulnerabilities:
  - Banks are liquid and report high capitalization, but high and rising non-performing loans (NPLs) and FSAP stress tests indicate significant risks.
  - Effects of past natural disasters persist; significant uncertainty surrounds balance sheet data quality, especially asset quality and provisioning.
  - High loan concentration and exposure to natural disasters represent significant risks.
  - Stress tests show local banks are relatively less resilient and could not withstand a severely adverse scenario.
- PFIs vulnerability:
  - PFIs have low asset quality and strong linkages with state owned enterprises, largely due to increased policy lending after natural disasters.
  - Significant stress in PFIs could materially impact other financial institutions and create fiscal risks because of explicit and implicit government guarantees.
- Data and assessment constraints:
  - Most detailed FI data used are as of June, 2014.
  - Assessments impeded by uncertainty in balance sheet quality.

### Stress testing and systemic analysis
- Stress test findings:
  - Results indicate local banks could not withstand a severely adverse scenario.
  - Implication: need for close monitoring, on-site supervision, asset quality reviews, and prompt corrective action.
- Systemic risk monitoring:
  - CBS should regularly analyze systemic risks through stress testing and macro-financial mapping.

### Financial sector policies, regulation, and oversight
- Central Bank of Samoa (CBS):
  - Main supervisor and regulator of domestic financial institutions.
  - Recent efforts: on-site inspections, elements of risk-based supervision, expanded staff resources, initiation of PFI supervision, submission of a new CBS Act (CBA) to reform governance and safeguards, promotion of financial inclusion, and progress on AML/CFT.
  - Remaining needs: improve quality and coverage of financial sector data, upgrade legal/regulatory/supervisory frameworks, and build capacity and staff.
- Banking supervision and regulation—priority reforms:
  - Stepped up regular on-site inspections.
  - Upgraded prudential data reporting.
  - Strengthened prudential guidance and supervisory powers.
  - Modernized Financial Institutions Act (FIA).
  - Strengthening of AML/CFT framework to continue.
  - Over time, supervision and regulation of all financial intermediaries, including credit unions and offshore banks, should be unified under the CBS.
- Non-bank supervision:
  - CBS off-site reviews must be intensified and should cover all PFIs.
  - Regulatory and supervisory architecture in the insurance market needs substantial improvement and enforcement.
- Legal and resolution framework:
  - Reform needed to empower CBS to take preventive and corrective actions in a timely manner, start resolution before insolvency, and transfer assets and liabilities of a distressed FI to a sound entity.
  - A new CBS Act is being finalized and should include provisions for CBS as lender of last resort; additional legal reform is needed.
- Coordination and contingency planning:
  - A framework for coordination between the Ministry of Finance (MOF) and CBS should be in place for financial stability assessment and contingency planning.
  - Contingency plans should cover the system and individual systemic institutions.

### Public Financial Institutions (PFIs) governance and performance
- Recommendations on PFIs:
  - Reform role and governance to achieve specific socio-economic objectives.
  - Assess effectiveness of allocated resources and mandates; develop government policies to focus PFI roles and government involvement in the financial sector.
  - The new Ministry of Public Enterprises should formulate a coherent framework for PFI governance and performance.
  - Where substantial adjustments are needed, new lending should be restricted.
  - Enhanced oversight: improved data collection and on-site reviews of PFIs.

### Access to finance and payment systems
- Structural impediments to access to finance:
  - High collateralization of loans.
  - Large share of customary land not usable as collateral.
  - Absence of a credit bureau and absence (in process) of a movable collateral registry.
  - High concentration and limited competition in the banking sector.
- Policy priorities to improve access:
  - Focus on indirect measures: credit bureau, economic use of customary land, and completing a personal property registry.
- Payment system:
  - National payment system, overseen by CBS, should continue to be developed.
  - A new system with key components of a modern payment and settlements system is planned to be procured by the CBS.
  - Several regulations still need to be issued for implementation of the new National Payment Systems Act.

### Near-term priorities and technical assistance
- Near-term priorities (to best use limited capacity):
  - Strengthened on-site and off-site supervision of banks and PFIs.
  - Upgraded prudential requirements for banks and PFIs, including review of relevant legislation.
  - Establishment of contingency planning.
  - Enhanced data collection and analysis.
- Authorities’ stance and support:
  - Authorities have broadly accepted FSAP recommendations and are making implementation progress.
  - Technical assistance to support near-term priorities has been requested and is already in train.

