The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Central Bank is proposing “materially higher capital buffers” for domestic commercial banks than other institutions to ensure they are properly insulated from heavy losses and financial crises.

The banking industry regulator, in discussion papers on how it plans to ensure the Bahamas meets the Basle global requirements on capital and other regulatory requirements, is proposing that the commercial banking sector maintain a “minimum capital ratio requirement” of 16 percent.

This compares to just 10.5 percent for Bahamian credit union and international banks with subsidiaries here, and 12 percent for institutions that count the Bahamas as their home jurisdiction. “The revised capital approach is more focused on reinforcing a regime that allows domestic SFIs (supervised financial institutions) to maintain a significant amount of capital that is accessible in the event of unexpected losses or a financial crisis,” the regulator said.

“The Central Bank expects that these buffers will maintain simplicity, whilst being super-equivalent to Basel’s standards. Once the capital buffer regime is in place, the current trigger and target ratio framework of 14 percent and 17 percent will fall away.”

The Central Bank, in discussion papers sent out for a 60-day consultation, said it wanted to make the industry’s capital adequacy regime both much simpler than Basle III but “appreciably more conservative” for domestic commercial banks.

“Accordingly, the Central Bank’s capital buffer strategy varies significantly between the domestically licensed and internationally licensed banks,” the regulator added. “In particular, the Central Bank considers that domestically-licensed institutions must be able to carry sufficient capital to meet not only current requirements, but to absorb material economic adversity, without any need for recapitalisation.

“When the need arises to deploy this pre-raised capital, however, it will be important that high fixed capital requirements do not impair a Bahamian banking and economic recovery.”

The Central Bank possibly has in mind Bank of the Bahamas’ recent travails, where the BISX-listed institution was twice “bailed out” by the taxpayer and, with an initial public offering (IPO) thrown in, saw more than $300m in public money committed to save it. It added that the Bahamas’ vulnerability to hurricanes, and global recessions, also justified its strategy to impose extra capital adequacy requirements on Bahamian commercial banks – especially those owned locally, and which do not have an international parent.

“These considerations suggest that the best capital strategy for Bahamian domestic banks is to require both a high minimum capital requirement and a high buffer, but with considerable flexibility to deploy the buffer in adverse times,” the Central Bank said.

“The domestic commercial banks require a larger buffer to ensure financial stability of the domestic banking system. The additional capital buffer for international SFIs should reflect the lower risk these institutions pose to the Bahamian jurisdiction. “Home-supervised (headquartered in The Bahamas with no offshore parent) SFIs would be required to maintain a higher capital buffer than host-supervised SFIs. There is a higher Bahamian reputational risk associated with the failure of a home-supervised SFI.

Also, as a general rule, home-supervised SFIs enjoy less access to additional capital under stress compared to host-supervised SFIs.”

The Central Bank said it expected minimal impact on the Bahamian banking industry as a whole from having to adopt the new standards.

“The Central Bank has conducted a preliminary assessment of the likely capital impacts of the proposed Basel III regime, using information already to hand from SFI filings,” it added.

“Preliminary results suggest that all, or nearly all, Bahamian banks will be able to adopt the new Basel III rules with very little (if any) change to their balance sheets.

“The impact of this regulatory reform may be larger for credit unions than for banks.”

Outlining its overall objectives, the Central Bank added: “Somewhat contrary to local and international experience, the Central Bank intends that its Basel III regime will reduce regulatory compliance costs, relative to the current capital regime, and greatly reduce costs relative to the typical international implementation of Basel III.

“This is in keeping with the Central Bank’s intent to develop prudential policies and regulations that balance safety, efficiency and competitiveness in the Bahamian banking system, while promoting financial system stability.”