The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The fund protecting Bahamian depositors against bank failure contains just 45 percent of its desired $125m asset target, the IMF has revealed, as it called for the industry to pay more.

The International Monetary Fund (IMF), in its just-released assessment of the Bahamian financial sector, said Bank of The Bahamas’ near collapse had exposed the Deposit Insurance Corporation’s (DIC) inability to fully protect Bahamian households and small businesses from the failure of even a mid-sized institution.

While the corporation’s protection fund contained some $56m at year-end 2018, the fund warned that this remains well short of both its current $88.5m “target balance” and the elevated $125m goal desired by its board.

Given that the latter target will take ten years to reach based on the corporation’s own projections, the IMF called for its main financing mechanism - the annual premium levy imposed on Bahamas-based commercial banks - to be increased from the present 0.0005 percent of each institution’s insurable deposit base.

Hitting the $125m target will give the corporation assets equivalent to two percent of the Bahamian commercial banking industry’s insurable deposits, but the fund recommended doubling this ratio to four percent over the long-term.

“Recent experience has demonstrated the insufficiency of the DIC fund to absorb the failure of a mid-sized institution,” the IMF concluded. “The fund is at $56m as of year-end 2018 with a target balance of B$88.5m.”

“The DIC Board is considering raising the target to B$125m (2 percent of insurable deposits), a level sufficient to fund resolution of the largest medium-sized bank. The levy should be increased to meet this target, as based on DIC’s projections it would take about a decade to reach $125 million at the current premium of 5 basis points.”

Tribune Business revealed yesterday how just one-third of insurance-eligible Bank of The Bahamas deposits would have been covered if the troubled BISX-listed institution had collapsed as the 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 report called for the DIC’s funding target to be measured against models showing the impact of potential banking collapses. It added: “The DIC should produce financial projections based on alternative scenarios of future bank failures.

“The [IMF] mission recommended targeting a level of at least 2 percent of insurable deposits in the near term, and increasing this to closer to 4 percent over the longer term.” The Fund also warned against expanding the DIC’s coverage to credit unions, arguing this should only be done when its fund had sufficient assets and that sector was “sufficiently capitalised” and regulated.

The DIC was created in 1999 following the collapse of Gulf Union Bank (Bahamas). It had paid out $6.517m to that bank’s depositors and liquidators as at year-end 2012, and is viewed as another element in ensuring financial industry stability by minimising or eliminating “the risk of loss of savings of small Bahamian depositors in the event a bank fails”.

Premium payments to the DIC, and membership in it, become compulsory once an institution starts accepting Bahamian dollar deposits. Members as at March last year, the last date at which a list is available, include Ansbacher (Bahamas); Bank of The Bahamas; Bank of Nova Scotia Trust Company (Bahamas); Citibank; Commonwealth Bank; Fidelity Bank (Bahamas); Finance Corporation of the Bahamas (FINCO); FirstCaribbean International Bank (Bahamas); RBC Royal Bank (Bahamas); Royal Fidelity Merchant Bank & Trust; and Scotiabank (Bahamas).

The IMF report, meanwhile, said Bank of The Bahamas’ near failure and subsequent bail-outs had exposed flaws in this nation’s financial crisis management and safety nets that it was now tackling through “ambitious” proposed legal reforms to bring regulation “in line with international best practice”.

Calling for these reforms to be implemented “without delay”, the proposed changes would allow the Central Bank to appoint a statutory administrator to take over a failing bank and/or put in a liquidator to wind it up without first obtaining approval from the Supreme Court.

“Vulnerabilities in the existing framework were exposed in the context of the near failure of Bank of The Bahamas, and indicated that implementation approaches for deposit insurance, asset management, and recovery and resolution planning should be addressed in parallel with proposed legal reforms,” the IMF said.

“The amendments represent a major improvement to the bank resolution framework. The proposal follows an administrative approach to bank resolution under which the Central Bank may appoint a statutory administrator with broad powers to resolve a failing bank, and a liquidator to wind up the bank without recourse to the courts.

“Provisions requiring recovery plans and granting the Central Bank the power to develop resolution plans are also included. Amendments to emergency liquidity assistance provisions clarify the purpose of such lending and address solvency tests, collateral mandates, penalty rates, and maturity limits.”

The Fund added that vehicles such as Bahamas Resolve, which was used to facilitate the two Bank of The Bahamas bail-outs, needed to be given legal standing with proper governance, accountability and strategies, and clear guidelines for appointing their Boards and management.

“Presently the operations and management of Resolve... are opaque, as the guiding legal infrastructure is lacking. It has no clear accountability as information regarding its activities is not available to the public, the Central Bank or the DIC. Resolve should run its operations on a commercial basis, with an explicit mandate to maximise the value of the assets it holds,” the IMF said.

“Any bank with excessively high non-performing loan levels and a potentially challenged business model should submit a restructuring plan to the Central Bank. Any such institution needs to ensure its viability on a forward-looking basis or be resolved if a path to viability cannot be found.

“High capital levels across the banking sector, in combination with the above-mentioned reforms to the crisis management framework, mean that any needed restructurings should be undertaken during the current period when they can likely be accomplished with minimal disruption to the financial system.”