### FSAP — Key recommendations (Table 1) — selected items and timing
- Cross-cutting:
  - Improve the quality and coverage of data. CBS to collect granular data on banks, PFIs, insurers, and other financial intermediaries for prudential and financial stability analysis. (ST)
  - Upgrade regulatory and supervisory frameworks, including amending the FIA and CBA to support corrective actions and resolution. (MT/ST)
  - CBS to raise capacity and hire additional staff; over time assume supervision and regulation of all financial intermediaries. (MT/ST)
- Banking supervision and regulation:
  - Conduct regular on-site inspections and in-depth assessments of financial statements (including asset quality reviews) of potentially vulnerable banks. (ST)
  - Upgrade supervisory guidance to banks, especially regarding risk management and NPL write-offs. (MT)
- PFIs — supervision and regulation:
  - CBS to produce periodic financial soundness indicators for PFIs and ensure proper IFRS accounting, especially for loan classification, NPLs, and provisioning. (ST/MT)
  - CBS to issue and upgrade prudential regulations for PFIs. (ST)
  - CBS to start on-site inspections of PFIs. (ST)
- Offshore bank regulation and supervision:
  - Enhance operational independence of SIFA to supervise international banks and remove potential for conflict between SIFA’s promotional and supervisory roles. (MT/ST)
- PFIs — governance:
  - Government to reform mandates and governance of PFIs for defined policy objectives based on cost-benefit assessments, and ensure efficient operations. (MT)
- Crisis preparedness:
  - Adopt a full set of enforcement and resolution instruments. (ST)
  - Create an appropriate scheme and operational framework for ELA. (ST)
- Systemic financial stability:
  - CBS and MOF to create financial stability and contingency planning committees. (MT/ST)
  - CBS to analyze systemic risks, including stress testing and macro-financial mapping. (MT)
- Central bank operations:
  - CBS to unwind lending to DBS and SHC. (MT)
- Access to finance:
  - Focus on indirect measures: credit bureau, economic use of customary land, and complete setting up a personal property registry. (MT)
- Insurance and payment systems:
  - CBS to develop insurance supervisory strategy and capacity building plans. (MT)
  - CBS to implement the new National Payment Systems. (MT)

*Timing abbreviations: Short-term (ST), Medium-term (MT).*

*Source: IMF FSAP—Executive Summary and Key Recommendations (content as provided).*

### 6.      One microfinance institution (MFI) and a number of credit unions represent a small

### _cr15192 - 6.      One microfinance institution (MFI) and a number of credit unions represent a small

### Microfinance, credit unions, and provider landscape
- Samoa Pacific Business Development (SPBD) is the only MFI in Samoa with SAT 10 million in assets.
- There are 13 credit unions licensed by the Ministry of Commerce, Industry and Labour (MCIL), but there may be more in operation.
- Based on uncertain data, total assets of credit unions are estimated at about SAT 20 million.

### Off-shore financial sector
- Seven offshore banks licensed in Samoa.
- Total offshore assets declined from US$112 million in 2005 to US$ 54.4 million mid-2014.
- Offshore sector size is about one tenth of the on-shore sector and is described as well capitalized.
- Two offshore banks restrict operations to serving members of their groups; other offshore banks are affiliates of investment advisers dealing with their clients.
- There appear to be no linkages between the on-shore and off-shore financial sectors.

### Insurance sector
- Total insurance sector assets correspond to about 5 percent of GDP.
- Premiums were at 1.2 per cent of GDP in 2013.
- There are five active licensed insurance companies: four non-life and one life insurer.
- Non-life insurance accounts for 85 percent of premiums; motor insurance is the main non-life business segment.
- The sector is underdeveloped and small and does not constitute a financial stability risk, but it is largely unsupervised which could lead to company failures and reputational damage.

### Money and capital market activity
- CBS securities are issued but are low yielding and only bought by commercial banks.
- Total outstanding CBS securities volume is around SAT 9.5 million, with no secondary trading.
- Inter-banking activity is very limited.
- There are no Treasury bills outstanding and bonds are not issued.
- Very few or no transactions in other securities, e.g., company shares.

### Liquidity management and central bank instruments
- The lack of collateral and active security markets are structural impediments for liquidity management by the CBS.
- The CBS has only occasionally provided liquidity support through its rediscount window; the repo facility has never been used.
- Following liquidity crunches, the CBS introduced a temporary facility for banks to borrow against their required reserves.
  - Banks could borrow up to 50 percent of their required reserves (4.5 percent of deposits) for a maximum of 189 days. The facility was closed in June 2013.
- Recommendation: CBS should continue to investigate avenues to use market-based sterilization instruments to better manage liquidity.
- Recommendation: Adjust the Public Financial Management Act to allow issuing T-bills, which could be used as collateral, without parliamentary approval.

### Public Financial Institutions (Box 1) — roles and features
- Samoa National Provident Fund: Established in 1972 as a compulsory retirement savings scheme with a minimum 5 percent contribution by employees and employers; however, most Samoans do not contribute.
- Unit Trust of Samoa (UTOS): Established in 2010 as an open-ended private unit trust to provide investment opportunities and intermediate funds among SOEs; generated returns to unit-holders of 17.3 percent in FY2014.
- Development Bank of Samoa: Established in 1974 to provide development assistance and on-lends funds from international financial institutions and credit lines provided by the CBS.
- Samoa Housing Corporation: Established in 1989 to facilitate access to housing; funded by loans from the CBS, which are guaranteed by the government.
- Samoa Life Assurance Corporation: Established in 1976 to provide life insurance and also provides credit insurance and mortgage loans to policyholders.

### Access to finance and SME lending
- Access to checking or savings accounts is nearly universal; access to credit constrains SME growth.
- 2009 Enterprise Survey: 51 percent of SMEs had a loan or line of credit outstanding.
- 16 percent of Samoan SMEs identified access to finance as a major constraint in 2009.
- A 2012 assessment found large unmet demands for financing.

### Small Business Loan Guarantee Scheme (Box 2)
- Purpose: Incentivize banks to lend to SMEs; supported by the Government of Samoa and a grant from NZAID.
- Guarantee details:
  - 100 percent guarantee for loans up to SAT 10,000.
  - 80 percent guarantee for loans between SAT 10-50,000.
- The guarantee fund totals SAT 8.5 million.
- The majority of the portfolio is with the DBS.
- Banks are responsible for credit assessment and can determine interest rates freely.
- No additional collateral is provided for the loans.
- When loans are considered a loss for the bank, SBEC repays the bank and starts collecting directly from the enterprise.
- Reform note: A thorough review and reform of the SBEC could strengthen the scheme. Issues include no clear eligibility criteria, a coverage ratio up to 100 percent, and payout conditions very favorable for banks.

