86947 FINANCIAL SECTOR ASSESSMENT BARBADOS MARCH 2014 FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY LATIN AMERICA AND THE CARIBBEAN REGIONAL VICE PRESIDENCY A joint mission from the World Bank (WB) and the International Monetary Fund (IMF) visited Bridgetown in July 2013 and October 2013 to conduct an assessment of Barbados’ financial system under the Financial Sector Assessment Program (FSAP)1 which included an assessment of the observance of the Basel Core Principles (BCP) and the International Association of Insurance Supervisors’ Insurance Core Principles (ICP) and produced three Technical Notes on Credit Unions; Capital Markets Development; and Financial Safety Nets and Crisis Preparedness. This report summarizes the main findings of the mission, identifies key financial sector vulnerabilities and developmental challenges, and provides policy recommendations.                                                              1 The FSAP team comprised Erik Feyen (World Bank) and Marco Pinon (IMF), co-heads, Juan Buchenau, Steen Byskov, Pierre-Laurent Chatain, Ines Gonzalez Del Mazo, Claire McGuire, Craig Thorburn (all World Bank); Jiaqian Chen, David Grigorian, Yugo Koshima, Joonkyu Park, Nobuyasu Sugimoto, Kalin Tintchev, Claudio Visconti (all IMF); Jonathan Katz (external expert, World Bank), and Jose Tuya (external expert, IMF). Kristine Vitola (IMF) participated in the first mission and supported the FSAP team on macro issues. Contents Glossary ........................................................................................................................................................ 3 I. Overview ................................................................................................................................................... 4 II. Macrofinancial Context ............................................................................................................................ 7 III. Structure and Performance of the Financial System ............................................................................... 8 A. Commercial Banks ............................................................................................................................... 9 B. Credit Unions ..................................................................................................................................... 11 C. Part III Financial Institutions.............................................................................................................. 12 D. Insurance Companies ......................................................................................................................... 12 E. Pension Funds ..................................................................................................................................... 13 F. Offshore Financial Sector and Financial Linkages ............................................................................. 14 IV. Financial Regulation and Supervision .................................................................................................. 15 A. Banking Sector ................................................................................................................................... 15 B. The Financial Services Commission .................................................................................................. 17 C. Insurance Sector ................................................................................................................................. 18 D. Credit Unions ..................................................................................................................................... 19 E. Securities Markets .............................................................................................................................. 20 V. Financial Safety Nets and Crisis Preparedness ...................................................................................... 21 A. Overview ............................................................................................................................................ 21 B. Early Intervention and Emergency Liquidity Assistance ................................................................... 21 C. Deposit Insurance and Consumer Protection ..................................................................................... 22 D. Resolution Framework ....................................................................................................................... 23 E. Cross-border Coordination of Resolution of Banks and Insurers ....................................................... 24 VI. Access to Financial Services................................................................................................................. 24 A. Households ......................................................................................................................................... 24 B. Enterprises .......................................................................................................................................... 25 C. Financial infrastructure ...................................................................................................................... 27 VII. Capital Markets Development ............................................................................................................. 28 A. Structure and Activity ........................................................................................................................ 28 B. Developing Capital Markets ............................................................................................................... 29 Appendix I: Detailed Recommendations of FSAP Update 2013 ................................................................ 35 Appendix II: Follow-Up on Key Recommendations of the 2008 FSAP Update ........................................ 37 2   GLOSSARY AML/CFT Anti-Money Laundering / Combating the Financing of Terrorism BCCUL Barbados Co-operative and Credit Union League BCP Basel Core Principles For Effective Supervision BDIC Barbados Deposit Insurance Corporation BDS Barbados dollar BNB Barbados National Bank BSD Bank Supervision Department BSE Barbados Stock Exchange CAR Capital Adequacy Ratio CARICOM Caribbean Community CBB Central Bank of Barbados CLICO Colonial Life Insurance Company CXN Caribbean Exchange Network CSA Cooperatives Societies Act DIA Deposit Insurance Act EIC Exempt Insurance Company FIA Financial Institutions Act FOMC Financial Oversight Management Committee FSAP Financial Sector Assessment Program FSC Financial Services Commission FSMP Financial Stability Management Plan GDP Gross Domestic Product IAIS International Association of Insurance Supervisors IBC International Business Company ICP Insurance Core Principles IFSA International Financial Services Act MoF Ministry of Finance MOU Memorandum of Understanding NIS National Insurance Scheme NPL Non-Performing Loan OSFI Office of the Superintendent of Financial Institutions PPS Policyholder Protection Scheme QIC Qualifying Insurance Company RRP Recovery and Resolution Plan ROA Return on Assets ROE Return on Equity SME Small and Medium Enterprise 3   I. OVERVIEW Financial system risks The financial system faces a weak economic outlook and a deteriorating fiscal position posing substantial macroeconomic risks. As a result, sovereign risk has increased while the fixed exchange rate further limits policy options. As such, full and timely implementation of the new fiscal adjustment package is required. Most public debt is held domestically and long- standing capital controls provide some protection to shocks. The financial system has sizeable sovereign risk exposures and non-performing loans are rising although high capital and liquidity buffers in combination with strong parent entities mitigate risks. Credit unions appear more vulnerable. Financial institutions have been reluctant to lend compounding weak economic and fiscal conditions. Given weak growth prospects, asset quality and lending conditions are projected to weaken further which could amplify economic and fiscal weaknesses. Collateral valuations appear overstated and loan-loss provisions appear low for both onshore banks and credit unions. However, standard bank stress tests suggest onshore banks are resilient, albeit fragile to severe shocks. In the absence of strong parent support and financial safety net coverage, credit unions appear weaker. Moreover, stress tests suggest credit unions are vulnerable to medium-sized liquidity shocks. The presence of a large domestic, regionally active insurer and its rapid expansion of non-insurance activities could produce vulnerabilities, but lack of data prevents an effective risk assessment. The financial offshore2 sector does not appear a source of risk as it mostly focuses on treasury operations and wealth management and does not have onshore financial ties although ownership links exist. Financial regulation and supervision Since the 2008 FSAP, the regulatory and supervisory framework has improved across all sectors. Consolidated risk-based supervision was introduced in the banking sector along with a formalization of supervisory methodologies. Established in April 2011, the Financial Services Commission (FSC) took over oversight for all non-bank financial services sectors (excluding Part III institutions), upgrading regulation and supervisory independence and effectiveness although there is substantial scope for improvement in both areas. While the FSC remains largely untested, progress to date is positive as it has been active across all sectors, evidenced by the issuance of guidelines and hiring and training of staff. Notwithstanding progress, important areas for improvement remain:  Banking supervision should be strengthened in the areas of operational independence, enforcement actions, loan loss provisioning, and AML/CFT oversight in offshore banks;  Across all non-bank financial services sectors (excluding Part III institutions), challenges remain for data collection and reporting standards, effective implementation of guidelines, quality and frequency of onsite examinations, and enhancing independence of the FSC;  In the insurance sector, liability valuations and capital adequacy standards are lacking and risk management needs strengthening;  For both banks and insurers, cross-border supervisory coordination and group supervision should be further enhanced as international financial linkages have grown;                                                              2 The term “offshore” is used in this document to ensure consistency with common international terminology. In Barbados, offshore institutions are referred to as “international” as per the International Financial Services Act. 4    For credit unions, two-tiered, risk-based prudential oversight should be intensified given the sector’s heterogeneity and the possible existence of non-viable entities. In particular, clear rules for restructured loans and write-offs should be established and enforced; and  In capital markets, capital adequacy rules for intermediaries should match international best practice and transparency in the mutual funds industry should be enhanced. Financial safety nets and crisis preparedness Safety net and crisis preparedness arrangements need strengthening across sectors. Financial safety net provisions are uneven across sectors and lack sufficient funding and backstop arrangements. Crisis preparedness and coordination on the national and regional levels is key given growing cross-border linkages, but remains a work in progress, particularly regarding insurers. Resolution regimes need improvement across sectors to provide authorities with an adequate range of tools and powers. In particular, judicial remedies for challenges to decisions should be limited and provisions for bridge institutions should be established. Credit unions are currently excluded from the safety net. Financial viability of entities, a well-equipped deposit insurer, and adequate prudential oversight should precede an extension of the financial safety net to all credit unions to avoid moral hazard and fiscal risks. Access to financial services Access to financial services is well-developed for households, but weaker for firms. Credit to households represents the majority of bank lending and credit unions serve a large majority of the population. However, firms of all sizes identify access to finance as a key obstacle and mostly finance their investments internally compared to peer countries. Moreover, growing NPLs and other risks stifle credit provision, particularly to firms. The playing field for credit unions should be leveled by removing regulatory constraints and tax privileges for qualified institutions to provide a wider range of products. Consolidation of smaller and mid-sized entities should be considered. Financial infrastructure deficiencies should be addressed to enhance competition, intermediation efficiency, and access to finance by, among others, improving credit enforcement and foreclosure procedures, creating an adequate credit information function, and introducing a real estate price index. Capital markets Markets are mostly inactive. The equity market has not grown since 2008 and suffers from high concentration, limited free float, and limited market activity. The secondary market for trading in government securities is limited and the corporate fixed income debt sector is not well- developed. A small, but growing mutual funds industry is one of the few ways to invest abroad. Development should focus on the private sector fixed income market. Regulatory changes that enable private companies to issue debt securities through limited offerings to institutional investors could have promise. For example, the FSC could eliminate issuer requirements that are not appropriate for a disclosure-based regulatory scheme and ensure an expedited notice reporting system to the regulator. Barbados has a significant number of institutional investors, such as insurance companies and pension plans that have an appetite for these securities. 