THE OVERALL LEVEL of financial stability in the Caribbean has improved significantly over what obtained during the height of the recent global financial and economic crisis. In terms of current performance, the levels of capital adequacy/reserves and liquidity among regional financial institutions are generally above their counterparts in Latin America and there have been improvements in this area again in 2014 relative to 2013.
Asset quality and profitability are also generally on par with their peers in Latin America although there has been same slippage in a few jurisdictions. Additionally, significant macroeconomic vulnerabilities still exist which can potentially create challenges for financial stability. In spite of these vulnerabilities, the level of financial system stress is relatively low and the resilience of the system has been buttressed by recent improvements in economic performance, ongoing efforts to upgrade the regional and national architecture for financial stability and significant buffers in terms of liquidity and capital.
The commercial banks in the Caribbean are the dominant institutional class among financial institutions in the region, both in terms of deposits and financial assets, and the state of their condition is therefore crucial to the stability of financial systems in the region. Commercial banks’ average performance was mixed over the period 2013 to 2014. The insurance penetration ratio in the Caribbean is quite significant in terms of the considerable number of companies and agencies in the various countries. The volume of policies has also been growing significantly as income levels and property and motor vehicle ownership have increased. Outside of the problems experienced by the collapse of CLICO and the British American Insurance Company, the other life insurance companies, with their traditional product offerings, managed to survive the post-2008 downturn in most Caribbean economies.
The financial system in the Caribbean has weathered the international financial and economic crisis fairly well. However, while the operational practices of its dominant financial enterprises are in the main fairly traditional and risk averse, the region’s financial stability still bears careful watching, partly because of the risks and vulnerabilities emanating from significant macro-imbalances, the risks associated with its less than mature financial markets, the skewed nature of the exposure to the non-financial sectors, the limited degree of asset diversification in the critical banking and insurance sectors; the significant weighting of systemically important financial institutions; and the incomplete state of financial reform and restructuring in the various jurisdictions.
In this context, regional central banks and other important stakeholders have long recognised the need for a more comprehensive and regional approach to financial supervision and regulation and have continued to build up the financial stability architecture in the region. These efforts have led to the continuous upgrade over time of the financial stability framework in the Caribbean. The regional authorities are currently focused on conducting not only stress tests on national financial systems but also cross-border contagion stress tests which are at the heart of regional macro prudential surveillance.
These stress tests on individual institutions are aimed not just at estimating the resilience of domestic financial systems, but at seeing how failure of individual institutions would propagate through the region, and therefore whether there are domestic risks that are regionally systemic in magnitude. These ongoing enhancements to the architecture for financial stability in the Caribbean reflect the commitment of regional stakeholders to continue improving the resilience of the financial system in the region.