### Risk assessment — recent shocks and macro risks
- Recent shocks: global financial crisis leading to downsizing of an automobile parts plant in 2009, a tsunami in 2009, and cyclone Evan in 2012.
- Government response: raised reconstruction expenditure financed largely by grants and concessional lending; households and small businesses supported by higher remittances.
- Main near-term economic risk: natural disasters (Appendix Table 2).
- Other risks: (i) asset quality deterioration due to weak recovery or weakened government guarantees; (ii) loss of confidence in banks and PFIs; (iii) sharp exchange rate depreciation; (iv) rising interest rates.

### Vulnerability analysis — banking sector features and PFI links
- Bank lending stagnant after natural disasters; lending concentration increased.
- Large borrower limit of 25 percent of capital has constrained lending, especially for local banks with smaller capital bases.
- System non-performing loans (NPLs) have risen to over 8 percent of total loans, with all banks above 4 percent.
- Local banks have higher and growing NPL ratios but increased loan-loss coverage.
- High NPL coverage ratio partly reflects lack of regulatory incentive for write-offs and eventual repayment of long-standing loans in arrears.
- Profitability remains high but declining; efficiency is down.
  - Net interest margins stable due to high interest rate spreads.
  - Negative loan growth, higher costs, and high provisioning have affected profitability; returns on assets and equity have been declining for the past three years with a slight rebound in 2014.
- Capitalization: the banking sector reports high capitalization, but parts of the system are vulnerable due to weak asset quality.
  - Samoa has adopted a Basel 1 capital adequacy regime, with a Tier one minimum of 7.5 percent.
- Liquidity: banks hold around 20 percent of deposits in reserves at the CBS on average.
  - Loan-to-deposit ratio is around 100 percent, but higher for foreign banks.
  - Dollarization is limited; foreign currency loans account for about 4 percent of total assets, and all foreign currency deposits account for about 8 percent of total deposits.
- PFIs:
  - Policy lending through PFIs likely results in lower quality loans; borrowers include many weak SOEs.
  - Accounting standards not always followed, particularly for recognition of non-performing assets.
  - The DBS is struggling with a weak lending portfolio and losses; some losses reflect directed lending after recent natural disasters.
  - PFI credit to the economy is important at about 33 percent of GDP.
  - Borrowings by SOEs have explicit government guarantees corresponding to about 6½ percent of GDP.
  - Most PFI liabilities are likely seen as implicitly guaranteed by the government.
  - Public debt is already fairly high; government finances are vulnerable to shocks or accumulated poor PFI performance.
- Direct linkages of PFIs to the banking sector appear limited:
  - Commercial banks’ lending exposure to PFIs is minimal.
  - Banks hold PFI deposits accounting for about 9½ percent of total commercial banks’ non-capital liabilities.
  - UTOS has started borrowing from the banking system.
  - Results suggest risks concentrated in cross-exposures among PFIs and SOEs.
  - Some loans (e.g., to DBS) are funded by the CBS and SNPF and are individually larger than lenders’ capital bases but are covered by government guarantees.

### Stress tests — scope, methods, and results
- PFIs excluded from stress tests due to lack of granular data.
- Tests conducted for four commercial banks: top down (TD) by FSAP team and bottom up (BU) by the banks.
- Single-period sensitivity stress testing (TD):
  - Banks appear relatively robust to a range of shocks, reflecting high initial capital buffers (well above the minimum of 15 percent).
  - Example: assuming impairment of the five largest exposures and 100 percent provisioning of the uncollateralized component, no bank fell below the minimum capitalization.
  - With a 20 percent haircut on collateral the two local banks fell below the minimum threshold by about 1 to 3 percentage points.
  - Banks were relatively robust to interest rate, exchange rate, and interbank contagion shocks.
  - Industry concentration: material increases in ten individual industry sector NPLs would cause two local banks to fall below the minimum capitalization by about 1-2½ percentage points.
- Multi-period multi-variable scenario solvency stress tests (TD):
  - Scenarios:
    - Baseline: The October 2014 World Economic Outlook, projecting a generally positive-trending macro-economic environment.
    - Moderate shock: Mirrors the cyclone event of 2012 — a class 4 cyclone strikes the two main islands in the first year, causing widespread damage. Economic growth declines by around 3½ percentage points before recovering to baseline growth over a four year period.
    - Severe shock: In addition to the first cyclone, another class 4 cyclone strikes a year later, coupled with a recession in Australia and New Zealand causing reductions in exports, tourist demand and remittances. Growth declines by 4½ percentage points in 2014/15 and further by 5 percentage points in 2015/16 relative to the baseline, with a slower recovery.
  - Results:
    - Tests show less resilience of the local banks.
    - In the very severe scenario (second cyclone plus external downturn), accumulating charges to profits and losses could only be fully absorbed by the less leveraged and less credit impaired foreign banks.
    - The two local banks approached the minimum tier 1 threshold of 7.5 percent CAR in the third year; one bank continued to deteriorate while the other began to recover.
- Bottom-up solvency stress tests:
  - Banks’ own estimates showed minimal negative impacts on capital adequacy, reflecting likely over-optimistic assumptions mainly regarding profitability.
  - The BU process was productive for discussing accumulating effects of shocks on capital.
- Liquidity stress testing:
  - Under the Basel Liquidity Coverage Ratio all banks were well above 100 percent, with over 200 percent for the system; the lowest ratio was for one of the foreign banks.
  - In a very severe “general run” scenario, assuming non-resident parent funding, and government and SOE deposits are retained, one foreign bank depleted liquidity in 19 days; remaining banks had liquidity beyond 30 days.
  - The general run could be triggered by perceived problems in parts of the banking sector and could be aggravated by weakened confidence in the government’s ability to provide a liquidity back stop.

