The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas’ breaches of Central Bank-mandated capital ratios did “not warrant” its closure because it was still in compliance with international regulatory requirements.

Wendy Craigg, the Central Bank’s governor, in e-mailed responses to Tribune Business’s questions yesterday, said it was the regulator’s “intervention” that forced the BISX-listed institution and the Government to come up with Friday’s $100 million ‘rescue’ plan.

Confirming the bad loans-for-bonds swap had the Central Bank’s approval, Mrs Craigg said the potential insolvency of Bank of the Bahamas was “an extreme scenario and not relevant under the circumstances”.

She acknowledged, though, that with Bank of the Bahamas accounting for 8 per cent of total Bahamian commercial banking system assets, any prospect that it might fail created “a material degree of systemic risk”.

Mrs Craigg said it was “premature” to wonder whether Bank of the Bahamas would need to transfer any more ‘bad loans’ to the Bahamas Resolve special purpose vehicle (SPV), and indicated the regulator was content with a solution that restored capital adequacy “in the immediate to near term”.

Responding to those who have suggested that Bank of the Bahamas should have temporarily been prevented from operating until its capital ratios came back into compliance, Mrs Craigg said: “In our view, while Bank of the Bahamas had breached the Central Bank’s minimum capital adequacy threshold for commercial banks (a trigger ratio of 14 per cent and a target ratio of 17 per cent), the company’s regulatory capital level was still above the minimum international standard under the applicable Basel III regime.

“Therefore, from a risk perspective, preventing Bank of the Bahamas from operating while it worked on restoring its capital adequacy was not warranted. This approach for restoring capital adequacy is consistent with international supervisory best practices.”

Mrs Craigg said the Resolve Bahamas plan, including which loans were to be transferred, asset valuations and the transaction terms were all worked out between the Government and Bank of the Bahamas.

The Central Bank, she added, gave its blessing after “careful consideration”. While the injection of new equity by existing shareholders was the typical response to issues of capital adequacy, this was not done in the Bank of the Bahamas situation - largely because the Government itself, as 65 per cent majority shareholder, is cash-strapped.

Strongly implying that it was the Central Bank that pushed for the Bank of the Bahamas loan book to be cleaned up, Mrs Craigg told Tribune Business: “Following our intervention, Bank of the Bahamas’ management, in conjunction with its majority shareholder, considered possible options and recommended their preferred resolution arrangement to the Central Bank.

“The Central Bank was in constant discussions with Bank of the Bahamas relative to a plan to augment its capital and liquidity positions. Our starting premise was to restore capital adequacy; insolvency of a Government-owned financial institution was an extreme scenario and not relevant under the circumstances.

“The Resolve plan restores Bank of the Bahamas’ capital adequacy in the immediate to medium-term, and improves the quality of loan assets on its books.”

Mrs Craigg added that Bank of the Bahamas accounted for 8 per cent of commercial banking industry assets, “and has a significant market presence and profile, due to the majority stake of the Government.

“Any commercial bank of this size would pose a material degree of systemic risk, in the event of a failure,” Mrs Craigg said. “The bank now has the opportunity to focus on its ongoing banking operations and implement enhanced credit risk management practices relative to a smaller and improved loan portfolio.”

Asked whether Bank of the Bahamas would have to transfer more ‘bad loans’ in the future, the Central Bank governor replied: “It is premature to suggest the need for any further transfer of loan assets from the bank’s balance sheet to Bahamas Resolve.

“Bank of the Bahamas has undertaken to aggressively pursue loan recoveries and reset its strategic focus. As the regulator and supervisor, we will continue to monitor the bank’s financial performance, credit quality and liquidity, with the view to mitigating any potential or emerging risks to financial stability.”