Should Barbados be concerned about financial instability?
Key financial sector indicators point to the continued stability of the Barbadian financial system during 2016. The banking system remained the largest and arguably most central group of institutions within the financial system.
The overarching feature of the commercial banking environment continued to be extremely high levels of liquidity as banks reduced their holdings of government securities and overall loan growth remained weak. Against this backdrop, banks still managed to increase profitability, due primarily to lower interest expenses.
Though there was no increase in their credit portfolios due to the continued weakness in business-related lending, an overall improvement of credit risk was reported as the banks’ non-performing loan (NPL) portfolio continued to subside.
Capital remained above international guidelines even with the introduction of capital reporting using Basel II requirements. The strength of the parent companies remains critical to these institutions’ soundness, and is a significant safeguard against potential spill-overs, since most inter-bank exposures are between domestic affiliates and their parents. The parent entities continued to obtain strong reviews from domestic regulators and international ratings agencies.
With their focus on personal lending, credit unions reported robust growth in loans and investments, an improvement in the ratio of non-performing loans to total loans, and increased profitability. However, a significant proportion of their NPLs have not been serviced in over a year and their provision levels remain significantly below those of banks.
The performance of the insurance industry was mixed during 2015, the last full year for which data is available. The industry as a whole recorded an overall increase in assets but the general insurers experienced a fall in their asset base. Several general insurers registered losses leading to an erosion of capital buffers in this subsector. However, life insurers recorded strong growth in premiums and a marginal increase in profitability.
Stress tests performed on the financial system suggest that the system is generally stable and can survive a range of adverse events. In particular, stress tests for banks continued to emphasise their resilience to a variety of economic shocks.
Deposit-taking finance and trust companies were also robust, although specific vulnerabilities emerged under less adverse conditions than for banks. For credit unions, capital levels in the industry are adequate to absorb potential losses due to credit risk shocks and liquidity was sufficient to buffer potential deposit runs.
Stress tests for the insurance sector, including the impact of recessionary, pandemic, natural disaster shocks and banking and sovereign crises, indicated that the overall industry appears to be reasonably resilient, though some companies faced significant losses of capital.
Commercial banks remained the dominant player in the financial system holding 55 per cent of domestic financial assets. The insurance industry accounted for 13 per cent, while credit unions continued to gain share, attracting eight per cent of the market compared to seven per cent five years ago. Trust and finance companies, mutual funds and private pension schemes each held less than ten per cent of the system’s assets.
Total assets of the system grew 4.5 per cent ($805 million), from 260 per cent of GDP at September 2015 to reach 266 per cent of GDP at September 2016. This growth was mainly due to expansions in commercial banks’ claims on the Central Bank, credit unions’ loans and investments and higher asset values of mutual funds.
Interconnectedness and cross border linkages remain a key feature of the financial system. All five banks are foreign-owned. The larger insurance companies operate both regionally and internationally, and some have mutual funds and pension investment businesses.
This information was captured from the latest Barbados Financial Stability Report which the Central Bank released on Friday in partnership with the Financial Services Commission.