*Source: IMF country report excerpt provided.*

### 30.      The team concluded that the framework for financial stability analyses and policy

### _cr15192 - 30.      The team concluded that the framework for financial stability analyses and policy

### Key deficiencies identified
- No financial stability unit dedicated to systemic issues in the CBS.
- No formal cooperation between the CBS and the Ministry of Finance (MOF) focusing on financial stability.
- Significant data gaps with respect to banks, and especially non-banks.
- Little public reporting on financial stability beyond descriptions of recent developments.
- Auditing firms are not subject to quality assurance reviews, identified as a weakness.

### Recommended institutional and analytical measures
- Create high and operational level financial stability committees, consisting of CBS and MOF staff, formalized through a Memorandum of Understanding, tasked with analysis of financial stability risks and policies and the coordination of contingency plans.
- Establish a financial stability unit in the CBS, assigning staff to regularly assess financial stability and to support the financial stability committees.
- Improve the quality, coverage and granularity of financial supervisory data for analysis of banks and non-banks.
- Develop research capacity on financial stability, including simple stress testing.
- Consider collecting financial data on businesses and households.
- Publish a basic Financial Stability Report.

### Legal and governance reforms
- New CBS Act (CBA) submitted to reform governance and safeguards; generally aligned with IMF technical assistance recommendations but exceptions remain:
  - Safeguards for credits to the Government could be stronger in terms of ceiling on the amount, maturity limit, and market based remuneration.
  - Terms of nonexecutive directors are not mentioned.
- The Financial Institutions Act (FIA) requires amendment to:
  - Accord CBS specific powers to waive the large exposure limit when appropriate.
  - Give CBS authority to effect change in a bank’s Board and senior management.
  - Define “significant shareholder”, the capacity to deem parties to be related and to require deduction of related-parties’ exposures from capital when assessing capital adequacy.
  - Remove provisions that contemplate involvement of the Court in certain administrative remedial measures that could obstruct application.

### Financial regulation and supervision — mandate and capacity
- CBS is principal domestic financial sector supervisor; mandate expanded to supervise domestic commercial banks, insurance companies, PFIs, Monetary Transfer Operators (MTOs), and foreign exchange dealers. Credit unions are intended to be added.
- Over time CBS should supervise all lending, deposit taking, and other financial intermediary institutions. Supervision and regulation of offshore banks should eventually move from SIFA to CBS.
- No capital market supervision currently; Finance Sector Plan envisages a capital market authority under CBS.
- CBS lacks adequate resources for increasing responsibilities; staffing should be increased.

### Domestic banks — supervision and gaps
- Supervision is primarily off-site; banks file returns designed for the monetary survey; data are manually extracted.
- Recommendation: introduce a parallel prudential data survey requiring new granular supervisory data in electronic format to automate data transmission.
- Consider use of the FIA power for CBS to request verification of returns’ accuracy by a bank’s external auditors.
- 2007 BCP Assessment identified significant weaknesses; many recommendations remain:
  - Issue more detailed guidance to banks on standards for credit policies and evaluation of systems and controls for managing credit risk.
  - Collect information on connected lending; use off-site surveillance and on-site inspections to monitor compliance; seek legal power to rule on existence of connected lending.
  - Require banks to establish Board-approved, comprehensive risk management policies covering interest rate, market, country and operational risks; assess adequacy during supervision.
  - Require banks to report all single exposures exceeding 10 percent of capital.
- Supervisory guidance remains confined to nine “Prudential Statements” issued between 1995 and 1999; these lack detailed prescriptive guidance; powers for enforcement should be strengthened.
- On-site inspections: a planned two-year cycle was not fully delivered; on-site inspections were conducted in 2013 for the four commercial banks; 2015 inspections of all banks were planned with near-term priority to local banks.
- Risk-Based Supervision (RBS) aimed for but gaps in implementation remain; follow-up to close out supervisory issues needs improvement.

### Offshore banks (SIFA)
- SIFA supervises international financial services but faces severe weaknesses:
  - Potential infringement of operational independence due to Minister of Finance powers to grant licenses and take important supervisory measures.
  - Potential conflict between promotional and supervisory roles.
  - Minimal published data on the offshore sector.
  - Need to introduce on-site inspections emphasizing asset quality and classification.
  - Lack of individual capital requirements based on risk profile.
  - Lack of guidance on banks’ risk management.
- SIFA’s supervision limited to receipt and filing of a quarterly report and review of audited accounts prior to annual license renewal for the seven offshore international banks; no Supervisory Guidance in place.

### Non-banks and PFIs
- CBS supervision of DBS and SNPF since FIA amendment in 2001; UTOS and SHC brought under CBS supervision during 2014.
- Supervision to date limited and almost exclusively off-site; hampered by data quality and methods, and insufficient skilled staff.
- Potential overlaps between government power over PFIs and CBS supervisory powers create reputational risks; policy lending through CBS should be discontinued to avoid conflict.
- Near-term supervisory priorities for PFIs:
  - Develop or revise and bring into force prudential statements for SNPF, SHC, DBS, and UTOS; supervise DBS and UTOS as banks given balance sheet structures.
  - Improve collection and verification of data.
  - Start regular on-site inspections.
  - Formulate plans to address non-performing assets where needed.
  - Deepen off-site analysis, eventually including simple stress testing.
  - Map and assess potential linkages with the economy and fiscal position.