5   Table 1. Key FSAP Update Recommendations Recommendations Term3 Institution Bank Supervision and Regulation Review and update/adopt: homogenous loan classification approach; substandard definition in the ST CBB classification regulation; and provisioning requirements Include in the CBB Act a provision stipulating conditions under which the Governor can be removed. ST CBB/MoF Revise provisions that allow MoF to overrule CBB’s corrective measures Enact the amended FIA and the CBB Act to further empower the CBB ST CBB/MoF Increase the number of AML on-site examinations of on-shore banks ST CBB Perform on-site examinations of international banks that have not been subject to any on-site visits over ST CBB the past five years, particularly in the context of AML/CFT Insurance Supervision Enhance supervisory colleges and maintain active engagement, particularly for systemic entities and ST FSC entities where Barbados is a host supervisor; improve crisis management coordination Amend the limitations in the FSC Act with regard to information sharing ST FSC Develop internal procedure manual for a financial crisis and require insurers with cross-border activities ST FSC to establish contingency plans and procedures Establish robust and enforceable valuation standards for technical provisions MT FSC Accelerate the implementation of risk-based capital adequacy requirements covering all insurers and MT FSC insurance groups and promote ERM frameworks Access to Finance and Credit Unions Consolidate dual, risk-based prudential oversight approach to on-site credit union supervision based on ST FSC well-specified criteria; improve data collection Issue/update guidelines for classification, monitoring and reporting of non-performing loans, ST FSC restructured loans and write-offs for the credit union sector Establish a level playing field for qualifying credit unions by lifting product restrictions, removing MT-LT FSC, CBB, corporate tax exemption and establishing appropriate prudential supervision MoF Improve credit enforcement through a more effective bankruptcy system and effective mortgage MT Government, foreclosure procedures CBB Establish an adequate credit information function, develop a real estate price index, and introduce a MT CBB/FSC collateral registry for movable assets Safety Net and Crisis Management Establish a national crisis management plan for the insurance sector ST FSC Enter into agreements for back-up funding for safety net entities ST BDIC/CBB/ MoF Continue to improve crisis management cooperation with other supervisors, particularly for insurance ST-MT CBB/FSC Develop a Strategic Plan and target ratio and test payout procedures for BDIC MT BDIC/CBB Amend various Acts to ensure consistency and bring the resolution powers and processes more in line MT-LT CBB/BDIC/ with international good practices and standards FSC Extend the safety net to credit unions, but only after ensuring the financial viability of entities and the MT-LT FSC/BDIC/ establishment of a well-equipped deposit insurer and adequate prudential oversight MoF Capital Market Development Require mutual funds to provide more granular, periodic information ST FSC Examine valuation policies and ensure consistency ST FSC Revise capital adequacy standards for financial institutions MT FSC Finalize regional agreements to facilitate cross-listing and mutual recognition of licensed firms MT FSC Promote greater use of private placement offerings by adopting reporting requirements consistent with MT FSC the needs of sophisticated investors Macroprudential Policy Develop a real estate price index MT CBB Clarify mandate and tools of the FOMC MT CBB/BDIC/ FSC                                                              3 Short term: within one year; Medium term: 1-3 years; Long term: more than 3 years. 6   II. MACROFINANCIAL CONTEXT 1. Macroeconomic conditions have continued to deteriorate since the beginning of the global financial crisis and policy options are limited. Following a contraction of 4.1% in 2009 and weak growth in 2010-12, Gross Domestic Product (GDP) growth is estimated to have declined by 0.7% 2013. Unemployment stood at almost 12% in September 2013, as activity in the tourism and off-shore financial sectors—the economy’s main pillars—declined in the face of weakening competitiveness and fragile global economic conditions. As a result, the external current account deficit rose to 11.5% of GDP in 2013 compared to 10% a year before and private capital inflows declined sharply in 2013, particularly long-term. Consequently, international reserves of the CBB fell significantly with reserve coverage declining to 2.6 months of imports in November, from 4.1 months at end-2012. At the same time, policy options are constrained by the fixed exchange rate regime. Long-standing capital controls support the exchange rate regime and contribute to financial system liquidity and insulate it from shocks, but they also hold domestic savings captive and impede diversification given a dearth of investible domestic instruments. 2. The fiscal deficit and government debt have increased significantly in recent years, elevating sovereign risk and complicating macroeconomic management. The central government fiscal deficit has remained high between 8-9% and tax revenues have declined substantially in 2013. Public debt4 increased to 128% of GDP in September 2013, from 55% at end-2007. Barbados’ sovereign credit rating was downgraded recently to non-investment grade. End-2013, a US$500 million Eurobond offering was withdrawn in part due to unfavorable market conditions. The government has since secured a loan commitment of up to $225 million from Credit Suisse strengthening foreign reserves which are estimated at 3.2 months of imports at end-2013. 3. The financial sector is increasingly exposed to the sovereign. Financial institutions, including the National Insurance Scheme (NIS), have been purchasing an increasing share of government securities.5 As a result, despite ample liquidity and capital controls, risks are emerging in the maturity and holder profiles of government debt. Banks have grown reluctant to acquire additional government securities, while NIS’ absorption capacity might be limited due to balance sheet constraints. A weakened fiscal position may impair the government’s ability to provide credible backstops for the financial sector which could affect financial sector performance and intermediation. 3. The government has committed a major adjustment package aimed at stabilizing international reserves and consolidating the fiscal position. Important risks remain, however. After consultation with social partners, the authorities announced consolidation measures in August 2013 and more drastic measures in December. These include a reduction in                                                              4 This includes government securities holdings by the National Insurance Scheme (NIS). Local currency government debt accounts for 77% of public debt, mostly at fixed rates. External debt is mostly long-term and has a favorable repayment profile. 5 Recent changes in monetary policies have resulted in a significant expansion of domestic assets by the CBB as well, driven by T-bill purchases. 7   the size of the civil service by about 15 percent in 2014, wage cuts for elected and appointed officials, and a two year nominal wage freeze. While the proposed measures are important steps in the right direction, significant implementation risks remain. Moreover, high exposures to households imply that increasing unemployment could further weaken asset quality, particularly in credit unions. 4. Barbados is facing a challenging medium-term outlook. Even if planned policies are successful, Barbados will continue to face challenging growth prospects, driven by weakened tourism markets, including Canada, the United Kingdom and the United States; increased competition from other offshore jurisdictions; and appreciation of the real effective exchange rate. Consequently, NPLs are projected to increase significantly under the baseline scenario. III. STRUCTURE AND PERFORMANCE OF THE FINANCIAL SYSTEM 5. Barbados’ financial system is relatively well developed. The onshore system is dominated by large, regionally active commercial banks and compares well regionally (Figure 1). A smaller credit union sector provides basic financial services to over 70% of the adult population. The system also includes a mature and concentrated insurance sector with extensive international linkages. Private employer-based pension funds are growing. The offshore sector is financially fully segregated from the resident economy and dominated by international banks which mainly conduct treasury and wealth management operations. Long-standing capital controls shape the financial system by keeping domestic savings within the country and curbing foreign currency transactions. 6. Capital markets are mostly inactive.6 The equity market has not grown since 2008 and suffers from concentration, limited free float, and limited market activity. The fixed-income market is dominated by domestic sovereign debt while corporate fixed-income issuance is very small. Secondary market activity is limited in both fixed income segments. The mutual fund sector, including off-shore mutual funds, exhibited a growth in total asset size. The National Insurance System (NIS) is a key institutional investor in Barbados with investment assets equal to around 45% of GDP in 2011, with a high exposure to domestic government securities. 7. Commercial banks constitute the largest sector in the onshore financial system, with individual institutions ultimately owned by international financial groups. Barbados’ financial system comprises 6 commercial banks (66% of total onshore financial system assets), 12 trust and finance companies or Part III deposit-taking institutions (9%), 35 credit unions (9%), and 23 active insurance companies including one large regional insurance company (17%).                                                                6 For details, see the Section on Capital Markets Development. 8   Figure 1. Cross-Country Comparison: Banking Sector Private Credit to GDP Deposits to GDP (In percent) (In percent) 70 140 60 120 50 100 40 80 30 60 20 40 10 20 0 0 Caribbean Trinidad & Jamaica 2011 Barbados 2012 Caribbean Trinidad & Jamaica 2011 Barbados 2012 Average 2011 Tobago 2011 Average 2011 Tobago 2011 Source: Finstats World Bank and Central Bank of  Barbados A. Commercial Banks 8. With assets at 140% of GDP, the onshore commercial banking sector is relatively large. The biggest banks are subsidiaries or branches of large Canadian banking groups with strong credit standing, and Barbados represents a small fraction of their operations. Two banks are from Trinidad and Tobago7, with operations predominantly in the Caribbean region. Parent bank credit ratings are all investment grade. 9. The deteriorating macroeconomic and credit environment have adversely impacted credit quality and profitability of the banking sector.  The non-performing loan (NPL) ratio has risen significantly from 3.5% in 2008 to 13.9% in June 2013, with decreasing provisioning rates. NPLs are concentrated in hotels and restaurants (41%), personal (31%), and real estate (20%). Provisions have declined from 60% to 32% of NPLs during the same period.  Banks’ ROA deteriorated from 1.4% in 2008 to 1.0% in June 2013. The decline reflects a reduced share of loans in assets, increased provisioning costs, and a decrease in the spread between average lending and deposit rates to 6% in June 2013 from 7% in 2009.  Recent asset growth can be mostly explained by higher holdings of treasury bills and government bonds, from 13.9% in 2008 to 19.8% of assets in March 2013. 10. Banks’ capitalization and liquidity ratios have improved mostly due to weak credit conditions and increasing sovereign exposures. Capital adequacy ratios have increased from 16.1% in 2008 to 20.8% in June 2013 (8% regulatory requirement), reflecting moderate increases in capital levels and declines in risk-weighted assets as a result of higher holdings of government securities and cash.8 With weak credit growth and increased holdings of government securities and cash, liquid assets have almost doubled as a percentage of the total, from 9% in 2008 to 17% in June 2013.                                                              7 In 2012, First Citizens Bank acquired Butterfield Bank, and Republic Bank took full ownership of Barbados National Bank. 8 These capital adequacy ratios include only subsidiaries of foreign banks. 9   Figure 2. Selected Indicators for Onshore Banks Banks: Key Assets in Balance Sheet (In millions of B$) Banks: Key Assets' Share in Total Assets Loans Private investments 9,000 30% 80% Other Government Investments 8,000 Treasury Bills 70% 25% 7,000 Treasury Bills 60% 6,000 20% Other Government Investments 50% 5,000 Private investments 15% 40% 4,000 Loans (RHS) 3,000 30% 10% 2,000 20% 5% 1,000 10% 0 0% 0% 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 Banks: Loan Distribution of Key Sectors (In millions of B$) Banks: Change in Key Loan Sectors' Share Manufacturing Distribution 60% 53% Tourism Construction 5,000 50% 46% Financial Personal Dec-08 Mar-13 40% 4,000 30% 3,000 20% 7% 6% 9% 8% 7% 8% 10% 2,000 10% 2% 2% 4% 5% 1% 0% 1,000 0 2008 2009 2010 2011 2012 2013 Banks: Personal Mortgage Loan Outstanding Banks: Personal Mortgage Loans' Share (In millions of B$) 2,500 80% Share in Personal Loans 2,000 70% Share in Total Loans 60% 1,500 50% 1,000 40% 500 30% 0 20% 2008 2009 2010 2011 2012 Mar-2013 2008 2009 2010 2011 2012 2013 Source: Central Bank of Barbados.  