The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Deposit Insurance Corporation (DIC) does not have “sufficient equity capital” to compensate Bahamian depositors if a large bank failed, it was revealed yesterday, and has “transparency and disclosure shortcomings”.

The International Monetary Fund (IMF), in its assessment of the Bahamian financial sector’s stability, said that while its chairman planned to address the identified weaknesses, the time allowed for the DIC to compensate depositors was “well below standard international practice”.

The DIC, which was established in 1999 after the Gulf Union Bank (Bahamas) collapse, provides a form of insurance that will payout 100 per cent of all bank deposits valued at $50,000 or less in the event that an institution fails.

“The level of coverage at $50,000 is in line with similar jurisdictions and protects approximately 96 per cent of depositors by number,” the IMF report said.

“The system would benefit from a number of operational changes including to: strengthen transparency and disclosure; undertake a deeper examination of the level of equity capital; reconsider the time allowed for payment of depositors; develop a strategic planning process; and identify back-up sources of funding.”

Going into the specifics, the Washington-based Fund added: “The operations of the DIC do not currently demonstrate a strong model of transparency and disclosure, shortcomings that the chairman of the DIC intends to address.”

The plan, according to the IMF report, is to make the DIC’s role and coverage of deposit better known by the Bahamian public via an awareness and Internet strategy. This will detail the laws and regulations governing its operations, and how claims on the DIC can be made.

But, potentially more seriously, the IMF report added: “Although the deposit insurance system is structured to operate as an ex-ante or pre-funded system, the DIC seems unlikely to have sufficient equity capital to absorb losses in the case of a significant bank failure.”

To address this, the IMF called on the Bahamas to analyse the impact of a single or multiple bank failure, then “bolster” the DIC “through an annual increase in the premium paid by the banks”.

Elsewhere, the IMF report said: “The allowable period of time for payment of depositors under law in the case of a bank failure is well beyond standard international practice.

“The DIC has six months to initiate payment of depositors and there is no deadline for completion. If there was a bank failure in the future, the intention of the DIC would be to pay depositors within a month. The recent international trend has been toward reducing this compensation period, and a shorter period should be codified in keeping with this trend.”

And, in a final foray, the IMF warned: “The DIC has been granted operational authority to borrow, but backup sources of funding have not been identified.

“In the past, the DIC issued five-year bonds to fund the payment of depositors. However, in a crisis, this may not be feasible, and prearranged access to back-up sources of borrowing is desirable, whether from the Central Bank, Ministry of Finance or private sources.”