### Insurance sector
- Insurance Act of 2007 established the Office of Insurance Commissioner under CBS with powers for regulation, licensing, and supervision.
- CBS relies on off-site supervision and lacks technical capacity in insurance.
- Financial reporting and auditing practices are inadequate; policyholders’ rights not properly protected.
- Recommendation: prepare a high level supervisory framework document describing the approach to effective supervision and a plan for staff skill and capability development; prioritize staff training in financial analysis and on-site inspection techniques.

### Payment systems and remittances
- National payment system at an early stage; no Real Time Gross Settlement System or other electronic clearing and settlement system.
- Only interbank payment system is cheque clearing with manual settlement in the CBS’ Exchange Settlement Account.
- Recommendation: consider implementing a high value cheque clearing process for same day settlement to reduce settlement and credit risks.
- National Payment Systems Act adopted in April 2014; CBS to procure a new ATS+ system.
- International remittances:
  - Mainly transferred through 15 licensed MTOs (78 percent) and the four banks (22 percent).
  - In FY2014 inflows through about 525,000 transactions represented about 21 percent of GDP.
  - Cost of remittances is high as a percentage of average transaction value (about 10 percent).
- Areas for reform: enhanced transparency on cost of sending money; stepped up consumer protection and education; implementation of a code of conduct for remittances; further cooperation on AML/CFT with key jurisdictions abroad.

### Banking resolution, crisis prevention and management
- Legal framework for dealing with severely distressed FIs should be upgraded:
  - Legal basis for directing FIs to take needed action affecting personal and property rights is not precise enough.
  - Available options (license revocation or liquidation through the court without prior resolution action) could be disruptive.
  - Legislation does not provide depositor preference; CBS is not allowed to take resolution actions that alter payment priority set by other law.
  - Court-supervised management gives the court full control over administrator powers and duration.
- Recommendations for FIA amendments to establish a special resolution regime:
  - Provide precise triggers for resolution actions before insolvency.
  - Give powers to undertake resolution actions under CBS direct administration (remove/replace management, appoint an administrator).
  - Provide legal basis for resolution tools (transfer/sell selected assets and liabilities, establish temporary bridge institution, override shareholders’ rights to recapitalize/restructure/dispose of business).
  - Legal powers to apply special rules in cases with systemic implications.
- Consider a funded Deposit Insurance Scheme (DIS) with industry contributions over the medium-term once pre-conditions are met (strengthened supervision and upgraded resolution regime); DIS should protect small depositors and be a tool in the new resolution framework, with least cost principle funding.
- Liquidity management and support:
  - CBS must closely monitor bank liquidity including assets usable as collateral for liquidity support.
  - Proposed CBA amendment would provide an emergency liquidity assistance (ELA) framework with safeguards against potential losses and protection for the CBS financial position in concurrence with the MOF.
  - On this basis CBS should develop an operational framework for ELA.
- MOF and CBS should coordinate to develop a contingency plan covering system and individual systemic institutions; plan should be followed under supervision of the financial stability committee, include coordination with foreign supervisors, consider emergency financial arrangements, and be tested via “war games.”

### Public Financial Institutions (PFIs) — mandates and performance
- PFIs collectively important to the financial system but lack a coherent policy framework; governed under individual Acts; activities have deviated from original mandates without market gap or cost-benefit analysis, resulting in overlapping functions.
- Alternatives to direct ownership/involvement include credit guarantees, improved business environment and financial infrastructure, reduction of informational asymmetries, and improving consumers’ financial capability.
- New Ministry of Public Enterprises offers opportunity to develop policy coordination framework for PFIs and SOEs.
- Steps to improve PFIs effectiveness:
  - Incorporate PFIs in CBS supervisory and regulatory framework to strengthen stability and competitiveness.
  - Contain potential fiscal risks by refraining from policy lending through PFIs without budgetary funding.
  - Enhance transparency and governance via improved accounting and disclosure practices.
  - Build sustainable PFIs through restructuring, potential divestment or privatization, and continuous re-evaluation of justification for activities and existence.

### Main recommendations for individual PFIs
- Development Bank of Samoa:
  - Urgent measures to address operational inefficiencies, political interference, and financial weaknesses.
  - Review operations and management processes; develop a focused strategy for long-term financial sustainability.
  - Conduct a full asset quality review as soon as possible.
  - Limit new lending until management practices are strengthened and balance sheet position assessed.
- Samoa National Provident Fund (SNPF):
  - Diversify investment portfolio, including share of offshore investments as permitted by foreign exchange controls.
  - Gradually reduce lending-against-contribution share to better reflect mandate.
  - Introduce multi-year budgets and strengthen credit and risk management capabilities.
- Unit Trust of Samoa (UTOS):
  - Clarify mandate; fully disclose increased risks to unit holders from leveraged operations.
  - Perform proper screening and monitoring of lending and investment decisions; improve accounting and credit and risk management capabilities.
  - Government to decide whether to convert UTOS into a policy bank or deleverage it and continue as a conventional mutual fund.
- Samoa Housing Corporation (SHC):
  - Clearly define and target clientele; improve accounting and credit and risk management.
  - Newly assigned unfunded mandate should either be compensated from the state budget or its social cost reflected in SHC’s financial reporting.
- Samoa Life Assurance Corporation (SLAC):
  - Reduce lending to the insured as a share of assets and move to a more diversified investment portfolio.
  - Strengthen CBS supervision and improve accounting, and credit and risk management capabilities.