10   B. Credit Unions9 11. Credit unions play an important part in servicing households serving 76% of the economically active population. Most credit union members are from low and middle income households. 12. The sector is concentrated and heterogeneous with two large institutions, 10 mid-sized institutions mostly serving employees of firms, and several community based ones with average assets of B$2 million (Figure 3). The size and sophistication of their services and risk management processes also vary substantially within the sector, which comprises 35 institutions representing almost 10% of the financial system. The two largest credit unions combined account for 73% of the total assets, 78% of loans, and 75% of members. Around 40% of the members of large credit unions and almost all members of the employer-based, medium-sized credit unions make use of payroll deduction arrangements. 13. The credit union sector has experienced a 42% growth in assets from 2007 to 2012. This is attributed to a significant growth in real estate loans over this same period, creating some concern over maturity mismatches. Funding from outside of the sector is less than 5% of liabilities, the main sources being longer-term funds for housing loans provided by the National Insurance Scheme and the Housing Credit Fund. 14. The profitability of the sector as a whole has declined since 2008 but remains stable. After declining from relatively high levels in 2008, the Return on Equity (ROE) and the Return on Assets (ROA) of the sector have been relatively stable and at acceptable levels since 2010, hovering around 12.5% and 1.2% respectively. 15. Most institutions meet regulatory capital requirements. The sector’s capital to asset ratio was 11.2% in June 2013, up from 8.75% at end-2008 and above the 10% regulatory guideline.10 However, a few smaller entities do not meet this threshold. Unlike in the commercial banking system, capital requirements are in terms of unweighted assets. 16. The main risk for credit unions is loan delinquency although payroll deduction arrangements ameliorate credit risk, particularly in medium-sized institutions. 17. NPLs have increased from 5.3% of total loans in 2008 to 8.2% in June 2013. However, these numbers are likely distorted making it impossible to determine the precise financial situation of the sector. Loan classification, provisioning, write off and restructuring practices are typically less strict compared to banks. Typically, unrecoverable loans are not fully provisioned for, collateral values are rarely updated, and there is a reluctance to write off loans since it requires additional provisioning. Some entities have recently departed from the common practice to immediately reclassify restructured NPLs as performing; the largest entity has been recently reported to have started provisioning loans according to applicable accounting                                                              9 More details on credit unions are available in a self-contained Technical Note. 10 Capital in the credit union sector is not comparable to the commercial banking sector where capital requirements are calculated in terms of risk weighted assets, while for credit unions the requirement is with respect to unweighted assets. 11   standards. This is a first positive step towards applying the same standards that prevail in the banking sector. Figure 3: Segmentation of credit unions in Barbados 100 12% 80 10% 8.80% 10.80% 8% 60 Members (%) 6% 40 5.40% Assets (%) 4% Number 20 2% Reported NPLs (RHS) 0 0% Two largest (avg. Medium-size (avg. Small-size (< $BDS 10 assets: $BDS 565 assets: $BDS 33 million, avg. assets million) million) $BDS 2 million) Source: FSC (NPL data, as of December 2012) and BCCUL (Data as of June 2012) C. Part III Financial Institutions 18. Part III institutions represent a small share of the deposit taking institution assets, providing loans or specialized financial services. Their assets decreased to 10% of total assets in the financial system in March 2013, from 12% in 2008.11 The sector comprises 12 institutions, including finance companies, providing loans mainly for real estate and vehicle purchases, and trust companies offering various services to mutual funds, trading, and brokerage services. 19. Part III institutions have a variety of owners and they remain well capitalized. Their parent entities include a credit union, an insurance company, commercial banks, non-financial service companies, and foreign financial institutions. From 2008 to March 2013, average capital to assets ratios further improved from 21.2% to 23.8%, well above the 8% regulatory requirement. 20. Asset quality is deteriorating. NPLs have increased from 3.3% in 2008 to 9.1% in March 2013. The main areas of concern are mortgage and personal lending, which are closely related to weak domestic demand and labor market conditions. This risk is being partly addressed, as reserves to NPLs almost doubled to 38% in March 2013, from 21% in 2008. D. Insurance Companies 21. The insurance sector represents a considerable part of the onshore financial system and its market structure is highly concentrated, especially in life insurance. The sector consists of 26 insurance companies representing 19% of the total assets of the onshore system.12 Six life insurers provide life and related health insurance policies, 16 general insurers focus on                                                              11 The sector’s share increased to 13% in 2011, but decreased to 10% in 2012, mainly due to a bank’s acquisition of a non-bank financial institution. 12 There are 3 inactive insurance entities. 12   property and commercial insurance contracts, and 1 additional company conducts both businesses. With the collapse of CLICO in 2009, a regional group based in Trinidad and Tobago, the life insurance sector became further dominated by a large regionally active insurance group domiciled in Barbados which currently accounts for 83% of the total assets of the life insurance industry. Figure 4. Peer Comparison: Insurance Sector Insurance Premiums to GDP (In percent) 9 8 7 6 5 4 3 2 1 0 Caribbean Average Trinidad & Tobago Jamaica 2011 Barbados 2012 2011 2011 Sources: Finstats World Bank and Central Bank of Barbados 22. The insurance sector faces various challenges. Premiums (net of reinsurance ceded) of life insurers have declined in recent years due to the weak regional economy and an erosion of public confidence. A low and stable claims ratio (32% in 2012) has helped general insurers to remain profitable. A Barbados-based internationally active group faces increased risk due to its expansion in non-traditional sectors and a material increase in holdings of Caribbean government debt securities. 23. Assessing the soundness of the industry is difficult due to the absence of a robust liability valuation framework. E. Pension Funds 24. Current information on the size of NIS assets, portfolio performance and portfolio allocations is not readily available. The National Insurance Scheme (NIS) provides six forms of contribution-based social security benefits – old-age pensions; sickness; maternity; funeral grants; disability and survivor. The last NIS Annual Report was published in 2009. NIS investment assets are estimated to equal about 45% of national GDP. 25. Private employer-based pension funds are growing, although it is estimated that less than 25% of the workforce is covered by a private pension plan. It has been reported that 293 private pension plans have applied for registration with the FSC. In November 2013 the FSC posted a list of approved private pension plans. However most of these are small in size and it is estimated that fewer than 50 plans have more than 100 participants in a plan. While a number of older plans are structured as defined benefit plans (DBP), virtually all new plans are defined contribution plans (DCP). The government encourages participation by providing a tax exemption for employee contributions and, upon retirement, permitting participants to receive a cash payment of up to 25% tax-free. 13   26. In the aggregate, private pension plans are believed to have between B$1.5 – 2.0 billion in assets (2012). Typically, independent third party providers manage the plans. The largest insurance company in Barbados is the dominant third party provider, managing an estimated 270 plans with more than 10,500 participants (2011). A major mutual fund group in Barbados also manages more than 30 plans, representing 68 companies and over 3,800 employees (2011). Typically a plan is structured to provide participants with a choice of investment portfolios, based on an aggressive or conservative asset mix covering differing proportions of equities, fixed income and real estate. F. Offshore Financial Sector and Financial Linkages Offshore financial sector 27. The offshore sector is a key pillar of the economy and segregated from the domestic financial system.13 It comprises banks, insurance companies, and International Business Companies (IBCs). Most institutions have parent companies in Canada and the United States. The sector’s financial transactions are limited to non-residents.14 Off-shore banks are mostly non- deposit takers and dedicated to treasury and trust management activities. 28. Barbados has offered an attractive environment for offshore companies, but faces increasing competition. It offers a legal framework for tax incentives, relatively few regulatory restrictions, quality professional services, and a reputation as a stable financial center. Nonetheless, improvements should be introduced to maintain its competitive edge compared to other jurisdictions, particularly in terms of efficiency and timely procedures. Financial linkages 29. Onshore financial institutions are interconnected through both financial and ownership linkages inside and outside the country. Financial linkages between onshore financial institutions have grown as the system develops. In particular, banks and one credit union have ties with Part III institutions and credit unions hold deposits in banks. There are currently no ownership links between banks and insurers in the onshore system. There are significant cross-border linkages between onshore affiliates and their foreign parents. 30. Two Barbados-based financial conglomerates have substantial external linkages. Their operations include commercial banking, life/non-life insurance, asset management and offshore activities in and outside of the Caribbean region. One of these entities is a regionally important insurance group with assets of about 120% to GDP and conducts a broad range of traditional and non-traditional financial services and. The other entity is a sizeable banking group with operations in 17 countries across the region.                                                              13 The onshore and offshore sectors contribute 10.1% and 7.6% of GDP, respectively. The offshore sector contributes 20% of tax revenue of which 11% originated in offshore banks. 14 Provisions under the International Financial Services Act (IFSA) aim to establish an effective “Chinese wall” as offshore institutions can only provide financial services to non-residents. 14   IV. FINANCIAL REGULATION AND SUPERVISION A. Banking Sector15 31. The Bank Supervision Department (BSD) of the CBB supervises both the offshore and onshore commercial banks and non-bank financial Part III institutions. The CBB is self-funded and determines how it manages the BSD. As such, the CBB enjoys operational independence. BSD’s financial resources have allowed for the hiring of staff in sufficient numbers and with skills commensurate with the banking system’s risk profile.16 However, going forward, the current headcount might not suffice as Barbados plans to transition to Basel II by 2015. The CBB is equipped with sufficient discretionary powers to address areas of weaknesses in banks or their non-compliance with applicable laws, regulations, or supervisory instructions. 32. The CBB has made significant progress in addressing the 2008 FSAP recommendations, including issuing or updating guidelines and establishing a risk-based approach. In 2008, guidelines issued to banks were insufficient and the approach used was compliance-based. Since then, efforts have been made to formalize internal procedures, methodologies and guidance for examiners in all major areas, including licensing. New or updated guidelines17 outline the responsibility of banks for managing and controlling exposure to several types of risks and describe the CBB’s expectations in relation to the minimum standards to be applied by banks. The pillars of CBB’s risk-based supervisory approach include a multi- step process to identify, measure, and grade the banks’ risk profile and risk management processes, a blend of onsite and offsite activities, and a follow-up system to track corrective action. 33. The CBB conducts supervision on a consolidated basis and expanded its information sharing network since 2008. All banks (both onshore and offshore) are foreign-owned, necessitating collaboration with home regulators. The CBB has close relations with the Caribbean Group of Banking Supervisors (CGBS) and sponsors a college for which it acts as a regional consolidating supervisor. The CBB participates in colleges for the other banks and signed a Memorandum of Understanding (MOU) with the Canadian supervisor (OSFI) in 2009; it conducts annual meetings with its Canadian counterparts. 34. However, despite significant progress, several issues require CBB’s urgent attention. It is important to pass the amendments to the CBB Act and the FIA as soon as possible in order to provide the Central Bank with explicit powers to issue regulations. Under the current regime, the power to issue regulations is granted to the MoF in conjunction with the CBB. The amendments to the acts will eliminate any doubt on the enforceable nature of the CBB guidelines since the latter will be given the force of law. The amendments will also broaden the scope of the Bank’s supervisory powers, inclusive of consolidated supervision, allowing the CBB to impose                                                              15 This section is based on a detailed Basel Core Principle Assessment (BCP). 