Despite expected economic challenges, Barbados’ financial system remains resilient to various risks, principally because of the nature and management of its financial institutions, the culture of its citizens and a robust regulatory system.
This conclusion is based on analyses conducted on the various sub-sectors by Barbados’ two main financial sector regulators – the Central Bank and the Financial Services Commission (FSC) – to determine their resilience to various risks originating domestically and externally. These tough and comprehensive tests revealed that strongly adverse conditions should not result in a crippling effect on the stability of the financial system.
While the system has benefited from generally prudent management among regulated entities, significant and ongoing work geared to meeting and maintaining best practice standards and ensuring that the underlying system can meet challenges overall has been performed by the regulators.
This includes the continued move towards a risk-based supervisory framework, the consistent review of capital adequacy of entities, an enhanced examination/inspection programme and where necessary, enhanced requirements for more frequent reporting. Despite these efforts, however, the potential impact of an extended worse-than-expected trend in the economy should not be underestimated.
The most recent review of the credit union sector found it to be sufficiently capitalized and able to remain solvent even in the face of significant shocks.
The sector currently has in excess of $1.5 billion in total assets, $1.1 billion in loans, and in 2012 reported operating net income of $20.7 million. The sector’s performance is tied directly to the domestic economy; therefore, its major risks will be driven by the level of economic activity in Barbados.
Weak job prospects and low economic growth reduce domestic demand, the ability of consumers to save, and their appetite for debt. These elements have the potential to increase non-performing loans in the sector in 2014.
While the sector does not hold the same level of excess reserves as the banking sector, as at March 2013 it reported gross capital levels in excess of ten per cent and liquid assets of approximately $320 million.
Likewise, the domestic insurance industry is expected to remain relatively stable and solvent. It is unlikely that industry income or assets will rise significantly due to projected lower investment returns and increased operating expenditure. The industry currently has total assets in excess of $3 billion and total insurance liabilities of $1.4 billion.
Excess capital and access to reinsurance in the international market as a risk-diversification tool would allow the insurance sector to withstand various shocks from catastrophic risks or shocks from continued low investments returns in 2014.
Stock market activity tends to trend with the performance of the overall economy, and therefore trading is expected to remain subdued in 2014.
Below average performance in key economic sectors such as tourism, along with lower estimated output in manufacturing and agriculture are some of the underlying factors affecting economic activity.
The local mutual fund sector has grown to have assets in excess of $1.5 billion, fuelled in part by pension plan investment. It is expected that the level of redemptions could increase and the growth in the net asset values could slow if investment returns remain depressed.
The FSC is, therefore, paying special attention to the liquidity in mutual funds to ensure adequate coverage for the potential increase in redemptions.
The FSC will continue to assess its licensees and the process of ongoing supervision, in accordance with legislation and regulations. Risk analyses of financial institutions are already performed and there are a number of strategies and policies which could be employed should the need for intervention arise.