*Source: _cr15192 - 30.      The team concluded that the framework for financial stability analyses and policy*

### 54.      While the difficult economic environment reduces the creditworthiness of borrowers,

### _cr15192 - 54.      While the difficult economic environment reduces the creditworthiness of borrowers,

### Access to finance — structural constraints and recent reforms
- Structural constraints limiting access to finance:
  - High collateralization of loans (over 200 percent on average).
  - Large share of customary land not used as collateral.
  - Absence of a credit bureau and/or a movable collateral registry.
  - High concentration and limited competition in the banking sector.
- Recent and ongoing reforms:
  - Authorities are in the process of setting up a credit bureau and a registry for personal property securities.
  - A law establishing movable collateral registry had been approved and implementation procedures are to be initiated.
  - Recent changes to the Alienation of Customary Land Act allow banks to use capital improvements on leased customary land as collateral, although banks remain hesitant and uncertain about contract enforcement.

### Customary land (Box 3) — facts and policy direction
- Facts:
  - Customary land constitutes approximately 80 percent of land in Samoa.
  - Customary land is owned communally and held by the ‘matai’.
  - Other types of land: freehold (12 percent of land area) and public land (7 percent).
  - Most aspects of customary land are enshrined in legislation, including the Constitution and the Alienation of Customary Land Act.
  - The Customary Land Advisory Committee was set up in 2013 to advise the government on reforms.
- Policy direction noted:
  - Using customary land as collateral remains one of the biggest challenges for obtaining mortgages and longer-term loans.
  - Allowing for leases already in place to be used as collateral and making leases transferrable in the event of a default while not changing communal ownership of the land may be the most realistic option.

### Banking sector structure, concentration, and spreads
- Market structure and concentration:
  - The largest bank has 45 percent of total assets.
  - A HHI above 0.3 indicates a high market concentration.
- Interest rate spreads and drivers:
  - The average interest rate spread in 2013 was 4 percent.
  - The interest rate spread for the largest bank was 6.2 percent.
  - Spread decomposition shows overheads and provisions as main drivers.
- Microfinance:
  - The only MFI is still small compared to banks, but over time it could add competition to the SME finance segment.

### Policy recommendations on financial sector competition and access to finance
- The authorities should pursue policies to increase private financial sector competition and improve access to finance, specifically:
  - (i) Collect better and more data on financial inclusion of households and SMEs, and on financial services provided by MFIs and credit unions to support policies.
  - (ii) Continue the work to establish a credit bureau and a personal property registry.
  - (iii) Promote the economic use of customary land.
  - (iv) Improve financial business education.
  - (v) Review and reform the Small Business Loan Guarantee Scheme to strengthen risk sharing with banks, and to improve financial reporting by the SBEC.

### Anti–Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- Recent assessment and timing:
  - Samoa’s AML/CFT regime was assessed in November 2014 by the Asia Pacific Group on Money Laundering (APG).
  - The detailed mutual evaluation report is scheduled to be discussed and adopted at the APG’s July 2015 annual meeting.
- Risks and recent measures:
  - Samoa’s offshore financial sector poses heightened money laundering risks, consistent with the 2012 national ML/FT risk assessment.
  - International business companies (IBCs) form the largest part of the offshore sector and are potential conduits for money laundering given their tax exempt status.
  - Recent measures enacted include added requirements for keeping financial information of IBCs and abolition of bearer shares.
  - Questions remain on whether trust and company service providers (TCSPs) have adequate understanding of IBCs to fulfill AML/CFT obligations and whether they can effectively identify and verify beneficial owners.
  - Supervision of TCSPs for AML/CFT compliance has become more regular, but the depth of on-site inspections by the Samoa International Finance Authority appears to be insufficient.
- AML/CFT recommendations:
  - (i) Require TCSPs to obtain sufficient information about IBCs to enable them to fulfill their customer due diligence and suspicious transaction reporting obligations.
  - (ii) Enhance the accuracy and timeliness of beneficial ownership information held by TCSPs on the IBCs that they form.
  - (iii) Strengthen the intensity of on-site inspections of the international financial sector.