16 Currently, 34 banking supervision professionals are assigned to supervise 19 onshore and 46 offshore entities. 17 These guidelines include operational risk management, liquidity, AML/CFT, credit risk, corporate governance, and measuring capital adequacy for market risks. 15   specific target capital ratios and administrative penalties for non-compliance with the FIA and other related norms18, and expand the scope of remedial actions. 35. There is a need to significantly strengthen CBB independence. The exact conditions under which the Governor can be dismissed or removed should be clearly specified in the CBB Act. In the same vein, even though current provisions contained in the FIA §50 (4) and the CBB Act §49 (1) that empower the Minister of Finance to overrule policies or corrective measures taken by the CBB19 have never been used, they should be removed to assuage concerns about the independence of the CBB. 36. The CBB should take more forceful actions in cases of serious deficiencies or breaches, beyond the moral suasion exercised through its on-going oversight. Under current practice, when the CBB identifies situations of particular concern (breaches of laws or regulation), it advises the licensee to submit a corrective action plan to address the situation. Once approved by the CBB, the plan must be implemented by the bank within a given time frame. However, in case of serious breaches20, it would be advisable to take more forceful and adequate enforcement actions, which will also help prevent similar breaches from occurring in the future (i.e. moral hazard). 37. Supervision of AML/CFT compliance in banks should be strengthened. Not all banks in the offshore sector have been examined and there is an urgent need to perform inspections in offshore banks from countries having a higher risk profile.21 Such banks have not been inspected over the past five years and should be inspected within a reasonable time frame. It is also recommended to increase the number of onsite examinations in onshore banks.22 While CBB adopted a risk-based approach to supervision in response to the recommendations of the 2008 FSAP update, the low levels of AML/CFT on-site examinations raise doubts about the effectiveness with which the oversight of ML/TF risks has been adequately integrated into the risk-based framework. 38. CBB’s loan provisioning guidelines should be reviewed and authorities should consider developing an index for real estate valuation. While banks can follow IFRS or CBB guidelines, the CBB requirements are lower than those observed in other countries using a                                                              18 The draft is being reviewed by the Chief Parliament Counsel under the Attorney General’s Chamber and the amendments were expected to be passed by end-2013 during the FSAP mission. However, since the mission, the authorities have incorporated recommendations arising from the FSAP and expect the amended Acts will pass early 2014. 19 In that case, banks that are aggrieved by the decision of the CBB can appeal to the MoF whose decision is final. 20 At least in two cases examined by assessors, CBB staff identified situations of serious violations with the AML/CFT Act that would have merited, in the assessors’ opinion, more forceful action as allowed by the MLTF act. 21 Only offshore banks from Canada have been inspected. 22 Since 2008, only 2 onshore banks (out of a total of 6) have been visited in connection with the AML/CFT. 16   similar framework.23 The CBB provisioning regulations do not ensure timely write-offs. A review of the provisioning requirements is therefore warranted to provide new data to update the guideline based on historical losses and the current level of risk in the banks’ loan portfolios. A review of real estate values available to offset provisioning requirements should be conducted in light of current market conditions to determine the net realizable value of the collateral. B. The Financial Services Commission 39. Established in April 2011 as an integrated supervisory body, the FSC regulates and supervises the insurance and pensions, credit union, and securities sectors. These functions were previously discharged by the Supervisor of Insurance and Pensions, the Co-operatives Department, and the Securities Commission. The FSC is headed by a seven-person Commission, appointed by the Minister of Finance, who also designates a Chairman and Vice Chairman. Members may be reappointed and the Minister may dismiss members for good cause. It is managed by a Chief Executive Officer, who is selected by the Commission and approved by the Minister. 40. The FSC Act provides the FSC with appropriate investigative and enforcement powers. Supervisory independence has improved, but should be strengthened. The Act provides the FSC with budgetary independence and limits ministerial authority over supervisory functions, although room for improvement remains.24 The Act also offers a range of powers for (onsite) investigation and intervention as well as to reorganize or wind-up an insurer or credit union. The Act provides for the enforceability of guidelines by empowering the FSC to issue compliance directives. Current FSC staff and agents are afforded with general protection in the good faith performance of their duties.25 The FSC Act could be further strengthened by allowing the FSC to share confidential information without the prior consent among a wider group of counterparties or a MOU as a necessary requirement. 41. The onsite supervisory function should be strengthened by the addition of sectoral specialists. The FSC currently consists of three sectoral departments: Insurance and Pensions (15 professionals), Credit Unions (4 professionals), and Securities (4 professionals). It also has two functional divisions: Examinations (6 professionals) and Policy & Research (2 professionals). Given that Barbados’ insurance sector is well-developed and comprises large and regionally active groups, the Insurance and Pensions department is the largest. Although there is some specialization, the Examinations Division does not have sectoral specialists assigned exclusively                                                              23 The CBB requires provisions of 100% for loss, 50% for doubtful, 10% for substandard, none for special mention and does not have a general provision for unclassified credits. The CBB requires a 1% provision for credits that have not been reviewed in the past 12 months. 24 The FSC Act has reduced, but not eliminated, the authority of the Minister of Finance. The role of the minister in the Insurance Act and the Exempt Insurance Act have been superseded by the FSC (FSC Act §57). However, the FSC may only adopt a binding regulation with the approval of the Minister (FSC Act §54). Also the Minister may, after consultation with the FSC Chairman, provide general policy direction to the Commission, which it must follow (FSC Act §30). The Minister may set limits on hiring and on salaries and retains final approval authority for personnel appointed to senior positions. 25 Legal protection should be clarified and extended to former employees and commissioners for actions taken whilst commissioners or employees. 17   to specific sectors and uses the same personnel to conduct onsite supervision across all sectors under the purview of the FSC. To offset this lack of specialization, onsite supervisors are often remotely assisted by specialized offsite supervisors during onsite examinations. 42. The FSC should expand the information that it provides to the public on its internet website. In addition to providing access to the applicable laws, and its recent Guidelines, all applicable regulations should be available. The FSC should also publish its Annual Report in a timely manner. 43. As a relatively new agency, the FSC’s supervisory effectiveness remains largely untested and further capacity building is necessary. Progress made to date is encouraging, as, for example, evidenced by the issuance of various guidelines across all sectors. However, the FSC faces a challenge in developing the capacity of its staff, developing and enhancing its internal processes, and building a clear understanding of its supervisory approach to regulated entities. FSC’s most difficult challenges likely still lie ahead given the heterogeneity and vulnerability of the credit union sector, the need to establish and implement significantly more sophisticated regulatory requirements in the insurance sector, and the increasingly complex cross-border linkages of domestic and international insurance groups. C. Insurance Sector26 44. The regulatory and supervisory framework for the insurance sector has improved with the creation of the FSC. The FSC oversees both onshore and offshore insurers and reinsurers, and insurance distributors, a responsibility previously carried out by the Supervisor of Insurance and Pensions which resided under the Ministry of Finance and lacked budgetary independence. Before the establishment of the FSC, the insurance sector was largely self- regulated and, as a result, exposed to material risks. 45. The FSC Act also allows the FSC to determine reporting requirements, request information more generally, and carry out offsite and onsite inspections. As such, the Act has enhanced the independence and capacity of the insurance supervisor. Moreover, the Act and various new guidelines have eliminated important regulatory gaps between the offshore and onshore sectors. 46. The FSC is in the process of developing its capacity by hiring and training new staff, improving reporting frameworks and requirements, further developing the regulatory framework by issuing guidelines such as for corporate governance, internal control and risk management, and introducing risk-based supervision and onsite examinations from 2012 including for the largest insurance group in Barbados. 47. Despite progress, the FSC needs further improvement. The main areas in need of improvement include continuing to hire and train staff, further elaborating the practical application of current high-level guidelines including specifying when and what remedial actions the FSC should take, ensuring the new onsite inspection program becomes institutionalized, and taking appropriate enforcement actions.                                                              26 This section is based on a detailed Insurance Core Principle Assessment (ICP). 18   48. Importantly, there is a need to introduce robust prudential standards, including valuation, capital adequacy, and Enterprise Risk Management (ERM). Currently, there is no specified actuarial standard, which results in inconsistent valuations among insurers. Current capital requirements are too simple to capture relevant risks for general insurers (such as credit, market, and underwriting risks) and non-existent for life insurers. Risk management requirements are not comprehensive and not proportionate to risks that Barbadian insurers face, such as group and catastrophic risks. The FSC should establish robust and enforceable valuation standards for technical provisions, introducing risk based capital requirements and expanding risk management requirements to make sure that the industry manages its own material risks. 49. Given the presence of regionally active and systemically relevant groups, there is also an important need to implement group supervision and crisis management. Group supervision is critical to the oversight of regionally important insurers. The FSC is responsible for group supervision as a home supervisor of a major regional insurance group and a host supervisor of two large regional insurance groups. Efforts to enhance emerging supervisory colleges, develop approaches to group-wide solvency assessments, risk management and governance, and develop effective group resolution plans should be high on the agenda. D. Credit Unions27 50. Progress has been made since the 2008 FSAP, but the FSC’s capacity to adequately supervise the credit union sector is still in its early stages. The 2008 FSAP concluded that regulation and supervision had not kept pace with the development of the credit union sector. The FSC took over the supervision of the credit union sector from the Cooperatives Department of the Ministry of Industry, International Business, Commerce and Small Business Development. Over time, steps have been taken to improve the regulatory framework, including through amendments to the Co-operatives Societies Act in 2007, the issuance of the Co-operatives Societies Regulations in 2008, and the approval of the FSC Act in 2011. 51. The recent issuance of several industry guidelines represents another positive step although they need to be more specified. The issuance of guidelines regarding non- performing loans and loan loss provisioning are still pending. Existing guidelines cover areas such as governance, market risk, and credit risk. However, these guidelines are very general in nature allowing credit unions to define their own policies and key parameters. 52. There is a need to strengthen onsite supervision. While the Cooperatives Department undertook 12 inspections in 2007, only two onsite inspections have been carried out since the inception of FSC in 2011. Both inspections were undertaken in the second largest credit union only. There is currently no schedule for regular onsite inspections of credit unions. An examination plan has been developed which incorporates the largest credit unions over a two year period. Thereafter frequency will be driven by the risk profile of institutions. 