The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Just one-third of insurance-eligible Bank of The Bahamas (BOB) deposits would have been covered if the troubled BISX-listed institution had collapsed, the IMF revealed last night.

The International Monetary Fund (IMF), which released both its Article IV report and assessment of the Bahamian financial system, disclosed that the Deposit Insurance Corporation (DIC) had less than $40m to cover $120m in insured deposits at the time the bank was first bailed out in 2014.

This meant that over $80m in depositor funds could have been wiped out if Bank of The Bahamas had been allowed to fail. Given that only Bahamian dollar bank accounts up to $50,000 are covered by the Deposit Insurance Corporation, this potential $80m loss would have been suffered by individuals, families and small businesses and entrepreneurs.

The IMF’s financial assessment said the extensive peril faced by these groups of Bahamians was used by the former Christie administration to justify the first Bank of The Bahamas bail-out, but the fund criticised both it and its successor for failing to follow “good international best practice” in the bank’s rescue.

In particular, it criticised both the first bail-out - and the second undertaken by the Minnis administration in August 2017 - for purchasing Bank of The Bahamas’ distressed mortgage loans at “gross book value” through the Bahamas Resolve special purpose vehicle (SPV).

Tribune Business previously reported that the bad loans transferred to Bahamas Resolve were worth just 37.6 percent of the $267.7m paid for them, and which subsequently became liabilities for the Bahamian taxpayer. Some $100m of the promissory notes used to finance the purchase from Bank of The Bahamas have already been redeemed.

The IMF, meanwhile, urged the government to eliminate Bahamas Resolve’s “currently opaque status” and enhance its accountability to the Bahamian people by completing its first audit of the toxic asset-holding SPV in 2019.

Noting that the two bail-outs had left Bahamian taxpayers on the hook for a sum equivalent to 2.2 percent of the economy’s total output, the Fund also urged the Government to conduct “a strategic review” of Bank of The Bahamas, develop “a reform plan” and strengthen its governance to prevent a repeat of the “poor lending practices” that almost led to its demise.

“The bank is the only case of significant instability in the banking system the past 15 years,” the IMF’s financial assessment said of Bank of The Bahamas. “BOB’s difficulties began to build as revealed in 2011 when the Central Bank discovered material operational weaknesses.

“A subsequent examination noted an outsized level of lending to politically exposed persons (PEPs), among other deep problems in commercial lending. Negative publicity led to liquidity tightness in late 2012 and early 2013, with large depositors withdrawing their funds.”

Describing Bank of The Bahamas’ bail-out as “two-staged”, the IMF said of the Christie administration’s $100m effort: “After the restructuring, the share of regulatory capital increased to about 47 percent of risk-weighted assets and government control went from 65 percent to 79 percent.

“Justifications for the bailout were the potential for instability, the lack of funding in the DIC to cover insured depositors ($120m in insured deposits with less than $40m in the DIC), and the large government deposits placed at BOB.”

The Fund added: “A second transfer of $176m in gross book value of problem assets (purchasing distressed assets at gross book value is not in line with good international practice) was initiated in August 2017, similar in terms to [the first time]. About this time the promissory notes issued during 2014 were redeemed by the Government.

“Although audits of Resolve are mandated yearly, the first such audit is only anticipated to be completed in 2019. This should improve Resolve’s currently opaque status and enhance its accountability.

“As of September 2018, BOB’s non-performing loans stood at about $102 million (or 26 percent of total loans). In addition, BOB had about $105m in restructured loans. Non-performing loans net of specific provisions represented about 25 percent of capital.”

Detailing the cost of rescuing Bank of The Bahamas, the IMF revealed: “The capital injections the bank received in 2014 and 2017 - totalling about 2.2 percent of GDP - highlight the need to complete the planned legislative reform to enhance recovery and resolution powers.

“Staff encouraged action regarding a reform plan for the Bank of the Bahamas, and efforts to strengthen governance of state-controlled financial institutions to help prevent recurrence of the poor lending practices that gave rise to BOB’s bailouts. A strategic review of the bank should be undertaken.”