### Key financial soundness indicators (selected, fiscal year ending in June)
- Asset quality:
  - NPL to Total Loans: 2010: 6.1; 2011: 4.4; 2012: 4.7; 2013: 7.5; 2014: 8.3.
  - Res for Loan Loss to Tot Loans: 2010: 4.0; 2011: 4.0; 2012: 4.4; 2013: 5.7; 2014: 6.4.
  - Res for Loan Loss to NPLs (Coverage): 2010: 65.8; 2011: 89.2; 2012: 93.3; 2013: 75.9; 2014: 77.3.
  - NPLs net of s/ Provisions to Regulatory Capital: 2010: 18.8; 2011: 10.4; 2012: 11.2; 2013: 19.9; 2014: 15.5.
  - Annualized Loan Growth: 2010: 3.8; 2011: 8.1; 2012: -1.7; 2013: 1.5; 2014: -4.4.
- Profitability and efficiency:
  - Net Interest Margin: 2010: 3.5; 2011: 3.4; 2012: 3.4; 2013: 3.5; 2014: 2.9.
  - Efficiency (Cost/Income): 2010: 44.1; 2011: 44.5; 2012: 48.2; 2013: 54.4; 2014: 47.6.
  - ROAA: 2010: 2.0; 2011: 2.2; 2012: 2.0; 2013: 1.6; 2014: 1.8.
  - ROAE: 2010: 11.7; 2011: 13.3; 2012: 11.5; 2013: 9.3; 2014: 10.8.
- Liquidity and funding:
  - Loan-to-Deposit Ratio: 2010: 104.6; 2011: 113.4; 2012: 115.2; 2013: 118.1; 2014: 105.4.
  - Liquid Assets / Liquid Liabilities: 2010: 76.6; 2011: 44.7; 2012: 54.8; 2013: 54.8; 2014: 56.3.
  - Wholesale Funds / Total Liab.: 2010: 10.6; 2011: 11.5; 2012: 11.0; 2013: 10.0; 2014: 10.1.
- Capital adequacy & leverage:
  - Capital Adequacy Ratio: 2010: 27.2; 2011: 27.1; 2012: 30.0; 2013: 27.4; 2014: 28.9.
  - Tier 1 Capital Ratio: 2010: 22.8; 2011: 22.3; 2012: 25.4; 2013: 23.6; 2014: 24.6.
  - Financial Leverage (times): 2010: 6.3; 2011: 6.0; 2012: 5.7; 2013: 5.9; 2014: 6.4.

*Source: Excerpt from IMF staff report (content unit: _cr15192 - 54.      While the difficult economic environment reduces the creditworthiness of borrowers,)*

### Appendix Table 4. Banking Sector Stress Testing Matrix (STeM)

### Appendix Table 4. Banking Sector Stress Testing Matrix (STeM)

### Banking Sector: Solvency Risk

- Institutional perimeter
  - Institutions included: 4 banks — 4 banks of which two foreign: (ANZ Samoa and Westpac Samoa) and two local: (National Bank of Samoa and Commercial Bank of Samoa).
  - Market-share: 100 percent of Banking Sector; 4 banks: 100 percent of domestic banking sector assets and 59 percent of Domestic Financial System assets.
  - Data and baseline date:
    - Bottom-Up: Institutions’ own data (historical and as at 30 June 2014). Institution to be assessed on a standalone basis.
    - Top-Down: Institutions’ data as provided by institutions (questionnaire templates): Historical credit and other risk data to 2007, and selected current data (as at 30 June 2014). CBS data as reported by institutions: Historical macroeconomic, credit and selected risk data to 2007 plus current data (at 30 June 2014).
    - Specific assumption: (i) each bank with minimum NPLs in each industry sector equal to 25 percent of the weighted average of its NPLs across all industry sectors; and (ii) where provisions were recorded for an industry sector, but no NPLs, a level of NPLs was assumed at least equal to the provisions allocated to that industry sector.

- Channels of risk propagation / Methodology
  - Bottom-Up: Banks’ internal models. Balance sheet approach (per templates).
  - Top-Down: Balance sheet approach incorporating satellite models for risk adjusted P&L, and on and off balance sheet impacts. Excel based sensitivity analysis.
  - Satellite Models for Macro-Financial linkages:
    - Bottom-Up: Banks’ internal models.
    - Top-Down: Expert judgment; Eviews models for local data availability for credit losses, and credit growth; Credit growth incorporating IMF/CBS estimates.
    - Integration of solvency and funding through increased funding costs under stress and loss of income through impairments. Triangulation through Heuristics and Expert Judgment.
  - Stress test horizon: 4 years (Bottom-Up), 4 years (Top-Down).

- Shocks: Scenarios (developed in consultation with the CBS)
  - Scenario Analysis:
    - Baseline: using WEO forecasts.
    - Moderate shock: single class 4 cyclone with diverse sector GDP impacts (including agriculture, tourism, construction and public sector).
    - Severe Shock: dual class 4 cyclones (a year apart) combined with a recession for two leading trading partners.
    - Accentuation of moderate shock impacts through (i) reductions in remittances and export demand due to recessions in Australia and New Zealand; (ii) presence of already stressed balance sheets.
  - Sensitivity analysis:
    - Bottom-Up: Interest rate shocks of parallel increases in rates of 200, 300 and 400bp (2 SD is 2.6 percent). FX shocks of 10 and 20 percent depreciation of the Tala against the USD.
    - Top-Down:
      - Interest rate shocks: (i) a 300 bps parallel move and a structured 300 bps non-parallel move in borrowing and lending rates across the applicable yield curve; (ii) 300bps contraction in interest margins in across the applicable yield curve.
      - FX shock: 20 percent depreciation and appreciation of the Tala against the USD.
      - Concentration risk: Failure of the largest counterparties (asset side credit loss and liabilities side reliance on non-bank depositors) with 20 percent haircut on collateral, and instantaneous increase in NPLs on industry exposures factored by levels of existing NPLs.

- Risks and Buffers
  - Risks/factors assessed:
    - Bottom-Up: Credit losses, profitability, funding costs, market risk, operational risk, exchange rate, taxes.
    - Top-Down: Change in credit aggregates, credit losses, profitability, funding costs (incorporating fixed / floating mix and spread contraction), market risk, non-interest income and expenses, operational risk, exchange rate, taxes.
  - Behavioral adjustments (both Bottom-Up and Top-Down):
    - Maturing exposures replaced with same asset class.
    - New assets originated proportionally across the portfolio.
    - Maturity / tenor assumed to remain unchanged.
    - No policy responses.
    - No management action other than already included in strategy (capital raising, cost cutting, asset sales etc.).