53. Taking a risk based approach and building on the greater responsibilities placed on external auditors by the FSC, auditors have been assigned an auxiliary role in supervising credit unions, effectively carrying out the onsite supervision of the small and medium sized                                                              27 More details on credit unions are available in a self-contained Technical Note. 19   credit unions. FSC maintains the responsibility for the supervision of all credit unions. FSC has already intervened and issued directives to five small credit unions in which irregularities were found off-site and in auditor reports. FSC has the ability to monitor the auditing firms closely as these have to be accredited yearly at the FSC. E. Securities Markets 54. The FSC took over supervisory responsibilities from the Securities Commission. The FSC Act provided the FSC with appropriate investigative and enforcement powers The FSC is charged with the supervision of the Barbados Stock Exchange (BSE), the Central Securities Depository, securities companies (brokers, dealers, investment advisers, traders, underwriters), and mutual funds issuers and administrators. In 2013, it issued four regulatory guidelines.28 An amendment to the Securities Act requires public companies and financial institutions to disclose material events within 24 hours, as recommended in the 2008 FSAP, and to notify the FSC within seven days. 55. Mirroring low market activity, regulatory activity has been minimal. Although the FSC has authority to conduct investigations to determine if persons or entities are in violation of the Act, to date it has not identified any facts or circumstances upon which to begin an investigation. As such no enforcement actions have been taken to date. The first on-site examination of a market actor began in late 2013. Since the FSC began operations there has not been a single public securities prospectus filed. No new market actor licenses have been issued. 56. The FSC should examine the need for changes in various regulatory standards. Its capital adequacy standards for financial institutions do not meet current international best practices. Consideration should be given to improving the reporting requirements for mutual funds and the requirements for disclosing information publicly to mutual fund investors (e.g. sufficiently informative and updated prospectuses, portfolio asset allocations, and annual reports). The FSC or the BSE should develop an internet-based system that provides the public with prompt and easy access to securities prospectuses, periodic and annual reports, and reports of material events. 57. In addition, a number of recommendations from the 2008 FSAP remain open, largely because legislative action is required. These include: an effectively implemented bankruptcy law and creditor-debtor rights; improved disclosure of insider and controlling person shareholdings; and improved regulation of transactions involving mergers, acquisitions, tender offers or other changes in corporate control. 58. Progress regarding the Caribbean Exchange Network has been limited. While the FSC has discussed mutual regulatory cooperation agreements with Trinidad and Tobago and Jamaica, in conjunction with other efforts to develop the Caribbean Exchange Network, an MOU or similar cooperation agreement has not been finalized.                                                              28 i) Compliance Program Guidelines for Market Actors and Mutual Fund Administrators, ii) Corporate Governance Guideline for Market Actors and Mutual Fund Administrators, iii) Insider Trading Guidelines for Unlisted Public Companies, and iv) Market Conduct Guidelines for Market Actors and Mutual Fund Administrators. 20   59. Calculation of mutual fund NAV is a challenge in an illiquid market. Mutual funds in Barbados are required to publish weekly net asset values (NAV). In response to the low trading volume on the BSE, its rules provide that market prices should not change for trades below a minimum number of shares (specified for each listing). Due to the lack of reliable market prices, mutual funds are able to choose which methodology to use in calculating net asset values. For example, a fund may choose to price securities on the basis of firm bid quotes rather than an official market price. If different funds adopt different pricing methods, it may interfere with an investor’s ability to assess a fund’s performance and it may make comparisons difficult when buying or selling fund shares. V. FINANCIAL SAFETY NETS AND CRISIS PREPAREDNESS A. Overview29 60. Recovery and Resolution Plans (RRPs) for all commercial banks and other financial sector institutions such as insurance companies deemed systemic are in the planning stage. Such plans would identify core functions and critical shared services. The authorities should engage home and other significant host authorities in the preparation of such plans. 61. There is a need to rationalize and ensure consistency among the various laws addressing different parts of the financial sector, with varying provisions governing resolution. For example, provisions addressing legal protection in the Deposit Insurance, Central Bank and Financial Services Commission Acts are not identical, thereby creating the possibility that a court could make findings that do not provide the necessary legal protection for some of those working on behalf of the safety net during a financial crisis. 62. Establishing robust cross-border cooperation among regulators and deposit insurers remains a work in progress. Cooperation among regulators in the various home countries and the authorities in Barbados is essential. Despite ongoing discussions about the establishment of a Caribbean Region Financial Crisis Management Plan to address the banking sector, no agreement has been reached, nor is there advanced planning on addressing the possibility of a crisis in the non-bank sector. Importantly, discussions on a Regional Crisis Plan have not included the Canadian authorities, a key counterpart to planning for any regional crisis response. There is a regional group of deposit insurers, but no crisis management plan has been drafted. Moreover, the BDIC has not entered into sharing agreements with any other deposit insurer to allow coordinated communication in the event of a regional crisis. B. Early Intervention and Emergency Liquidity Assistance 63. The draft national Financial Stability Management Plan (FSMP), or ideally the law, should require the government to compensate CBB’s losses arising from the provision of solvency support. The draft FSMP states that when a bank is of sufficient size to be considered “too big to fail”, financial support would require assistance from the CBB and/or the MoF. It should further stipulate that the government should be primarily responsible for the provision of                                                              29 More details on financial safety nets and crisis preparedness are available in a self-contained Technical Note. 21   solvency support and the CBB should obtain government guarantees or compensation for any support it provides. The legal framework provides sufficient powers to the CBB to provide financial assistance, including the capacity to provide (collateralized) liquidity and solvency support. C. Deposit Insurance and Consumer Protection 64. The deposit insurer, BDIC, is a paybox-plus with the responsibility of paying depositors in the case of a winding-up and liquidating under the Financial Institutions Act.30 BDIC began its operations in 2007 and has a fund of BD$38.8 million. There are thirteen members of the Fund, including six banks and seven deposit taking Part III institutions. Credit Unions are excluded from BDIC coverage. Annual premiums are 0.05% of average insured deposits. BDIC is required to meet its objectives of insuring deposits in a manner so as to minimize its exposure to loss, but it does not have the power to provide financial support for a purchase and assumption transaction. 65. Various improvements in the deposit insurance framework are required, including: First, BDIC has not adopted a comprehensive Strategic Plan to govern its operations. Second, while the Deposit Insurance Act (DIA) provides that back-up funding for the deposit insurer shall be made available through borrowings from the CBB or the government, there are no concrete protocols in place. Moreover, the credibility of such backstops would be negatively affected by the current high public debt levels. Third, the legal framework governing the payout procedure for BDIC is inconsistent with the ability to conduct prompt payouts of insured depositors. Fourth, legal protection for the deposit insurer should be made explicit for persons acting on its behalf or for former employees. Fifth, public awareness policies of for the deposit insurer should be adopted. 66. Careful consideration should precede allowing credit unions to join the deposit insurance system. Financial viability of entities, a well-equipped deposit insurer, and adequate prudential oversight should precede an extension of the financial safety net to all credit unions to avoid moral hazard and fiscal risks. Credit unions do not have access to any emergency liquidity assistance. 67. Consideration should be given to the establishment of a policyholder protection scheme (PPS) for insurance. A privately-financed PPS could help secure continuity of insurance coverage and payments by the transfer of insurance policies to a bridge insurer or third party and to compensate policyholders for their losses in liquidation. In order to establish a PPS, further discussions would need to be undertaken by the authorities about its governance, coverage level, funding arrangements, and position within the resolution framework.                                                              30 The BDIC is led by a Board of Directors consisting of the Governor of the Central Bank, the Director of Bank Supervision of the Central Bank, the Chief Executive Officer of the BDIC, a representative of the Minister of Finance and three other qualified persons appointed by the Minister of Finance. The Minister appoints the Chairman and Deputy Chairman from the directors. A quorum of the Board can only be made up of non-ex-officio members. BDIC has two professional employees. 22   D. Resolution Framework Banking sector 68. The bank resolution regime contemplates both going-concern and gone-concern procedures under the FIA and DIA. It includes the procedure for seizing management and control of a bank (the seizure procedure) and the winding-up procedure, with the BDIC being appointed as liquidator. 69. There are several areas where the legal framework for bank resolution could be brought more in line with international good practices:  The judicial remedy for aggrieved parties should be limited to monetary compensation. Under the FIA, the courts can reverse the CBB’s decision to seize a bank, set aside the MoF’s license revocation decision, and alter a re-organization plan drawn by the CBB/manager. However, judicial actions should not constrain the implementation of measures taken by the resolution authority. Instead the FIA should establish ex-post compensation procedures with a “no worse off than in liquidation” safeguard.31  The supporting powers for recapitalization under the seizure procedure should be established under the FIA. The FIA should provide the powers to allow (i) the cancellation of existing shares and (ii) the overriding of pre-emptive rights of existing shareholders.  The powers to transfer part of a bank’s business should be explicitly established under the FIA.32 The FIA provides only for amalgamation, which is defined as a merger under the Companies Act.  The provision for the establishment of a bridge bank should be added to the FIA. Although the draft FSMP includes a bridge bank in the “effective tools” for resolution, together with private sector purchaser and temporary public ownership, the legal framework fails to specify the terms and conditions for establishment of a bridge bank, including the time limit for its existence, governance framework, and applicable prudential requirements. Credit unions 70. Credit unions are resolved under the FSC Act. The FSC has the power to revoke the license of a credit union and seize management and control of an institution or reorganize or wind-up a financial institution. However, any person aggrieved by a decision of the FSC can appeal first to an administrative tribunal and then to the court of appeals, either of which can reverse the FSC’s decision.                                                              31 KA 5.2 and 5.5 of FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes). 32 KA 3.3 of Key Attributes. 23   Insurance companies 71. The existing legislation provides for the basic elements of a resolution regime for systemically significant insurers. However, the legal framework should address the following issues in respect of a bridge insurer and public funding:  The laws are silent on the terms and conditions under which a bridge insurer will be established. Therefore, the court is left to determine these issues on its own, without guidance from the legal framework, including a time limit for its existence.  The laws are silent on the power and process for the recovery from the insurance industry of any public funding used to resolve an insurer. E. Cross-border Coordination of Resolution of Banks and Insurers 72. The legal framework and ongoing close communication among Caribbean authorities provide for a solid basis for cross-border coordination within the Caribbean. For example, the coordination arrangements for the resolution of CLICO (Barbados) included the regional advisory committee, the appointment of the same persons as office holders in different jurisdictions, and the recognition by the foreign court of the decision of the Barbadian court. 