Should Barbados be concerned about financial instability?
At a time when there are major concerns about Barbados’ stagnant economy and Government’s severely challenged finances, the news that the island’s financial system remains stable is an announcement that Barbadians would welcome.
The positive news was announced on Friday when the Central Bank released
the latest Financial Stability Report, which was produced in partnership with the Financial Services Commission.
Why is financial stability important? As Zimbabwe economist Sanderson Abel said in 2015: “It is fundamental to have a sound, stable and healthy financial system to support the efficient allocation of resources and distribution of risks across the economy.
“Financial instability and its effects on the economy can be very costly because of the associated contagion or spillover effects to other parts of the economy. Financial instability may lead to a financial crisis with adverse consequences for the economy.”
Arguably the last major scare the region, including Barbados, had as far as financial instability was concerned was the crisis that saw the collapse of Trinidad and Tobago’s C.L. Financial and its subsidiaries CLICO and British American Insurance Company Limited (BAICO).
In Barbados’ case, the CLICO and BAICO matters remain unresolved, but progress has been made, and only last week, during debate on the Appropriation Bill, Minister of Finance Chris Sinckler told the House of Assembly that policyholders of these companies were likely to soon start receiving monies.
Outside of that matter, Barbados’ insurance industry has not had major financial instability, neither has the wider sector, including commercial banks, credit unions, other deposit-taking institutions, and mutual funds.
On an international scale, concerns about financial instability have increased in the wake of the United Kingdom’s decision to leave the European Union, as well as the coming to office of the Donald Trump administration, and the decision of the United States Federal Reserve to raise interest rates.
While Barbados’ financial system is stable, it still remains vulnerable to international events outside of the control of local authorities.
So the question is, is the world about to enter a period of financial instability?
Based on statements he made on Friday, Financial Stability Board (FSB) head Mark Carney fears the world might be facing the threat of “reform fatigue” years after the financial crisis and identified a need for the world’s largest economists to boost regulatory cooperation.
Last month the FSB, which is an international body that monitors and makes recommendations about the global financial system, held a meeting in Cape Town, South Africa at which post-financial crisis reforms were assessed.
In a statement reporting on the outcome of that meeting it warned there were a number of “current and emerging financial system vulnerabilities”.
These included “high and rising levels of domestic and foreign currency debt in many countries, potential increases in long-term interest rates and exchange-rate developments are leading to tightened financial conditions for some sovereign and corporate borrowers”.
It added: “Commercial and residential real estate valuations are elevated in some jurisdictions, raising concerns over real estate asset quality in a rising rate or slowing growth environment.
“Uncertainty over the path of future interest rates may pose significant, but varied, risks to banks and institutional investors. Shifts by insurers and pension funds into higher-risk assets raise concerns about losses and portfolio rebalancing when the credit cycle turns.” (SC)