- Regulatory and Market-Based Standards and Parameters
  - Calibration of risk parameters:
    - Point in time parameters for credit risk for both credit losses (Bottom-Up); Point in time parameters for credit risk for both credit losses and stressed RWA calculations (Top-Down).
    - Historical P&L and Balance sheet performance used.
  - Regulatory / Accounting and Market-Based Standards:
    - Capital metrics per local regulatory requirements:
      - CAR minimum of 15 percent
      - Tier 1 minimum of 7.5 percent
      - Tier 2 < 100 percent of core capital
    - RWA metrics per local regulatory requirements, which do not have separate risk ratings for retail residential, and corporate and commercial as in Basel II (Bottom-Up).
    - RWA metrics per local regulatory requirements (based on Basel II standardized) (Top-Down).
    - RWA metrics per Quasi Internally Rated Bank (QIRB) assessment – per Schmieder et al. (Top-Down).

- Reporting Format for Results
  - Output presentation:
    - Bottom-Up: 4 year P&L and Balance sheet under each scenario. Loan classification under each scenario. Industry sector impact under each scenario. Capital /Capital shortfall.
    - Top-Down: Process and methodology; 4 year P&L and Balance Sheet by bank. Industry sector impacts (10 sectors). Capital/Capital shortfall, by bank and by sector. Dispersion of capital ratios: min, avg, max; percentage of assets that fail. Capital shortfall, system wide. Pass or fail; percentage of assets that fail. For each hurdle rate, share in whole system by asset. Industry sector concentrations. Multiple Financial Soundness Indicators.

### Banking Sector: Liquidity Risk

- Institutional perimeter
  - Institutions included: NA (Liquidity Tests were not undertaken by the banks).
  - As for Solvency Risk for Top-Down.
  - Data and baseline date:
    - Bottom-Up: NA.
    - Top-Down: Institutions’ data as provided by institutions (questionnaires); Selected current data (as at 30 June 2014). CBS data per regulatory reports by institutions; Selected current data (at 30 June 2014). Institutions to be assessed on a standalone basis.

- Channels of Risk Propagation / Methodology
  - Bottom-Up: NA.
  - Top-Down: Implied cash flow tests (30 day). (Increase in funding costs are covered separately in multi-period solvency tests).

- Risks and Buffers
  - Risks (Top-Down): Rapid withdrawal or non-rollover of deposits (including from foreign parent). Concentration of funding/loss of funding by Govt. and SOEs. Closure of funding markets. Discounts on realization of liquid assets and haircuts on saleable non liquid assets.
  - Buffers (Top-Down): Counterbalancing capacity (saleable assets). Central bank facilities. Possible reduction in Minimum Reserve Requirement.

- Tail shocks: Size of the shock (Top-Down)
  - Bank run and dry up of traditional sources of funding, loss of key sources of funding.
  - Rising discounts on realization of liquid assets and haircuts on disposal of non liquid but saleable assets.
  - In a very severe “general run” the assumption is consecutive daily withdrawals of:
    - (i) 7.5 percent and 5 percent, respectively, of domestic and foreign currency demand deposits;
    - (ii) 2.5 percent and 1.5 percent, respectively, of domestic and foreign currency savings deposits; and
    - (iii) 1.5 percent and 0.5 percent, respectively, of domestic and foreign term deposits.
  - This scenario also assumes a haircut of 30 percent on disposal of saleable assets.

- Regulatory and Market-Based Standards and Parameters
  - Regulatory standards: NA (No regulatory metrics (ie self-regulated)).
  - Market based Standards: Basel III Liquidity Coverage Ratio. Liquidity shortfall per day as percentage of Total Assets (TA).

- Reporting Format for Results
  - Output Presentation (Top-Down):
    - Assumptions.
    - Survival period in days by bank.
    - Number of banks that still can meet their obligations.
    - Liquidity shortfall as percent of TA.

### Banking Sector: Contagion/Spillover Risk

- Institutional perimeter
  - Institutions included: NA (Contingency/Spillover tests were not undertaken by the banks).
  - As for Solvency Risk for Top-Down.
  - Market share: NA.
  - Data and baseline date:
    - Bottom-Up: NA.
    - Top-Down: Institutions’ data as provided by institutions (questionnaire templates): Selected current data (as of 30 June 2014). CBS data as reported by institutions: Selected current data (as of 30 June 2014). Institutions to be assessed on a standalone basis.

- Risks
  - Potential insolvency (technical or actual) on failure of a local banking sector participant.
  - Currently there is only limited interbank lending between resident-banks. The risk of insolvency due to the failure of another resident bank is considered to be low.

- Methodology
  - Top-Down: Inter financial institution contagion/spillover risk model. Assumed default of selected borrower and subsequent domino effect.

- Shock assumption
  - Single and multiple default (pre and post severe-scenario solvency test):
    - (i) each resident bank failed in turn;
    - (ii) all resident banks failed at the same time; and
    - (iii) each resident bank failed in turn, in which case the assessment was undertaken assuming the creditor bank in each case was at the lowest level of capital adequacy induced by the severe solvency scenario (see Severe Solvency Test).

- Type of test
  - Iterative simulations of single and multiple resident-bank defaults.

*Source: Appendix Table 4. Banking Sector Stress Testing Matrix (STeM) — as provided in the source content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15192.pdf_