73. In contrast, the coordination with non-Caribbean jurisdictions for resolution planning and crisis management is yet to be established. Although the CBB takes part in supervisory colleges regarding Canadian banks operating in Barbados, the existing coordination with Canadian authorities focuses on supervisory issues, and Barbados has not been involved in the recovery and resolution planning for Canadian banks. Likewise there is insufficient coordination outside of the Caribbean for those insurance companies with extra-regional operations. 74. Going forward, the modalities of coordination for resolution planning and crisis management, including coordination with non-Caribbean jurisdictions, should be formalized in the FSMP. Regarding banks, the FSMP should spell out possible options of coordination arrangements with the Office of the Superintendent of Financial Institutions of Canada and Canada Deposit Insurance Corporation for resolution of Canadian banks. Regarding insurers, any FSMP for the insurance sector could formalize the procedures for cross-border coordination for resolution. VI. ACCESS TO FINANCIAL SERVICES A. Households 75. Households are served by banks, credit unions, and insurance companies as well as mortgage and finance companies (i.e. Part III institutions). Mortgages and consumer finance are the main products. Both life and non-life insurance products are well developed and widely available. Finance companies provide funding for vehicles. As regards savings and investment 24   products, individuals primarily use deposit accounts33, although they can also directly purchase government securities in the primary market, invest in a mutual fund, or purchase stock directly on the exchange. Credit unions usually pay higher deposit rates, potentially reflecting the lack of deposit insurance. 76. Mortgage loans are the predominant household credit product across the entire financial sector, amounting to 44% of GDP. Mortgages are provided by banks, credit unions, insurance companies and mortgage finance companies. Except for insurance companies, commercial bank loans are financed by short-term liabilities, and mortgages are offered with variable rates after three years. Rates are variable over the whole term for credit union mortgages. Real estate prices have softened in recent years, increasing the need to monitor the collateral values for mortgage loans. 77. The credit unions sector focuses on households and is the predominant provider of financial services to the poor and middle income segments. Over 75% of the economically active population is a credit union member. Core lending products are personal consumer loans, mortgage loans for housing and lines of credit. In 2012 these three products accounted for 90.6% of total loan disbursements. 78. Credit unions have limitations on the range of products they may offer although they are in the process of diversifying their services within existing limitations. At the current stage, credit unions are not allowed to offer checking accounts, foreign exchange transactions and credit cards due to legislative restrictions. In addition, legal restrictions limit credit union investments in equity securities and real estate to10 per cent of statutory reserves. Within existing limitations, the largest and some medium-sized entities have begun to diversify their services to members, offering debit card and mobile banking services (through the Caribbean Integrated Financial Services Inc. network, CarIFS). Several credit unions and the Barbados Co-operative and Credit Union League (BCCUL), an industry association, own an insurance company and are contemplating the creation of a Credit Union Bank to offset their regulatory limitations and offer a broader range of services as well as larger loans. B. Enterprises 79. Enterprises of all sizes in Barbados have identified access to finance as a major constraint according to the World Bank Enterprise Survey conducted in 2010 (Figure 5). About 45% of small enterprises identify access to finance as a major constraint. Moreover, firms of all size rely significantly on internal financing to fund their investments compared to peers (Figure 6). 80. Domestic credit to enterprises has been affected significantly by the crisis, contracting 37%34 in real terms since end-2006. It now accounts for a modest 27% of GDP, reflecting the weak tourism and real estate sectors. Rising NPL ratios are discouraging new lending, while an ineffective insolvency system is slowing their resolution.                                                              33 Data on the number of accounts are not available for Barbados. 34 Based on credit from banks, trusts, and mortgage companies identified as enterprise credits. 25   81. Some SMEs are currently being served by finance companies and merchant banks. However, finance companies and merchant banks account for only 4.5% of onshore financial sector assets (2012). Finance companies and merchant banks typically offer financing through variable rate loans at rates that may be 12-14% above deposit rates. 82. The BSE created its Junior Market in 1999 to provide a public trading platform for smaller companies that are too small to list on the Regular Board. However, the Junior Market is small and inactive. To date the only listings are four small closed-end ETFs. There were 3 trades on the Junior Market in 2012, all in one ETF. 83. The government has tried to promote venture capital investment with government and international organization funding. In 1998, the Enterprise Growth Fund Limited (EGFL) was established to provide seed capital for SMEs. Over time it has evolved into seven funds that provide specialized assistance and loans. The total size of these funds is small, approximately B$25 million. In addition, there is the privately led Caribbean Financial Services Corporation (CFSC) which gives medium and long term loans to companies, accompanied where appropriate by equity investments. CFSC is also small, with assets totaling B$ 20 million. 84. Anecdotally, credit unions have started to develop lending products for the small and medium enterprise (SME) sector. Currently, credit unions provide credit to some SMEs through personal loans. Figure 5. Enterprises Identifying Access to Finance as a Major Constraint in 2010 j (In percent) 60 50 40 30 20 10 0 Medium Medium Medium Medium Small Small Small Small Large Large Large Large Barbados Trinidad and Jamaica LAC Tobago   26   Figure 6. Enterprise Sources of Finance in 2010 Proportion of investments financed by different sources, 2010 100 90 80 70 60 50 Internally 40 30 Banks 20 10 Supplier credit 0 Equity or stock sales Small Small Small Small Large Large Large Large Medium Medium Medium Medium Barbados Trinidad and Jamaica LAC Tobago   Source: World Bank Enterprise Survey 2010 C. Financial infrastructure 85. Despite the existence of various plans and a very small bureau, Barbados still lacks an adequate credit information function. 35 Only 22% of all countries36 do not have a credit bureau. Credit bureaus are particularly effective for household and small business lending, for which a payment track record provides an important indication of credit risk. They add an incentive for borrowers to pay as a poor repayment history will impede their ability to borrow in the future. Moreover, a credit information function can be useful for supervisory and systemic risk monitoring purposes. 86. Actions should therefore be taken to provide Barbadian financial institutions with reliable, timely and relevant information from credit bureaus. For this it is recommended to carry out an assessment of the existing regulatory environment and institutional options. 87. There is a need to improve credit enforcement through a more effective bankruptcy system and effective mortgage foreclosure procedures. Resolving existing NPLs and ensuring an institutional framework to resolve future NPLs would be critical to ensure continued supply of credit to key sectors. An important step would be to issue the regulations supporting the Bankruptcy and Insolvency Law of 2002. For defaulted mortgages a more efficient system that maintains appropriate protection of consumers will ensure continued availability of credit should mortgage loan quality problems grow. 88. Barbados does not have a registry for the use of movable assets as collateral. This affects SMEs in particular as they cannot pledge their movable assets as collateral for a loan. As                                                              35 The existing credit bureau (Caribbean Credit Bureau Ltd, also known as Credi-Check) does not provide adequate information about a creditor’s exposures and standing. Data is incomplete, as only a few lending institutions (credit unions, banks and/or retailers) provide information periodically. Only negative information is reported. 36 World Bank Doing Business report. 27   such schemes have contributed greatly in other countries to improve access to finance, it is recommended to introduce a modern, notice-based collateral registry for movable assets, amending, as necessary, the corresponding secured transactions legislation to allow for the use of a wide array of assets and to establish proper foreclosure mechanisms. VII. CAPITAL MARKETS DEVELOPMENT A. Structure and Activity37 89. Capital markets are dominated by the equity market in terms of size, but exhibit very low activity. While well-capitalized at over 130% of GDP, the Barbados Stock Exchange (BSE) has not grown since 2008. The BSE suffers from high market concentration, a limited free float and limited market liquidity, as do other exchanges in the region (Figure 7). Annual trading turnover by value in 2012 was 1.7%. The two largest listed companies account for 55% of total market cap and the four largest listed companies represent 70%. The limited free float in these companies exacerbates market illiquidity. There are no market makers on the BSE and none of the licensed firms is an active trader for its own proprietary account. Figure 7. Cross-Country Comparison: Stock Market Capitalization and Turnover 90. Stock Market Capitalization to GDP Stock Market Turnover (In percent) 140 4 120 3 100 3 80 2 60 2 40 1 20 1 0 0 Caribbean Trinidad & Jamaica 2011 Barbados 2012 Caribbean Trinidad & Jamaica 2011 Barbados 2012 Average 2011 Tobago 2011 Average 2011 Tobago 2011 Source: Finstats World Bank and Central Bank of  Barbados 91. The fixed-income market in Barbados is dominated by Barbados sovereign debt issues with very little secondary trading. Total outstanding issuance domestic (August 2013) is approximately B$2.2 billion in Treasury bills and B$2.7 billion in debentures and savings bonds. Almost half of the T-bills are held by the commercial banks and trust companies, and the National Insurance Scheme (NIS) owns almost half of all longer-term government debt instruments. 92. The corporate fixed-income sector is extremely small and faces strong competition from banks. A government yield curve that can function as an effective benchmark for non-government debt offerings is absent. There have been no registered public offerings in the past 4 years. There is some level of activity via private placements (4 since 2010). In other countries corporate debt is attractive because it may be less costly than bank lending, and it may                                                              37 More details on capital markets development are available in a self-contained Technical Note. 28   be possible to obtain longer term financing. This is not the case in Barbados. Banks in Barbados have excess lending capacity and so are in a position to offer highly competitive lending terms to established corporate borrowers. 93. Institutional investors including the NIS allocate small amounts of their portfolios to equities and non-government debt. Active participation by institutional investors is an essential component of a vibrant capital market. The NIS allocation to equities has dropped from 12.3% (2009) to 9% (2013 estimate), and the life insurance sector has reduced their investments by 90% since the market peak. 94. Because of the limitations in Barbados’ capital markets and capital controls, NIS and other institutional investors are unable to meet the usual requirements of investment diversification. Instead they invest predominantly in Barbados government securities (NIS- 66.4% in 2009) and investments tied to Barbados real estate. Reasons for shrinking portfolio allocations to equities include the poor BSE market performance, the lack of new listings, and overall market illiquidity. 95. The mutual fund sector has exhibited a dramatic growth in total asset size. During the period 2009 – 2011, total assets under management (AUM) grew dramatically from B$1,500 million to B$4,380 million. In 2012 total AUM more than doubled from 2011. Most of this growth occurred in off-shore registered mutual funds. B. Developing Capital Markets 96. Increasing the number of listed companies on the BSE will be difficult. The number of listings on the BSE is small, but it is not small for the size of the economy. Potential listings could come from the privatization of government-owned enterprises, but recent preliminary proposals have not moved forward. Because of the decline in the overall market, the low valuations of companies and the costs and disincentives of public disclosure reporting, a meaningful increase in the number of listed companies is not expected in the near future. 97. Increasing the minimum free float requirement for listed companies would improve BSE market liquidity. It is common for markets to require listed firms to have a minimum free float (25-33% is common) that is sufficient to provide trading liquidity. Two of the five largest companies by market cap on the BSE have free floats of less than 10%. A third large company has a free float under 20%. 98. Recognizing the limited potential for a substantial increase in listings, the BSE has initiated projects to expand its business. There is a junior market for smaller Barbadian companies and a Caribbean Exchange Network (CXN) linking the BSE with exchanges in Trinidad and Tobago and Jamaica has been in development. Consideration is being given to creation of an international stock market to provide an international trading platform for offshore companies domiciled in Barbados. While these initiatives are creative, it is unclear if they will contribute significantly to market development. 99. Progress on the CXN has been limited. To date there has been only limited and sporadic use of the Phase I linkage (no data available). Migration to Phase II cannot occur until the three national regulators agree on procedures that would legalize cross listing of companies 29   and cross licensing of firms. Long-term progress may also require the three exchanges to consider the need to consolidate trading infrastructure as well as clearance and settlement and securities depository functions to achieve cost economies. 100. In the short-term and medium term, development efforts should focus on promoting the corporate debt market. Growth in the corporate debt market may be more likely in the near-term than growth in the public equities market. While Barbados has a number of companies of sufficient size and profitability to become public listed companies, the current environment makes it unlikely that these companies will engage in public offerings in the near future. The prospects for increasing the corporate debt market are more promising. On the supply side, Barbados has a significant number of companies that could issue corporate notes to finance company initiatives. On the demand side, Barbados has a significant number of institutional investors, most importantly NIS and the mutual fund sector, that have a strong interest in increasing their investment allocation to corporate debt securities. An increase in the amount of non-governmental fixed-income securities in Barbados would enable the NIS and the private pension sector to increase portfolio diversification. Life insurers would be interested in longer- term notes that address issues of maturity mismatch. 101. The FSC can support development of the corporate debt market by reducing the regulatory burdens for corporations interested in issuing debt via limited offerings to institutions and sophisticated investors. Regulatory policies may be contributing to the lack of private placement debt offerings. It is common for corporate debt to be sold via a limited offering placement to a restricted number of large “sophisticated” investors, such as insurance companies, pension funds and mutual funds. However, one factor that may discourage the use of private placements to issue corporate debt is an FSC requirement that any company that issues debt through a private placement is considered a “reporting issuer”. It is required to register the offering with the FSC and, for the term of the offering, it is required to file an annual report with the FSC. This is a costly requirement that also entail some risk that confidential information could be disclosed. 102. Mortgage-backed securities (MBS) and other asset-backed securitizations could stimulate the fixed-income market. Traditional, “plain vanilla”, MBS could be mutually beneficial to banks and institutional investors to manage their maturity mismatches since banks have large mortgage holdings funded shorter term, while institutional investors require long-term assets. This would also allow banks to offer borrowers longer-term fixed rate mortgages. 103. Regulatory mutual recognition of Caribbean firms could promote the entry of non- bank affiliated investment banking firms and contribute to capital market development. The lack of any non-bank investment banking firms may have an influence on the limited development of the capital market in Barbados. Because banks are the exclusive source of investment banking services, in the current environment of surplus lending capacity it is unlikely that banks will aggressively market securities offerings as an alternative to traditional bank lending services. If the FSC and other Caribbean regulators adopt mutual recognition policies that enable other firms to enter all markets, growth in the sector may be stimulated. 104. Institutional investors should be required to provide more information on investments to investors/plan participants and to strictly adhere to timely reporting. It is 30   important that investors fully understand how their funds are invested. The NIS should publish an annual report that accurately states the Fund's investment strategy, shows its significant holdings, provides a commentary on the fund's performance, and contains audited financial statements. Mutual funds should be required to expand their disclosure on portfolio holdings and investment strategies and performance. Table 2. Barbados: Financial System Structure                         2008  2009  2010  2011  2012  H1 2013                       Number of Institutions                   Banks                       Domestic banks (foreign owned)    6  6  6  7  6  6  Branches    2  1  1  2  2  2  Subsidiaries    4  5  5  5  4  4  Offshore banks    50  50  50  45  44  45  Non‐bank Financial Institutions                      Credit unions    35  35  35  35  35  35  Insurance companies    29     23  23  26  26  Mutual funds  12  15  21  22  23  …                       Assets (B$ millions)                      Banks    11,500  11,481  10,993  11,535  11,878  12,194  Domestic banks (foreign owned)                      Branches    4,209  2,225  2,290  2,299  2,616  2,723  Subsidiaries    7,291  9,256  8,703  9,236  9,262  9,471  Offshore banks    86,190  77,636  73,781  82,192  90,912  92,437  Non‐bank financial institutions                      Part 3 Institutions    1,710  1,762  1,818  1,925  1,464  1,590  Credit unions    1,202  1,312  1,366  1,460  1,561  1,639  Insurance companies   1,399  …  2,480  2,390  3,040  …  Offshore insurance  48,965.3  …  125,500  133,400  142,600  140,000  Mutual funds (net assets)  782.3  1,015  1,061  2,213  2,470  2,470                       Miscellaneous                    Share of the 3 largest banks, percent    73  70  69  71  71  78                       Sources: Central Bank of Barbados; and Financial Services Commission.  31   Table 3. Barbados: Selected Indicators for Onshore Commercial Banks 2008 2009 2010 2011 2012 H1 2013 Solvency indicators Capital adequacy ratio 1/ 16.1 17.5 17.1 19.3 21.0 21.5 Core capital adequacy ratio 1/ 2/ 13.9 16.3 15.7 18.1 19.5 19.6 Nonperforming loans net of provisions to capital (percent) 5.0 21.0 11.2 11.8 23.0 21.4 Liquidity indicators Loan to deposit ratio (percent) 64.0 66.0 67.0 79.2 73.6 71.9 Demand deposits, percent of total deposits 34.9 36.6 35.2 32.0 29.3 29.3 Liquid assets, percent of total assets 3/ 9.0 10.8 11.5 12.0 14.6 17.0 Credit risk indicators Total assets, annual growth rate 4/ 3.9 -5.4 -1.5 -4.7 15.8* 2.6 Loans and advances (growth rate, percent) 4/ 12.4 0.9 0.6 -0.5 6.3* -3.6 Total mortgage loans, percent of loans and advances 28.0 29.0 31.3 33.7 39.6 41.2 Nonperforming loans, percent of total loans 3.5 7.9 10.8 11.1 12.9 13.9 Provisions to nonperforming loans, percent of NPL 60.1 43.6 37.4 32.9 33.9 36.2 Sectoral distribution of loans to total loans Agricultural 1.0 0.9 0.5 0.4 0.3 0.3 Commercial 18.0 19.4 20.5 21.7 16.9 15.7 Construction 8.0 4.5 4.7 4.2 4.1 3.8 Consumer 46.0 46.4 47.3 47.8 52.1 53.9 Industrial 2.0 2.4 2.2 2.5 1.8 1.8 Tourism 9.0 8.4 8.9 8.4 8.2 8.2 Others 16.0 18.1 15.9 15.0 16.6 16.3 Foreign exchange risk indicators Share of foreign currency deposits in total deposits 5/ 3.6 4.9 4.6 3.2 3.0 3.5 Deposits in foreign exchange, percent of total deposits 6/ 14.8 13.3 13.6 6.6 4.9 4.8 Net foreign assets, percent of total assets 3.3 3.1 4.1 2.8 -2.5 … Profitability indicators Return on Assets 7/ 1.4 1.6 1.2 1.0 1.1 1.0 Return on equity 7/ 17.3 15.6 11.3 6.1 4.9 3.8 Profit before tax, percent of total assets 1.8 2.0 1.5 1.3 1.3 1.2 Total noninterest expense, percent of total assets 2.7 2.6 3.1 3.4 3.0 3.0 Spread between lending rate and deposit rate 8/ 6.2 7.0 6.7 6.1 5.9 6.0 Operational efficiency Nonfinancial expenditure to total revenues 57.1 54.3 63.3 64.2 51.3 … Nonfinancial expenditure to total revenue-generating assets 5.4 5.3 5.3 6.1 5.0 … Source: Central Bank of Barbados. 1/ Does not include branches of foreign banks. 2/ Tier-I capital. 3/ Includes cash balances, amounts due from the CBB and commercial banks in Barbados, and Treasury Bills. 4/ Values for 2012 include effect from merger between financial companies. 5/ Foreign currency deposits of residence to total domestic deposits. 6/ Total foreign currency deposits to total deposits (including resident and non-resident deposits in foreign currency). 7/ ROA is based on all institutions, while ROE excludes branches. 8/ Does not fully reflect the intermediation margin due to fees, commissions, etc. 32   Table 4. Barbados: Selected Structure and Financial Soundness Indicators of Credit Unions    2008  2009  2010  2011  2012  Q1 2013  Q2 2013  I. Structure                       Number of Institutions    35  35  35  35  35  35  35  Number of Members    148,604  129,476  146,162  157,198  148,744  150,527  157,921  Share of the 3 largest credit unions, percent    84  83  85  86  85  86  86  Assets (In BD$ million)    1,202  1,312  1,439  1,513  1,579  1,617  1,639  Share of the 3 largest credit unions, percent    71  73  79  79  78  79  79  Loans (In BD$ million)    965  1,042  1,132  1,206  1,245  1,239  1,246  Share of the 3 largest credit unions, percent    81  82  82  83  83  83  83                          II. Selected Financial Soundness Indicators                       Solvency                       Reserves to total Liabilities (percent)    10.3  10.5  10.4  10.7  11.4  11.5  11.4  CAR  8.8  9.2  9.2  9.4  11.6  11.2  11.2  Liquidity                       Loan to deposit ratio (percent)  1/  96.4  102.6  114.8  113.6  117.1  93.3  93.0  On‐call deposits, percent of total deposits 2/  100.0  100.0  73.0  72.2  70.7  69.7  68.7  Profitability                       Return on Equity  21.5  16.9  12.7  12.4  13.1  2.3  3.1  Return on Assets  2.0  1.6  1.2  1.2  1.3  0.2  0.3  Credit risk                         Total assets, annual growth rate (percent) 3/   7.4  9.1  9.7  5.1  4.4  2.4  0.9  Loans, annual growth rate (percent)  3/  10.4  8.0  8.6  6.5  3.2  ‐0.5  0.5  Total mortgage loans, percent of loans (percent)   33.7  39.9  40.2  42.5  43.6  44.2  44.4  Nonperforming loans, percent of total loans (percent)    5.3  6.5  7.2  6.9  8.2  8.3  8.2  Provisions for Nonperforming loans, percent of  total loans (percent)    1.8  1.9  2.2  2.8  3.2  3.1  3.2  Source: Central Bank of Barbados for pre‐2010 data; Financial Services Commission for 2010‐13.       1/  Amendments to Act and by‐laws have resulted in funds previously treated as equity shares being classified as deposits (shares).       2/  This figure is overstated as there are some funds, which are pledged as loan security and should not be classified as demand deposits. 3/  2013 outcome is not annualized.                  33   Table 5. Barbados: Selected Indicators for Part III Institutions    2008  2009  2010  2011  2012  H1 2013  Solvency Indicators                    Capital to Assets (percent)  21.2  22.6  23.5  23.8  23.6  23.9                       Liquidity Indicators                    Loan to deposit ratio (percent)  180.0  168.3  167.6  152.3  109.9  98.5  Demand deposits to total deposits (percent)  25.0  22.4  29.0  23.0  25.5  …  Liquid assets / Short‐term liabilities (percent)  54.7  46.7  52.8  77.4  89.8  …                       Credit Risk Indicators                    Non‐performing loan ratio (percent)  3.3  5.2  5.7  8.6  9.1  11.0  Substandard loans / Total loans (percent)  3.0  4.8  5.2  7.4  6.0  7.5  Doutful loans / Total loans (percent)  0.1  0.1  0.1  0.7  2.0  2.4  Loss Loans / Total loans (percent)  0.2  0.3  0.3  0.6  1.1  1.1  Reserves to NPLs (percent)  21.2  16.2  14.5  17.0  36.8  35.2                       Profitability Indicators                    Net income / Capital (percent)  10.4  11.1  10.9  8.3  5.2  …  Return on Assets  2.1  2.4  2.5  1.9  1.3  …  Source: Central Bank of Barbados for pre‐2010 data; Financial Services Commission for 2010‐13. Table 6. Barbados: Selected Indicators for the Insurance Sector    2008  2009  2010  2011  2012  Q1 2013  Q2 2013                          Domestic sector                       General Insurance                         Gross written premia BD$ million  478.7  …  515.2  499.5  512.6  117.2  121.5    Investment assets BD$ million  266.5  …  675.6  718.6  726.3  725.1  725.7  Life Insurance                         Gross written premia BD$ million  135.5  …  170.3  163.7  190.8  43.8  39.0    Investment assets BD$ million  868.9  …  1,387.0  1,345.0  1,391.0  1,434.0  1,431.0                          Offshore Sector                       Number of active companies  …  223  225  223  221  …  …  Net premiums (BD$ billion)  9.0  …  31.2  56.2  61.3  16.8  16.8  Assets  (BD$ billion)  49.0  …  125.5  133.4  142.6  142.7  140.4                          Source: Office of the Supervisor of Insurance for pre‐2010; and Financial Services Commission for 2010‐2013.        34   APPENDIX I: DETAILED RECOMMENDATIONS OF FSAP UPDATE 2013 Recommendations Term Priority Institution Bank Supervision and Regulation Amend credit guidelines to include managing risk of borrowers’ unhedged ST H CBB foreign exchange exposures; issue the Large Exposure Guideline Review and update/adopt: homogenous loan classification approach; amend ST H CBB the substandard definition in the 1998 classification regulation to remove or amend the statement “several renewals with capitalization of interest”; provisioning requirements as they are lower than those observed internationally for countries using the same system; and determine whether there should be haircuts to the value of the real estate collateral given the current state of the market and the lack of market data on real estate values Include in the CBB Act a provision stipulating clearly the conditions under ST H CBB/MoF which the Governor can be removed from his position; and revise the provisions that allow the MoF (i) to give written orders to the CBB or (ii) to overrule its corrective measures, for example by replacing the MoF by a Court as the appeal authority Amend the FIA and the CBB Act empowering the CBB to “make guidelines” ST H CBB/MoF Amend the FIA as planned to promote a stricter definition of related parties ST H CBB/MoF Increase the number of on-site examinations for on-shore banks ST H CBB Perform on-site examinations in international banks that have not been subject ST H CBB to any on-site visits over the past 5 years Issue supervisory guidance to aid examiners in the analysis of new areas such MT M CBB as banks’ capital planning, market risk capital requirements, model review stress testing and interest rate risk Amend the FIA so that the CBB can issue administrative penalties MT M CBB/MoF Issue the Large Exposure guideline so that its principles can be implemented ST H CBB as soon as possible, and in particular the aggregated limit on the sum of large exposures exceeding 600% Take more forceful action in case of serious breaches of AML/CFT MT M CBB obligations Insurance Supervision Enhance supervisory colleges and maintain active engagement, particularly ST H FSC for systemic entities and entities where Barbados is a host supervisor; improve crisis management coordination Amend the limitation of FSC Act with regard to information sharing ST H FSC Develop an internal procedure manual for a financial crisis and require ST M FSC insurers with cross-border activities to establish contingency plans and procedures Work closely with the Caribbean Association of Actuaries to establish robust MT H FSC and enforceable valuation standards for technical provisions Accelerate the implementation of risk-based capital adequacy requirements MT H FSC covering all insurers and insurance groups and promote ERM frameworks Improve overall regulatory framework and supervision capacity, in particular, MT M FSC continue to hire and train staff, elaborate further the practical application of current high-level guidelines, ensure that new on-site inspection and risk based off-site monitoring becomes institutionalized and take appropriate enforcement actions Establish a policyholder protection scheme (PPS) for insurance MT M FSC Financial Services Commission Enhance independence regarding supervisory decisions and staff hiring and MT M FSC compensation Access to Finance and Credit Unions Consolidate dual risk-based prudential oversight approach to on-site credit ST H FSC 35   Recommendations Term Priority Institution union supervision based on well-specified criteria; improve data collection; ensure financial viability of entities Issue guidelines for classification, monitoring and reporting of non-performing ST H FSC loans, restructured loans and write-offs for the credit union sector Establish a level playing field for qualifying credit unions by lifting product MT- H FSC, CBB, restrictions, removing corporate tax exemption and establishing appropriate LT MoF prudential supervision Improve credit enforcement through a more effective bankruptcy system and MT H Government, effective mortgage foreclosure procedures CBB Establish an adequate credit information function MT H CBB/FSC Introduce a notice-based collateral registry for movable assets, amending, as MT H CBB/FSC necessary, the corresponding secured transactions legislation to allow for the use of a wide array of assets and to establish proper foreclosure mechanisms Safety Net and Crisis Management Establish a national crisis management plan for an insurance sector crisis ST H FSC Enter into agreements for back-up funding for BDIC with the CBB and the ST H BDIC/CBB/ MoF MoF Develop and adopt a Strategic Plan for BDIC MT H BDIC Develop a target fund ratio for the deposit insurance fund MT H BDIC Amend the Deposit Insurance Act to provide legal protection for former MT M BDIC employees and those acting at the direction of the BDIC and to simplify payout processes Develop and test payout procedures and processes that would allow direct MT M BDIC/CBB access to depositor level data at member institutions Stipulate in the FSMP that the CBB should obtain government guarantees or ST M CBB compensation for any solvency support it provides Amend the Financial Institutions Act, Deposit Insurance Act, Financial MT M CBB/BDIC/F Services Commission Act, and Insurance Act to ensure consistency among SC them and bring the resolution powers and process for a bank, credit union, and insurer more in line with international good practices and standards Capital Market Development Require mutual funds to provide the FSC with periodic information on ST H FSC portfolio holdings and provide expanded information to investors on fund performance and core holdings Examine valuation policies ST H FSC Finalize regulatory agreements with regional regulators for the CXN to MT H FSC facilitate cross-listing of companies and mutual recognition of licensed firms Complete ongoing review of BSE rules ST M FSC Enable public electronic access to listed company annual reports and other ST H FSC filings either on the FSC or the BSE website Consider revising capital adequacy standard for securities firms MT M FSC Seek authority to second FSC staff to the private sector for training purposes MT H FSC and to hire financial sector professionals on term appointments Promote greater use of private placement offerings by adopting reporting MT H FSC requirements consistent with the needs of sophisticated investors Increase public free float minimums for listed companies ST H FSC Require all pension funds, including the NIS, to publish promptly annual ST H FSC reports that accurately state the Fund's investment strategy, its significant holdings, provides a commentary on the fund's performance and contains audited financial statements Consider listing benchmark Barbados government debt on the BSE in MT M FSC denominations that would encourage retail investors to purchase and trade Explore the viability of mortgage-backed and other asset-backed securities LT M FSC Macroprudential Policy 36   Recommendations Term Priority Institution Develop a real estate price index MT H CBB Clarify mandate and tools of the Financial Oversight Management Committee MT H CBB/BDIC/ (FOMC) FSC APPENDIX II: FOLLOW-UP ON KEY RECOMMENDATIONS OF THE 2008 FSAP UPDATE Recommendation Progress Banking Strengthen cross-border consolidated The consolidated supervision and cross-border collaboration supervision, including establishing a clear legal frameworks have been significantly strengthened. Consolidated framework for the consolidated supervision of supervision guidelines have been issued and implemented. MOUs banking groups and enhancing home/host have been signed with key regulators and active collaboration is cooperation. (H). taking place. Update regulations on capital adequacy, asset Credit risk management guidelines have been implemented and classification and loss provisioning to ensure asset classification/provisioning procedures for analysis of bank their effectiveness after the last ten years of practice have been adopted for inspectors to use. Additional structural changes in the banking industry. (H). enhancements are recommended in CP18 to further strengthen provisioning such as updating the provisioning regulation. Strengthen regulation and supervision for large Progress is underway. The CBB Guideline on large exposure exposures and related-party exposures, limits is still in draft. It contains an aggregated limit on the sum of including setting up the regulatory aggregate large exposures exceeding 600%. A Credit Risk Management limits on total large exposures and related-party Guideline has also been issued. The revised FIA will contain a exposures on a consolidated basis, and defining comprehensive definition of Related Parties and Groups. the related party in a comprehensive way. Based on a quantitative impact study, make Adjustments have been made. Barbados is planning to achieve its adjustments to the timetable of adoption of transition towards Basel II by 2015. A Basel II Implementation Basel II, including by delaying the Roadmap was submitted to the industry in February 2012 detailing implementation schedule, and strengthening the the methodology for the calculation of capital in a 3-phased Pillar 2 framework. approach and the timeline. Phase 1, which has already commenced, will focus on strengthening compliance with Pillar 2 of Basel II (e.g., issuance of industry risk management guidelines); Phase 2 which is also in progress seeks to implement the Market Risk Amendment and Phase 3 will implement Pillars 1 and 3. Basel II compliance forms will adopt the standardized approach for credit risk and market risk and the basic and standardized approach will be used for operational risk. Financial Services Commission Resolve promptly the mandate and structure of The regulatory and supervisory framework, including the mandate, the FSC so as to help advance the planned power, independence and resource, has been improved after the improvements in the supervision of both the establishment of the FSC. Credit Union and Insurance sectors. (H). Insurance Develop standards on corporate governance, Legally binding guidelines for corporate governance, market market conduct, internal controls (including conduct, risk management, and valuation of assets have been asset and derivative controls, particularly in the issued and implemented. However, developments of standards for case of the offshore market), asset and liability liability valuation and solvency requirements for life insurers have valuation, and a solvency standard for life not yet progressed. insurers with a view to enhancing the observance of the International Association of Insurance Supervisors (IAIS) principles. (H). Improve the timeliness of supervisory returns, A quarterly reporting format with more granular financial and redesign processes for onsite inspection, information has been issued. Late submission of the return would 37   and offsite analytical support. (H). be enforced by a monetary penalty. Development of risk based supervision and on-site examinations are in progress. Collaborate with the Trinidadian authorities in Negotiation with other regional supervisors (including the the supervision of larger cross-border groups. Trinidadian authorities) to establish MOUs are on-going. However, information exchange is limited due to the current FSC Act. The FSC proposed to amend the Act to enhance its capacity to exchange information and collaborate with relevant authorities. Credit Unions Increase the frequency of joint (Cooperatives Not done. Department and Central Bank) on-site examinations. (H). Consider issuing a specialized Credit Union Not done, although some progress achieved in the FSC Act and Law (H). the issuance of guidelines. Securities Markets Provide the Securities Commission with The FSC law empowers the FSC to issue guidelines, and statutory power under the Mutual Funds Act directives requiring compliance, to conduct inspections and and SA to make legally binding rules, inspect demand information from regulated persons and entities, and share and access all information at regulated firms at information with other regulators. any time, share information and otherwise cooperate with domestic and foreign supervisors. (H). Develop and implement a regular inspection The FSC plans to begin on-site inspections in 2013. The FSC has program for regulated firms under both Acts issued a Guideline that requires all financial institutions to institute and require firms to have adequate internal internal control programs. control and risk management policies and procedures (H). Update and harmonize takeover bid rules across No action taken to date. the region at the exchange and statutory levels; consider an update of bankruptcy and other commercial legislation. Require timely disclosure by mutual funds, Mutual funds and public companies must publicly disclose public companies and insiders of public material events within 24 hours. companies; consider raising penalties for No changes on securities holding disclosure by insiders. statutory offences. The FSC provides a series of penalties for violations, including fines up to $100,000. Deposit Insurance Scheme Formalize early warning and prompt corrective The early warning and prompt corrective action systems have been action systems (H). provided by the Intervention Policy Framework, but a license suspension should be a measure not at Stage 3 (high solvency risk/severe regulatory breaches) but at Stage 4 (imminent insolvency or non-viability), since a bank whose license is suspended would generally need to be brought to resolution. Expand and improve the level of public There is no public awareness strategy in place for the deposit awareness about the characteristics of the new insurer and there has been no measurement of public awareness to deposit insurance scheme. inform the development of such a strategy. Financial Stability Report Consider enhancing the financial stability A model for credit risk has been developed and is referenced in report by supplementing the CBB’s macro the financial stability report. model with a banking credit-risk model. Other Revisit the NIS’ investment strategy. No progress. H=High priority. 38